Eastgroup Properties Inc Q1 FY2023 Earnings Call

Good morning and welcome to the EastGroup Properties First Quarter 2023 Earnings Conference Call and Webcast. Please also note that this event is being recorded today. I would now like to turn the conference over to Marshall Loeb, President and Chief Executive Officer. Please go ahead, sir.

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

Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website. And to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views about the company's plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions that may change. We undertake no duty to update such statements or remarks whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Please see our SEC filings included in our most recent annual report on Form 10-K for more detail about these risks.

Thanks, Keena. Good morning. I'll start by thanking our team for a strong start to the year. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our first quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance, up 9.5% for the quarter. For ten consecutive years, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term trend. Our quarterly occupancy averaged 98.1%, up 80 basis points from first quarter 2022. At quarter end, we're ahead of projections at 98.7% leased and 97.9% occupied. Quarterly re-leasing spreads were robust at approximately 48.5% GAAP and 32% cash. Cash same-store NOI set a record at 11% in the quarter. Finally, I'm happy to finish the quarter at $1.84 per share, helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top ten tenants accounting for only 8.5% of rents, down 90 basis points from first quarter 2022. In summary, I'm proud of our start to the year. Statistically, it was one of our best quarters on record all with looming prospects for recession and capital markets dislocation. We continue responding to strengthen the market and user demand for industrial products by focusing on value creation via raising rents and new development. This strength is what allowed us to end the quarter at 98.7% leased, average over 98% occupancy and push rents throughout a wide geography of our portfolio. As we have stated before, our development starts are held by market demand within our parks. Based on this readthrough, we're forecasting 2023 starts of $340 million. While our developments continue leasing up, we're closely watching demand with the goal of a balanced fluid response pending what the economy allows. What's promising is to see the decrease in industrial starts. To quantify, starts as measured by square footage, fell 25% from third to fourth quarter in 2022. Comparing third quarter 2022 to first quarter 2023, starts dropped approximately 45%, and I suspect this quarter will show a further decline. Given capital markets volatility, we've taken a measured approach towards transactions since mid-2022. That said, when we find the right strategic opportunities, we'll pursue them. The disposition of World Houston 23, which further manages market allocation is an example, as well as our Las Vegas acquisition. In Las Vegas, we were able to invest in a newer, well-located building in an underallocated, fast-growing market and achieve development-like yields. We're hopeful the choppiness in the capital markets will present other attractive investment opportunities. Brent will now speak to several topics, including assumptions within our updated 2023 guidance.

Good morning. Our first quarter results reflect the terrific execution of our team, strong overall performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the upper end of our guidance range at $1.84 per share compared to $1.68 for the same quarter last year. $0.02 of first quarter FFO was attributable to an involuntary conversion gain, recognized as the result of roof replacements that were damaged in a hurricane. Excluding the gain, FFO per share was near the upper end of our guidance range at $1.82 per share, an increase of 8.3% over the same quarter last year. The outperformance continues to be driven by stellar operating portfolio results and the success of our development brand. From a capital perspective, we have long stated that we continually analyze all of our potential sources. After a year more weighted towards debt issuances, the stability in our stock price in the first quarter yielded the opportunity to access the equity markets. During the quarter, we sold $133 million of shares at an average price of $163.51 per share. As previously reported, in January, we closed a $100 million senior unsecured term loan with a seven-year term and an effective fixed interest rate of 5.27%. We also successfully expanded the capacity of our unsecured bank credit facilities from $475 million to $675 million. This step was taken simply to provide additional flexibility in a capital-constrained market. We remain conservatively drawn on the revolver. As a reminder, the company does not have any variable rate debt other than the revolver facilities, and our near-term maturity schedule is light with only $50 million scheduled to mature through July 2024. Although capital markets are fluid, our balance sheet remains flexible and strong with healthy financial metrics. Our debt to total market capitalization was 19.8%. The unadjusted debt-to-EBITDA ratio is down to 4.8 times, and our interest and fixed charge coverage ratio was at 7.2 times. Looking forward, FFO guidance for the second quarter of 2023 is estimated to be in the range of $1.83 to $1.89 per share and $7.49 to $7.61 for the year, a $0.15 per share increase over our prior guidance. Those midpoints represent increases of 8.1% and 7.6% compared to the prior year, respectively, excluding the involuntary conversion accounting gain. Revised guidance produces an average quarterly same-store growth midpoint of 7% for the year, an increase of 100 basis points from last quarter's guidance. We also increased the midpoint of our average occupancy by 50 basis points from 97.2% to 97.7%. This is the result of outperforming our budget expectations in the first quarter, along with continued optimism for the remainder of the year. In closing, we were pleased with our first quarter results. As we have in both good and uncertain times in the past, we were allowing our financial strength, the experience of our team and the quality and location of our portfolio to lead us into the future. Now Marshall will make final comments.

Thanks, Brent. In closing, I'm proud of the results our team created. We're carrying that momentum forward. Internally, operations remain historically strong, and we're constantly working to strengthen the balance sheet. Externally, the capital markets and overall environment remain unstable. While it's never fun to experience this, it is leading to a marked decline in development starts. In the meantime, we'll work to maintain high occupancy while pushing rents. Longer-term, I remain excited for EastGroup's future. There are several long-term positive secular trends occurring within last-mile shallow-bay distribution space and Sunbelt markets that will play out over several years, such as population migration, evolving logistics chains, onshoring, etc., which we are well positioned for. We'd now like to open up the call for any questions.

We will now begin the question-and-answer session. Our first question will come from Bill Crow with Raymond James. Please go ahead, sir.

Hi, good morning guys. Another great quarter. Marshall, as other people pull back on their construction pipelines and activities, I'm wondering how you're thinking about yours. I know it's a different risk profile and within your existing parks. Have the risks elevated enough to make you pull back? And then maybe talk about the balance, any shift in the balance between acquisitions and developments at this point. Thanks.

Sure. Okay. Good question. Good morning Bill. Thank you. I think on development, you are right, we've really what I try to remind myself is to let the field tell us as much as Brent and me and the team here at corporate. You say it's usually within our parks, and it's usually, I'll use our Tampa parks where it's been of late and then same in Texas, where it's tenant expansions or relocations within our portfolio. So I never want to be so hesitant to start that we lose a tenant with really the capital markets; we've been pushing towards higher development yields. That said, last year, we came in north of $7 million. We probably targeted would have dropped into the upper fives a year ago or maybe just over a year ago, and now we're probably a good 100 basis points higher at kind of our development threshold, where you're kind of getting that mid-upper sixes. I think we've tried to just be flexible. I know we raised our development starts this year slightly from $330 million to $340 million, but I've told ourselves, I'm perfectly comfortable if the market tells us that should be $200 million or $500 million, we'll go in that direction. I say that if it grows, we need to be smart about how we fund that, but we'll react to the market. It's the guys in the field calling, saying I'm running out of inventory. I've usually got a prospect or two or an existing tenant, and here's how things pencil out. We'll go that way. On the acquisition front, we were happy to find the Las Vegas opportunity. We think, given the capital markets, there will be better and better acquisitions on the horizon. We like the newer building; we were able to get a development that really looks more like a development yield than an acquisition yield on that, and we’ve made—in any given time of late, we've had two or three kind of not very aggressive offers out there and just saying if we can find the right opportunity, we'll close on it. It could also be a substitute a little bit if we could do both development and some smart acquisitions we’d like to, but if we slow down development because of the market, it may—the acquisition market may give us the opportunity to replace that capital.

Yes, thanks. That's helpful. If I could just ask a follow-up. And that's really about Miami and the performance in that market. We sense that it's a really strong market, but the data the last couple of quarters seems to have been a little bit weaker from your portfolio. Is there anything going on there?

It's one good catch. One vacancy. We had a bankruptcy in Broward County, about 100,000 square feet. It was a tenant lost a lawsuit and filed bankruptcy. So we've got 100,000 square feet there we need to backfill. Internally, we've put another person on it that really runs Florida for us. I think we'll get there; we've just been a little slow getting that space refilled. I don't think it's indicative of the market so much as one space that is sub-divisible that we just kind of need to work through our system.

Got it. Thank you.

Sure, you're welcome.

Thanks, Bill.

Our next question will come from Craig Mailman with Citi. Please go ahead.

Hey, guys. Maybe following up on the development piece from a funding and yield perspective clearly, cost of capital has risen. Just trying to figure out how you guys are thinking about this internally, how to price that capital either from a build-to-suit or speculative nature to capture that phenomenon? And are you seeing any pushback on kind of market rent growth in the markets where you're developing?

I'll start and Brent jump in. Really no pushback on rents where we've lost tenants. It always still seems to be predominantly there combining locations or exiting a market or have outgrown the space and we can't accommodate it. Again, that's probably like the park setting. It's not very regular that we lose the tenant over rents. Our rents are usually at market or hopefully, if it's a renewal, you can get a little better than market by a little bit. In terms of returns, we've tried to think—our kind of historic rule has been trying to be 150 basis points over an acquisition cap rate for development yields. Again, all the market yields have been pretty much in flux for a few quarters now, but we feel like we're still achieving that. I personally think about it as if we can get an attractive yield, say we're 6.5 to 7 type yield going in, one of the advantages you have as a REIT, unlike maybe a merchant developer or private equity, if it's a good location, we're going to be able to hold that location. We're starting at, say, 6.75, and it's only going to improve over time as markets like Orlando or Phoenix or Austin continue to grow. So we're creating some value on the development, which we're excited about. Hopefully, that will show up later in same-store NOI as well.

Yes, I would just add to that, Craig. This is Brent. I would just add to that, we're continually evaluating our best capital sources. Last year, when our stock price initially fell, we were a little happier on the debt. We issued $525 million last year of debt at an average of 3.8 million. We got kind of in front of that ahead of rate hikes. We're very pleased with that result, what turned out to be a difficult environment. We did about $75 million in equity first quarter last year and then pretty much we're not able to—or didn't get back in the equity market. But as you saw in the first quarter, we pivoted to equity, viewing that by far is our most attractively priced component, kind of, call it, a mid-four versus even the revolver now, which is a mid-five. As a result, we lowered our debt assumptions a little bit, as you saw in our guidance and increased equity. Based on current environment pricing, we anticipate we would probably lean towards equity, but we've got a good balance sheet. We can go either direction. The important thing to point out is that our guys in the field continue to find via development or, as Marshall said, strategic acquisitions, we continue to find good opportunities to put our capital to work at still making a good risk-reward spread. So that's really what's driving the need for capital. We appreciate that we even need to keep a close eye on it. The guys are finding a way to use the money.

That's helpful. And then as we think about—you cited the pullback in construction starts, which likely contracts further now given the financing environment. But as you guys look at the land bank that you have and the competitive landscape across markets where maybe cities have been overdeveloped, now that pulls back a little bit. Where do you see the—in that $340 million of starts, kind of where is the best opportunity to start to monetize the land bank where you guys think you can kind of fill in the gap and fill that void where other developers are capital constrained and you're not?

I don't—good question, and I'm not sure I have—I wish I had as good an answer. It really will play out in parks. Austin is a market that I mentioned earlier, it seems awfully strong. The population growth there. We feel like there are some opportunities where we've—I like our land bank that we have in Austin today. Atlanta is another market where we're seeing pretty good opportunities. There's a lot of construction in Atlanta, but not a lot of shallow bay construction. There's a lot in the pipeline, but the number of starts is dropping pretty rapidly in Atlanta too. When I think of specific markets, I think of those two. I'm glad we bought the land in Tampa, Florida, subsequent to quarter end and that we're wrapping up our last park there, Grand Oaks. There have been a lot of expansions, relocations in Tampa for us. We kind of need the raw materials to keep going in that market as well. Probably those would be the three that would come to mind. Again, we’ll follow the markets where kind of where the tenant demand is, and I like that it's pretty broad-based within our markets.

If I could slip a third here because you mentioned the Tampa land, could you just—it looks like your price per billable square foot was pretty attractive there and then the piece you bought in San Antonio. Can you just kind of talk about the land acquisition market, what you're seeing from a pricing perspective and opportunity set?

Good comment. We're excited about both of those acquisitions. The land opportunity seems like I would—in my mind, I always put land sellers in two categories. There's the generational holders, the farmer, someone like that, and those prices are pretty sticky and probably haven't moved a lot. If they hold it for a few more years, they're probably fine with that. Where we've found opportunities in a couple of the Austin acquisitions we made was where people were acquiring land, getting it permitted, zoned and then selling it on a forward basis, that's probably where the pricing has moved back, maybe 25%, 30%, things like that, and just you have people that are running out of time. We've found a couple of those. We've heard of a few more of those, a couple out West that we've looked at and are looking at where it's basically developers without a lot of experience, and they've gotten out over their skis financing-wise, and they can't raise the debt or the equity because as a merchant builder, you don't really know where you could sell the building 15, 18 months from now, unlike where you could have the last few years. With the better land sites, there's always a backstory and that the San Antonio land and I'll complement our team, it was—it's an infill site in San Antonio right along I-35, but it was a—we've described it as a land-rich, cash-poor church. We helped the church relocate to a corner of the site, and we probably worked on it for 4 years. We like our land bases there. We've looked at churches, water parks, horse tables, dark horses and you name it. But that was unusual. I'll thank Reed and Terra Warren for helping build a church in order to get a good park land site. In Tampa, odd land sites, we have experience in Fort Myers, where there was an eagle on-site and you have to hire someone to observe the eagle; there are certain times of the year you can build. We've lived through that in Fort Myers and that helped us on this site just outside Tampa and that there's an eagle on the site. We'll hope he stays and we'll try to not disturb him, and we have experience building around that. On the good sites, there's always something kind of atypical. Both of those were where you saw the closing this month in April, but they started three, four years ago, and that's probably what I think most investors don't see is how long it takes us to get the zoning permitting and usually an unusual seller situation.

Great. Thanks Marshal.

Sure. Thank you, Craig.

Our next question will come from Connor Mitchell with Piper Sandler. Please go ahead with your question.

Hey good morning. Thanks for taking my question. I guess you guys have touched a good amount on development transaction markets. I just want to focus a little bit on any pressure on the tenants. You guys talked previously about a bankruptcy. I guess just one, do you see any other issues with your tenants with some of the retailer struggles? And then as a follow-up, I'll include in this is, are you seeing any pressure on tenants due to banks pulling back on the credit?

Yes. Hey Connor, good morning. This is Brent. Yes, we—pleasantly, I guess, the overall summary is we—our tenants continue to be very strong and have not had much in terms of payment issues. In the first quarter, we did record $370,000 of bad debt. About two-thirds of that was from one tenant from the situation we described, and predominantly, most of that was the straight-line rent balance. Currently, we only have 12 active tenants on our allowance list. Just a reminder, we've got about 1,650 tenants. So that number is historically low. It's very low. All our top 10 tenants are current. Budget-wise, we have maintained that at $500 a quarter; second, third, fourth, it came down a little bit to $1.9. Hopefully, those numbers prove to be conservative. In the first quarter, you just get one tenant with a certain balance and that can get to a couple of hundred thousand dollars fairly quickly. To answer your question, we've not seen tenants reach out to us or any banking issues or funding issues. We're not aware of any tenants that might have been called out in California with a couple of banks that had troubles there. From a collections and receivables and tenant stability standpoint, it continues to be a very resilient, very strong.

Okay, that’s all from me. Thank you.

Thank you.

Thanks, Connor.

Our next question will come from Nick Thillman with Baird. Please go ahead with your question.

Hey good morning guys. Maybe I wanted to touch a little bit on same-store. Obviously, best performance in company history at 11%, but the guide kind of suggests a little bit of a slowdown. It looks like there was some concession burn-off in the first quarter, but just wondering if there's any lumpiness as we go through 2023 here and getting down to that 7% range.

Nick good morning, it's Marshall. You're right. We're really happy with our quarter. I think part of our challenge, and it's a great problem to have, is as we move through the year, we're running up against better and better comps. We finished last year in 98s, and it will still be moving forward. But really, we're not—this quarter, we picked up on rents and an 80 basis points of occupancy. That 80 basis points occupancy gain will drift down lower during the course of the year. Again, we're glad we were able to raise our occupancy guidance for the year. I think it's just coming up against harder comps. Hopefully, we'll—hopefully, we can continue to be. We're thrilled to be at 11%. I think the quarters going ahead will be a little bit higher mountains to beat, but we still are showing positive beats. If our occupancy can hang in there, it has through the end of April. So far, I've been the nervous one. I've been very nervous about the economy, given all the headlines for several months, but our day-to-day operations don't reflect that. I hope I'm wrong for just eight more quarters of this year and will be good.

That's helpful. And then maybe one question just on your tenant base. Have you noticed any change in the amount of investment tenants are making into their space recently?

It does seem to be trending up, and some of it you could say inflation and things like that. I think with hiring, one thing we've noticed in Arizona and some of the Western markets—and in Florida too, HVAC space before you've had fans and things like that, but more air-conditioned space. I think that’s— and we've upped amenities at our parks and things like that, given the difficulty hiring. Tenants have probably made it more accommodating for their employees in our spaces. They’re always working on and finding ways to improve just the efficiency of our buildings, the racking and things like that. That's where I've always hoped over time, we'll pick up more retail distribution space just because our buildings are so much more efficient than order online, pick up at store option. I don't think the retail format has the physical structure we can offer retailers. I think that mix will get— that will be another source of demand, but I think that's going to play out over— it started to play out but will take several more years still.

That’s it from me. Thanks guys.

You're welcome, Nick.

Our next question will come from Jason Belcher with Wells Fargo. Please go ahead with your question.

Yes, hi, good morning. Wondering if you could talk about any additional demand you are seeing from near-shoring or on-shoring of manufacturing and production activity and which markets are seeing the biggest impact from those trends? Maybe how should we think about that evolving going forward?

Okay. Happy to take a stab at it. We do talk about what we are reading and seeing is kind of the China plus one manufacturing. Where we're seeing those benefits, as you would expect, are in Texas markets, El Paso has been a very strong market for us the past few years, probably the best three or four years in El Paso of the 20 years we've been there. San Diego—we've acquired several opportunities there over the last few years and filled those up quickly. We still like San Diego, and then Arizona has been a good market. We've been active in Phoenix, a little less so in Tucson, but we're 100% in those markets. We like—that’s where we're seeing the near-shoring. Central Texas has seen a pickup in manufacturing, along with Tesla and chip plants and things that have been built in Mesa, out in Phoenix and the same in Austin. We won't get the manufacturer, although I’m glad they’re coming to our areas where we pick up. We've seen it in San Antonio, and it's picking up the suppliers that are working with the plants that are getting built. It's another source. I think it will play out over several years. I can't imagine the process when you think of where we open another plant and does it go to India or Vietnam or do we go to Mexico with it and how that plays out. It's been interesting, some of the tours we've had, especially I think of a couple in San Diego, where you've had the CEOs come tour the space and tell me they're going to lease 80,000 or 100,000 feet; that's not something I would expect from a large company. But I'm thinking I might be over-analyzing it, probably means a bigger supply chain decision and what they're doing in Tijuana or Juarez and how that rolls through their supply chain. We're trying to pick up sites. We're actively looking in El Paso. We're full in San Diego and have some land in Phoenix to keep working on that. I'm—again, as I mentioned, I'm glad we’ve got several tailwinds that I think will play out at different philosophies over the next few years.

Thanks for all that color. That's helpful. One more for me; if you could give us an update on what you're seeing in terms of materials and labor cost inflation. I noticed the price per square foot increase in your development starts guidance, maybe if you can just comment on the cost inflation front there?

Yes. On our starts, if helpful, those are usually we'll have those specifically by project. They get moved around sometimes, so you can get kind of a false positive where we're going to build in Florida rather than Arizona and the price could be higher or lower. Thankfully, we've seen construction costs come down a little bit. The last couple of projects we bid out—one in San Antonio, one in Phoenix—where the shell costs have come in a good maybe 5% to 10% lower than they would have been at the end of last year. I’m hopeful with the drop in the construction starts, although there's a lot of infrastructure spending and things like that, that we’ll see some pickup as the subcontractors get less busy and things like that. I think the other thing that's helping us too is like electrical panels and steel were so problematic just to get deliveries when the market was really hot. We're seeing delivery times come down, so we can get our buildings to market while it's good, or a few months more quickly. Hopefully, the pricing drops we're seeing will at least flatten out, thankfully, after a few years of pretty heavy increases. We've actually seen a couple of drops and things go up, absent concrete that still seems to be a pretty expensive material, and obviously, we use an awful lot of it in our buildings.

Thanks a lot. That's all for me.

You're welcome.

Our next question will come from Jessica Zheng with Green Street. Please go ahead with your question.

Good morning. I'm curious to hear your view on how sensitive you think the 3PL tenants are to overall import volumes. We've seen the import container volumes decline pretty significantly year-over-year in the first quarter. Has that driven any softness in 3PL demand at all?

I think it certainly will in time. If you say within our portfolio, we've not really seen any movement within the 3PLs. Thankfully, the ones we have are like everyone is on long-term leases and things like that. There's a lot of consolidation within the 3PL world, and so far we've not had any issues of them wanting to buy out of their lease, give space back, things like that. I think over time, I've thought that 3PLs can be—they're one of the first tenants to expand rapidly when things are good, and they're also a pretty early tenant to contract. Obviously, it's not like their headquarters location and things like that, and they'll have multiple locations in a submarket. They're pretty twitchy tenants. They'll move in one direction, one way or the other. But knock on wood, we have not really had any abnormal amount of moving parts within our 3PL tenancy.

Okay. Great. Thanks for the color.

You're welcome.

Thank you.

Our next question will come from Jeff Spector with Bank of America. Please go ahead with your question.

Great. Good morning. I just wanted to clarify, Marshall, your concerns over the recession. Is it more tied to kind of the economic forecast, like BofA calling for a recession since last year? Or have you actually seen anything or heard anything from tenants, anything that really is creating that concern on the recession?

Good morning, Jeff, and yes you're right. I mean, I wasn't looking to blame it on the BofA economist, but it really is more. We typically use the phrase with our own board at 5,000 feet, things feel pretty good. If we're in a recession, and we're 99% leased and raising rents 50%, that feels good. When I read the newspaper or watch TV, it feels like there's a lot of banks failing and the banks that have come through that are in our line have called on us; there's a lot of anxiety out there. It's a long-winded way of saying, no, it's more headline nervousness, paranoid trying to look around corners, which I think I felt like I should always be doing to some extent, but I don't want to do it to the point that we miss good opportunities. It's headline anxiety. When I talk to the guys in the field, they look at me like I've got two heads because they're trying to find space for tenants and things like that.

Thank you. By the way, I blame BofA econ all the time, so it's all good. Second, I just wanted to confirm your comments on possible opportunities, merchant builders; are you actually seeing anything today? Or again, is this the hope that if there may be down the line, there's some distress and EastGroup could take advantage?

There’s been a little bit in the sense that a couple of the land sites specifically that I can think that we bought late last year in Austin, we're moving parts. One was a newer merchant developer where they needed to do something and we acquired that. There are a couple of sites out West, Arizona, Las Vegas where we've seen where again, I think one, we passed on—you'll hear the stories from the broker where they had the site, they had ordered one was the electrical equipment, another was the steel, and now they were scrambling trying to get their financial house in order, either do a joint venture or sell it things like that, and that's not something we saw in the last few years. The property we bought in Las Vegas, although there were other bidders, one of the things we really stressed to the tenant was our ability to close using our line of credit, which allowed us to move and close in a little over 30 days. I do think without trying to violate our confidentiality agreement, we were told we were not the highest bidder, but we were a certain path to closing, and so we were awarded the contract that way. We haven't seen a lot of distress, but if it shows up, it may be more land opportunities. I think on acquisitions—and I know I'm talking to some of our peers, we have a lot of respect for Blake Baird, and the Torino team; they really think it's going to be a great acquisition environment. I want to believe Blake, so we're trying to have some dry powder and be able, when capital is going to be constrained and credit tightens and things like that. If we can have some dry powder, we'll either put it into our development pipeline where the demand is there or if we can find the right acquisitions. It's something we hadn't looked at for a good two or three quarters, but we've really started sticking our toe in the water here in the last 60 days a little bit. If we can find some distressed opportunities and pricing in Las Vegas, we think we were slightly below replacement cost on a newer building and got a development-like yield. We felt like something that would have been sub-four cap rate a year ago, if we can get close to the mid-6s on a GAAP return, that's a pretty good opportunity.

Okay. Great. Thank you.

You're welcome.

And our next question will come from Ki Bin Kim with Truist. Please go ahead with your question.

Thanks. Good morning. I want to ask you a question about supply. I realize new supply out there for shallow-bay products or smaller buildings is only a small slice of the 600 million-plus square feet of deliveries. But I'm curious if you look at that supply that's more comparable to your own product, how would you describe that level of supply in a historical context, just trying to gauge if it is getting tougher or easier that level of supply relative to your portfolio?

Good morning, Ki Bin. We've seen—and I'll use it Atlanta where, and I'm picking it really just the CBRE numbers were a little more granular than some of the other markets. They've talked about the average starts last year were 8 million square feet a quarter. The first quarter was under 2 million, 1.7 million square feet; and then maybe a couple of other stats—the overall construction is mostly in buildings 200,000 feet and up. Ten percent to 15% of what's in the pipeline is comparable product. I do think stepping back, a lot of our competition isn't— it is a local regional developer with an institutional partner like AEW, Nuveen, Clarion someone like that. Those merchant developers have been hit harder than the larger institutions. It's just hard to know where your exit is and to raise that capital, be it debt or equity, the cost of that debt has certainly gone up a lot in the last year. For example, per CBRE, starts have fallen from the third quarter of last year to the first quarter this year by about 45%. I imagine it will be a pretty material decline in shallow bay compared to the overall market. That's where, after I talk about my anxiety and with Jeff Spector, I get excited about 2024. If we can hang on to our own tenancy where you're 98%, 99%, and get to the back half of this year and into 2024, our markets are pretty tight. We’re full, and there's no new supply that I'm hopeful gives us some pre-lease development opportunities and abilities to push rents as well. I just hope—the flip side of that bank credit tightening and Brent spoke about it earlier is that our own tenants, thankfully, there's over 1,600 of them, I'm hopeful they make it through this credit tightening period as well.

Great. And you guys reported 48% of lease spreads this quarter. I'm just curious if you had any thoughts on what we should expect for the remainder of the year.

That was about where we ran fourth quarter, thankfully as well. Last year, we averaged about 40%. It feels like a pretty good run rate at this point unless things really slow down, and I like it's pretty spread out throughout our portfolio. The tech before was California and California is still a strong market. Unfortunately, we don't—fortunately or unfortunately I think it was you who pointed out, Ki Bin. There’s not a lot rolling which most years is a good thing. With rents rising as they are, I wish we had a little more role in California than we do, but thankfully, other markets have offset that. I think that's a pretty good run rate. Hopefully, we can stay in the 40%, and we’ll just—what I like of putting those quarters back to back to back, you’re working your way deeper through the portfolio, and rents don't seem to be slowing down yet. That's the other nice thing in the market with the demand feels normalized—not for net like it was, but rents continue to grow in most all of our markets.

Okay. Thank you.

Sure. You're welcome.

And our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead with your question.

Hi. Thanks. Good morning. I just wanted to, I guess, follow on the discussion around leasing and pricing power a bit. Does the pace of development leasing pick up over the next several quarters as we think about 2024, just given the decrease in starts that you're discussing for shallow bay? Should we expect the projected stabilized yields to continue moving higher?

I'd like to think our yields will keep moving up. I mean, I don't think dramatically, but they'll keep creeping up; rents are going up. Hopefully, as we bid our projects, I'm optimistic construction pricing will be flat to slightly down; we’ll see. I would hope our development leasing—we underwrite it. We always have that it's one year from shell completion to finish. We've been beating that the last several years and have had some success with early leasing on projects. If the economy stays where it is today, we'll continue that pattern. And again, if you said where is your concern, it’s not so much on supply. I see supply as upside in a couple more quarters as the development pipeline empties out. It's really more tenant demand, and if we're in a recession, how deep of a recession? But if things can just kind of stay where we're hovering around a recession, we have enough tailwinds to our last-mile shallow-bay Sunbelt markets to our development program. I always say we don't need a great economy; we just need an okay economy. If we can stay okay, then probably your thesis will hold up. We should get—we should be leasing fairly rapidly or kind of delivering like we did this quarter, with 100% leased projects and getting good returns on those, knock on wood.

Okay. And then the second question, back to acquisitions. So the deal in Las Vegas for $34 million that you completed in April, it sounded like you achieved a premium yield, something in the mid-6% range. Is that right? Are there any portfolios that you're tracking that could transact, anything of size? Is there appetite to do something larger to the extent that something there is dislocations or something becomes available?

Good question. You're right. That's an accurate description of Las Vegas where it was kind of that yield in the 6s, and our building that was about five years old right off the freeway. So we're excited about it. There are probably higher odds of that. I think there are fewer portfolios in the market just because it's so hard to finance. I mean, I think there's so much dry powder, but it doesn't feel like there are that many portfolio deals transacting. We've seen a few, and it always seems—we were excited to buy the Tulloch portfolio last year, and it fit us well, but it always seems like on the portfolio as we just looked at one recently, although the markets aligned up well, the quality of the portfolio—we're biased, but it wasn't nearly what our portfolio is, so we passed on it. There are always a couple of things that we're kicking tires on and if we can find one, and the big if to that—we were happy to transact with the stock price and where that came out on Tulloch a year ago. On a larger transaction, we would need a pretty good equity price to have that make sense as well and have it be accretive to our own FFO. A few more hurdles, and never say never, but those are if acquisitions are difficult; portfolio acquisitions are an even longer shot. Look, if we buy a building every once in a while and we develop buildings each quarter, I'm perfectly happy to just kind of grow slow and steady that method without keeping our shareholders up at night. Every once in a blue moon, if we find a portfolio, we will try to move forward with it, but that would be the exception in the rule.

All right. Thank you.

Sure. Thanks, Todd.

And our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead with your question.

Yes. Thanks. Marshall, I wanted to touch on your comments about demand. I mean, obviously, I think you've been highlighting, still pretty healthy. But how big of a pullback has there been compared to last year? I mean is there a noticeable slowdown in activity just off of those record levels to today? Or you've not really noticed it that much?

The results are similar, and what we hear in the field from our team is there for a while. I remember a tenant rep broker saying this isn't fun being a tenant rep broker; I'll find a space, and there are two or three other prospects for it. It felt frenetic and almost fun, but in a scary way, because it didn't feel sustainable where rents were going up, parabolic was one phrase someone used. Now it’s more, there are one or two prospects, and it feels more of a manageable process than a scramble for space and/or Amazon out running rapidly leasing up space and things like that. It was fun, but it didn’t feel sustainable. This feels more of a normalized 2019 pre-COVID market. We’ve got prospects just not multiple, and again, every developer seems to be becoming an industrial developer. It's like your Uber driver when they're giving you stock tips—it's time to move your money to bonds or cash, I guess. The number of active developers will slow—has slowed down rapidly in our markets, too, and that thankfully feels more sustainable.

Okay. And then also you talked about your development yields that you thought they might be starting to tick higher. Is that just due to construction costs dropping? Or is that due to rents improving? I guess, how does the whole financing costs kind of get included in that calculation? I mean, with interest rates where they are today. Has that pressured or reflected on your development yields at all?

It does. Maybe I’ll take the first time, rent the second. Yes, on the first part, I really do. I think we'll have some slight improvements from against where we underwrote it on our numerator and a little bit higher rents than where we originally thought. Construction pricing—we've always done underwriting where we haven't projected rents. We'll use current market rents or ideally last rents on the building we built in that part, but those rents continued rising and maybe a little bit of a drop in construction pricing, too. I think that's where we could pick up 10 to 30 basis points hopefully on our development yields, although they were strong last year, I think just what we're underwriting seems to creep up. We've—because of the financing costs, we raised our target development yields.

Yes. As Marshall mentioned earlier, we had historically said or typically said we wanted that 150 basis point spread between our cost of capital and the yield we’re getting. I think over time, it kind of got lost in the shuffle because we got spoiled there. We had a period where we were basically doubling our money. We were building in a low to mid-6s, and I said, call it a mid-3 to high-3 cap environment. Obviously, that has tightened with the increase in cost of capital, but we're still making what, again on a historical basis, we'd call a good spread, call our blended cost of capital after SME debt somewhere in the 5% range or somewhere in that area, with equity cheaper and debt a little more expensive than that. As Marshall said, you're hitting that upper 6 to 7 range; it's still a good spread, still a good opportunity. We monitor it. It certainly gives you less wiggle room than you had when you had such a wide gap, but we're still in a position where it's very accretive and continues to be a good NAV creator for us.

Okay. Great. Thank you.

You're welcome.

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

Hello. Good morning guys. This is Timmy for Ronald Kamdem. Just a question on some of the Houston dispositions that we've seen over the past couple of quarters. I thought that you had completed on this quarter. I think the pricing was a little under $100 a foot. Just curious if that's kind of the pricing we expect going forward for Houston asset sales for the remainder of the year and beyond or if that's kind of a one-off? Just curious how you guys are looking at that.

Yes. I think that was a little more one-off. It was one of our earlier buildings in World Houston. It was a building for the tenant at the time. So there were some unusual features to that building. It had been vacated recently. As we tried to manage our Houston size, we always ask our team if the building were vacant, what would you want to exit? This building had recently gone vacant, and as we were re-leasing it, we said, all right, we've got a nice gain here. It’s work. We got a good yield on the initial development, and we'd like to keep developing in Houston. If we can develop to a 7 and round and sell to a 5 or below, we like that model. It needed a fair amount of work to re-tenant it and we thought it was a good time to exit that. I would expect more of our dispositions to still be north of $100 a foot, and this was a little bit of a tenant-specific building that we had built 15 to 20 years ago.

Great. And then just a follow-up. The portfolio is obviously around 99% occupied today. Maybe just historically when you see that level of vacancy, where is market rent growth typically been? Just on that question, what do you expect for the remainder of the year for market rent growth? You talked about slowing starts. Just curious about the outlook for that?

Yes. I would think probably a wider range, maybe call it 7% to 12%, 15% in rent growth market year-over-year for the balance of the year. At 99%, I guess, Brent and I both have been in industrial probably more years than we both want to add up just because it wouldn't make us feel old. I never thought you'd see rent growth that we've had in industrial the last several quarters. At 99%, I remember the rule of thumb early on someone told me anytime vacancy is below 10%, it's a landlord market, and above 10% becomes a tenant market. I suspect vacancies will pick up nationally. It sounds like, again most of that will be big box, just because of where deliveries will be this year. We should continue to have rent growth, especially on our product type; I think will be hopefully sheltered from a lot of that supply as it comes out of the pipeline. I hope we can continue on the path we're on and where we are probably every once in a while, each market is a little different, where you'll see some drift one way or the other in a quarter. It will just be more on the mix. But all in all, we were last year, we're off to a heavy start this year at—I’m quoting GAAP numbers because that gets the rent—the free rent and the rent bumps in there as well, where we've been able to increase the rent bumps to the last few years kind of where it was a 2.5%, 3% market to now a 3.5%, 4+ market depending which market you're in.

Great. Thank you, guys.

You're welcome.

And this concludes the question-and-answer session. I'd like to turn the conference back over to Marshall Loeb for any closing remarks.

Thank you. Thank you, everyone, for your time this morning. We appreciate your interest in EastGroup. If we didn't get to your question or you have some follow-up questions, Brent and I are certainly available, and we look forward to seeing many of you at Nareit here in just over a month. Thank you.

Thank you.

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