Eastgroup Properties Inc Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the EastGroup Properties Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, October 24, 2024. I'd now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our third quarter 2024 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call. 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, including our most recent annual report on Form 10-K for more detail about these risks.

Thanks, Keena. Good morning. Before shifting through quarterly results, I want to express our concern for everyone in our markets affected by the recent hurricanes. Our team and their families are thankfully safe, and I graciously appreciate their quick professional response to help our tenants get back to business as usual. The buildings themselves, meanwhile, had limited damages, especially considering the strength of these storms. Operationally, I want to thank our team for another strong quarter. They continue performing at a high level and finding opportunities in an evolving market. Our third quarter results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial markets. Some of the results produced include funds from operations rising 9.2%, when excluding involuntary conversions. For over a decade now, 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 leasing was 96.9% with occupancy at 96.5%. Average quarterly occupancy was 96.7%, which, although historically strong, is down from third quarter of 2023. Quarterly re-leasing spreads were 51% GAAP and 35% cash. Year-to-date results are slightly higher at 56% and 38% GAAP and cash, respectively. In cash, same-store NOI rose 5.9% for the quarter and 6.3% year-to-date. Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 7.5% of rents, down 70 basis points from third quarter 2023. We view our geographic and revenue diversity as strategic paths to stabilize future earnings regardless of the economic environment. In summary, we're pleased with our performance year-to-date and are optimistic about the prospects for an improving economy along with a lack of new supply. We're focused on value creation via raising rents, acquisitions, and development. This allowed us to end the quarter at 96.9% leased and continue pushing rents throughout our portfolio. On the acquisition front, we're excited to acquire Hays Commerce Center consisting of two new 100% leased buildings in South Austin. The property is near our Stonefield development, allowing us greater flexibility long term. We have a couple of other probable acquisitions we're working on, and we'll happily share more detail when timing permits. Overall, our acquisitions are guided by two criteria: one, to be immediately accretive and secondly, raising the long-term growth profile of the portfolio, thus creating NAV per share. As we've stated before, our development starts are pulled by market demand within our parks. Based on our read-through, we're adjusting our 2024 starts forecast to $230 million. While we signed several development leases during the quarter and have promising prospect interest, decision-making remains deliberate and prospects are focusing later in the construction process. In terms of starts, we ultimately follow demand on the ground to dictate pace as we always have. Longer term, the continued decline in the supply pipeline is promising. The construction pipeline is at its lowest level since 2017. Assuming reasonably steady demand, the market should tighten in 2025, allowing us to continue pushing rents and create development opportunities. As demand improves, our goal is to capitalize earlier than our private peers on development opportunities based on the combination of our team's experience, our balance sheet strength, existing tenant expansion needs and the land and permits we have in hand. Brent will now speak to several topics, including assumptions within our updated 2024 guidance.

Good morning. Our third quarter results reflect the terrific execution of our team, the solid overall performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the quarter exceeded our guidance range at $2.13 per share compared to $1.95 for the same quarter last year, an increase of 9.2%, excluding involuntary conversion gains. The outperformance was driven by solid operating results, successfully negotiating two lease terminations and lower G&A. From a capital perspective, we continue to access the equity market. During the quarter, we directly issued common shares for gross proceeds of $30 million, several forward share agreements for gross proceeds of $50 million with an additional settlement of $50 million after quarter-end. Currently, $204 million in forward agreements are available for funding when needed. Collectively, the shares in the third quarter transactions were initiated at an average price of $185.70. In August, we repaid a $50 million unsecured term loan and have $120 million maturing in mid-December. Although capital markets are fluid, our balance sheet remains flexible and strong with record financial metrics. Our unadjusted debt-to-EBITDA ratio decreased to 3.6x and our interest and fixed charge coverage increased to 11.6x. Looking forward, we forecast FFO guidance for the fourth quarter to be in the range of $2.13 to $2.17 per share and $8.33 to $8.37 for the year, a $0.02 per share increase from our prior guidance. Those midpoints represent increases of 5.9% and 7.9% compared to the prior periods, respectively, excluding insurance-related gains on involuntary conversion claims. Our revised guidance includes increased acquisition opportunities and a corresponding increase in capital proceeds. Of the $780 million of capital proceeds forecasted for the year, over $500 million has already been executed, leaving approximately $275 million for the fourth quarter. 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 will rely on our financial strength, the experience of our team and the quality and location of our multi-tenant portfolio to lead us into the future. Now Marshall will make final comments.

Thanks, Brent. In closing, I'm proud of our quarterly and year-to-date results and the value our team is creating. Internally, we continue to grow earnings while strengthening the balance sheet in what's been an uncertain climate. Others have described the environment as bottoming, which seems about right. Tenant leasing decisions are deliberate, which when combined with tight capital markets, has led to a seven-year low in the construction pipeline. Within this backdrop, we're doing three things: first, we're working to maintain high occupancies while pushing rents; second, we've slowed our overall development pace, we are continuing forward where submarket opportunities allow; and finally, over the past two years, we've sourced several attractive new long-term investment opportunities, something which is much more challenging in a steady market. Stepping back from the near term, I like our positioning as our portfolio is benefiting from several long-term positive secular trends such as population migration, near-shoring and onshoring trends, evolving logistic chains, and historically lower shallow bay market vacancies. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is improving each quarter. Our balance sheet is stronger than ever, and we're expanding our diversity in both our tenant base as well as geography. We'd now like to open up the call for questions.

We will now open the question-and-answer session. Your first question comes from the line of Craig Mailman with Citigroup. Please go ahead.

Hey. Good morning. Just want to follow up on the acquisitions. It looks like you guys have close to $240 million implied in the guidance there. I know you said you'd give a little bit more info as you get closer to closing. But maybe there's just a little bit more than what you've already given in terms of timing, kind of expected yields, whether these are stabilized versus value-add? Is there anything that you can offer? And I guess as another part of that, Brent, you said $275 million of expected capital proceeds and the balance, what's that difference between kind of the acquisition guidance? And that spread, is it just money to pay for continued construction?

Hi, good afternoon, Craig. It's Marshall. I'll respond to the first part of your question, and then I'll pass it over to Brent regarding how we will finance this. We're excited about the current acquisition market, which has been positive and somewhat atypical in the last couple of years. In our guidance, there are three projects we are working to finalize. They are all in existing markets, and I appreciate that they are newer buildings that complement our portfolio well. You are correct that these are stabilized assets with below-market rents. In terms of yields, considering what has made the acquisition market unusual over the past few years, the purchases we've made individually have averaged, I would say, construction from 2020 and above a fixed yield. I think these three projects may not reach that high, but they will probably be in the higher 5s and include new product as well. So, this will align with what we have been acquiring over the last couple of years. We are hopeful to get these transactions closed, as they are all scheduled to wrap up by the end of the year, assuming everything goes well with due diligence. While they won't significantly contribute to FFO in 2024, we believe they will be great additions to our portfolio moving forward. The acquisition market does seem to be tightening quickly, which is why I am pleased we located these opportunities before the window closes, as the private market has returned to acquisitions. Brent, I'll let you elaborate further.

Yes. Good morning. And on the capital proceeds, Craig, yes, we've, to-date, actually received about $307 million. We still have just over $200 million outstanding on forwards, which would represent about $510 million. And as you noted, or as I noted in my opening comments, looking at about $270 million, $275 million in the fourth quarter. We upped our acquisition guidance by $135 million and upped our capital proceeds by about $55 million more than that. But Craig, that's just the culmination of various factors between development spending and just operating in general for – from quarter-to-quarter as 90 days change, those kind of changes in your cash flow statement can vary a little bit. So there's nothing in particular there. I mean the main driver in upping the capital proceeds with the acquisitions, but you have just other general operations flowing through that, that can move that number a little bit from quarter-to-quarter.

And just to clarify, Marshall, that higher 5% cap rate, that's if you roll the rents to market, right, that's a stabilized yield?

No, and I'm glad you asked that. That's existing rents. These are newer assets with a higher mark-to-market that will be realized over time, each one a little different based on the weighted average lease term or wallet as the brokers phrase it, but I would say the blended initial cash cap rate is in the higher 5s.

Great. Thank you.

You're welcome.

Also clarifying.

The next question comes from the line of Rich Anderson with Wedbush. Please go ahead.

Thanks. Good morning, everyone. Last quarter, Marshall, you mentioned that the environment was improving slowly. Today, you referred to it as choppy. I'm curious if you see any reversal in the trend between the second and third quarter. Also, in relation to your optimism for 2025, how are things looking for next year compared to three months ago?

Okay. Good morning, Rich. When I refer to things as choppy or slowly improving, I don't mean there has been a real reversal. It feels much the same as before. This year has been like two steps forward and one step back in leasing. It seems to be getting better. Recently, I've heard that people are waiting on the election and interest rates, as there are candidates with very different policies. This has likely caused some to hold off on decisions. There always seems to be a reason for the slower pace than we’d like, and that’s the latest explanation. The positive aspect is that the election will soon be over, which might help ease some of these uncertainties. I had thought things would have improved more by now. As Brent mentioned, when we look at the broader situation, there's been little positive economic news, from global unrest to delayed interest rate cuts originally planned for March, and the unusual dynamics of this election. So, overall, confidence hasn’t really surged. However, I’m proud of the team; we are 97% leased and have pushed rents. I'm optimistic about private market acquisitions, as the fundamentals are strong. If you check our investor slide deck, you'll find that spaces of 100,000 square feet and below have around a 4% vacancy rate, indicating limited product available. The conditions are solid, and with a slight boost in business confidence, we could see a quick turnaround. I believe it will resemble a V-shape rather than a U-shape; we're just waiting a bit longer than I initially expected earlier this year.

Okay, great. Thanks very much.

Sure. You’re welcome.

The next question is from the line of Andrew Berger with Bank of America. Please go ahead.

Hey. Good morning. Just maybe following up on the last question. Curious, if the brokers have talked at all about excess capacity or slack in the system, if that's feeding into the slower decision-making. We've heard this a bit throughout the sector, but not sure if it's as big a factor for some of the smaller spaces. Just curious if you have any thoughts on that?

Hi, Andrew. Good morning. It's Marshall. Yes, I've heard and read about that. Within our space, our average tenant size is about 35,000 square feet, so we don't really have excess capacity. This issue mainly relates to larger spaces and third-party logistics providers in those larger areas. Earlier this year, we actually saw a slight decrease in subleasing. I don't believe we have excess capacity; rather, we need tenants to feel more confident about expanding. That confidence will drive our development pipeline, as typically, the next building in a park is constructed when our existing tenants expand. We are waiting to hear more about that, and there have been discussions, but we would like to hear it expressed with more certainty.

Got it. Thank you very much.

You're welcome.

Your next question comes from the line of Samir Khanal with Evercore. Please go ahead.

Hey, good morning, Marshall. What is your updated view on market rents? In the past, you mentioned being in the mid-single digits. Is that still your position, or have you changed your perspective based on the demand side? Thanks.

I think that's fairly accurate. If I recall correctly, this was discussed at your conference not long ago, possibly in August or September. I believe we will see a rent growth of about 4% to 5% in our product type this year, which translates to 3.5% to 5%, putting us in that mid-single-digit range. Looking at the fundamentals and the delay in supply, I anticipate another rent squeeze similar to two years ago due to the limited supply. For instance, in Dallas, the construction pipeline has dramatically reduced from about 76 million to under 11 million square feet, indicating a potential supply squeeze if there is any increase in demand. It's akin to dry ground where it wouldn't take much for a spark to ignite a fire. When that happens, we will likely ramp up construction quickly and see an upward pressure on rents. However, for now, our portfolio, excluding Los Angeles, is probably in the 4% range.

Thank you.

Sure.

Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please go ahead.

Hi. Thanks. Good morning. I wanted to ask about development and development leasing. You had a couple of leases signed in the quarter, but activity in the lease-up portfolio slowed a little bit relative to prior quarters. And you've generally been ahead of conversions with regard to leasing so far during the cycle. Do you see that changing as you look to the schedule for anticipated conversions in 2025, which really starts to pick up a little bit into the second quarter? And then I'm also just curious if you could elaborate a little bit on development starts as we think about 2025 a little bit just vis-à-vis your comments?

Good morning, Todd. The positive aspect of our development pipeline is that the returns we are averaging when we roll in new projects is quite high, currently at 7.4. One of the projects from last quarter, Hillside and Greenville, wasn't fully completed, but we managed to get it to 100% leased. What we are observing is that tenants are taking their time, unlike before when we experienced strong leasing during construction. Now, tenants seem to prefer waiting until the buildings are almost finished, with the walls up and similar progress. So, our usual process is to roll them in 12 months after completion, but in some cases, it may extend to 15 or 16 months. That's our current situation. I'm optimistic that next year, if the economy improves a bit, we may see some of these projects rolling in. Overall, I believe we are creating significant value; it just might take longer than the typical 12 months. We are developing properties with potential returns in the 7s, while private market cap rates are quickly shifting into the 4s. We appreciate the value being created, although we have seen the leasing timeline extend from about 6 months during construction to approximately 15 months now. I believe this is a cyclical trend, and it will eventually revert, especially considering the limited product available in the market.

Your next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks. Good morning. Marshall, you've alluded to the election a bit, but I think the discussions around the impact to industrial have been focused on potential impacts from increased tariffs. So just wanted to get your updated thoughts on the subject and whether you have any concerns about the potential impact to your business, your markets or your tenants or on the flip side, maybe even think it could be an additional positive driver related to the near-shoring and on-shoring impact?

Yes, good morning. It's hard to provide political advice, so take my thoughts with caution. Long term, the current uncertainty impacts our tenants. Knowing who is in office and the control of Congress, especially the President, will give our tenants the confidence they need to plan their businesses. This is a positive aspect. We're optimistic overall, with strong trends in e-commerce, population growth, and onshoring/near-shoring. Specifically, when we discuss onshoring/near-shoring, we see significant benefits for San Diego, as well as Dallas and Austin, but markets like Tucson, Phoenix, and El Paso have been performing well. Their leasing spreads exceed our portfolio average, showing our advantage. As for onshoring, the CHIPS Act funding highlights that Texas and Arizona account for a substantial percentage of the top states receiving funding. This process of building new plants will ripple through local economies. In looking at border crossings, comparisons from 2015 to now show increases of over 100% in several markets, including Juarez, Tijuana, and Nogales. This trend is ongoing and will likely persist, regardless of election outcomes. My optimism around the election stems from the belief that stability and predictability will assist our tenants in managing their space needs and customer planning. We'll observe the implications of tariffs as they unfold in Congress, but regardless of political leadership, we will continue to lease developments one at a time.

Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Yes. Thanks. I want to dive a little bit deeper into the guidance that you provided. I know there's two other updates that the lease termination income increased a decent amount. And then also your reserves for bad debt increased a smaller amount. Can you provide some color on what drove those termination fees higher and what's potentially driving bad debt a little bit higher?

Sure, Michael, good morning. I can provide some clarity on the term fees. Our team successfully negotiated a couple of leases with green energy-related tenants, although there were some calculated risks involved. In one case, the tenant of a 103,000-square-foot space never fell behind on rent but chose to wind down operations at that location. They initially provided a letter of credit, and the rents we secured covered about nine months of gross rent. They've already leased out half of the space and are in talks for a quarter of it. Overall, this situation looks promising for our net cash position. For the other space that contributed to the term fee income, the tenant did fall a couple of months behind, but we reached a termination agreement, and we had a substantial letter of credit that accounted for about 15 months of rent. We've also verbally agreed to terms with a replacement tenant. Once everything is finalized, this could lead to a seven-figure gain as we replace the tenants at higher rates. However, since this is happening in the fourth quarter, while we benefit from the term fee, it affects the base run for this quarter due to turnover. The residual impact from re-leasing won’t materialize until 2025. If this had occurred earlier in the year, we might not be discussing it as much since the benefits would have been more immediate. Regarding the $1.7 million in term fee income, it positively affected our bottom line in the third quarter. On the topic of bad debt, it has been frustrating despite good collection rates. Our active tenants, reserves, and those on the watch list remain low and stable. However, our year-to-date bad debt is largely concentrated in four tenants, accounting for 70% of the total. About 71% of this bad debt comes from our California properties, primarily affecting regional or local logistics companies that have seen a slowdown in contract business. While collections have been generally successful, a few tricky situations persist. We've managed to move most of those tenants out and are seeking replacements. However, dealing with some tenants in California can be particularly challenging and time-consuming compared to states like Texas, where lease terminations are easier and quicker. This prolongs the process and extends our bad debt situation. We've had to navigate these complexities.

Great. Thanks, Brent.

Welcome.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Please go ahead.

Hi. Good morning. So just sort of wrapping it all together, Brent, it sounds like bad debt is really not a big issue, and it sounds like it's mostly some California specific tenants that you're dealing with. And then overall demand for the portfolio overall sounds pretty good. I didn't hear you guys talk about expectations for rent declines, your ability not to push rent. So is this really just sort of a macro thing where overall tenant demand is, for the most part, good, you're a little nervous on development just because tenants aren't there to pre-lease, but you're comfortable boosting acquisitions? So really, overall, it sounds like the portfolio is performing well. What you need to see is just some increased tenant confidence. It doesn't sound like there's tenant credit issues. It just sounds like people are operating well, and you're just looking for them to feel better about expanding. It sounds like that's really the key.

I'll let Marshall discuss the activity. However, I wouldn't categorize bad debt as a minor issue. What I can say is that throughout the year, we haven't observed a significant increase in the number of tenants that we are monitoring. This figure has remained stable within a low range, with no substantial additions. There have been a few cases, primarily in California, where tenants have struggled due to the economic slowdown in that region. While I wouldn't dismiss it as a minor issue, it hasn't been widespread, and we haven't seen it escalate. It's frustrating to see that just a handful of tenants have contributed to this situation, especially given our portfolio of over 1,300 tenants. We handle it by re-leasing the space. Now I'll let Marshall address the overall demand.

Thanks, Alex. I agree with Brent's comment about bad debt; it's been a challenging issue this year. Without going into details, regulations in California are tougher than in the rest of our portfolio. However, our diversification in terms of tenants and geography helps. The fundamentals are improving compared to what we've seen in several years, with increased demand. The current supply and vacancy rates are more favorable than they've been in years, which the private market is starting to recognize. Regarding development, we have names, prospects, and proposals out, but they're not progressing as quickly as we'd like. That's why we've reduced our development efforts. If developments aren't leasing well, moving forward with the next phase won't be effective. We have scaled back our starts by about $130 million this year compared to last year. On the flip side, despite businesses and capital being more constrained and costly, this situation has opened up acquisition opportunities. Ultimately, we're focused on acquiring well-located shallow bay multi-tenant properties. We've found better opportunities to purchase, and we will still pursue construction when the right submarket conditions arise. I expect that the market will become much more favorable and accessible into 2025 compared to 2024.

That's why one of our starts this year, fourth quarter. So thanks, Alex.

Your next question comes from the line of Nick Thillman from Baird. Please go ahead.

Hey. Good morning, guys. Just wanted to touch on development, because fourth quarter still implies almost $125 million of starts? Should we just view this as like where the field is kind of seeing the demand, is it in your traditional Florida and Texas markets where the current pipeline is? Or are you starting to see a little bit broadening out of the opportunity side?

Excellent, it's certainly Florida. Houston has been a good market. Arizona has a site near the Mesa airport, so it's a bit spread out. I'm trying to recall what we've scheduled for the fourth quarter, especially with Greenville, where we recently moved a building in. We are now fully leased in South Carolina, which allows us to kick off the next phase of a park there. This gives us a nice mix, and those economies have been performing well. Currently, there's limited availability. By the time we start these buildings in the fourth quarter and deliver them, we feel optimistic about the environment, considering it takes around 10 months to construct, plus another 12 months for leasing. We anticipate some strong opportunities in those markets as our starts will align chronologically with the end of this year.

Your next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.

Yes. Hi. Sticking with development, it looks like your lease-up developments have about a 6.8% yield expectation and what's under construction is about 7.5%. I guess how much of the pickup there is being driven by the movement in the 10-year versus kind of what you're perceiving for market risks? And as a follow-up to that is, as you're thinking about new projects you maybe going to the ground on, is 7.5% more in the ZIP code of what you're expecting there?

Good morning, Mike. That's a great question. I think the yield isn’t really driven by tenure as much. Fortunately, we’ve observed a slowdown in the construction pipeline for all product types, which has led to decreased costs. This has allowed for some positive rent growth despite the lower costs. Consequently, that's why we find ourselves in the mid-7% range for both ongoing and recently completed projects. When we consider starting a new construction project, we typically begin with an expected yield of around 7%. Instead of projecting future rents, we underwrite based on current market rents, as projecting rents can be risky and often inaccurate. Historically, by the time we deliver and lease out our developments, market rents have typically exceeded our initial expectations, leading to development yields that have been 80 to 90 basis points higher than we initially projected. We appreciate this incremental yield and the value creation because, as a long-term owner, we expect those rents to continue rising over time. While many investors are purchasing industrial properties, we prefer to focus on creating new developments rather than competing in bidding wars. We've been fortunate to capitalize on attractive yields during this unique two-year window, but we believe that opportunity is diminishing. Recently, we’ve noticed several trades occurring in the mid to low 4% range, which is less appealing to us.

Got it. Okay. Thank you.

Thank you.

Your next question comes from the line of Jessica Zheng with Green Street. Please go ahead.

Good morning. So you guys have done a few acquisitions and developments in Austin this year, and you also have a pretty large land bank there as well. Just knowing it's been a market with relatively higher supply deliveries lately, could you please just share some color around what you guys are seeing there?

We've been observing Austin and believe it has strong long-term potential. We are excited about our investments in the area, similar to how we feel about Raleigh, Nashville, and Phoenix, which also benefit from being state capitals with educational institutions that tend to drive technology job creation. The geography in these markets restricts development opportunities. Austin has seen more growth, partly because many developers have ties to the University of Texas. We were able to acquire some land at reduced prices during the downturn, which positions us well for the future. We have a solid team in place in Austin and are optimistic about our ongoing development, including a project in Hayes County, south of Austin, where we may have tenants needing more space. This clustering of assets offers us flexibility. In Round Rock, north of Austin, we are also monitoring the competition and leasing activity. Both Austin and Phoenix are promising markets that we are keeping an eye on, despite some higher levels of construction than we typically prefer. We are strategically looking for opportunities to develop within these sub-markets. Overall, we have a very favorable outlook on both markets long-term.

Great. Thank you.

You're welcome.

Your next question comes from the line of John Kim with BMO Capital Markets. Please go ahead.

Thank you. I just wanted to get back to bad debt, which looks like it's about 65 basis points of ABR this year. Where does that compare to your historical average? How do you see that trending next year and do you have any exposure to some of the banks that have been out there, including cons?

In terms of bad debt, historically, we're currently at around 68 basis points for the third quarter. When we look at the full year, including our budget for the fourth quarter, we're seeing about 50 basis points of revenue. This is slightly above our longer-term average, which has been around 30 to 40 basis points. It's worth noting that this includes two or three years following the pandemic when our bad debt was nearly zero. I would characterize our current situation as somewhat at or slightly above average, but it's primarily related to a small number of tenants and hasn't become widespread. I'm trying to recall the second part of your question, John. What was that again?

Second part is bankruptcies?

On the bankruptcy front, Cons was in two locations, with the smaller space being 26,000 square feet. To start, I want to mention that Cons is current through October. They are a retailer facing challenges, so it wasn’t entirely unexpected when they filed for bankruptcy. They were up to date on payments for both spaces through October, but they have rejected the small lease of 26,000 square feet. Currently, they are still occupying the larger space, which is 300,000 square feet in Charlotte, and remain current through October. The rent due for November and December for the year amounts to about $340,000. We will monitor the situation and listen for any updates on their plans. Overall, the larger space is flexible and could be re-leased to multiple tenants at a higher rate if needed. We'll see how this develops, but that's the current status with Cons.

If I could just follow-up, do you have like a watch list …

Sure.

... that you could share with us and how that's trended?

The watch list consists of a mix of tenants for whom we have active reserves and those we are monitoring due to slow payments or other field comments. This list has typically included four to five tenants, falling within a range of 16 to 20 in total. The number has remained steady over several quarters. While it hasn't increased significantly, some California-based tenants have fallen behind enough to be considered uncollectible, prompting us to seek new tenants for those spaces. Overall, I would characterize our collections as good. However, in today's environment, we must address these isolated instances promptly when they arise. It's worth noting that dealing with California tenants can be a longer process due to required protocols and timing involved.

I agree with Brent's comments regarding the timing of events this year. It has been a challenging quarter. A balance of good orders and some bad debts and terminations has occurred, and I commend the team for managing the letters of credit. If these issues had arisen earlier in the year, as Brent pointed out, we would have been fine. The spaces we will regain are good quality, and there was nothing unusual about the build-out; the rents are below market rates. However, because of the timing at year-end, this has impacted our occupancy, leading to a forecasted 10 basis points drop in that area and a slight dip in our same-store NOI. This is not a systemic issue; had we had 6 or 9 more months, we likely could have balanced it out. This situation could actually improve our 2025 outlook, as we will be able to re-lease those spaces at market rents, which are typically around 30% higher than what we received back. While it has created some fluctuations in our short-term results, it is not indicative of a long-term systemic problem.

Sorry, I just wanted to follow up. So, I just wanted to clarify what you mentioned earlier, Brent. But is Conn's included in the bad debt reserve for the year?

They are not. I mean, they're current as of October, so there's literally nothing to reserve.

Okay. Thank you.

Next question comes from the line of Brendan Lynch with Barclays. Please go ahead.

Great. Thanks for taking my question. This has been a topic with some of your peers. I was wondering if you could talk about potential for converting some of your land bank into data center assets? What markets that might make sense? And what are the considerations that you're balancing when thinking about these opportunities?

It's a good question. We have looked into this and engaged with several data center brokers, while also interacting directly with a couple of data center companies. We see the land we own as suitable for industrial development, but if there's an opportunity to sell the land or develop it properly without risking EastGroup, we would consider it. We've been focusing on markets like Dallas, Austin, Phoenix, and Charlotte. There are necessary requirements for power and height clearance that we've encountered, so nothing is immediate. We plan to concentrate on our core business, which is industrial space. However, if we discovered valuable resources under our land, we would be open to selling it for data center development and would seek other value-added opportunities elsewhere. We are exploring what options are available to enhance the value of our land, whether it involves a data center or industrial development.

I will turn the call back over to Marshall Loeb for closing remarks. Please go ahead.

Thank you, everyone, for your time and your interest in EastGroup. I hope we got to everyone's questions. If not, Brent and I are certainly available after the call. And we look forward to seeing most of you at NAREIT coming up here in just a couple of weeks. So thanks again.

Thanks, everybody.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and may now disconnect.