EastGroup Properties Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

Key Takeaways

  • EastGroup reported Q2 FFO per share of $2.05, up 8.5% year-over-year and above guidance midpoint, and raised full-year FFO per share guidance by $0.06 to a midpoint of $8.33.
  • Portfolio occupancy remained strong at 97.1% quarter-end with solid leasing activity delivering GAAP/cash re-leasing spreads of 60%/42% and cash same-store NOI growth of 5.3% for the quarter.
  • The company’s balance sheet strengthened after renewing its $675 million unsecured credit facility, lowering debt/EBITDA to 3.8x and boosting interest coverage to 11.3x, both record levels for EastGroup.
  • In Q2 EastGroup entered the Raleigh market via the 147 Exchange acquisition, while top-10 tenants now represent just 7.8% of rent, enhancing geographic and tenant diversification.
  • With national industrial starts below 50 million square feet for four consecutive quarters, management expects market tightening in 2025 to support further rent growth and development opportunities.
AI Generated. May Contain Errors.
Earnings Conference Call
EastGroup Properties Q2 2024
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the EastGroup Properties Second 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. Instructions will be provided at that time for you to queue up for a question. I would now like to turn the conference over to Marshall Loeb, President and CEO.

Operator

Please go ahead.

Speaker 1

Good morning, and thanks for calling in for our Q2 2024 conference call. As always, we appreciate your interest. Brent Wood, our CFO is also on the call. And since we'll make forward looking statements, we ask that you listen to the following disclaimer.

Speaker 2

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.

Speaker 2

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 ks for more detail about these risks.

Speaker 1

Thanks, Kina. Good morning. I'll start by thanking our team for another strong quarter. The team continues performing at a high level and finding opportunities in an evolving market. Our second quarter results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial market.

Speaker 1

Some of the results produced includes funds from operations rising 8.5%, excluding voluntary conversions. 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 leasing was 97.4% with occupancy at 97.1%. Average quarterly occupancy was 97%, which although historically strong is down from Q2 of 2023. Quarterly re leasing spreads were solid at 60% GAAP and 42% cash.

Speaker 1

Year to date results were similar at 59% 41% GAAP and cash respectively. And cash same store NOI rose 5.3% for the quarter and 6.5% year to date. Finally, we have the most diversified rent role in our sector with our top 10 tenants falling to 7.8% of rents, down 50 basis points from Q2 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 I'm optimistic about the combination of an improving economy with a lack of new supply.

Speaker 1

We're focused on value creation via raising rents, acquisitions and development. This allowed us to end the quarter over 97% leased and continue pushing rents throughout our portfolio. On the acquisition front, we're excited to enter the Raleigh market with 147 Exchange. Raleigh is similar to a number of markets we're attracted to offering economic stability and growth due to the mix of the state capital, large educational presence, technology companies which follow the university presence, topography constraints for new development and long term population growth. Our acquisitions will continue to be guided by 2 criteria: 1, to be accretive and secondly, raising the long term growth profile of the portfolio, thus creating NAV as well.

Speaker 1

We're continuing to patiently find one off acquisition opportunities in the market. As we've stated before, our development starts are pulled by market demand within our parks. Based on our read through, we're maintaining our 2024 starts forecast of $260,000,000 We had some strong leasing wins during the quarter and have solid prospect interest. On the other side, decision making is still deliberate and prospects are focusing later in the construction process. In terms of starts, we ultimately follow demand on the ground to dictate pace.

Speaker 1

Based on the decision making timeframes we're seeing, our starts are more heavily weighted to the last part of 2024. In this environment, we're seeing 2 promising trends. The first being the decline in industrial starts. Starts have been materially below 2022 peak levels for 7 consecutive quarters with the past 4 falling below 50,000,000 square feet. Assuming reasonably steady demand, the market should tighten in 2025, allowing us to continue pushing rents and create development opportunities.

Speaker 1

Brent will now speak to several topics, including assumptions within our updated 2024 guidance, which I'm happy to say contains several improved metrics. I believe is when interest rates ultimately begin to fall and election passes and or global turmoil settles, then confidence and stability within the business community will rise. As that 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 base and the land and permits we have in hand.

Speaker 3

Good morning. Our second 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 the midpoint of our guidance range at $2.05 per share compared to $1.89 for the same quarter last year, an increase of 8.5 percent excluding involuntary conversion gains. From a capital perspective, we continue to access the equity market. During the quarter, we directly issued common shares for gross proceeds of $50,000,000 settled forward shares agreements for gross proceeds of $77,000,000 and we have an additional $100,000,000 in forward agreements available for funding when needed.

Speaker 3

Collectively, the shares in these transactions were initiated at an average price at an average share price of $172.25 Debt authorities are minimal this year with $50,000,000 in August and $120,000,000 in mid December. In June, we renewed our $675,000,000 unsecured credit facilities, extending the maturity from July 2025 to July 2028. There were no other material changes to the agreements. Although capital markets are fluid, our balance sheet remains flexible and strong with increasingly healthy financial metrics. Our unadjusted debt to EBITDA ratio decreased to 3.8 times and our interest and fixed charge coverage increased to 11.3 times, both representing all time best for the company.

Speaker 3

Looking forward, we forecast FFO guidance for the Q3 to be in the range of $2.06 to 2 point 12 dollars per share dollars per share and $8.28 to $8.38 for the year, a $0.06 per share increase from our prior guidance. Those midpoints represent increases of 7.2% and 7.7% compared to the prior periods, respectively, excluding insurance related gains on involuntary conversion claims. We raised the midpoints for cash same store growth and occupancy from our prior guidance. We increased estimated capital proceeds raised for the year by $100,000,000 as a direct result of more property acquisition opportunities. We currently anticipate raising that capital via our ATM program.

Speaker 3

In closing, we were pleased with our 2nd quarter results and are well positioned entering the latter half of 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.

Speaker 1

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. Externally, the capital markets and the overall environment remain unsteady, which has led to the continued low levels of construction starts. In the meantime, we're working to remain high occupancies while pushing rents.

Speaker 1

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, near shoring and on shoring trends, evolving logistics 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 our geography. We'd now like to open up the call for your questions.

Operator

Thank Your first question is from Jeff Spector from Bank of America. Please ask your question.

Speaker 3

Great. Good morning. I guess if I could focus my question on the acquisition market, which seems to have opened up, I guess what has changed since 1Q? And again, how are you it sounds like you believe with whether it's past the election or again, maybe after the first cut that things will open further? Thank you.

Speaker 1

Hey, Jeff. Good morning. It's Marshall. Good question. It's probably a little more micro than that, at least in our case.

Speaker 1

It felt like 1st quarter acquisitions were getting pretty competitive. We've heard a portfolio and a a portfolio and a portfolio being 3 or 4 buildings, when you get the dollar number up there, it gets off competitive and cap rates, we've seen it even as recently as in the last week or so, drop into the 4s. What pushed our guidance raise more this quarter were more specifics that are kind of one off deals. They're similar to what you've seen us buy newer buildings, existing markets. We're working our way through due diligence and happy to share as much as we can as soon as we can on those.

Speaker 1

But just we were able to secure a couple of bids and similar. We're newer buildings. I think at least one had been under contract, fallen out of contract because of financing, and we represented a more certain path to closing. So a couple of times we were able to find pricing that we liked on acquisitions and that drove the guidance range raise. We're still out pitching on some other buildings, so maybe we can increase it later in the year for and see.

Speaker 1

And again, I hope we close these 2. We'll see how due diligence and everything shakes out, but we felt like they were more probable at not given where we are in due diligence and raised our guidance as a follow-up to that.

Speaker 4

Great. Thank you.

Speaker 5

Sure. You're welcome.

Operator

Thank you. Your next question is from Craig Mailman from Citi. Please ask your question.

Speaker 5

Hey, good morning. Marshall, I just want to go back to your comment that demand for your shallow Bay product is good, smaller tenants remain a little bit more robust and you're continuing to push rents throughout the portfolio. Could you just give a sense of kind of how much you're able to still push when there's concerns about kind of flattening market rent growth or even declining market rents in some markets. And just also, I think you guys are running slightly ahead of your average occupancy guidance. Is there anything in the back half of the quarter that you know about that brings you down?

Speaker 5

Or is that just kind of a placeholder based on an uncertain environment?

Speaker 1

Good morning, Craig, and thanks. I'll try to touch all those points and Brent catch me for the ones I missed. What I would say is, I guess, a little bit of both. We have the embedded growth in our portfolio and you've seen us having been in industrial, I'm pleasantly surprised how many quarters in a row our GAAP re leasing spreads have been north of 50%. We're probably 6, 7 quarters in a row.

Speaker 1

We still have that embedded growth. You're right, the market rents have slowed certainly kind of they spiked post COVID. They've slowed to where we're maybe a solid national report, and it was showing 7% to 8%. That feels a little high to me. And they did admit those were asking rents, not effective rents.

Speaker 1

So maybe more mid single digits. So that's our embedded growth rate has slowed a little bit, although I think where construction has been for going on 2 years now, we could have a pretty sharp turn hopefully next year given the lag and supply catching up. And then in terms of occupancy, you're right, we've trended ahead of where our budget has been really about every month this year. Things feel like they've been slowly improving kind of those green shoots kind of month to month this year. Still have within our budget kind of some dips here and there, but there's no major move outs that are known or anything like that that would really throw us in terms of we just thankfully don't have those big boxes or anything out of 60,000,000 square feet, any one space here or there that will throw it.

Speaker 1

It's just a little bit more, I hope it's conservatism by the team, but that's kind of where our budget shook out. And I am glad, we didn't move it by a lot, but at least it did move little we'll see how the economy shakes out. We can do a little better than that.

Speaker 5

And I feel like I already broke your one question, Will. So I'm going to break it again. Can you sorry. Can you guys just talk about balancing kind of the use of the forward ATM versus just going directly to the market given I know you guys don't want to kind of speculate on your multiple, but clearly versus where you guys did the forward versus where the stock is trading today, You left like 15% on the table. So just the thought there of pulling those two levers?

Speaker 3

Yes, I tried to tell Marshall that the old time, Craig, that we were probably leaving that on the table, but I'll jump in and Marshall can fill in the holes. But it's obviously at that point, we I mean, we're very pleased to have gained what we have since we went into blackout. We were $1.70 a share at June 30. So certainly the news about potential rate cuts and all of that got more positive incrementally and quicker more positive post quarter end. But as a reminder, our revolver is still running 6% to 6.25% on an interest rate, variable interest rate.

Speaker 3

And we just we've had some great acquisition opportunities. The team we continue to find good opportunities to invest capital. So we were trying to derisk that a little bit with the forward and taking some of that down. As a reminder, just a couple of weeks after quarter close, we always know we have our dividend payment coming, which is in the mid-sixty million range. So looking staring at a low 6 interest rate versus kind of stockpiling or putting taking some risk off the table, we were pleased to do it.

Speaker 3

You just you make a decision at that time and if you like it, you roll with it. Look, I hope that we issue something in the next coming days at 190 and we look back and we say, why did you do it at 190 when you could have done it at 200. So it is I've kind of likened it like a 401 you would like to always invest right at the peak, but you're really over time when you're issuing equity like we've been, you're to some extent, you're always looking at the dynamics of it, but you're averaging your way into some extent. And so we'll blend some of that in Q3, hopefully, if the price holds up. But you're evaluating in the moment and it was attractive and made sense then.

Speaker 3

And we like having the forward component. It does allow us to take some risk off the table. Certain things could have gone another way and then maybe you're looking at you were down 15% and you're glad you have it. So a lot of that goes into the equation. But as we always do, you do it in bite sized pieces.

Speaker 3

And so we're not making we didn't make any big bets or anything else. Pretty normal course of business in terms of just getting capital together.

Speaker 5

Perfect. Thank you.

Speaker 4

Yes. Welcome.

Operator

Your next question is from Alexander Goldblatt from Piper Sandler. Please ask the question.

Speaker 6

Hey, good morning and I will stick to the one question rule. So if we look at the sort of softness in tenants that you guys spoke about 6 to 12 months ago and then now, nothing's really changed in the economy. Jobs are still pretty good. The economy is humming along. Interest rates, everyone expected generically year end, that's still the case.

Speaker 6

So it's not like we suddenly have lower interest rates. It's not like the election has gotten more certain and it's not like the global macro has improved. So in your view, what caused tenants to sort of slow down late last year, earlier this year versus now picking back up given when you look at what's going on, nothing has really changed? I mean, obviously, it's good to hear you're seeing increased demand and potential for improvement in the back half of this year. But from a tenant perspective, there doesn't really seem to be anything different.

Speaker 6

So can you just sort of parse through that?

Speaker 1

Good morning, Alex. I'll try and again, it's more theory. What I would say is, maybe if you went back a year ago, we really felt like development leasing, it was probably the second half or third quarter into the end of the year, it felt like leasing decisions were noticeably slowing. And I wouldn't say and kind of end of this year, as I mentioned earlier, it's improving. It's not gotten dramatically better, but it's better and heading in the right direction.

Speaker 1

So it's not dramatically better. And then maybe a year ago, I think people were still I don't hear as much about a hard landing. Everybody seems to think it's a soft landing and interest rates even maybe every quarter and interest rate cut gets kicked down the road eventually we'll get there. People seem to think it's always 90 days away. I just don't know 90 days from when.

Speaker 1

And I think at some point, people have put off their expansion plans and you just kind of get used to the new norm. And so maybe they were waiting for the other shoe to drop late last year and now we're rolling into August next week and people are starting to go, all right, we're operating in this environment. We're kind of used to political chaos and used to interest rates being about to drop sometime in the next few months and people are just starting to feel like, okay, we need our sales are still there, we need to make decisions and we need to expand our space and or make a decision and that's what we're seeing. And I also think the other thing that helps us, as I mentioned earlier, we're going on 2 years now of lower supply. I mean, a lot has delivered certainly to the market, but on the back end, the construction pipelines are at today in our markets probably 70% to 80% of what they held at the peak.

Speaker 1

So there's just no inventory coming and it will take a while for that inventory to get there. I don't know that that's hit tenants yet, but that will be a reality as the supply gets taken off the shelves, there's not going to be much restocking the shelves for a while.

Operator

Operator? Yes. Thank you. Your next question is from John Kim from BMO Capital Markets. Please ask your question.

Speaker 6

Thank you. I realize UPS is not a top ten tenant of yours. They might be in your portfolio overall. I wanted to ask about that. But specifically, to the extent that you paid attention to the results yesterday, I'm not really asking you to comment on their results, but I was wondering if you had thought that it could be reflective of maybe some other tenants of yours as far as struggling with profitability, high labor costs and if this is in any if this is of any concern with you as far as leasing demand?

Speaker 1

Sure. I mean, we watched it and you wish again, that's why I say the economy is doing better. Certainly not an expert or any real insight on UPS versus the we read what's public like everybody else. I would say, I think it's been a tough environment with labor and I'll say insurance costs for businesses, utility cost, everything. So I've said I felt for our tenants at times with rents up, labor cost up, utility cost up, it's hard to get inflation in line.

Speaker 1

It does feel like the economy is improving. And look, that's why as we kind of mentioned in our prepared remarks, I'm glad our top 10 are under 8% because it I like that diversity because even large companies have issues during at times when interest rates have been high for this long and debts are rolling to higher levels and things like that. So we like the tenant diversity and it does feel like things are getting better, although our bad debts run ahead of where we thought it would be year to date or what we budgeted. We still got to we keep bumping our reserve, but we're our watch list and things like that, it will feel better when the economy is on a little firmer footing. So yes, I hate that for them and I'm appreciative of the geographic and the tenant diversity we've got.

Speaker 6

Is UPS a major tenant of yours or?

Speaker 3

They are not a major tenant. I don't know exactly what percentage they are. I don't even think they're top 20, which would put them less than 0.4% of our revenue. It's not a name that our team has really brought up, but they've been a tenant in the past. And again, they're not a major tenant.

Speaker 3

So out of our 13 or 1400 tenants, we likely have a space or 2 with them, but they're not any large scale.

Speaker 1

We have FedEx, but not as much UPS.

Speaker 6

Appreciate it. Thank you.

Speaker 3

Sure. Welcome.

Operator

Thank you. Your next question is from Todd Thomas from KeyBanc Capital Markets. Please ask your question.

Speaker 7

Yes. Hi. Good morning. I just wanted to go back to investments and capital raising activity where there has been a lot of uncertainty and volatility in the capital markets. And you talked a little bit about the issuance in the quarter both on the regular ATM and the forward just relative to where the stock is trading today at almost $190 How much does that drive your thought process on capital deployment?

Speaker 7

And does this provide you with a window to be more aggressive and afford you an ability to maybe change your underwriting thresholds a little bit on new acquisitions and also maybe new starts later in the year and into 2025?

Speaker 1

Yes. Hey, Todd, good morning. It's Marshall. Good question. And for right or wrong, I've always tried to decouple those a little bit.

Speaker 1

Certainly, as we're bidding, we don't if it were the other way around, we don't want to run up our line of credit and not have that capital. So we will kind of as Brent mentioned, as we got towards the end of the quarter, we knew we were running into a blackout and we were a couple of acquisitions that I mentioned earlier that we were awarded, a couple of more things that we were that we're pursuing and still pursuing some with a $50,000,000 mortgage maturing in August. It felt like, okay, we know we've got uses and our equity cost was right, kind of in the zip code of NAV, which is around $170 a share, at least last $170,000 $171,000 $171,000,000 consensus. So that felt like a green light. Today, we certainly like it a lot better at $190,000,000 but I like keeping a discipline on our acquisitions.

Speaker 1

And really, you don't want to buy something you regret later just because your equity cost was low at the moment. We really it bubbles up from the field, so the guys that are responsible for operating it, we purposely have never had a Chief Investment Officer, so that really what you buy and Brent and I were both in the regionals at one point, you kind of need to live with. So we like that discipline that let's only buy things we really like long term and that are going to create NAV for us long term. And on starts, we've always said too, again, driven by the field, as fast as your last building leased up, we'll go to the next one as long as the world's not shutting down for COVID or some unusual circumstances and things like that. So we'll typically follow the field and as leasing goes on development leasing, we'll go as fast and we know the way to solve a Phase 3 issue isn't to start Phase 4 or anything like that.

Speaker 1

So, it's I like our model for our simplicity.

Speaker 6

Okay. Thank you.

Speaker 1

Sure. You're welcome.

Operator

Thank you. Your next question is from Rich Anderson from Wedbush. Please ask your question.

Speaker 3

Thank you. Good morning. And I guess apparently the mailman always rings twice. I'll stick to one question myself. So on the same store guidance, just up a hair 10 basis points.

Speaker 3

And I'm curious about that. Are your systems so sophisticated that it's spit it out a 10% or 10 basis point increase from last quarter? And if so, impressive, kudos. But or is the is it really a more of an art than science, meaning you wanted to sort of setting the signal that things are getting better, you don't really necessarily see an increase in your same store growth profile, but you also felt like it would send the right signal to just nudge it up a little. I'm just curious how you came to a 10% very subtle increase to your same store outlook?

Speaker 3

Thanks. Rich, thanks. It's we really would say it's more we rely really more just straight mathematical, meaning it just from the field. Obviously, at this point, you've got 6 months of actual, then you plug in the assumptions of the other and it bubbles up from the other 6 months, you combine it. It did happen to result in that 10 basis points.

Speaker 3

But to your point, it really fits with our narrative in that we are seeing that continual steady, slight better improvement. We've done better. 1st quarter, we beat our midpoint of same store guidance by 50 basis points from what we had originally projected. This quarter, we were pleased to beat by 40 basis points. We pretty much have been maintaining the back end of the year as we go pretty steady without a lot of movement.

Speaker 3

So where you've seen that midpoint move has been more picking up what we actually accomplished to the positive versus building it in. So we're hopeful that we can continue to pick that up. If the market allows and the guys execute that we can pick up additional growth through the back end of the year. I would just point out that our last 6 months, we're projecting a little lower occupancy than say a year ago, but we were running the bar that we're comparing against for the last 6 months of last year was 98.1% and we're projecting the back half of this year falling somewhere around 97%. So it's just a high bar.

Speaker 3

So we've been able to do better than we've been projecting and pick up some of those little bits to the positive. But it really when you look at our guidance table, pretty much we say here are the ingredients that produces our midpoint of guidance. And from there, you can toggle either way. But we do like that our occupancy is up slightly, the same store is up. And I think that fits with what we're feeling as far as our momentum as well.

Speaker 3

Okay, fair enough. Thanks very much. Thanks, Rich.

Operator

Thank you. Your question is from Michael Carroll from RBC. Please ask your question.

Speaker 4

Hi, thanks. I just wanted

Speaker 8

to touch on your development start guidance. I know Marshall, you highlighted earlier in the call that you think that your starts will be more back end weighted this year. I guess what are you really waiting for on those? I mean do you need to see leasing activity within your current portfolio to break ground on those projects? And if that doesn't occur as when you expect, is there a chance that some of these starts kind of get pushed out a quarter or so into 2025?

Speaker 1

Good morning, Mike. Yes, a little both in that typically, I would say it's when the last phase gets pretty well leased, we'll start the next. I mean, that's kind of our bread and butter. Given the amount of supply that really kind of hit the market in 'twenty three, there's a few spots like Austin, like Phoenix, for example, and even Greenville, South Carolina, where we're ready getting closer, ready to start that next building. It's really waiting for some of our competition to fill up and kind of create that entry point and where they stand.

Speaker 1

So we do look at that, but we've probably looked at it a little more of late given the amount of supply. So there's and then in terms of our $260,000,000 in starts, I would say kind of traditionally, if you ask our field, that number is $100,000,000 more than we're telling The Street, and I love their optimism over that. It stress is Brent out of how do we fund that at the beginning of each year. And then there's usually a little bit of give and take of, all right, what is it and when does it start, and then sometimes it can get delayed. It seems like getting permits and approval takes longer and longer in each of the cities we're in.

Speaker 1

So sometimes it's usually not that they go away, it just can make one slip from 1 quarter to the next and things like that. So we feel pretty good about our $260,000,000 in starts. The field is higher than that and that's usually been the case and we'll go as fast as our leasing goes or as fast as kind of the, I won't say the market, but maybe the submarket leasing is and which area of Austin or which area of Phoenix and what type of supply. And that thankfully, it's usually been big box supply that doesn't affect us and we can sneak another phase in here and there.

Operator

Thank you. Your next question is from Nick Thielman from Baird. Please ask your question.

Speaker 6

Hey, good morning guys. Maybe touching a little bit on leasing activity and lease economics relative to your peers a little bit stronger here in 2Q. I guess any noteworthy trends that you're seeing in your markets or just like from tenant behavior over the last 90 days, you seem a little bit more positive on that front? And then Brent, maybe just on development lease up assumptions for the second half of the year, what kind of you have baked in perspective to the lease up in the second half? That would be helpful.

Speaker 6

Thank you.

Speaker 1

Okay. I'll take the first half. Good morning, Nick. The first half and it does feel like, again, things we got some nice wins within development leasing and then even within some of our portfolio leasing that it still feels like people are taking their time in terms of development leasing. 1 of the guys recently I think there's so many options at the frenzy we were signing leases while you're still fairly early under construction and their comment to me was now you really need to have the building about finished and painted.

Speaker 1

The tenant rep brokers don't have to take the risk that the space gets delayed today, but they needed to take maybe in 2022. So they're waiting and only looking at finished buildings and things like that. So the economics are still pretty positive. Positive rent growth, I would say, the one really markets that are an anomaly for us, if you reading through the brokerage reports, any market to the east of California, you would see positive absorption every certainly every year, most every quarter going back years. And it's just a matter of how much did supply get out ahead of absorption, but then supply shut off, so the market's working its way to equilibrium.

Speaker 1

The markets really that have been historically some of our best markets would be LA and San Francisco and to a materially lesser extent San Diego, but they've actually had negative absorption for the last 5 to 6 quarters. So that's I don't we're waiting for that to stabilize. Those are the markets where rents have had a great run up, but are certainly coming back now and they're unlike our other markets and that they do have negative net absorption where every other market has positive net absorption. It's just a matter of how much supply is hitting and clearing the market in any given quarter there. Brent?

Speaker 3

Yes, just following up on the development lease up assumptions. We have we've seen our lease up period kind of get really tight, but then widen back out to more traditional 12 month lease up time. Frankly, we've been pretty conservative with our leasing assumptions in the development portfolio. We have very little and I can send you exact number. We have very little in terms of speculative NOI baked into the back half of the year in terms of contribution to the numbers or anything there could be incrementally positive in terms of as you get to this point in the year, the time you sign leases, get the build out done for the tenants and get them occupying, there's not a lot of time left for them to contribute.

Speaker 3

But so there's not a lot baked in, very little in terms of FFO impact for the back half of the year for the existing leases. I would say that's what we budgeted, not our goal. It's we tend to be again a little bit conservative with the one thing that can slip in your budget more than anything is if you get real aggressive with the lease up in the development, it starts going away from you, it gets hard to catch back up out in front of that. So history has told us to take a pretty conservative approach. Even when you sign leases, as Marshall said earlier, wind up, it takes 30 or 60 days longer to get the build out and get the tenant in.

Speaker 3

So there's not much of anything in terms of contribution baked into the back half of the year in terms of the actual NOI impact.

Speaker 6

Helpful. Thanks everybody.

Speaker 4

You're welcome.

Operator

Thank you. Your next question is from Mike Miller from JPMorgan. Please ask your question.

Speaker 6

Yes. Hi. All of your completed developments that were in lease up as of June 30 were in Florida, Texas. But if you look at what's under construction, the mix also includes, it looks like Georgia, North Carolina and Colorado. I guess as you're thinking out to which you could start in 2025, do you think the starts could be more geographically diverse or do you think they'll be more concentrated like what you've recently completed?

Speaker 1

Hey, good morning. I think we'll certainly have a lot we like Texas and Florida. And the good news about those are such big states and such diverse economies. When you kind of run from Orlando, Tampa are so different than Jacksonville, then Miami and then Texas, Dallas, Houston, Austin, San Antonio, El Paso is so different. So we'll remain active and kind of monitor our portfolio allocation to those markets.

Speaker 1

But next year and really maybe even late this year, but probably next year, Greenville, South Carolina, we're in development in Colorado. We'll timing in Phoenix. We've got a really good land site in Mesa near the airport down there that will break ground probably late this year or Q1 next year. So I think we'll we like the geographic mix long term. And then really, I'll tie it into maybe the acquisition question earlier.

Speaker 1

Kind of our goal is to ultimately own well located shallow bay, multi tenant industrial buildings and sometime the market seems to open the window better for acquisitions than development and we'll really toggle back and forth or even value add between where the risk return looks attractive. I think next year, if interest rates do come down and the economy picks up, I've been waiting for the acquisition window to slam shut and it probably will and we'll be back to being a developer again and cap rates will fall a good bit. But we should have a good kind of geographic mix and we'll go where we can find land sites that make sense within our markets. We'd like to develop in Nashville and Raleigh a couple of new markets for us. So we're looking at sites in those as well.

Speaker 6

Got it. Okay. Thank you.

Speaker 2

Sure. Thanks, Mike.

Operator

Thank you. Your next question is from Brendan Lynch from Barclays. Please ask your question.

Speaker 9

Great. Thanks for taking my question. You mentioned earlier in the call that there's no investment officer. So it sounds like acquisitions and operations are managed by the same team on the ground. Maybe you could just walk through what informs that structure, the philosophy of that arrangement?

Speaker 1

Okay. Sure. Good question. Yes, we've kind of always done it that way and I've worked it REITs and there's pros and cons obviously to every structure. But the way we've been structured is, if you had Texas, for example, every renewal, new lease, acquisition, development you're responsible for.

Speaker 1

So it's really not so much an assembly line. And really the thoughts are you're living in Phoenix or you're living in Dallas or Orlando, you'll know that market better than someone from corporate can and that you really are responsible I enjoyed it. I was in our Western region. I enjoyed it that you could go find things, acquire them and see it all the way from A to Z to see it through to fruition. And I'd like that.

Speaker 1

And then the only negative I've seen and every structure has its pros and cons, sometimes when you have a Chief Investment Officer and an Operations person, the kind of usually the push and pull is the investment officer is underwriting rents that are higher than the operations person thinks they can get and things like that. So you'll have a little bit of you can have tension there. We kind of like, hey, it's your area and you can grow it as fast as you can find opportunities there. And then you also know our dispositions of we'll typically say if you got a call and a tenant went bankrupt, what building do you not want to have that call from? And that really starts to set our dispositions kind of batting order as well.

Speaker 1

So we're admittedly a different model than our peers, but it's worked well for us and I'll put words in Brent's mouth too. Since we were both Brent had Texas, I had the Western region. I love that job where you're kind of responsible for everything and you got to touch all the real estate that was in your area and come up with the new ideas.

Speaker 3

Yes, I would just add to that. Brendan, I think it's a good point. And as MarSett does set us apart a little bit, but we are a very vertical organization, a very team oriented. And you basically the old Bill Parcells quote, you get to eat some of the you get to pick the groceries and you have to eat what you cook sort of thing as you bring it in. But obviously, the guys in the field still have an approval process.

Speaker 3

We have an internal investment committee and depending on size of Board level investment committee. So it's obviously some approvals. But if Marshall has a question about what's happening in Texas, he calls the regional head there and he's got one point of contact and that guy or ladies to know the answer. So I think it's really we're fortunate to be a size of an organization where we can still do that. And I think it helps our culture a lot as well.

Speaker 3

Great. Thank you. That's helpful color.

Speaker 1

You're welcome.

Operator

Thank you. Your next question is from Samir Khanal from Evercore ISI. Please ask your question.

Speaker 6

Hey Marshall, good morning. Maybe you can provide some color on supply and the pace of new construction starts in some of your major markets. The reason I ask is we saw we were sort of calculating we saw one broker report where the pace of starts were up in 2Q over 1Q at the national level. Just wondering what kind of you're seeing in the some of your Sunbelt markets you've identified some of these stronger margins in Florida, Austin. Just give us an idea kind of what you're seeing.

Speaker 6

Thanks.

Speaker 1

Yes. No, I think and if I'm picturing the same report, good morning. I thought I think I remember the report that you all put out that and even asking one of the other brokerage peers about it. The numbers we were seeing for 2nd quarter, maybe I'm doing this from memory, I'll say we've got if any investors or any other listeners, I think it's just had made some notes, Page 13 of our investor presentation, it's one of the brokerage firms start. So they were up a little bit in 2nd quarter from Q1, but by their calculations, we've been we've probably gone from a peak in late 2022 of about 120,000,000 square feet nationally to now we've been below 50,000,000 square feet for the last 4 consecutive quarters.

Speaker 1

And if I were going to guess, I guess probably with emphasis on guess, I don't think we'll get over $50,000,000 this quarter. The other metric and speaking with them usually build the suits and maybe that's the lack of starts or kind of in the teens, call it mid teens as a percentage of starts that it had peaked up into kind of 25%, I'm trying to remember that number, 25% or 28%. So there were more build to suits started in Q2 and that pushed the number up a little bit more, but it was probably large larger build to suit projects driving that. So we still see supply really low nationally. It's typically been big box.

Speaker 1

The 2 markets that we're in that have had more supply and they've got the growth are Austin and Phoenix, where we would say usually it's there's a lot of supply in Dallas. But looking at Dallas, for example, the peak there was about $70,000,000 in there or a little north of $70,000,000 in the construction pipeline. And reading through some of the reports, it's down about 80% to 14,000,000 square feet. And a lot of that, given what land's available that I don't know Dallas specifically, but using it as an example, it's gotten further and further out. So it's big boxes and given this last run-in supply, it's getting pushed further and further out like in Charlotte, where you just get further out in Rowan County and things like that.

Speaker 1

So we're not absent Phoenix and Austin, we feel good about supply and it's clearing the markets and those and then we're really kind of watching each submarket in those cities because the great news is there's a lot of positive absorption and a lot of economic growth in Phoenix and Austin. So it'll work its way through without much behind it. But I hope that helps. And I did notice your supply numbers were a little bit more than CBREs, and that's really the conversation we had with them of what they were seeing.

Speaker 6

No, that helps, Marshall. Thanks for the color.

Speaker 1

Sure. You're welcome.

Operator

Thank you. Your next question is from Vince Tibone from Green Street. Please ask your question.

Speaker 6

Hi, good morning. Are you seeing increased competition from new players for shallow Bay acquisitions? We have heard about more private funds that are now targeting this strategy just given some of the strength and fundamentals. So curious what you're seeing on the ground? And also just wanted to follow-up on a cap rate comment you made earlier about cap rates starting to creep back into the 4s.

Speaker 6

Just wanted to confirm on that comment specifically whether that's a representative of building at market rents or is that a building with a large lease mark to market?

Speaker 1

Yes. Good morning, Vance. We are seeing more competition. And again, I think the acquisition market is probably of all the things we kind of track can move the most rapidly or the quickest. On a one off basis, we compete fairly well and we've been able to buy things where it's either fallen out of contract or something someone needs a quick closing and we're a certain path.

Speaker 1

I mean, that's where the forward contract and we forward ATM has helped us out to have that we can point someone and say we have this dry powder where certainty of closing, we can close in probably a little over a month type thing between due diligence to closing. Where we've seen more competition is if the dollar size of the investment grows, there are more funds that have been raised. I don't think last mile kind of shallow bay is a it's hard to be public and have well kept secrets. I guess we've kidded kind of during the run up where we have a 15 page press release and a 25 page supplement. There's not many secrets within that development at 7% and cap rates in the 3% s works pretty well.

Speaker 1

So there is more competition out there. And in the 4% s, as we were underwriting it, those would be existing in place NOIs in the 4s. They were little bit larger portfolios, some things we were looking at pursuing and I say larger, it wasn't a 10 building portfolio so much as 3, 4s and 5s within our markets and kind of a variety of, I guess, as I say, WALT or weighted average lease term. So it wasn't all rolling next year, but you had a little bit of time and that was a little bit, I guess, cold water to us, maybe we're better off. Our opportunities are probably going to be better off one off acquisitions that when the dollar size gets up there, it certainly seems to draw more attention and the cap rates get compressed.

Speaker 6

Thank you. That's really helpful color.

Speaker 1

You're welcome.

Operator

Thank you. Your next question is from Ronald Kamdem from Morgan Stanley. Please ask your question.

Speaker 4

Hey, good morning guys. This is Tameen on for Ronald. Just wanted to get back to some of the comments around equity issue and how it looks like you guys are going to pay off some of that debt in the back half of this year with equity issuance. Just looking forward to 'twenty five, it looks like there are some debt maturities that come up. Should we sort of take that commentary around paying off debt with equity issuance and kind of play it forward or how are you guys thinking about that?

Speaker 4

And then just where do you guys see leverage ticking down to if debt is continuing just to get paid down with equity here?

Speaker 3

Yes. I appreciate the question. And I would just say it's been more just a byproduct of the environment than any goal. We haven't necessarily said, hey, let's get our debt to EBITDA to sub 4 into the mid-3s, which where we are and even headed lower than that. It's just been a component of continually evaluating our most attractively priced source of capital where we can create the most long term value for the shareholder and that's been equity.

Speaker 3

We are seeing interest rates back up some. Our 10 year potential 10 year cost of money is probably receded 60 or so basis points from its peak and is headed in the right direction. I would say it still has a bit of a ways to go before we would view it as an attractive maybe alternative or comparative alternative to equity at the moment, but we're continually watching it. So if you ask me to project now, I would say yes, especially in the first half of twenty twenty five, I would think that we would be able to continue again, hope the price all subject to the equity price hanging in there for us. But I would think that it would continue in the first half, but if rates could continue to come down, the good news is thinking glass half full long term, if our team in the field continue to find investment opportunities, if we can reaccelerate, for example, development pipeline next year.

Speaker 3

We have an immense runway ability to add debt. Obviously, with the balance sheet, it's incredibly flexible and low leverage, lowest leverage we've had in the history of the company. But that will all be just predicated in where we are in the moment. So over the past 2 years, Marshall, Stacy and I have had more daily conversations about financing and best sources than we probably had in the 4 years prior to that. When you're trading at a nice large premium to NAV and interest rates or in threes, you're just a matter of just kind of running, so which bucket do you want to dip into.

Speaker 3

It's been much more cash management and daily intensive and a lot of evaluation. But so yes, to summarize, I think it would be safe to assume into early 2025. I would expect that to probably look more toward equity, but frankly look forward to having another good viable alternative in terms of debt and it's headed in the right direction and hopefully the economy is strong and it's headed there for good reason and then we can tap into it when it looks more attractive.

Speaker 4

Great. Thank you, guys. Yes.

Operator

Thank you. Your next question is from Blaine Heck from Wells Fargo. Please ask your question.

Speaker 3

Great. Thanks. Good morning, guys. Just to follow-up on the leasing metrics. Spreads improved during the quarter, which was good to see, but it did look like full second quarter rent spreads came in lower than they were at your June NAREIT update when they were 49% quarter to date on a cash basis, potentially indicating that leasing in the back half of the second quarter came with lower spreads.

Speaker 3

Can you just comment on whether that was kind of a mix issue or you think maybe we should expect to see some moderation from the peak rent spreads levels that you've seen recently?

Speaker 1

Hey, good morning, Blayne. It's Marshall. Now, good catch and a couple of thoughts on volume. I'll touch on spreads and then volume. It was more of a mix than an indication of the market that one of the larger leases that happened kind of post our hitting in the near read update and into the quarter was we have one building with one tenant left here in Jackson, Mississippi.

Speaker 1

So we got that renewal done. It was positive, but it's probably on a GAAP basis about half our run rate, which again, that's and we'll put we're putting that property on the market. So that will take Jackson off our map. It will still be our headquarters, but in terms of we like moving our capital to Austin and Raleigh and Nashville, Phoenix and moving it out of Jackson. So as we kind of manage our portfolio and that was one that given the size of that lease and just the timing of all within 1 quarter brought us back a little bit, but I'm glad we got that renewal done and that will position us well to take that property in the market.

Speaker 1

And if we can close it a little bit later this year, that was our bump and dispositions guidance. We sold a couple of assets in Jackson earlier in the year. This will be our last one and we'll just kind of I think we owe it to our shareholders to kind of always be pruning our portfolio from the bottom best we can. And then on the leasing, happy that as we were kind of looking through some of the numbers, this is more year to date. We've signed about 11% more square feet year to date than we did last year, although we said things had slowed down.

Speaker 1

It's actually maybe it feels that way, but we've signed about 11% more square feet year to date. And then quarter over quarter, it was about a 14% pickup. So again, those kind of I've used the phrase green shoots. It hasn't been a U-turn, but kind of month by month slowly improving. And I think with our embedded rent, I think we can keep similar rent spreads, knock on wood, and really the drop in May or in June was really the one large lease in Jackson, but that set us up well for a disposition here in the next few months.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Marshall Loeb for the closing remarks.

Speaker 1

Okay. Thanks everyone for your time. Thanks for your interest in EastGroup. I know we tried to keep it on time and I apologize for limiting you to one question. That said, Brent and I are certainly available for your second, 3rd, 4th and 8th question following the call.

Speaker 1

So just give us a call, drop us an e mail. And again, appreciate everybody's time this morning.

Speaker 3

Thank you.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

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