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

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

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

Thanks, Keena. Good morning, and I’ll start by thanking our team for a strong quarter. They continue to perform at a high level and capitalize on opportunities in a fluid environment. Our third quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance, up 13% for the quarter and 11% year-to-date. For over 10 years now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term growth trend. Demonstrating the market's normalizing trend, our average quarterly occupancy and quarter-end occupancy are down from both third quarter 2022 and June 30. The quarterly occupancy was historically strong at 97.7%, just down from what were peak levels. Our percentage lease, however, remained consistent with June 30 at 98.5%. Our quarterly releasing spreads reached a record at approximately 55% GAAP and 39% cash. These results pushed year-to-date spreads to 53% GAAP and 37% cash. Same-store NOI was solid, up 6.9% for the quarter and 8.1% year-to-date. And finally, I’m happy to finish the quarter with FFO rising to $2 a share. Helping us achieve these results is thankfully having the most diversified rent roll in our sector with our top 10 tenants falling to 8.2% of rents, down 70 basis points from third quarter 2022, and in more locations. We view the geographic and tenant diversity as ways to stabilize future earnings regardless of the economic environment. In summary, I’m proud of our year-to-date performance, especially given the larger economic backdrop. We continue to respond to strengthen the market and user demand for industrial products by focusing on value creation via raising rents, developments and, more recently, acquisitions. This strength allowed us to end the quarter 98.5% leased and push rents throughout a wider portfolio of geography. Due to current capital markets, we’re seeing broader strategic acquisition opportunities. It’s hard to predict how large the opportunity may be, but we’re pleased with our ability to acquire newer fully leased properties with below-market rents and attractive initial yields. As we’ve stated before, our development starts are pulled by market demand within our parts. Based on our read-through, we’re forecasting 2023 starts of $360 million. And while our developments continue leasing with solid prospect interests, we’re seeing more deliberate decision-making. In this environment, we’re also seeing two promising trends. The first is the decline in industrial starts, starting to fall now for four consecutive quarters, with third quarter 2023 being roughly two-thirds lower than third quarter 2022. Assuming reasonably steady demand in 2024, the markets will tighten, allowing us to continue pushing rents and create development opportunities. The second trend we’re seeing is being with developers who’ve completed significant site work prior to closing; with the forward window tightening, it’s allowed us to step into shovel-ready sites and several markets such as Tampa, Denver, Austin, etc. And Brent will now speak to several topics including our assumptions within the updated 2023 guidance.

Good morning. Our third quarter results reflected terrific execution of our team, the strong overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the third quarter was $2 per share, compared to $1.77 for the same quarter last year. $0.05 of FFO was attributable to an involuntary conversion gain recognized as a result of roof replacements that were damaged in storms, along with related insurance claims. Excluding the gain, FFO per share for the quarter exceeded the upper end of our guidance range at $1.95 per share, an increase of 10.2% over the same quarter last year. The outperformance continues to be driven by stellar operating portfolio results and the success of our development program. From a capital perspective, the strength in our stock price continued to provide the opportunity to access the equity markets. During the quarter, we sold shares for gross proceeds of $165 million at an average price of $177.14 per share. During this period of elevated interest rates, equity proceeds have been our most attractive capital source. In our updated guidance for the year, we increased our stock issuance assumption by $110 million to $585 million, of which $465 million is complete. During the quarter, we repaid two loans totaling $52 million, including our remaining secured mortgage. The company’s debt portfolio is now 100% unsecured. Also, we refinanced a $100 million unsecured term loan with a 45 basis point reduction in the effective fixed interest rate, while the maturity date was unchanged. That will produce interest savings of approximately $2.25 million over the remaining five years of the term. Although capital markets are fluid, our balance sheet remains flexible and strong with record good financial metrics. Our debt-to-total market capitalization was 18%. The unadjusted debt-to-EBITDA ratio was down to 4.1 times, and our interest and fixed charge coverage ratio increased to 9.1 times. Looking forward, FFO guidance for the fourth quarter of 2023 is estimated to be in the range of $1.98 to $2.02 per share, and $7.73 to $7.77 for the year, a $0.12 per share increase over our prior guidance. Those midpoints represent increases of 9.9% and 10.7% compared to the prior year, respectively. The revised guidance produces the same-store growth midpoint of 7.8% for the year, an increase of 50 basis points from last quarter’s guidance. We also increased the midpoint of our average occupancy again by 10 basis points to 97.9%. This is the result of outperforming our budget expectations in the third quarter, along with continued optimism for the final quarter of the year. In closing, we were pleased with our third quarter results and are well positioned to close out the year as we have in both good and uncertain times in the past. We rely on our financial strength, the experience of our team, and the quality and location of our portfolio to lead us into the future. Now, Marshall will make final comments.

Thanks, Brent. In closing, I’m proud of the results our team is creating. Internally, operations remain strong, and we’re constantly strengthening the balance sheet. Externally, the capital markets and the overall environment remain clouded. And while never a pleasant experience, it’s leading to further declines in starts. In the meantime, we’re working to maintain high occupancies while pushing rents. And in spite of all the uncertainty, I like our positioning. More specifically, our portfolio is benefiting from several long-term positive secular trends, such as population migration, evolving logistics chains, onshoring, nearshoring, etc. We have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets improves each quarter. Our balance sheet is stronger than it’s ever been, and we’re expanding our diversity both in our tenant base as well as our geography. We’ll now take your questions.

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

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

Okay. Good morning, Craig. Thanks for the question. I guess as we look at what the market has done recently on our mark-to-market, the good news is now, for trailing 12 months on a GAAP basis, we've got cash numbers that have been high. But our trailing 12 months GAAP rental rate increases have averaged 50%, a little higher than that. This quarter, in spite of all the interest rate increases and things like that, it was a record quarter for us in terms of cash and GAAP spread. So we’re in the mid-50s, and our year-to-date averages are in the combined 53. So a little better, not out of the park, but continually improving there. What we were looking at recently in terms of what the market has done this year and some of our peers estimating around 7%. I saw a CBRE number in the mid-7s. Working with Cushman & Wakefield, we took their annual market growth rate and really market weighted it based on our NOI, and that’s on an overall market, and that gets you just north of an 8.5% rent growth. Yes, it’s gone negative in LA, but in our markets, using Cushman & Wakefield, let’s call it, 8.5%, a little above that. And I would also encourage people, if you’re curious, and I wish we had the ability to share a slide on our investor presentation on our website, if you’ll flip through it if you have a chance and go to about Page 12, there’s another chart that shows vacancy rates for 100,000 feet and below really haven't moved much in a year. What’s moving the rents is big boxes getting delivered, and those prospects are deliberate and it’s taken a little more time to lease though. So that 8.5% for our product type, I’ll probably add 100 to 150 basis points to that just because the supply has not been there. And that’s why I was thankful you’ve seen our occupancy hold and our percent leased hold fairly steady this year at 98.5%. We still feel like we’ve got good mark-to-market, although I would agree maybe where you started, the rent is not a hyperbolic frenzy that it was post-COVID. But it’s still pretty solid rent growth. A little bit longer-term, we’re encouraged to see starts fall for the fourth consecutive quarter; I think they’ll fall again in the fourth quarter too, just given what’s going on in the world. So we can stay around 98% leased with supply falling as fast as it is, we feel pretty good about our ability to push rents going forward, assuming steady demand.

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

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

Okay. Thank you.

Sure.

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

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

Good question. Good morning, Jeff. It’s been really a more dynamic acquisition market, or maybe market on the capital transaction than we’ve seen in a few years. It’s almost two parts. We’ve bid on portfolios, we’ve bid on a couple of portfolios of 3 to 6 buildings, we’ve been clobbered, and those are still traded. There’s some out there in the 4s, larger one below 4 type cap yield and things like that. But we’ve seen a few one-off transactions, and the way we’ve looked at it, whether we’re pretty indifferent between equity and debt, if all being equal. But this year, we’ve had the advantage of having our equity priced in kind of that low- to mid-4s implied cap rate, and we’ve been able to see we’ve closed on three. And then we have another one as we move that acquisition guidance that we are optimistic about by the end of the year. The ability to buy new buildings in markets we’re in, sub-markets we want to be in and around them, call it, a 6 cap yield, old high 5, 6 cap trend. I’m trying not to violate every confidentiality agreement, and below market rents. Those would have been 4 type cap rates or sub-4 18 months ago and that would have been a bidding frenzy. But all of a sudden, with debt prices where they are and some of the firms as we read about needing liquidity, it’s also hard to sell office buildings, so they’re trying to get things closed by the end of the year. Industrial is, as the brokers explain it to us, the most attractive product to have on the market. Our pitch has been that we may not be your highest bidder, but we’re the most certain that we have the line of credit, we have zero outstanding of roughly a low balance on most of kind of second and the third quarter. We have the ability to close and we know this market and submarket. That’s worked where our bidding average has been much lower. And just anecdotally talking to our three regionals, we have good relationships with the national marketing firms and brokerage firms, and we’ll get calls that the ratio of inbound calls has really increased. All of a sudden we’re a more attractive buyer. I think it’s just our ability to acquire. So all of a sudden acquisition, and I don’t think the window will stay open terribly long. But if our equity price were to stay where they are, it’s not today, but where it was in the awful lot of third quarter, if we can kind of buy new assets and below market rents and get that spread on investments, we’ve lined up shut out a little more than $0.05 to next year’s earnings on a run rate, with $140 million. The average building is probably literally 2 years old of those four that we’ve acquired. So we like that model. If we can pursue that strategy, we don’t have the capital today; equity is not priced like that, and it’s below our NAV. We’ll continue to watch that window. We’ve seen some interesting opportunities and I think we won’t change what we’re doing, but in terms of products or markets, I think we should pivot our strategy as the market gives us those opportunities.

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

Some of the best I could point, which I hate them, essentially we said this is one call, which we had a zoom call with slides, on our investor presentation, and we just set this up late yesterday. So it’s about Page 12 will show you the vacancy rates by size for anyone that wants to flip through them and about, I may be off the page, but I’m in the zip code, about Page 10, you’ll see national starts. They fall in four quarters in a row, and the third quarter last year was the peak; we’re down to quarter to quarter almost two-thirds this quarter. Shallow bay usually makes up, and there’s another chart that I’m going to share with the shallow bay numbers on our webcast. It’s pretty far down; it’s usually 10% to 15% of supply. We felt like in any markets competitive, the whole thing is starts falling off, and the supply construction pipeline empty now will be a vacuum for a bit, which should enable us, kind of earlier question, to really push rents. It will be a minute before we get there, but it should also allow us with our parks to really, if I’m being an optimist, ramp up our development pipeline because people will need expansion space down the road in 2024 if they feel better about the economy. Usually that’s when our developments lease up quickly when there’s a lack of available product on the market that people have to go ahead and sign up pre-lease and things like that. Hopefully, that’s helpful to you; you’ll see the start kind of graph. Our vacancy hasn’t moved very much within an average building size under 100,000 feet; where the vacancies really moved is kind of when you get to 300,000 square feet and above. That’s where most of the new product has been built; that’s mostly what’s been built, and where you could put a lot of capital work the last few years. It until all of a sudden, people got nervous about the economy, and that’s stopped. I’ve always said I like where we kind of fit on the playground.

Great. Very helpful. Thank you.

Thanks, Jeff.

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

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

Yeah. That’s a good question. I think we’ve always said we’ll go as fast or as slow as really the market dictates. Phase 3 in a park is moving slowly. We’re not going to roll into Phase 4, but if we run out of inventory, especially if we have tenants telling us they need expansion space, we’ll move pretty quickly. We always try to have permits in hand. So we’ll be looking into next year. I think the market will get tight, hopefully in the back half of the year tighter because what comes out of the pipeline is not being replaced. Where we are seeing opportunities is, over the past few years, there’s been such an appetite for industrial products that developers went through the permitting, zoning, all those kind of – it could take years, usually 1.5 years at a minimum, and in some cases, 3 years to get the wetlands every issue. In a number of cases, those local regional developers have flipped the land or built the building and sold it on a forward basis. We’ve seen in a couple of cases, that Denver land acquisition we made recently, the one in Tampa; we’ve got another one that we’re optimistic about one in Austin, where those developers got to the end and hadn’t caught up. I should have backed up; where they’ve done all this work while it’s under contract that hasn't closed yet. They needed to look for capital sources to move forward. It feels like my analogy is we’ve been able to jump into the game in the fourth inning rather than the first inning. Like in Denver, for example, they had worked on the site for several years and we broke ground within, I think, call it, 60 days of closing. The same thing in Tampa; some of these we were all of a sudden getting outbid for years. People want to get capital out. Now, we’ve become a source for them. They’ve created all this work, and if they don’t close, the value they created reverts back to that seller. They’re all looking for capital, and we’ve been able to step in and circumvent an awful lot of that development cycle.

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

Yeah, I’ll take a stab. Brent can correct me if he disagrees. To me, the risk is always that we’ve said for years, we’re way less about supply than we do demand given, not many people build what we build, and especially today, that’s got an exclamation point at the end. I do worry about our tenant balance sheets with all prices higher, labor wages higher, interest rates higher, rents higher; it’s a lot on them. So I worry about tenant demand. But if we can stay full, we do have land for development. I guess in reverse order, we’ve got the ability to push rents first and then organic growth. Then we can develop and fund it with dispositions or this or that. It’s great to have the equity when we do, and we can take advantage of it in this market. But I’d also say we don’t feel compelled; I think we’ve got a perfectly good company. If we don’t buy a lot, we’ll be alright on that. It’s a way to accelerate our growth, but we’ll have growth one way or the other. The way we’ve tried to view it is to be nimble in what the market allows us. We’ll take advantage of it. We want to change our strategy, but we may change the way we implement it. For several years, when everybody wanted to own U.S. industrial, our attitude was it’s better to create it than outbid people for it. Now, if there are good acquisition opportunities, we’ll pivot to that. It doesn’t mean we’ll stop development if it’s there, but we’ll pivot to those. Sometimes it’s okay to sit on your hands and wait for a window to open too. Thankfully, we’ve got that organic growth that you were talking about.

Okay. Thank you.

Sure.

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

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

Good question. As we think about it, we’ll look at our percent NOI kind of as a portfolio and where we are. In that market, Las Vegas has been a really strong market; I’ll compliment Mike Sacco, our guy, who has been really pushing rents in Las Vegas over the last couple of years. We’re under allocated; it’s about looking back 3% of our NOI, so strong market. The way our pricing worked out, I’m pretty positive on one, if not both of those we acquired; there were higher offers, but again, we were the most certain buyer, we believe. The West Coast in the last few years, we’ve been under allocated to that market. We try to look at it, what’s the right real estate, the right sub-market. We don’t want any market; we spent a lot of time bringing Houston down from 20% into the 10s as a percent of our NOI too. So that’s part of real estate itself. Part of it is also how much we allocate to that market. Then we think having more of our NOI from Las Vegas positions us long-term to have higher cash same-store NOI, higher releasing spreads, all the things we get measured by each quarter. That’s kind of one of the markets; you’ve seen us do a lot in Austin. El Paso has been a strong market; Florida has had a great run in the last couple of years as well.

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

Yeah. No, we feel good about our development pipeline that we’ve pulled half a dozen buildings in. We can maybe talk, I’ll save it for later in the call and kind of parsing our development pipeline, answering your question. I would say, yes. People are getting activity, and we’re getting leases signed, closing in, once you get in the red zone seems slow. I think it’s all about the economy; it’s hard to feel confident to expand your business, probably given the larger climate. I appreciate, from a future bad debt perspective, our tenants and our prospects being a little bit more hesitant than shooting from the hip. So yes, it felt a little frenzied post-COVID to the point where you felt a bit nervous of brokers saying things they hadn’t seen in years. I’m glad it’s normalized a little bit. Now it feels like with the interest rates and two different wars and everything else, I get why people are being a little slow and deliberate in their decision-making.

That’s helpful. Thank you.

You’re welcome.

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

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

Okay. Brent?

Yeah, I’ll jump in. Todd, this is Brent. Good morning. The equity, our stock price has had some volatility just due to macro concerns, and so it’s moved around a lot. Even NAV itself has been very fluid this year; as most everyone on the call realizes, that has been a moving target but has been drifting down. We have full capacity on our revolver; we have just a little bit drawn under $675 million. It would depend; we’ve not been crunched for capital so far this year, as you can see, we’ve been very active on the ATM, somewhere around I think $465 million year-to-date issued is very good pricing. So we would take a pause at current pricing, but the way it’s moved up and down, if it were to shut us out for an extended period, then you’ve got to – maybe we won’t be able to do certain things on some of the good opportunities, Marshall alluded to, maybe on some one-off acquisitions, or that could impact our decisions on starts next year. But we’re going to take that as it comes. We understand we have plenty of dry powder to fund what we’re doing; it’s just a matter of the cost of funding. We’ve been very pleased with what we’ve been able to do this year. We’ll just take it as it comes, the way that the markets has been and look at my phone and see our price drop and say, as Marshall talked about, higher longer. In this odd environment today, you have good consumer news, which is bad because we want the economy to slow for interest rates to come down to us all those factors that go into it. So as we’ve always been, let’s be flexible. If the market will allow us, we’re excited about what opportunities are out there. But at the same time, we’re not – as Marshall says, we don’t have to do anything; we’ll take our time.

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

I guess, answering it reverse. Good morning, Todd. As we always underwrite, we will capitalize for 12 months after completion. We’ll level it. The earlier of when we hit 90% occupancy or 12 months post-completion. Thankfully, the outside date has been the last few years has been that 12 months. The movement within completion dates, you’re right, it’s more construction timing-related than us stopping construction that we really didn’t do any of that. Traditionally, it’s been weather and things like that could be one of the reasons. Things have certainly gotten better supply chain-wise post-COVID. But what we’re hearing on ordering switch gear, electrical transformers, those things have gotten to be that’s always the new item that takes a year now. We used to be able to deliver buildings in about 6 months pre-COVID, and now that’s stretched out. That’s what’s kept the construction pipeline so far for a little bit longer than it normally does. Any kind of electrical equipment takes a while. My guess is just the timing here; they’re on orders for concrete. The good news in several of our markets is we’ve had the new semiconductor plants or some of the government work done between whether it’s Dallas or Austin or Phoenix. The bad news is when we’re also ordering those same concrete and subcontractors, it’s hard to get on their schedules on a timely basis to lead times.

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

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

Okay. Got it. Thank you.

Sure.

You’re welcome.

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

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

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

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

It’s definitely helping them. When we look at our activity in markets, especially in some of the Texas market – I lumped onshoring and nearshoring together. The number of buildings we acquired in Dallas, for example, is a tech company electrical equipment, and they are a supplier to the semiconductor plant in Sherman, Texas, which is a suburb of Dallas. As we see those things, so many different kinds of semiconductor EV plants have been, like Tesla going into Austin, we’ve picked up Tesla suppliers in Austin, and even we’re in Northeast San Antonio, so just on I-35. San Diego, we’re feeling the effects of Tijuana and Juarez. We’re going to stay on this side of the border and have picked up. Many of the plants, whether it’s in Phoenix with the TSMC plant, and some things like that, there’s just an uptick. We’ve been looking for our next opportunity and are patient with that end markets like El Paso and San Diego. It’s been hard; we’ve kind of wait until we find it. But we’d like to grow in those two markets just given the pace of activity across the border. That hasn’t slowed down; it started with some of the trade tariffs with China. Each quarter, it seems that the Mexican trade seems to grow while China falls as a trade partner. We think between Arizona, Southern California, and Texas, we’re in a good position to try to grab our piece of that market share.

Thank you.

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

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

No, it’s interesting. Actually, what seems to happen is when things get bad like during COVID, our retention rate goes up. It doesn’t make sense to me as people are nervous to expand or things like that. You might do a shorter-term renewal. I think next year is rollover; we’ve taken a big bite out of it from where we started. We’re down to about 11%. It should be an opportunity for us to push rents next year as we move those to today’s market. I just worry about all the compounding effects that it may be twofold. At a high level, you think of all the things impacting any business today, and our tenants aren’t immune to that, and so that concerns me. But then when I look at our bad debt and our watch list, it feels manageable. Each quarter, it’s been a little bit less than what we budgeted, knock on wood. We haven’t had the problems, probably then I expected at this point in time. I’m glad we have the tenant diversity we do. The roll next year will give us an opportunity to push rents, which will benefit mainly – especially kind of a mid-year convention; 2025 will benefit next year from this year’s rent increases. I hope our tenants and the buildings next door can hang in there given the drops in supply.

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

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

Yeah. Okay. That’s it for me. Thank you.

Okay. Thanks, Bill.

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

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

Yeah, that’s a good point. We’ve typically, probably for a new start now, look, ideally, I’d say again, it would depend on if we had some pre-leasing, an existing tenant, or what city that, but the cap rates will vary, north of 7. We typically said as a rule of thumb we’d like 150 basis points above a market cap rate to justify the construction and leasing risk of a new development. I will say the cap rates, and you all study it more closely probably than even we do. It’s been a pretty fluid market. We’ve been able to buy one-off buildings at attractive cap rates, and we’ve gotten clobbered on some portfolio transactions. Again, not big portfolios, meaning three, four, or five-building portfolios. Cap rates seem pretty fluid right now. Ideally, we thought if we can start in the 7s, call it, we have high 6 to at least 7; you’re looking at our cost of capital, we’re creating value above the cap rate when we deliver the building. What I like about the REIT model compared to private equity or merchant developer, our bid has always been there will be another half million people in Austin, Texas, 10 years from now. If we can start with a good yield, it will only grow over time.

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

It’s usually about, I call it, 10 to 15 basis points for quoting GAAP; it’s usually about a 10 to 15 basis points for that.

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

Yeah, the short answer would be yes. Probably, and I can’t speak for the concept developer, the groups we worked on those; they had tied it up a couple of years ago or more, and the markets and the prices had risen. They successfully ran through all their contingencies; zoning, planning, permitting, all those things. When it came time to close, the options were more limited. That’s probably a trend we’re seeing is the ability to jump into projects that are pretty far, much further along than us acquiring a greenfield or site to start from scratch. Those land prices, they didn’t lose money on it. But we were really able to step in at about their bases. Their timing was they were under some time pressure to get the things closed and perform with their seller and buyer. It didn’t go down, but they were able to get a successful outcome and move on or in one case in Denver stay in partner with us on the project in a smaller way.

Got it. That’s really helpful color. Thank you.

You’re welcome.

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

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

This is Brent. The lease roll was very similar; it’s around 11%, at this point is a typical standpoint for us. Obviously, the occupancy we had, if you recall, our original midpoint GAAP for this year was a few 100 basis points lower than what we’ve achieved. Part of that is, we did anticipate having some occupancy headwind; we didn’t know we’d be sitting here in October and still be over 98% leased. We’re very appreciative. The team’s executed very well. So kind of get to the earlier comment that we feel good about the rental rate side of things, the ability to push rents. We’ve also been able to obtain a bit higher annual escalators in our leases, which add up over time that’s been more in the 4% area as opposed to maybe 2% or 3% in the past. The occupancy is the one bit of a wildcard in that factor that we didn’t incur this year. We’re getting to a much higher almost an 8 midpoint on same-store. Next year, it just depends; you want to factor in if we could be at that 97, 98% again or do you give up a little bit of room or not. That’s just part of the fact; it’s hard to put your parts put your finger on at this point.

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

I guess, it’s probably never said always or never. There are circumstances where we would do it. We have, look, we’ve got a couple of datacenters. We’ve talked to datacenter brokers. It would be at the margin; it’s not going to be a driver of our business; it won’t be a focus of our business. But if we had the right center and either could sell the land or ground lease the land, get the right type transaction, then we would look at it. Some things like that. We’ve explored that. Just from the sense that if there are opportunities there, we should take advantage. But it’ll be ancillary and minor to our – I’d rather stick to what we do well and kind of do it over time in more markets than in the right submarkets; I think we should pivot our strategy. That doesn’t mean we’ll stop development if it’s there, but we’ll pivot to those. It’s okay to sit on your hands and wait for a window to open, and thankfully we’ve got that organic growth that you were talking about.

Great. Thanks. Congrats on a great quarter.

Thanks, Ron.

Thanks, Ron.

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

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

Thank you, everyone.

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