Eastgroup Properties Inc Q4 FY2023 Earnings Call

Good morning ladies and gentlemen and welcome to the EastGroup Properties' Fourth Quarter 2023 Earnings Conference Call and Webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator instructions were provided.) This call is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning and thanks for calling in for our fourth quarter 2023 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call. Since we'll be making 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 as a result of new information, future 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 including 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 quarter and year in which we delivered record FFO per share and record re-leasing spreads. Our team continues performing at a high level and finding opportunities in an evolving market. Our fourth quarter and full year results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial market. Some of the results produced include: funds from operations coming in above guidance, up 11.5% for the quarter and 11.3% for the year. For over a decade, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term trend. Quarter-end occupancy rose 50 basis points from the prior quarter to 98.2%. Occupancy would have been 30 basis points higher but for a leased and occupied late-December acquisition. Our percent leased rose 20 basis points from the prior quarter to 98.7%. Average occupancy was 98.1%, which although historically strong, was down 30 basis points from 2022. Quarterly re-leasing spreads reached a record at 62% GAAP and 43% cash. These results broke the previous record set last quarter and pushed year-to-date spreads to 55% GAAP and 38% cash. Cash same-store NOI was strong, up 7.5% for the quarter and 8% year-to-date. And finally, I'm happy to finish the quarter with FFO rising to $2.03 per share. Helping us to achieve these results is thankfully having the most diversified rent roll in our sector with our top 10 tenants falling to 7.9% of rents, down 70 basis points from fourth quarter 2022 and in more locations. We view our geographic and tenant diversity as ways to stabilize future earnings regardless of the economic environment. In summary, I'm proud of the performance last year, especially given the larger economic backdrop. We continue responding to strengthen the market end-user demand for industrial product by focusing on value creation via raising rents, development, and more recently acquisitions. This strength allowed us to end the quarter 98.7% leased and push rents throughout the portfolio. Due to current capital markets, we're seeing broader strategic acquisition opportunities. It's hard to accurately gauge how large the opportunity may be or when the window may close, but we're pleased with our ability to acquire newer, fully leased properties with below-market rents at accretive yields. As stated before, our development starts are pulled by market demand within our parks. Based on our read-through, we're forecasting 2024 starts of $300 million. And though our developments continue leasing with solid prospect interest, we're seeing longer deliberative decision-making. While we forecast $300 million in starts, we'll ultimately follow demand on the ground to dictate the pace. Based on the decision-making time frames we're seeing, I expect starts to be more heavily weighted to the second half of 2024. Further in this environment, we're seeing two promising trends. The first is the decline in industrial starts. Starts have fallen five consecutive quarters with fourth quarter 2023 being roughly 60% lower than third quarter 2022 when the decline began. Assuming reasonably steady demand, the markets will tighten in 2024, allowing us to continue pushing rents and create development opportunities. The second trend is the rise in investment opportunities with developers who have completed significant site work prior to closing and need capital to move forward. This allows us to take years off our traditional development timeline and materially reduce the site development legal risk. Brent will now speak to several topics including assumptions within our initial 2024 guidance. As always, we'll update our forecast as the year unfolds. My belief is that when or if interest rates begin to follow, confidence and stability within the business community will rise.

Good morning. Our fourth quarter results reflect the terrific execution of our team, the resilient performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the fourth quarter was $2.03 per share, compared to $1.82 for the same quarter last year, an increase of 11.5%. The outperformance continues to be driven by stellar operating portfolio results and the success of our development and acquisition programs. 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 $235 million at an average price of $171.55 per share. Additionally, we executed on our forward equity program for the first time, securing gross proceeds of $75 million at an average initial price of $183.92 per share. Subsequent to year-end we settled $50 million with $25 million in commitments still outstanding. Although capital markets are fluid, our balance sheet remains flexible and strong with solid financial metrics. Our debt to total market capitalization was 16%. For the quarter, our unadjusted debt-to-EBITDA ratio is down to 3.9 times and our interest and fixed charge coverage ratio was 9.6 times. Looking forward to 2024, FFO guidance for the first quarter is estimated to be in the range of $1.93 to $2.01 per share and $8.17 to $8.37 for the year. Those midpoints represent increases of 8.2% and 7.4% compared to the prior year, excluding involuntary conversion gain as a result of insurance claims, respectively. Notable operating assumptions that comprise our 2024 guidance include an average occupancy midpoint of 97.0%, cash same property midpoint of 6.0%, bad debt of $2 million, $300 million in new development starts and $130 million in strategic acquisitions, $55 million of which has already been executed. During this period of elevated interest rates, we continue to view equity proceeds as our most attractive capital source. In our guidance for the year, we are projecting $465 million in common stock issuances, $75 million of which has already been secured via the forward equity program as mentioned earlier. 2024 has minimal debt maturing with $50 million in August and the remaining $120 million not until December. In summary, we are pleased with our solid 2023 results. Thank you, EastGroup team members that are listening to the call. As we turn the page to 2024, we will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to maintain our momentum. Now Marshall will make final comments.

Thanks, Brent. In closing, I'm proud of the results and the value our team is generating. Internally, operations remain strong, and we continue to strengthen the balance sheet. Externally, the capital markets and overall environment remain clouded. This is leading to the continued decline in starts. So, in the meantime, we're working to maintain high occupancies while pushing rents. And in spite of the uncertainty, I like our positioning as our portfolio is benefiting from several long-term positive secular trends, such as population migration, nearshoring and onshoring trends, and evolving logistics chains, for example. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is continually improving each quarter, our balance sheet is stronger than ever and we're expanding our diversity in both our tenant base as well as our geography. With that, we'd like to open up the call for your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Your first question comes from Craig Mailman from Citibank. Your line is already open.

Hey, good morning everybody. Marshall, I just wanted to touch on the acquisition environment getting a little bit better for you guys. You've been more of a developer over the last couple of years. What are you seeing from a pricing perspective that on a risk-adjusted basis is compelling relative to where you're developing? And how much of the remaining, it was about $80 million, $75 million embedded in guidance, what's the visibility on that? And kind of where are the markets that you guys are targeting?

Thanks, Craig. Good morning. And if you'll allow me, maybe before we dive in, I'll let the people on the call know a little bit of a baton switch. We pre-recorded the call; Brent Wood has the flu or is under the weather today. So you're in Staci's capable hands and mind. So if you don't hear Brent, he'll be back tomorrow, but he's under the weather today. On the acquisition environment, we've been encouraged and the sense that it's almost two different buckets. On a portfolio of properties, cap rates have remained low, and they feel more competitive. By portfolio, I'm thinking three or four buildings where our team has been successful in finding opportunities. If I go back to about the midpoint last year till today we've acquired six buildings — a little over, call it, $225 million. The average age is 1.5 years old. So they've been new buildings with rents typically slightly below market where they got leased up. And it's added about $0.08 a year on our run rate in terms of FFO, if you match it with the equity that we issued in the quarter we closed is kind of how we were looking at it. They've all been different in that they've been one-off. But in some cases it's been a seller who needed to close for certainty. One was a group that had a property tied up, had gotten a commitment and needed funds to close so we assumed the contract. A marketing process that didn't work out the way the brokers expected — we weren't originally in it. We came in later. Our pitch has been we may not be your highest offer, but because of our line, and we've been issuing equity, we're your certain path to closing. Two years ago, one year ago that really wasn't a point of differentiation. And all of a sudden it's become an ability. We've kind of viewed it as we want to own well-located infill industrial buildings in our markets. Whether we build them or acquire them, we'll adjust to where the risk returns are. Of that batch, our average GAAP cap rate — they're leased and it's been about a 6.5% type GAAP return. So that's what when you compare it to an equity cost in the 4s and a GAAP return at 6.5%, on a blended average on brand-new buildings that are usually, we underwrite a year to lease up a development and these were 1.5 years old. So that's really been a new development in the market. And I'll tie it to interest rates. All of a sudden, people that were underwriting and using low-cost debt — we had a more competitive cost of equity or cost of capital using our equity than we normally do. I think that window will slam shut on us unfortunately when interest rates start coming the other way. But in the meantime, we've kind of turned over a lot of stones and found some really, what I'd call, unique situations. It doesn't take that many to add $0.08 a year to our FFO. So it's a longer answer than maybe you were seeking, but that's how they've played out. We've got visibility. We're always in the market bidding on a handful of properties in our markets and that's probably where we are today. Nothing big coming. And the last comment I'll make: I've been a little bit of a bottleneck. We could have done more. I'll take the blame for not wanting to run off our line and then issue equity. That's really what led us to add the forward component to our ATM in fourth quarter. Now it allows us to match-fund the acquisitions a whole lot better than we did because before I was probably a light switch to the teams in the field saying we've got capital, we don't have capital, and it usually takes six weeks to a month to run through more of the bidding process on a property.

Okay. And that's really helpful. And so that 6.5% is probably, what, low 6% high 5s going in. And so when you compare that to your cash-on-cash development returns and adjust for cost of carry and risk, you guys kind of view that as very favorable.

Yes. If you look maybe two parts in our supplement and I may be off slightly, but about pages 11 and 12, we're developing to about a 6.9% gap. So if we can buy a 6.5% and take leasing and construction risk away, I will say and it's been a function of the teams mainly and the market rents last year what we developed — what we delivered, all leased and it was in the higher 7s. So we've been coming out ahead of where we thought we would be, thankfully, on our developments. But a new building and that delta between a development and an acquisition all of a sudden looked more attractive for this moment in time.

Okay. And you led me to my next question which is going to be the introduction of the forward. So really you'll kind of use the ATM to fund near-term spend that you need and the forward is more forward; when you think you're going to be closing on an acquisition you may employ that if it makes sense.

Yes. And I think the other thing that's true — and I know we'll see you here in a month so more inputs welcome when we sit down — we viewed the forward, if it's an attractive price, attractive meaning at or above our internal NAV, at or above the Street and we feel pretty good about it, ideally the uses being our own development pipeline or acquisitions. If we can get out — if we have a year to take down the forward and we can get out ahead of it and really prefund some so we know we've got that capital, but we don't have to pull it down today, it's another tool in the toolkit and a nice one, because acquisitions are so clunky coming and going. I didn't want to — I was nervous. I didn't want to run the line up and then have to issue equity to get back to where you want to be. Because if we're using debt, that's kind of where you were at: you're buying at a low 6% cash and you're funding at a low 6% cash today. So we don't like that. But if we can use our equity and maybe get a little bit ahead and prefund some, we'll either use it on development, which we know we'll have, or acquisitions. We know out of the properties we're always bidding on, someone's going to say yes to us eventually.

Yes. And one thing I would add to that, Craig, is just the timing. So much of the year, we're in blackout due to earnings as a public company. So it just gives us flexibility on the timing of when we can receive the cash. We don't have to be in an open trading window in order to actually receive the funds. That gives us some additional flexibility.

If I could slip one more in and maybe if I could squeeze in — by the way, congrats on your promotion.

I appreciate that. Thank you.

The G&A ramp this year looks a little bit more than what you typically have. Is there something one-time in that number?

The main driver there — about two-thirds of the additional G&A in our 2024 guide is due to a slowdown in development starts. We have our internal development team that spends their time on development and construction activities. We capitalize a portion of the costs related to that team based on the development projects that they're working on. In our guide, where in 2023 we had $360 million of development starts and our guide for 2024 is $300 million, that slowdown in development starts means that we have less in development fees that we'll be recording. When we record those fees it's a reduction in G&A and it adds to the basis of the properties. So hopefully, there's some upside in that — hopefully G&A ends up being less because we're able to start more development projects. But to be conservative and make prudent business decisions we felt like it was best to lower the guide for development starts. In turn that added about $0.05 of G&A compared to 2023. That's the main driver. Then our team is growing as the company grows, so we're adding a few people to the team and then typical additional investments in other aspects of G&A, ESG and some other matters. But the main driver there is the development phase.

Is that partially offset though by lower capitalized interest drag from starting those projects so is it a full $0.05? Or is it something a little bit smaller?

It's really two separate things. We have capitalized interest but then these internal development costs are more personnel costs. The impact to G&A is for our team's time that they spend on the development projects. So it's offsetting salaries and other compensation costs. You're welcome.

Your next question comes from Jeff Spector of Bank of America. Your line is already open.

Great. Thank you. Good morning. First question: I know we constantly talk about onshore and nearshoring. Marshall, I know you mentioned it quickly. Could we just touch on that? Anything new there in light of what we're seeing in terms of potential impact on ports, et cetera? I guess if we could touch on that first. Thanks.

Sure. Good morning, Jeff. I view it as a long-term trend. When companies make the decision on their China Plus One manufacturing, which port it comes through, it's a fluid dynamic environment. We want to be near the consumer and a growing base of consumers because I don't think that flips dramatically between ports — markets like Houston and L.A. each have strengths and can gain or lose share quarter to quarter, though we like both markets. We do feel when I look at El Paso, we're 100% leased; Phoenix 99%; San Diego is strong. Some of our best rent growth markets in our company are in those markets. So we still feel long-term strong and we're looking for opportunities in all of those markets to take steps one at a time to grow our portfolio. We're active in San Diego and El Paso; Phoenix we have development land. It's really a timing issue of when we kick that off. We like that segment of our portfolio. I'm also seeing a lot of EV manufacturing activity and suppliers running through the Carolinas, Georgia and into Florida. Texas is seeing tech-related manufacturing. We may not have the manufacturer but we'll have the supplier and the ripple effect of growth in the local economy.

Great. Thank you. And then again a follow-up on the acquisition guidance. I believe you talked about the $130 million. Is that strictly for operating properties? Can you talk about land purchases in 2024?

Sure. We've got a little bit of land, yes. On acquisitions, I'll preface that it's always a hard number — we've usually missed that number. We spent a fair amount of that. We had the Spanish Ridge in Las Vegas which we closed. I hope we beat that number. If we find the right opportunities and we have affordable capital we'd like to beat that number. On land, we have land that we tie up and we try to get as far through zoning, permitting and wetlands issues prior to closing to minimize the time between signing and closing. We have a few parcels tied up currently, as you saw us close. Another newer path to finding land has been when someone's approached us and they've done all of the work but now need capital to close. You're not selling forward lands on a forward sale like you used to and that's expensive, so they've come to us and we've seen it in Denver, Tampa, Atlanta and Austin a couple of times. Sometimes we buy it completely or we work out a venture. That's been an interesting new path given constrained capital markets, because the legal risk is sometimes we don't get through zoning and you might have to walk away. We like where people have come to us at the 11th hour to help them get it closed. With the land we have on our balance sheet we feel good about it, and we have more acres tied up here and there where we're kicking tires. If everything checks out we'll close, but we have it under control and haven't closed yet. Overall, we feel pretty good about the land we have. I think when things turn given the drop in supply, starts will pick up fairly quickly and buildings will fill up, especially in our size range where vacancy is tight.

Your next question comes from Alexander Goldfarb of Piper Sandler. Your line is open.

Great. Hey. Good morning. Staci, echoing Jeff's comments, congrats on all the terms on the promotion. That's awesome.

Thank you, Alex.

Two questions. First, just going back to the ATM, Marshall. EastGroup has long used the ATM to fund its investments. Going to a forward is a playbook some other REITs have used. Do you see shifting in terms of how you use the ATM? Or what was it about the forward issuance now where traditionally you guys have been comfortable using a traditional ATM mindset? And Staci, does this affect timing of the settlement of the shares? You guys have issuance in the guidance, but I'm not sure if we should think about this settling later in the year or modeling ratably as we normally would?

Hey, Alex. Good morning. We still like the ATM a lot and we'll continue to use it. We intend to use both and really, as we've said, we'll use the traditional ATM probably until we get the line to a fairly low or flat balance. At that point, if we still like the price and given blackout periods, that's probably where we'll toggle over to the forward. It's money that we know we will have a good use for and we're at attractive pricing. We can put it on the shelf for when we need it and give banks 48 to 72 hours' notice to bring it down later. That's how we're thinking. We'll still use both and probably have a limit on how much of each we have. We're not going to get out too far over our skis. It gives us the ability to have equity on the shelf. When we closed Las Vegas earlier in the year, even though we were in a blackout, we were able to fund that through the forward.

Yes. I agree with Marshall. The forward will continue to issue under the regular ATM as well. It's all part of one program, so we can easily toggle back and forth. Some of it will depend on market pricing, timing, whether we're in blackout. What we have built into our guidance is funding more heavily weighted to the back half of the year, and that aligns with the timing of potential development starts and acquisitions. In terms of actual funding, when we execute a forward, like Marshall said, we can have that forward outstanding and whenever we need the funding we give 24–48 hours notice and then we issue the shares and receive the cash. It gives us a lot of flexibility in terms of our cash needs. We hope to add to the forwards we have outstanding and in the meantime we can issue under the regular ATM as long as we're not in blackout.

Okay. Second question: In the past two years, you guys have come out with expectations of occupancy drop and things have held up well. Is it just normal EastGroup caution that's caused you to forecast occupancy could drop 100 basis points? Or are you seeing pushback from tenants, potential credit issues, trouble backfilling space, longer downtime, that leads you to the occupancy drop?

Good question. I'll say it's really a return to the norm. The last two years we've had record occupancy in the high 98% range. There's no major identified move-outs or bad debt keeping us up at night. It's more that things have been really good for a few years, and with higher interest rates and global unease it feels prudent to assume a modest reversion to the mean. Also, decision-making by tenants has been more deliberate; before, a tenant might have 60 days of downtime, now it might be four months. That hits occupancy and same-store metrics, as tenants take more time to move between phases in a park. It has moved many decisions up to the CFO level at companies, adding time. I expect when interest rates come down there will be some lag, but pent-up demand should take off and retention rates are high. Many tenants have renewed across the country and as supply dwindles our development pipeline and land positions give us an advantage to pick up starts faster than private peers.

You're welcome.

Your next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is already open.

Hi. Thanks. First, can you talk about the leasing activity that's embedded in guidance within the lease-up portfolio? You have a few conversions scheduled for 1Q and 2Q, about 1.4 million square feet in total that's scheduled to transition to the operating portfolio during the year. What's budgeted in guidance for leasing and can you talk about confidence around getting those buttoned up ahead of the conversion dates?

Todd, if I'm following you, of our transfers we're about 60% leased on those today. We feel good about the activity. Leasing felt a little slow during the holidays, but activity has picked up in the last 30–45 days. The majority of transfers this year are in the back half of the year. We need to convert activity into signed leases. One of the Orlando projects got leased this quarter, moving it from a 2025 stabilization to 2024. That kind of upside is possible. Typically our occupancy dips a bit toward mid-year and builds toward the back half. As supply dwindles and confidence picks up, I expect the latter part of the year to be stronger.

And on touring activity — you've said activity picked up in the last 30–45 days. How does demand and touring activity today compare to pre-pandemic 2019 levels?

Probably very similar to pre-pandemic other than lease commitments being higher now. Tenant reps say it takes more approvals today, which adds time. There's activity, but tenants don't have the same urgency they had in late 2021 and early 2022. Many are being patient, waiting for clarity on interest rates, global conditions or other factors. Renewals have become a larger share of activity — maybe about one in every three square feet versus one in four previously — which suggests deliberation. When tenants feel confident again I think pent-up demand will accelerate. Our model is built to be responsive and we compete more with private owners focused on smaller buildings rather than the largest institutional developers.

Your next question comes from Bill Crow of Raymond James. Your line is already open.

Great. Thanks. Good morning, Marshall and Staci. Marshall, just a follow-up question on the guidance on occupancy. I'm wondering if fourth quarter occupancy was boosted at all by any seasonal demand you saw.

Hey, Bill. Good morning. Not really. We came out ahead of our budget. Usually at the end of the year someone like the Post Office will take space on a 90-day basis, but I don't think we had that this year. It was a pickup in demand and our occupancy recovered. It wasn't seasonal. I do think our occupancy may drift a little in the first quarter, but through February we're in the same ZIP code as where we ended the year. Not much movement, maybe 20–30 basis points one way or the other, but nothing material.

The second area: guidance on equity issuance assumptions. It feels like you're leaning heavily on equity this year. Can you give more color on sources and uses? It feels like equity is being used a lot.

We'll certainly monitor the debt markets as well. When we put the guidance together, equity simply looked more prudent and in many cases a lower cost of capital versus short-term debt for the uses we have. We could easily shift some to debt if rates come down or equity markets change. We have $170 million in debt maturing later in the year, and we'll need to fund those repayments. For development starts and acquisitions included in guidance, equity was the lower cost of capital assumption. We could see that shift; if the total stayed $465 million, maybe $150 million could shift to debt, but that wasn't an assumption we wanted to build in given current cost differentials.

At this point you're assuming overall debt outstanding goes down by $170 million this year. Is that fair?

Yes, that's fair given the maturities we have in August and December.

We're not trying to over-strengthen the balance sheet; it's just that our cost of equity has in recent times been materially lower than our cost of short-term debt. That will evolve and we'll shift back toward a historical norm when appropriate. We still expect to have a balance sheet with meaningful debt capacity and remain very conservative.

Your next question comes from Samir Khanal of Evercore. Your line is already open.

Thank you. Hey Marshall. Can you provide a bit more color on California? When I looked at the page where you provided the market breakdown, San Francisco NOI growth slowed considerably. Could you expand on what you're seeing in Southern California as well in L.A. and San Diego? Thanks.

Sure. San Francisco: we had some vacancy there. We bought a value-add property that's now 100% leased but it took longer than we hoped to lease up a 60,000-square-foot vacancy. In one part of the portfolio a 3PL left; we're about half leased on that space with activity on the balance. That vacancy pulled our same-store figures down in San Francisco. Both San Francisco and L.A. had some tech-related layoffs, and city stats can be weaker, but our positions are in the East Bay and North Bay which have been more stable. In L.A., the Inland Empire had been extremely hot and ran up, and a number of 3PLs have given back space; rents retreated a bit and are finding stability. Thankfully our portfolio has been full and we've been less impacted. San Diego has been the most stable of the three markets for us and we like it a lot. Overall, those markets have been the most volatile recently, but our geographic diversification helps mitigate impacts.

And on development starts: with supply coming down, could we see you ramp up development starts? How are you thinking about that?

I hope so. Two slides I would point to in our investor materials show how fast starts have come down and vacancy by size range. The supply that's not been absorbed is mostly big-box; shallow-bay supply is tighter. We've modeled $300 million in starts more heavily weighted to the back half of the year. We modeled conservatively; that cost us about $0.05 in earnings, which isn't fun, but we think it's prudent. We like long-standing relationships with general contractors, permits in hand and the ability to deliver industrial product quickly. If demand picks up and inventory gets absorbed, there should be opportunities to move faster than private peers.

Your next question comes from Vincent Tibone of Green Street. Your line is already open.

Hi, good morning. I'd like to keep the dialogue going on the broader supply landscape. Within your markets, what percentage of new supply do you estimate to be light industrial and competitive with your portfolio? Are any markets where you're concerned about overbuilding and potential near-term market rent declines for your type of building?

Typically we estimate 10% to 15% of new supply is competitive with our product. While you can break up big-box space, it often becomes very inefficient for our product type — long, narrow runs, fewer loading doors, higher costs. Markets to watch for supply are Austin and Phoenix where there is some supply; we've pulled back on starts in those markets. I'm cautious: I'd rather be one quarter or two late than one quarter or two early. We are monitoring closely and being patient. I haven't seen rents come back in many markets other than some parts of L.A. for our product type, where vacancy is higher relative to big-box, but overall the shallow-bay vacancy remains fairly tight.

That's helpful. One quick follow-up: can you provide any color on cash releasing spreads assumed within 2024 guidance?

We haven't provided an explicit cash releasing spread number in guidance. Last year our same-store occupancy and results were strong; we've budgeted average occupancy of 97%. I would expect re-leasing spreads to moderate compared to the record levels from last year but still be positive. GAAP re-leasing spreads improved each quarter last year, and I don't see that trend changing materially. We've modeled conservatively, perhaps a hair below last year's levels just in case moderation occurs.

Your next question comes from Ki Bin Kim of Truist. Your line is already open.

Thank you. And congratulations Staci.

Thank you, Ki Bin.

Marshall, EastGroup has an excellent balance sheet and significant financial flexibility. Given that your cost of equity is lower than your cost of debt currently, does that change your thinking on larger-scale portfolio deals or is there a philosophical reason to avoid large portfolio buys because you might have to sell chunks?

Good morning, Ki Bin. We don't want to be reckless, but we'd pursue portfolio opportunities that make strategic sense. We did buy the San Francisco portfolio and that was a unique situation where most of the NOI fit our strategy. Often portfolios include assets we don't want and then you have transaction and disposition costs that reduce the effective yield. Larger portfolios also draw more competition from major institutions. If we find one that lines up like Bay Area, we'll pursue it, but historically we tend to prefer assets where a meaningful portion aligns with our strategy.

Do you think portfolio deals are at a discount today and approximately how much?

I don't think portfolios are dramatically discounted compared to where they were; sometimes bundling creates a premium because of scale buyers. We've had success finding one-off unique situations where timing and seller motivation created attractive opportunities. When we bid on portfolios we've sometimes been outbid by larger players willing to accept a lower levered IRR. So while discounts may exist in some pockets, competition remains fierce for many portfolios.

Your next question comes from Michael Carroll of RBC Capital Markets. Your line is already open.

Yes. Thanks. Marshall, I wanted to circle back on your comments regarding development. For EastGroup to be more aggressive pursuing new development starts, do you need to lease up your projects currently in lease-up or in process? Or do you need to see broader market leasing improve?

A bit of both. In markets like Austin and Phoenix we're watching competition closely. Sometimes it's about sequencing: if Phase 3 of a park is leasing up quickly we'll start Phase 4 to provide inventory to tenants and keep continuity in the park. Tenant reps want visibility that delivery will occur when promised. We build spec to meet that need. If Phase 3 isn't leasing rapidly, we may wait. We know our product and can move quickly when warranted. We'll monitor supply and demand and act accordingly.

Are those competitive projects shallow-bay properties or larger buildings that might not directly compete with you?

If it's big-box vacancy that doesn't affect us much. We're more concerned with shallow-bay supply that's directly competitive. If that inventory is being delivered, we'll be cautious and wait a quarter or two to see absorption before starting more product. There's little downside to being patient, and potentially reward if inventory clears and rents strengthen.

Last one: how much predevelopment work do you do so once you decide to go vertical, how quickly can it be completed and delivered?

It used to be about six months. During COVID it stretched to a year. Today it's around nine to ten months. Some electrical equipment and switchgear have about a year lead time, so the supply chain is better than the peak but not perfect.

Your next question comes from Jason Belcher of Wells Fargo. Your line is already open.

Hi. Good morning. Could you talk about pockets of strength or weakness across tenant industries? Any groups more aggressive in taking space or others that have decreased requirements more abruptly?

Food and beverage has picked up lately. Construction has shown some activity, possibly tied to government and homebuilding projects. Third-party logistics (3PLs) remain active and typically are the first movers when markets turn. We've seen more green energy-related tenants — battery storage, distribution and related uses — and growth in medical-related tenants, such as online pharmacies and medical product distribution. Some tenants have relocated operations from California to Dallas, which we captured.

Thanks. Secondly, can you talk about contractual rent increases or escalators in newly signed leases and whether you're seeing pushback? What's your average escalator across the portfolio?

We've seen escalation increases. A couple of years ago average escalators were around 3%; now portfolio average is in the low 3% range and new leases are seeing 3.5% to 4%, in some cases higher. That has held up and we've not seen recent pushback on that. We expect escalators in the 3.5% to 4% range for new leases we're signing.

Your next question comes from Ronald Kamdem of Morgan Stanley. Your line is already open.

Great. Hey, two quick ones. On rent growth commentary you said positive — can you give more color by market? I think L.A. may be slow, but what markets are higher or lower?

Market rent growth should be positive and may be inflationary, and for our product type add 100 to 200 basis points given tight shallow-bay vacancy, so mid-single digits is possible and should pick up in 2025–2026 as supply tightens. Stronger markets include Central Florida, Miami, Las Vegas, and Atlanta. Phoenix was strong last year, and while we've noted more supply there, it remains an important market. Historically California drove rent growth for us; now it's spread throughout the portfolio.

Given your unlevered balance sheet potential, are you seeing distressed or opportunistic acquisition opportunities or mostly motivated sellers?

We're seeing motivated sellers in some cases, not broad distress. Some developers who tied up properties and did site work need capital to close or faced difficulty sourcing financing. Those situations have produced opportunities for us to step in and assume contracts or close where the seller needed liquidity. The pitch often is we may not be the highest bidder but we provide certainty to close.

Your next question comes from Vikram Malhotra of Mizuho. Your line is already open.

Hey, this is Georgi on for Vikram. Two quick ones: When you model credit risk, is it a placeholder or do you anticipate a sector issue? And can you provide any color on broadening demand from nearshoring? Thank you.

On tenant credit and bad debt in our guidance: our actual bad debt in 2023 was $1.5 million, about 27 basis points as a percentage of revenue. For 2024 we have $2 million included in guidance, roughly 32 basis points of revenue. Looking at a 10-year average, our bad debt has run around 20 basis points of revenue. Last year was a bit higher but we don't have reason to believe there will be major change from last year. With company growth the dollar amount grows a bit, and given some economic uncertainty we thought $2 million was reasonable. We don't have specific bad debts identified and haven't seen any particular tenant industry or market trend toward credit deterioration. Our watch list includes tenants with reserves for roughly 15% to 20% of the number of leases out of about 1,600 leases — still a very small percentage overall and no broader trend.

On nearshoring: it's a steady, long-term build rather than a rush. El Paso has been strong for several years; Phoenix and San Diego benefit from onshoring and nearshoring. The border supply-chains and port dynamics can push manufacturers to locate near the border, in Mexico or nearby, and we like that both from a growth and tenant-demand perspective. These remain long-term trends rather than short-term phenomena.

There are no further questions at this time. I will hand the call back to Marshall Loeb for closing comments. Please proceed.

Okay. Thank you, everyone, for your time today. If we didn't get to your question, Staci and I, or Brent — he's back in the office — are certainly available. Feel free to email us or call us if there's anything we didn't get to. We'll hopefully see you at an upcoming conference. I appreciate your time and hope to speak with you all soon. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.