EastGroup Properties, Inc.

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.

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 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 risks in our SEC filing.

Thanks, Kena. Good morning and thank you for your time. We hope everyone and their families remain well and out of harm's way. I'll start by thanking our team. They've done a great job transitioning our operating strategy quickly and doing so 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 stats as funds from operations came in above guidance of 9% compared to 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. And for the year, FFO per share is up 9.5%. Our quarterly occupancy was high, averaging 96.6%, leaving us 97.5% least 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. Also benefiting our occupancy is a high year-to-date retention rate of 84%. Releasing spreads were strong for the quarter at 13.8% gap and 7.9% cash. Year-to-date leasing spreads are higher at 20.1% gap and 11.5% cash. Finally, same-store NOI was up 4.1% for the quarter and 3.9% year-to-date. And some, during an extremely choppy environment, are proud of our team's results. Our strategy remains one of 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 had 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 color commentary, but our upcoming debt placement further improves our liquidity while lowering our cost of capital. I'm grateful we ended the quarter generally full at 97.5% least. 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 five-month average collection rate on rents of over 99%. My five months used being the length of this pandemic to date. 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 528 per share in FFO, or only two cents shy of our original pre-pandemic expectations. Towards that end, we thankfully 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 pulled by market demand. With the shutdown, we reduced projected 2020 starts to reflect first quarter actual starts as well as some level of pre-lease 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. And in the meantime, we view operations, working with our tenants, and maximizing liquidity is the key goals until we reach the next market phase. And now Brent will review a variety of financial topics, including our updated 2020 guidance.

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, and deferment requests, and assumption changes that increased 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, and 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 5.1 times, and our interest and fixed charge coverage ratios are over 7.2 times. 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 of collected and deferred for the month to 96.2%. That is 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 request, are in various stages of consideration on 8%, and have entered into some form of deferral agreement with 13% of the request. The rent deferred thus far totals $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 is undeterminable. However, the immediacy and degree of potential tenant financial stress 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 quarter of 2.4 million is not attributable to specific tenants. Rather, it is a general assumption that there will be some companies who 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.

Thanks, Brent. In closing, I'm proud of our second quarter results. We've said the past few years our fear wasn't shallow bay oversupply as much as a black swan economic event. We don't want either, but now we have just that. Our company and our team have worked through these 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 East Group. Our strategy, which has worked well the past few years, will come out of this pandemic with trends that we're hearing of, including, companies carrying additional safety stock inventory, shopping habits that have changed accelerating the consumer to e-commerce, new industrial users as a result of these shopping habits, and increased U.S. manufacturing or nearshoring in Mexico. Meanwhile, our bread-and-butter 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, have me optimistic about our future. We'll now open up for any of your questions.

And at this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You can always remove yourself from the queue by pressing the pound key. Once again, star and one for questions. We do ask that you limit your questions to one and one follow-up. make you with any other follow-ups. Thank you. We'll take our first question from James Feldman with Bank of America. Please go ahead.

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

Good morning, Elvis. It's Marshall. I'll take a start at that. In Houston, probably a couple of three things. One, and it's always hard to quantify from outside, but we have a really good experience team that's worked well together for a long time in Houston. You know, and we've kidded them. Houston has a downturn about every few years, so they've gotten a lot of experience. And so they have done a good job and been very diligent about chasing down tenants and You know, maybe comparing it to some other parts of the country, really probably focusing out west to Texas is probably more favorable market in terms of landlord rights when tenants don't pay and things like that. So that ability to lock someone out or really push to kind of on that negotiation probably legitimately helps with our collections in Houston. And then the third thing I think that sometimes gets lost in the kind of the high-level market overview, but when we shrunk our size, our investment in Houston from a little over, you know, kind of a low 20% down to below 14% and still dropping today, what we sold were our older kind of standalone buildings, and what we've kept are really the buildings that each group has developed that are in parks. So quality of what's left and this this statistic is a couple years old by now but I remember as we were selling the average age of what we were selling was in the high 30s like 38 years is what I remember in the average age of what we still had was eight years so it's a fairly it's a new highly functional well located you know East Group developed type parks of what we've got left and so I think That attracts credit-quality tenants that I think even if they're smaller spaces, one of the things that's kind of gotten lost the last few months on us is, you know, a general kind of painting of, okay, each group has smaller spaces. That must mean mom-and-pop tenants. And there's a lot of national and public or private well-capitalized companies that need last-mile space. And so you're seeing that in our company population. collections. And then our Houston team has just done a great job and been after it to be over 99% the past five months. I'll admit it surprises me how well we've done and fingers crossed we'll keep after that. In terms of any specific sub-markets, it's been pretty broad brush. The trouble we've seen within our tenants, it's not so much by size of space as to what they're doing. It's markets that concern us a little bit. Certainly, there's Houston because of the supply, although I think people get lost in how much of that is Most of that is big box, not shallow bay. And then the other statistic, which gives us some comfort, of the 18.8 million square feet in Houston under construction, it's roughly 50% lease, 49.2% lease per CBRE. Most of that space is accounted for. That leaves, you know, a little over 9 million square feet, but absorption year-to-date has been over 6 million square feet, you know, even during the pandemic in Houston. So hopefully we'll work our way through that as a market. And then a lot of that, thankfully, the majority of it by far is not shallow bay. I'm trying to think of any specific markets. The tourist markets concern me a little bit, you know, just because like a Las Vegas, we need the strip to be open, tourists to be coming to town. It's not a large market for us, but that certainly helps. Our tenants need the economy to be open, and the same with Orlando, for example. Tampa's been a very stable, strong market. We've had some great releasing spreads there and things like that, and Orlando, we've hung in there, and I guess Disney's reopened now, but with Disney and Universal Studios and conventions slowing down in Orlando, those are the markets we've said have been hit a little harder than a Dallas or a Charlotte or some markets that are a little more stable, like that Austin, for example.

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 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 that you thought would not survive are actually thriving? What exactly are you seeing that's different quarter over quarter?

I'll take it and Brent jump in. I think as we pulled together, you know, to us, as we've kind of said, This shutdown really started, and it was a, you know, like a curtain coming down in an instant. You know, that Friday, March 13th, it felt like things came to just a dramatic, shocking stop. And then a month later, as we were pulling together our guidance, you know, one, you're just kind of watching the news, watching the economy, and all working remotely as we were pulling this together. We just said, with this kind of shutdown... It's going to really impact our tenants and people aren't leaving their homes. So the ability to backfill space is going to be very difficult. What surprised us or me to the good 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 try to figure out ways they're trying to stay in their space or bring an investor on board and do things like that. So I've been pleasantly surprised. And then With things shutting down, it has accelerated as people read e-commerce so much. So there's more and more companies with social distancing that that has led to incremental demand as the Amazon, as the home building, the e-commerce tenants have really increased. grown pretty rapidly this year and continue that 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 i just we probably didn't expect it to happen as fast as it as it did and i'm i'm really surprised that our average occupancy for the quarter at 96.6 percent is the same as last year, and last year was a record year. So if you had asked me in April our odds of our occupancy staying the same, I would have been wrong, but I would have bet you a lot that it was going down, and thankfully it hung in there. Brent, any color commentary? What have I missed?

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

Great.

Congrats on the quarter, guys.

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

Hey, good morning. Thanks for taking my question. I guess the first one is I was 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.

Yeah, I hope we hope you're right. I mean, we, our thoughts and today, thankfully, at least speaking it kind of here at the end of July, you know, maybe one more month into it. Since quarter end, we've hung in there. We thought just is this, you know, the economy's reopened, but not exactly reopened. You know, restaurants at 50%. I don't know that things won't get shut down. Again, different places where you've heard of, you know, different states, different cities shutting down bars, shutting down this, you know, that gyms are different things. But I think that over time has to change. you know, stress our, with 1,600 tenants, has to stress our tenants' balance sheets over time. So I hope you're right. I hope we're being conservative, but we thought we're not out of this yet, and, you know, it's the months. build upon each other it's got to be a drag on some of our tenants so as we it's not anything specific there's not any you know any one market any two or three tenants specific any large ones that really drive it it is just more of a i'm not sure or i don't believe we're through the end of this and over time more of our tenants have to get almost kind of picked off by a weak economy got it that's helpful

And then my 2nd question is, is on distribution and how much would you say I appreciate the comment on the incremental demand from from e-commerce. But how much would you say has really changed distribution and last mile in a permanent way versus. Something, you know, just a temporary change between now and when things go back to quote unquote normal.

Okay, good question. I mean, I think the. The spike that we read about in terms of how much, pick any retailer almost, much less than Amazon and things, what the numbers I've seen, the e-commerce growth in terms of retail sales was in the high teens, and it had jumped up into the low 30s as a percent growth, and that people were expecting it to moderate back into maybe the 20s. But I don't think things will go back to the way they were or some of the things we've read and actually seen that this shutdown has demystified e-commerce for a large segment of the population. So I think the way people shop and maybe the way they live too, which I think will help us over time in Sunbelt markets live and work, I think those trends have started. This has all accelerated that. If they were all coming this way, e-commerce from last mile was coming our way. Company relocations, people relocating to, you know, fast-growing sunbelt markets was happening, but I think this will add fuel to the fire coming out of this, and it really will accelerate it. Almost, you know, the other side, as you see, shopping malls die. I think they were dying, but this is, you know, somebody said this is euthanasia for some of them. It's pushed it ahead two or three years.

Got it. Thank you. Sure. You're welcome.

Thanks, Dan.

We'll go next to Manny Quartzman with Citi. Please go ahead.

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

Yeah. Hey, this is Brent. Good morning. You know, obviously we have had some direct feedback from tenants that had initially put in requests, and then we got feedback later, hey, we received some PPP money and got caught up. And so certainly we've seen some tenants benefit from that. It's hard to tell out of our 1,600 to 1,700 customers exactly to what extent that's helped. We did do a cross-reference of our tenant base to the public list of companies that have received PPP money. We used $150,000 sort of as a minimum, so we were looking at people that received $150,000 or greater. And it appears that somewhere around 20% of our tenant base did receive some form of PPP money, which seems to make sense to what we expected. I mean, as Marshall mentioned, we have only had 29% of our tenants at some, and most of that, 26% of the 29% occurred back in April, requested some relief. In terms of whether they extend the program, if that'd be helpful, I think any time you put money into people's pockets, certainly that would be beneficial. 80 plus percent of our tenants have shown a good resiliency without that. Really not a lot we can control in that. Certainly if it's part of the program, we would expect that would be incrementally better, but if they don't, our tenant base have been long time customers of ours and we'll continue to work with them. But it's hard to tell what impact that might would have, whether it does or doesn't happen.

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

Sure. The good news, I think, kind of given the choppy environment, what we've got rolling between now and year-end is only about 4%. So not a ton, and to date, company level, our retention, I think this uncertainty has led our tenants to renew. You know, usually people were working on growth, and we were talking about, you know, kicking off new buildings. here and there in certain cases, and they understandably put those on hold until the economy feels a little more solid. So our tenant retention as a company is 84% year-to-date, and if you were building your model on East Group from scratch, I would tell you 70% is usually our long-term and most everybody else's long-term retention rate. So uncertainty has led to a higher retention rate in Houston and in other markets. My guess is we have more rolling in 2021 as the economy stabilizes, hopefully. I think we'll have, you know, probably keep that and work our way through. Rents have come down in Houston, probably 5 to 10 percent as a market. The good news is, you know, anything that you had that may be two to three years, those that are coming up or expiring are going to be anywhere from three to five years. So they're still embedded Rent growth there. Maybe it's down and what I think is with supply stopping really across the country for the most part I think because industrials held up supply will probably pick up a little more in the back half of the year, but I think Houston will work our way through those and I would expect probably 70 plus percent retention rate and probably it'll start to hopefully things normalize the back half of 2021 and things like that, but nothing alarming today and

Okay, great. Thank you.

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

Hi, this is Alina on for Vikram. Congrats on the awesome quarter. Could you provide a little bit more color on your expectations for development starts? I know you said that you're not going to have any feature spec development starts, given your confidence on the outlook, just curious why not push development a little bit more?

A good question, and probably as we think about it, almost if you divide the second half of the year into quarters, really, into another half. We had no, we stopped our spec starts because the economy was so uncertain in second quarter. We're feeling better about things, although still, you know, cautious here in late July. Probably will not have any starts in third quarter. And then as we roll into fourth quarter, there are some, you know, between third and fourth quarter, there are some pre-lease conversations we're having where we would, you know, If we get a lease signed, we would build a building for that tenant, and we have a number of proposals out. So that's probably the biggest part of the difference of the spec development, which is about $70 million in starts between now and year-end. And probably what we are thinking about a little bit differently, there are markets like Charlotte, Phoenix, Northeast Dallas. There's several markets where I think if these were normal economic times, we already would have started that next phase. And the next couple of buildings were then an existing park. But we've really put those on hold. And probably what's giving us a little pause not you know is really watching our own portfolio but also watching the market we've said thankfully we're you know 97 plus percent least but delivering that next building you want to make sure your peers are also pretty full but we really thought construction prices are dropping with this slowdown because of not only has industrial slowed down but hotels retail office entertainment type development has really stopped so we are seeing you know, the benefit of waiting in terms of construction pricing a little bit. And then we also wanted to just see, you know, what the vacancy rates in our, you know, kind of sub-market by sub-market, how those went or which of our tenants, what vacancy we may get within our own portfolio. But thankfully, we've not, knock on wood, seen much of that today.

And just to follow up on some markets, It looks like from the core market operating statistics that rents were a little bit weaker in the California market. Can you talk about what was going on there last quarter?

Last quarter, one that was weaker, for example, is San Francisco. Good property and Hayward, we've got a vacancy there. So it was vacant the entire quarter, and last year it was full. So it's really a drop in occupancy. The good news is we have an agreement, and we'll see if it comes back signed, but we have an agreement with a prospect and a lease out for Hayward. for review and hopefully signature there. And then probably the same thing, just kind of looking through the quarter or year to date, Fresno is not a large property there. It's a park that we've owned in Fresno since the late 90s, 400,000 feet, and just a little bit of a pickup and vacancy there. But the biggest one, and we should get, we've had some still really strong releasing spreads as you look at kind of in San Francisco of You know, mid 50 type percent. It'll be one of those type spaces when we get it released. It's just and it's taken a little bit longer. I would say that space, the markets. East Bay kind of Hayward area towards Oakland and San Francisco's 2% vacancy, sub 2%. But one of our markets that's been shut down probably a little bit longer being California than, say, Georgia or the Carolinas. And so it's drugged that vacancy out a little bit longer. And that hit us in second quarter there.

Great. Thanks so much.

You're welcome. Next question is from Michael Carroll with RBC Capital Markets. Please go ahead. Michael, please check the mute function on your phone.

There we go. Sorry. And Marshall, can you provide some color on your comments that the companies plan on increasing safety stock? I know that's been a conversation that's been going around now for the past couple of quarters. Have your tenants indicated that they plan or need to hold more inventory to sustain some of these potential supply chain shocks? I mean, have they voiced that directly to you yet?

It's more, certainly it's more us reading and hearing about it and hearing it at conferences and conversations with brokers than direct, I would say, you know, kind of between, you know, I guess the tricky part from April to now, we've been in front of our tenants less than typical. You know, you may have phone calls and things, but you're certainly not traveling and walking through spaces where you kind of get a sense for how they're using it. But what we were hearing directly a little bit through tenants and then more through brokers and other people is just because people got caught so short sourcing from China and had less inventory that they're going to need to carry more inventory and probably carry more inventory. As another broker once said to us, anytime when someone hits click to when it gets delivered to your doorstep, it speeds that up. That's where the world's going. And that excites us given our type properties and how close we are to rooftops and typically higher end, better educated rooftops, more e-commerce oriented. So I think Coming through that, companies are, you know, before it was a logistics center, and they'll still have those on the edge of town, you know, in Chicago, in South Dallas, South Atlanta, but now they need to carry more and more inventory near rooftops to get, you know, when you go from Amazon, we're delivering in two or three days to Amazon Prime and Amazon Prime Now. And I think that in itself is leading to more inventory, and we're I did read where I'm trying to think of which company is relocating already Craftsman Tools from China to Fort Worth, which is one of our markets, so they'll manufacture there. Some of these long-term trends, you're seeing maybe the, I'll use a broker phrase, green shoots of that, but I think it's pretty early on, but hopefully it continues to come our way.

And I guess how broad-based do you think this will be among tenants? I mean, will the larger tenants be the ones mostly driving the higher inventory, or do you think smaller tenants will need to do that too? And I guess, and if so, they do hold more inventory, where are they going to hold it out at? I mean, is it going to be in the infill shallow-based space at TAB, or is it going to be more in the outskirts of some of these major cities?

Probably a little bit of both. I mean, and I think we, you know, early on in the In this, kind of this being the downturn, we saw the national tenants still being the most active ones. Kind of our conversations, Home Depot, Lowe's, Wayfair, Tesla, some of those type names. But in the last 30, 45 days, it's been more local regional tenants. Probably as the economy stays open and gets a little more certain, it's nice to see those local kind of regional tenants start to be active. I think they will all need to keep more inventory or probably think about that. They probably have their inventory in their warehouse, depending on how local, regional. I think it's the national companies. And I do think, I guess, as we talk about like a Lowe's and a Home Depot, it's so much cheaper for them to keep their inventory with us. than it is in a strip center type property. The large, bulky items that you're not leaving your home with That's where you would order a washer-dryer, and it gets delivered from an East Group warehouse in Atlanta or Tampa or Miami, and that's cheaper than keeping it. I'm only picking on them because they're Florida than, say, a Regency Center that's somewhere else in Florida or something like that. So I think that trend will keep coming our way because our rents are probably a third to a quarter on a gross basis what a typical – you know, strip center retail rent would be. So I think that's all coming our way, and people will figure out, you know, just go work on their supply chain and chipping away at cost, and that pushes more and more inventory our way. We've seen it, as I'm thinking about Florida, and it's another group we're having conversations with, but Nike, they've got space for Nike and their different brands with us And because it's cheaper to use us as backup store, given all the, you know, the tourists and the outlet malls in Orlando, they run hourly van service back and forth to our buildings. And, you know, for Nike and Hurley and some of their concepts to continue growing and using our type buildings.

Okay, great. Thanks.

Sure. Our next question is from Bill Crow with Raymond James. Please go ahead.

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 is just any color on construction costs. We know the growth had been coming down. Are we actually seeing material declines in construction costs?

We've seen our shell costs come down. A good question. Good morning, Bill, I guess, backing up. We've seen our shell cost on buildings come down $1 or $2 per square foot. So it starts to be a meaningful number. We said while rents have kind of... The rent growth is... At different times, people have thought nationally that rent growth would be flat for 2020. I'm starting to think it'll pick up some in the back half of the year, given how strong, you know, as we talk to our peers and read their reports and things like that, I do think rents will maybe pick up the back half of the year. Labor certainly has picked up with unemployment. It used to be such a big part of conversations of tenants of where, if I come to this location, where am I going to source labor and tight markets and especially tight construction markets where in a couple of cases, the general contractor had fenced the site where they were building our building so that they could lock the basically would lock the workers in because during breaks the competition would show up and try to hire the workers away. So that gives you an idea of how tight labor was and that was going on. I don't know that that's completely stopped, but I would think where unemployment is Labor and what we're hearing is labor is more available, but certainly on construction, but a little bit less efficient and rightly so because of safety distancing requirements and things like that. So we've kind of continued our development construction on buildings we have underway, drug our heels a little bit because prices were coming down, and we think rents will bounce back a little bit. So that's part of that. You're trying to time when do you really start developing again. And it's early, and it just depends on how you think. You can get real nervous about thinking about kids going back to school and things like that about another shutdown. So we're being a little bit cautious about that.

Marshall, on land, development land, any indication that it is, that competition for the land is easing a little bit or that more owners are looking to liquidate land in order to maybe pay for other investments given this economic environment?

Yeah, we've got a good question. We've not seen distress in terms of, you know, industrial assets. If anything, it seems like demand may have Picked up on land, however, it does seem like there's a little less, there is less competition for land. The prices have been sticky. And part of our thinking has been land has been, you know, when we met, we had met at Nereid last November, we would have said our long-term concern is it's awfully hard to find good industrial land sites in fast-growing areas. markets, you know, that it's been so picked over and land gets priced out of range for industrials. So we've, we're trying to tie it up as long as the seller would let us have our funds go at risk as late as possible, but have been happy and that we've been able, and some of it's been in the press, but to tie up some contiguous land near us in Charlotte, like our Steele Creek, which has been a very successful development. tie up some land in Northeast Dallas where we could continue developing a good park there, San Antonio. And so we've really, and again, contiguous land as I'm kind of thinking through our portfolio in Fort Myers where we're building what would be the last building in a park, the eighth building in a park, and we're out of land and they were able to source some land. adjacent land, because once you get that many tenants as we have there, really the next thing to do, and it makes our development risks, I feel like, so much lower than maybe some of our peers, is you're just waiting for one of your existing tenants to raise their hand and say, I need another 30,000, 40,000 square feet, so we'll we'll move you into building 9 or 10 and backfill your space at a higher rent. So we're trying to use this opportunity to bolt on a little bit to some of our existing parks, whether it be Charlotte or Fort Myers or Northeast Dallas or places like that where you can pick up land here or there. Because we think coming out of this, for the reasons we talked about earlier, whether it's e-commerce or manufacturing or safety stock or just relocation to Sunbelt markets out of kind of mass transit markets in the Northeast, as those pick up, that that land is only going to become more and more near and dear. So if we can use this downtime to slowly add, and again, land gets a little scary, we want to add a reasonable amount of land so that you don't get stuck carrying it for too long. But that's how we're thinking about it. Yeah, and unfortunately, when we talk to the brokers about distressed sales, they'll kind of kid and say, I'll put East Group here into the E's because I've got a Rolodex of names of people that want to buy distressed industrial right now. Sure, I get it.

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

We'll go next to Eric Frankel with Green Street Advisors. Please go ahead.

Thank you, and thank you for working with me on my phone issues. Just an accounting question. Of your bad debt assumptions for the second half of the year, can you express what that is going to be on a cash basis?

Hey, Eric. Good morning. It's Brent. You know, we wouldn't know until it occurs. What's been happening through the first two quarters, it's probably been running probably two and a half to one straight line versus cash. So, so far out of the 1.2 million or so for the year to date, just over 300,000 of that, about 325,000 of that has been cash. So the cash component of it will be just like it's been. We would anticipate it being similar to where it would be a smaller percent relative to straight line. The 2.4 million, we have 1.2 per quarter. As I mentioned in the lead-in, that's just a general overall Bad debt allowance not specific to tenants and we really don't you know have that necessarily broken down We do some internal things, but it'll be like say I would expect whatever we have occur We certainly hope that proves to be conservative, but whatever it comes to be I would say it'd be two to three times probably greater on the straight line side versus cash Helpful

And then I think, Marcia, you kind of expressed this in a couple of different ways. Maybe just to clarify specifically, you're leasing this quarter. The average lease term is a little bit shorter than it's been for the last few years. So is that just based on a little bit of uncertainty on tenants as their growth plans have been stalled? So I think you're down to roughly three and a half, 3.8 years or so on leases this quarter. Is that a trend you expect to stay? Do you think that will go back to where it's been the last few years?

Good catch. You know, it is a little bit down. It's been there before, you know, kind of late 16, late 17. We've been kind of around that four range. So it's not dramatically down, but a little bit. You know, it wouldn't shock me given the uncertainty for third quarter to stay there. And as the economy gets to sound footing, I think then we go back over the fours, which is where it's you know, kind of in a 4.1 to 4.5, that type thing. So I think it's kind of, again, a good catch. I think it's more uncertainty in the market, and we'll do a three-year renewal because we're not sure and just stick where it is. But I would expect, and this is me estimating, that it would normalize hopefully by fourth quarter, first quarter next year, depending on how COVID plays out. Thanks.

Final question, just related to kind of what you're seeing on the last mile demand front. How much of this last mile demand is, as you're describing with your Nike example, just like store replenishment versus actual customer delivery or delivery to individual consumers?

It's mostly customer related. You know, it's usually that we're going to ship out of an East Group building rather than Our retail store. The phrase I heard some of our customers use is we used to have store-level inventory, and now we've moved to market-level inventory. So that's, by and large, most of it. Probably store-level storage, where you're that back of house, there are a few examples of it, but that's more the exception.

Okay, good. Thank you.

Sure. Sure.

We're next to Craig Millman with KeyBank Capital. Please go ahead.

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

Good question, Craig, and not really. I mean, where we've seen it, probably not on renewals. Those have stayed pretty consistent. You know, all of our tenants, you know, just about everybody has a tenant rep broker and where it's typically been in the development pipeline or where there's vacancy where you'll get, you know, it's usually you're about rounding third base on getting a deal done and they'll ask for a month or two of free rent. So we've seen free rent grow up where the rents have been pretty stable, the annual increases have been pretty stable, where there has been a little bit of market movement. As tenants realize, there's not as many tenants out in the market, so free rent could chip up a little bit rather than two months on a longer-term lease. Maybe they'll ask for two more or three more and we'll settle somewhere in the middle. But outside of Houston, thankfully, rents have been, you know, have probably leveled out but not gone backwards.

And we've heard from some other companies that maybe there's been a trend to try to push bumps higher. Have you guys, you know, pre-COVID, were you part of that trend to try to get escalators into that three-and-a-half range, or have you guys... Kind of where has your ask been on that side of the lease equation?

Probably, you know, usually the bigger the space and the longer the term, you know, it makes sense. They'll negotiate those bonds probably closer to two. We'd love to go higher, but we probably typically have been around that two and a half to three. And if we can go higher than that, we... We would. And again, I guess that's where we're probably, it probably boils down between the two brokers. If everybody has a tenant rep broker and you're on a spreadsheet. comparing it versus your peers. So probably heading into this, we were trending higher, but not materially higher. And it's really a case-by-case basis. And if you get to a 10-year lease or a bigger space, those tenants are going to push back pretty hard. And they're going to get closer probably to 2% to 2.5% rather than 3% bumps.

Okay. And then just one last one. I apologize. If I missed this, but just looking at kind of the monthly collections here, um, it looks like there's been a marginal fall off as you get further away from April. I'm just curious, is there anything going on there or is it, you know, w what's driving that? And also, I mean, your portfolio has been a market set of, you know, preview at the start of this kind of more insulated from the impact of COVID versus the Northeast markets and maybe, you know, more on the West coast. Are you seeing an uptick in deferral requests as PVP has burned off and, you know, maybe COVID's kind of impacted communities a little bit more?

Yeah, Craig, good morning. You know, I'll answer the second part first. We have not seen an uptick in deferral requests, and it's actually gone the other way. The deferral requests, thankfully, sort of knock on wood here, have really trailed off. Our guys, we have a process where we're getting at least weekly reporting from each asset manager in the field. And for maybe three or four weeks running now, a lot of those updates have basically been no new update, meaning there's been no new requests. And so that has certainly trailed off significantly. The AR, we're very pleased with where the collections are and you can see we've deferred very little. Our collections have remained high. Our teams worked hard. There certainly has been, as you mentioned, a minimal decline month over month. You know, that is very fluid. You know, July, we've got reported here 95.5, and even since we've put the print on this yesterday, that's now 95.9. So, each day, all of those numbers literally change. I think the deeper we go into it, obviously, the opportunity for that to have pressure is certainly there, but... On the whole, it's just been, you know, the one sort of group of tenants that originally asked for some assistance that we've had to keep a closer eye on, but the vast majority of our tenants have continued to, you know, maintain, hang in there, and pay. So it's something to keep an eye on, but it's, you know, where we are in those high 90s, it's not, you know, we don't have any alarm bells or anything going off at this point for sure.

Maybe just slip one more in. What's your exposure to brick and mortar retail and apparel type tenants?

It's funny. We get questions about retail a couple of years ago, and we would say it's not that great, but it's actually grown over the last few years. Again, I think with e-commerce, between the Wayfair, the Lowe's, the Home Depot, the You know, I can think of, we have cons in Charlotte. There's not much. We've had Nordstrom as a tenant for over 20 years in Orange County. So it's here and there, but we really don't have, you know, we don't have a big JCPenney warehouse or, you know, Tuesday morning, or I'm trying to think of different people that we've got some spots here and there. We've got Nike in Orlando, but it's in three different locations within a park because it's their different brands. Nothing with Asina or anything? Oh, yeah, no, I can't think of anything with, you know, Asina brands or some of those since I left Blumshire. I don't know.

Repressed memories.

All right, thank you, guys. Thanks, Craig. Next to Venkat Komaneni with Mizuho. Please go ahead.

Hi, good morning. Just wondering if you can comment on some of the movement in Houston occupancy during the quarter. When I compare occupancy at the end of 1Q to that provided in the June 1st business update and then to 2Q, it looks like it declined from 98.7 to 97 and then ticked back up to 97.9. And I guess two questions around that. Was that increase in June driven by the lease signed with Agility in Houston as they now show up in your top tenant list? And as a follow-up, did that initial occupancy decline in April and May help explain the near 100% collection rate in Houston and TQ20 as maybe some weaker or more challenged tenants vacated space?

No. I mean, good eye. You know, just with the number of tenants, Agility was – signed and it's really more delivery and then taking occupancy of a new building. So that's when they jumped into our top 10. They took a couple of buildings. a global third-party logistics firm up at our World Houston Park. So that moved them into our top 10. You know, we have had some instances, but it's really, I'll compliment our San Antonio team, where we've had some problem tenants where they've been able to negotiate getting those tenants out and backfilled. But Houston, I think it was just collections and really kind of organic movement of tenants in and out where occupancy, you know, and always in any market kind of ebb and flow a little bit, you know, unless it's one of our smaller markets where probably fewer moving parts. But with Houston with five and a half million square feet, there's always someone kind of coming and going almost like an apartment complex, if you could think about that. And agility was really more delivering a new building and them taking occupancy of that building is what moved them in. Great. Thank you.

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

Thank you, everyone, for your time. Thank you for your interest in each group. Brent, Stacey, Tyler, and I are all certainly available for follow-up questions after the call, and hopefully look forward to seeing you all in person again one of these days whenever the world allows. So take care, and thanks again. Thanks.

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