Earnings Call Transcript - EGP Q2 2020

Marshall Loeb, CEO

Good morning, and thanks for calling in for our Second Quarter 2020 Conference Call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

Keena Frazier, CFO

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 and within the Safe Harbor 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 we undertake no duty to update them whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risk factors in our SEC filings.

Marshall Loeb, CEO

Thanks, Keena. Good morning, and thank you for your time. We hope everyone and their families remain well and out of harm's way. I will start by thanking our team. They've done a great job transitioning our operating strategy quickly while working remotely. Our second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. The team had a solid quarter producing such that funds from operations came in above guidance of 9% compared to the second quarter last year. This marks 29 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. For the year, FFO per share is up 9.5%. Our quarterly occupancy was high, averaging 96.6%, leaving us 97.5% leased and 97% occupied at quarter end ahead of our projections. Our occupancy is benefiting from a healthy market with accelerating e-commerce and last-mile delivery trends. A high year-to-date retention rate of 84% is also benefiting our occupancy. Re-leasing spreads were strong for the quarter at 13.8% GAAP and 7.9% cash. Year-to-date leasing spreads are higher at 20.1% GAAP and 11.5% cash. Finally, same-store NOI was up 4.1% for the quarter and 3.9% year-to-date, and I’m proud of our team's results during an extremely choppy environment. Our strategy remains focused on maintaining occupancy and cash flow with an eye on liquidity. I'm hopeful our strategy will shift again later in 2020 to focus on growth. In terms of liquidity, I'll thank Brent and our finance team, as at quarter end, we have the highest availability on our line in the company's history and one of the lowest percentages drawn on our line in decades. Brent will give you further commentary about our upcoming debt placement, which also improves our liquidity while lowering our cost of capital. I'm grateful we ended the quarter generally full at 97.5% leased, while Houston, our largest market at 13.8% of rents, is 97.9% leased, has roughly a 4% square footage roll through year-end, and a 5-month average collection rate on rents of over 99%. Company-level rent collections remain resilient; for July thus far, we've collected 95% of rents. The unknown is when the economy truly reopens, how fast it will reopen, in which cities, and are there any shutdowns remaining. We, and everyone else, simply have less clarity than normal, even several months into this. Brent will speak to our budget assumptions, but I'm pleased that with our second quarter results and a realistic plan, we can reach $5.28 per share in FFO, only $0.02 shy of our original pre-pandemic expectations. Thankfully, we also have the most diversified rent roll in our sector, with our top 10 tenants only accounting for 7.5% of rents, down almost 200 basis points over the past few years. As we've stated before, our development starts are dictated by market demand. With the shutdown, we reduced projected 2020 starts to reflect the first quarter actual starts and some level of pre-leased conversations underway. In other words, we're not forecasting new spec developments at this time. We're also looking at acquisitions and value-add investments in the same light. Given the positive long-term distribution trends we foresee, we're working on several land sites, which we view as valuable development parcels when the economy stabilizes. In the meantime, we view operations, working with our tenants, and maximizing liquidity as our key goals until we reach the next market phase. And now Brent will review a variety of financial topics, including our updated 2020 guidance.

Brent Wood, CFO

Good morning. Our second quarter results reflect the resiliency of our team and strong overall performance of our portfolio amidst unprecedented conditions. FFO per share for the second quarter exceeded our guidance range at $1.33 per share and compared to second quarter 2019 of $1.22, represented an increase of 9%. The outperformance was primarily driven by our operating portfolio, maintaining occupancy and collections better than we had estimated in April, which was the initial onset of the pandemic. I will center my comments around our capital status, rent collections, deferment requests, and assumption changes that increase the midpoint of our FFO per share estimate. During the second quarter, we raised $30 million of equity at an average price of $123 per share. Earlier this month, we agreed to terms on two senior unsecured private placement notes totaling $175 million. The $100 million note has a 10-year term with a fixed interest rate of 2.61%. The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%. We anticipate closing on both notes in October. That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength, which is serving us well during this time of uncertainty. Our debt to total market capitalization is 21%. Debt to EBITDA ratio is 5.1x, and our interest and fixed charge coverage ratios are over 7.2x. Our rent collections have been equally strong. We have collected 98.1% of our second-quarter revenue and entered into deferral agreements for an additional 0.8%, bringing our total collected and deferred to 99% for the second quarter. As for July, we have collected 95.5% of rents thus far and have entered into deferral agreements on an additional 0.7%, bringing the total collected and deferred for the month to 96.2%, slightly ahead of June's pace. Last April, we reported that 26% of our tenants had requested some form of rent deferment. In the three subsequent months, that has only risen to 29%. We have denied 79% of the requests, are in various stages of consideration on 8%, and have entered into some form of deferral agreement with 13% of the requests. The rent deferred thus far totaled $1.5 million, which only represents approximately 0.4% of our estimated 2020 revenues. As we stated last quarter, the depth and duration of the pandemic and its impact on the economy are undeterminable. However, the immediacy and degree of potential tenant financial distress and loss of occupancy we had budgeted for in April did not occur in the second quarter. As a result, our actual performance and revised assumptions for the remainder of the year increased our FFO earnings guidance by 2.1% from a midpoint of $5.17 per share to $5.28 per share, or a 6% increase over 2019. Among the changes were an increase in average occupancy from 95.2% to 96% and a decrease in reserves for uncollectible rent from $3.8 million to $3.6 million. Note that the reserve for potential bad debt for the third and fourth quarters of $2.4 million is not attributable to specific tenants. Rather, it is a general assumption that there will be some companies that succumb to the disruption in the economy caused by the pandemic. Other notable revisions include a lower average interest rate on new debt and the increase of equity issuances by $95 million. In summary, we were very pleased with our second-quarter results. We will continue to rely on our financial strength, the experience of our team, and the quality of our portfolio to navigate us through the remainder of the year. Now, Marshall will make some final comments.

Marshall Loeb, CEO

Thanks, Brent. In closing, I'm proud of our second-quarter results. We’ve said for the past few years, our fear wasn't of oversupply, as much as a Black Swan economic event. You don't want either, but now we have just that. Our company and our team have worked through these scenarios before and while different, we're working through this one too. As the economy stabilizes, it's the future that makes me the most excited for EastGroup. Our strategy, which has worked well in the past few years, will come out of this pandemic with trends that we're hearing of, including companies carrying additional safety stock inventory, changing shopping habits that have accelerated the consumer to e-commerce, new industrial users as a result of these shopping habits, and increased U.S. manufacturing or near-shoring in Mexico. Meanwhile, our traditional tenants will remain and continue needing last-mile distribution space in fast-growing Sunbelt markets. All of these, along with the combination of our team, our markets, and our properties make me optimistic about our future. We'll now open for any of your questions.

Operator, Operator

We'll take our first question from Jamie Feldman with Bank of America. Please proceed.

Elvis Rodriguez, Analyst

Good morning, guys. This is Elvis on for Jamie. Just a quick question. If we can drill into Houston and what makes your rent collections there stronger relative to the rest of your portfolio? And then number two, any outlook you can share on supply-demand and rent changes that you're seeing in your submarkets relative to the rest of the market? That would be helpful.

Marshall Loeb, CEO

Good morning, Elvis. It's Marshall. I'll start with that. In Houston, there are probably a few things. One, it's always hard to quantify from the outside, but we have a really experienced team that's worked well together for a long time in Houston, and we've equipped them. Houston has a downturn about every few years, so they've got a lot of experience. They have done a good job and been very diligent about following up with tenants. This probably compares favorably to other parts of the country, really focusing out West, where Texas is a more favorable market in terms of landlord rights when tenants don't pay and things like that. Our ability to lock someone out or push to hone that negotiation likely helps with our collections in Houston. The third thing that I think sometimes gets lost in the larger market overview is that as we shrunk our size, our investment in Houston from a little over 20% down to below 14% and still dropping, what we sold were older standalone buildings, and what we've kept are really the buildings that EastGroup has developed in the market. The quality of what's left is important. A couple of years ago, as we were selling, the average age of what we sold was in the high 30s, while the average age of what we still had was 8 years. It's a pretty new, highly functional, well-located EastGroup-developed type of park that we've kept. I think that attracts credit-quality tenants, even if they have smaller spaces. One thing that's gotten lost over the past few months is that EastGroup has smaller spaces, which doesn't mean we have mom-and-pop tenants. There are a lot of national and well-capitalized private companies that need last-mile space. You're seeing that in our company collections, and our Houston team has done a great job being proactive, maintaining over 99% collections for the past five months. I'll admit, I'm surprised at how well we've done, and fingers crossed, we'll keep after that. In terms of any specific submarkets, it's been pretty broad; the trouble we've seen with our tenants isn't so much by the size of space as it is by what they're doing. There are markets that concern us a little bit, certainly in Houston due to supply. Although most of that is big box, not shallow bay. Another statistic, which gives us some comfort is that of the 18.8 million square feet in Houston under construction, roughly 50% is leased, according to CBRE. That leaves a little over 9 million square feet, but absorption year-to-date has been over 6 million square feet, even during the pandemic in Houston. We're hopeful we’ll work our way through that as a market. Thankfully, the majority of that, by far, is not shallow bay. The tourist markets concern me a little bit, just because places like Las Vegas need the strip to be open and tourists to be coming to town. It's not a large market for us, but it certainly helps our tenants when the economy is open. The same way with Orlando; for example, Tampa has been a very stable, strong market. We've had some great leasing spreads there and things like that. In Orlando, we've held our ground, but with Disney and Universal Studios and convention slowing down, those are the markets we feel have been hit a little harder than Dallas or Charlotte or some of the more stable markets like Austin.

Elvis Rodriguez, Analyst

Thank you. That's very helpful. And then just one more question either for Marshall or Brent. On what you were thinking when you lowered guidance with the 1Q release and then, obviously, increasing guidance now, what did you see from tenants then versus now? Is it that the markets have reopened? Is it that some of those industries you thought would not survive are actually thriving? What exactly are you seeing that's different quarter-over-quarter?

Marshall Loeb, CEO

I'll take it then Brent can jump in and we'll both try to answer. I think as we pulled together our thoughts, this shutdown really started as a curtain coming down in an instant on March 13th, and it was a dramatic stop. A month later, as we were pulling together our guidance, we were just kind of watching the news, watching the economy, and all working remotely. We just said with this shutdown, it's going to impact our tenants, and people aren't leaving their homes, which would make it very difficult to backfill space. What surprised us—or me—positively is just how critical our space is to our tenants. Even those that have been in trouble; some of our bad debt, we're still working with those tenants to figure out why they're trying to stay in their space or bring an investor on board. So I've been pleasantly surprised. When the shutdown occurred, it has accelerated companies' shifts towards e-commerce so quickly, and we’re seeing more companies adopting social distancing that has led to incremental demand. As you know, with Amazon and home building, e-commerce tenants have really grown rapidly this year and continue to do so, and we've picked up probably our market share of that. So probably seeing that happen that quickly surprised me. You think it makes sense that it's going to happen; we just didn't expect it to happen as fast. I'm really surprised that our average occupancy for the quarter at 96.6% is the same as last year, and last year was a record year. If you would have asked me in April about occupancy staying the same, I would have been wrong, but I would have bet a lot that it was going down, and thankfully it hung in there. Brent, any additional commentary around this?

Brent Wood, CFO

No, I think that's right on. I mean, the reality is in April, it was so soon we just didn't know. Now we have a bit of data, and as Marshall said, we are very pleased with how everything has held up. There's still some uncertainty, maybe even toward the end of the year. We've factored in a few things into guidance to hopefully adjust for that. But yes, I would say in April, we just didn't know, and you felt like you needed to do something to adjust for the lack of any knowledge of what might happen. So again, we're very pleased with where we are, Elvis.

Elvis Rodriguez, Analyst

Great. Congrats on the quarter, guys.

Marshall Loeb, CEO

Thank you.

Operator, Operator

The next question is from Daniel Santos with Piper Sandler. Please go ahead.

Daniel Santos, Analyst

Hey, good morning. Thanks for taking my question. I guess the first one is wondering if you could give some more color on why you're baking in such conservative guidance for occupancy in the back half of 2020, just given the first half has been better than expected. One would expect that the second half would kind of continue that trend; just some color on that would be helpful.

Marshall Loeb, CEO

Yes, I hope you're right. We hope so. Our thoughts to date—thankfully speaking here at the end of July, maybe one more month into it—are that we feel like we've held in there. As the economy reopens, it's not fully reopened. Restaurants are at 50%. I don't know that things won't get shut down again. Different places have been mentioned; different states, different cities shutting down bars or gyms, or other closures that create stress across our 1,600 tenants and potentially on their balance sheets over time. I hope you're right. I hope we're being conservative. We just thought we're not out of this yet. While we have held strong occupancy numbers, it’s just more uncertainty than any one tenant specific or large ones that drives it. It's just a case of caution overall.

Daniel Santos, Analyst

Got it. That's helpful. And then my second question is on distribution and how much would you say—appreciate the comment on the incremental demand from e-commerce. So how much would you say COVID has really changed distribution and last mile in a permanent way versus something just temporary between now and when things go back to quote-unquote normal?

Marshall Loeb, CEO

Okay, good question. I think the spike that we read about in terms of how much—pick any retailer, much less Amazon, and the numbers out show retail sales where originally in the high teens, it jumped into the low 30s. People are expecting it to moderate back and maybe settle into the 20s, but I don't think things will revert back. This closure of retail has further demystified e-commerce for a large segment of the population. I think the way people shop and perhaps how they live too, which I think will help us over time in Sunbelt markets, live and work. I think those trends have started to accelerate; this was all heading in the e-commerce and last-mile direction. The company relocations and population shifts to fast-growing Sunbelt markets were already happening. But I think this will add fuel to that fire coming out of this. Someone mentioned it is like euthanasia for some malls that were already dying. This action has expedited that process.

Daniel Santos, Analyst

Got it. Thank you.

Marshall Loeb, CEO

Sure, you're welcome.

Brent Wood, CFO

Thanks, Dan.

Operator, Operator

We will go next to Manny Korchman with Citi. Please go ahead.

Katy McConnell, Analyst

Good morning. This is Katy McConnell on for Manny. Can you discuss the potential impact of the PPP program rolling off for your tenant base and the effects on rent collections or increased deferrals that you might be factoring into your estimates for the balance of the year?

Brent Wood, CFO

Yes. Hey, this is Brent. Good morning. Obviously, we've had direct feedback from tenants that initially put in requests and then later said they received some PPP money, and it helped them catch up. So certainly, we've seen some tenants benefit from that. It's hard to pinpoint, out of our 1,600-1,700 customers, exactly how much it's helped. We did cross-reference our tenant base with the public list of companies that received PPP money. We were looking at those that received $150,000 or more. It appears that approximately 20% of our tenant base received some form of PPP funding, which seems to align with what we were expecting. As for whether they extend the program, that would be beneficial. Any injection of cash into people's pockets would help. I think over 80% of our tenants have shown good resiliency without that assistance. We don't have much control over it; if it's part of the program, we would anticipate that it would incrementally improve the situation, but if they don't extend it, our tenant base consists of longtime customers we will continue to work with, but it's challenging to gauge the impact.

Katy McConnell, Analyst

Okay, thanks. Maybe following up on Houston for the leases you have expiring there, can you talk about your expectation for retention as well as backfill demand?

Marshall Loeb, CEO

Sure. The good news is given the choppy environment, our tenant roll-off between now and year-end is only about 4%. Our retention, despite this uncertainty, has led our tenants to renew. Ideally, if you were modeling EastGroup from scratch, long-term retention is usually about 70% for us, while we’re currently at about 84% year-to-date. If this uncertainty persists, it has resulted in higher retention rates in Houston and other markets. I anticipate more roll-offs in 2021 as the economy hopefully stabilizes. Rents in Houston have come down between 5% and 10%. However, there is embedded rent growth, with renewals on the horizon.

Katy McConnell, Analyst

Okay, great. Thank you.

Marshall Loeb, CEO

Okay.

Operator, Operator

Our next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.

Unidentified Analyst, Analyst

Hi. This is on behalf of Vikram. Congratulations on the quarter. Could you provide more details about your expectations for development starts? I understand you mentioned there won't be any future speculative development starts, but considering your confidence in the outlook, I'm curious why you wouldn't consider increasing development efforts.

Marshall Loeb, CEO

A good question. If you divide the second half of the year into quarters, we had stopped our spec starts because the economy was so uncertain in the second quarter. We feel better about things now, although we're still cautious at the end of July. There will be no starts in the third quarter, but as we roll into the fourth quarter, there are some pre-leased conversations we're having; if we get a lease signed, we'll certainly build for that tenant. We have several proposals out. That's probably the biggest part of the difference with the spec developments. Between now and year-end, we’re thinking a little differently about markets like Charlotte, Phoenix, and Northeast Dallas—places where, in more normal economic times, we would have started new buildings in existing parks. We've really put those on hold.

Unidentified Analyst, Analyst

And just to follow up on some markets, it looks like from your core market operating statistics that California's same property NOI was a little bit weaker. Can you talk about what was going on there last quarter?

Marshall Loeb, CEO

Last quarter, that was weaker. For example, in San Francisco, we had a good property in Hayward that was vacant the entire quarter while it was full last year. We've had an agreement there for a prospect to review and hopefully sign a lease soon. For Fresno, it’s a park we have owned since the late 90s, a 400,000 square-foot property, and it saw a minor increase in vacancy. The good news is we still have strong leasing spreads as you look at San Francisco with mid 50% rates. This is one of those tight spaces that once we get a tenant, it'll be backfilled quickly. Right now, it’s just taken a bit more time there. California has been shut down longer than Georgia or the Carolinas, which has extended that vacancy.

Unidentified Analyst, Analyst

Great. Thanks so much.

Marshall Loeb, CEO

You're welcome.

Operator, Operator

Next question is from Michael Carol with RBC Capital Markets. Please go ahead. Mike, please check the mute function on your phone.

Michael Carroll, Analyst

There we go. Sorry. Marshall, can you provide some color on your comments about companies needing to increase their safety stock? Have your tenants indicated that they plan or need to hold more inventory to withstand potential supply chain shocks?

Marshall Loeb, CEO

It's probably more us reading and hearing that and hearing it at conferences and conversations with brokers than direct feedback. I would say, our tricky part—between April and now, we've been in front of our tenants less than typical. You may have the occasional phone call, but you're certainly not traveling and walking through spaces to get a sense for how they're using it. What we've been hearing, particularly from brokers, is companies that were sourcing from China and had less inventory will need to carry more inventory. There’s the notion that every click by a customer to delivery needs to happen promptly. We see this moving significantly toward needing to carry more and more inventory near rooftops.

Michael Carroll, Analyst

Got it. And how broad-based do you think this will be among tenants? Will only larger tenants be the ones driving the higher inventory needs, or do you think smaller tenants will need to do that too? If so, where are they going to hold it? In shallow bay space or more in the outskirts?

Marshall Loeb, CEO

It’s probably a little bit of both. Early on, in this downturn, we've seen national tenants still being the more active ones in conversations: Home Depot, Lowe's, Wayfair, Tesla, and some others. In the last 30 to 45 days, we've seen more local regional tenants becoming active now that the economy is starting to stabilize. I think all tenants will need to keep more inventory; their warehouses will shift depending on how local or regional. I think national companies with adequate resources will need to consider this too. For companies like Lowe's and Home Depot, it's cheaper for them to keep their inventory with us than in a strip-center location, especially for large bulky items that cannot be transported easily by customers. This makes for a cheaper option to stores where they can keep bulk and order appliances to be delivered from an EastGroup warehouse.

Michael Carroll, Analyst

Okay, great. Thanks.

Marshall Loeb, CEO

Sure.

Brent Wood, CFO

Thanks, Mike.

Operator, Operator

We will next go to Bill Crow with Raymond James. Please go ahead.

Bill Crow, Analyst

Hey, good morning. Congratulations, guys. Marshall, a couple of topics that seem to surface pretty often. I just wanted to get an update from you. Number one, what are your tenants telling you about their ability to source labor? And number two, any color on construction costs? We've noticed costs coming down. Are we actually seeing material declines in construction?

Marshall Loeb, CEO

Good question. We’ve seen our shell costs on buildings come down by $1 or $2 per square foot, which is becoming a meaningful number. We said that while rents have remained relatively stable in terms of growth, we're starting to see sentiments that rent growth may pick up again in the back half of the year. Labor is certainly an issue with rising unemployment; it was previously a significant topic of discussion with tenants about their ability to source labor in tight markets. But I would say we hear labor is more available now. Additionally, we have seen construction capacity go down; we’ve been a little less efficient than typical due to safety and distancing requirements.

Bill Crow, Analyst

Marshall, on the development land, are we seeing indications that competition for land is easing a little bit, or are more owners looking to liquidate land in order to pay for other investments given this economic climate?

Marshall Loeb, CEO

Good question. We're not seeing distress in terms of industrial assets; if anything, it seems the demand may have picked up. However, there is less competition for land. The prices have stayed sticky. What we've noticed is that we’ve been able to tie up some contiguous land near successful developments like in Charlotte or Northeast Dallas. We want to tie it up as long as the seller will let us have our funds go at risk as late as possible, thus improving our overall development strategy. With population relocations to Sunbelt markets expected during this downturn, we hope to continue using this period for strategic land acquisition.

Bill Crow, Analyst

Sure. I get it. All right, well, thanks for the color. I appreciate it, guys.

Marshall Loeb, CEO

Sure. Thanks, Bill.

Operator, Operator

Go next to Eric Frankel with Green Street Advisors. Please go ahead.

Eric Frankel, Analyst

Thank you. An accounting question. Can you express your bad debt assumptions for the second half of the year on a cash basis?

Brent Wood, CFO

Hey, Eric, good morning. It’s Brent. We wouldn't know until it occurs. Bad debts have been running at about 2.5 to 1 straight line versus cash. So far out of $1.2 million for the year to date, just over $300,000 of that has been cash. The reserve we have for bad debt amounts to $2.4 million, which is not tied to specific tenants; rather, it's a general assumption—though it's not lacking hope that it might be conservative. We expect cash to remain at a ratio of about 2x to 3x of straight line.

Eric Frankel, Analyst

That's helpful. I think, Marshall, you've expressed this in a couple of different ways, but could you clarify specifically the leasing core of the average lease terms, which are shorter than it's been the last few years—will this trend stay? Or do you think it'll revert back to where it was?

Marshall Loeb, CEO

Good catch. The trend has dipped, which was around 3.5 to 3.8 years. It may stay there due to uncertainty around the markets, but I would expect a return to over 4 years in the long run, which has traditionally been 4.1 to 4.5 years. I think there's some uncertainty regarding the market and the tenants signing shorter contracts as a result—hopefully, by next year we can return to more stability.

Eric Frankel, Analyst

Okay, thanks. Final question, just related to the last-mile demand front. How much of this demand is driven by store replenishment versus delivery to individual consumers?

Marshall Loeb, CEO

It's mostly customer related; we calculate this from our EastGroup buildings rather than store locations. Many customers are moving to a regional level of inventory instead of store-level inventories, and that's by and large the common practice.

Eric Frankel, Analyst

Okay, great. Thank you.

Marshall Loeb, CEO

Sure.

Brent Wood, CFO

Thanks, Eric.

Operator, Operator

Next we have Craig Mailman with KeyBanc Capital. Please go ahead.

Craig Mailman, Analyst

Hey, guys. Marshall, you mentioned Houston rents are down 5% to 10%. Are you seeing any kind of weakness outside of Houston or significant increases in concessions across any of your markets?

Marshall Loeb, CEO

Good question, Craig. Not really. We're not seeing a change in renewals, and those have remained consistent. Most of our tenants have tenant rep brokers, and when we’re close to a deal, they often ask for short rent-free periods (2 or 3 months on a longer-term lease). Free rent has increased while rents have remained stable; annual increases have stayed consistent. Outside of Houston, thankfully, rents are stable without going backwards.

Craig Mailman, Analyst

We've heard from other issues about pushing bumps higher. Are you part of that trend?

Marshall Loeb, CEO

In general, on larger spaces with longer terms, it makes sense to negotiate. They generally push for 2%, but we typically aim for 2.5% to 3%. If we can negotiate higher, we would, but depends on tenant demands; often tenant rep brokers will reference market data for negotiations. So in terms of rent increases, we've seen it rise, but not hugely.

Craig Mailman, Analyst

Okay. And just one last one, I apologize if I missed it, but it looks like collections have seen slight declines month-over-month. Is there anything specific driving that, or are you seeing any increased deferral requests as COVID impacts specific communities more?

Brent Wood, CFO

Yes, Craig, good morning. I'll answer the second part first. We have not seen an uptick in deferral requests; it's actually gone the other way. The deferral requests have significantly trailed off. Our team has a process where we’re getting at least weekly reporting from each asset manager in the field. Over the past several weeks, a lot of those updates have been essentially no new update, meaning there's been no new requests. So thankfully, that's trailed off significantly. The overall performance of our collections remains strong. For July, the collection rate is 95.5%. We've already reported an increase, hitting 95.9%. Each day, those numbers literally change. There's always fluidity in it; although there's an opportunity for pressure, overall we don't have alarms going off at this point.

Craig Mailman, Analyst

What is your exposure to physical retail and tenants?

Marshall Loeb, CEO

It's a funny situation. With retail, we did get questions a couple of years ago and noted it’s not significant at all. It’s grown a little in the last few years. We've got some large tenants, like Nordstrom for over 20 years in Orange County. But we do not have large tenants like J.C. Penney or Tuesday Morning. We've lined up Nike and their different brands too, but it's more about stability as opposed to being heavily exposed to a traditional retail structure.

Bill Crow, Analyst

Sure. Thanks for the color. I appreciate it.

Marshall Loeb, CEO

Sure. Thanks, Bill.

Operator, Operator

Next, we have Venkat Kommineni with Mizuho. Please go ahead.

Venkat Kommineni, Analyst

Hi. Good morning. Just wondering if you can comment on some of the movement in Houston occupancy during the quarter. When I compare it from the end of 1Q to the update on June 1st and then to 2Q, it looks like it declined from 98.7% to 97% and then ticked back up to 97.9%. Was that increase in June driven by the lease signed with Agility in Houston, now showing up in your top 10 list? As a follow-up, does this initial occupancy decline in April and May help explain the near 100% collection rate in Houston in 2Q as some weaker tenants vacated?

Marshall Loeb, CEO

No, that's a good question. The lease with Agility was signed, resulting in them moving into our top ten. They took occupancy of several new buildings. There have been some shifts in occupancy, but overall our San Antonio team has worked diligently to negotiate tenant transitions successfully. With nearly 5.5 million square feet in Houston, there are always tenants moving in and out, somewhat like an apartment complex. The increase was majority made by a new delivery of a building by Agility, which we are excited about.

Venkat Kommineni, Analyst

Great. Thank you.

Marshall Loeb, CEO

Sure.

Operator, Operator

It appears we have no further questions. I'll return the floor to our presenters for any closing remarks.

Marshall Loeb, CEO

Thank you, everyone, for your time. Thank you for your interest in EastGroup. Brent, Staci Tyler, and I are available for follow-up questions after the call and are hopeful we can see you all in person again one day when the world allows. Take care, and thanks again.

Brent Wood, CFO

Thanks.

Operator, Operator

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.