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spk07: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.
spk09: Good morning, and thanks for calling in for our third quarter 2021 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.
spk01: 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 and 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 filings.
spk09: Good morning and thank you for your time. We hope everyone is enjoying their fall. I'll start by thanking our team for a great quarter. They continue performing at a high level and reaping the rewards of a very positive environment. Our third quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. Some of the results the team produced include funds from operations coming in above guidance, up 14% compared to third quarter last year, and ahead of our forecast. This marks 34 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 97.1% of 50 basis points from third quarter 2020. And at quarter end, we're ahead of projections at 98.8% least and 97.6% occupied. Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends. Quarterly releasing spreads were at record levels at 37.4% gap and 23.9% cash. And year-to-date, those results are 31% gap and 18.5% cash. Finally, cash same-store NOI rose 5.2% for the quarter and 5.6% year-to-date. In summary, I'm proud of our team's results, putting up one of the best quarters in our history. Today, we're responding to the strength in the market and demand for industrial product by both users and investors by focusing on value creation via development and value-add investments. I'm grateful we ended the quarter at 98.8% least, our highest quarter on record. And to demonstrate the market strength, our last four quarters marked the highest four quarterly rates in our company's history. Looking at Houston, we're 96.7% leased. It now represents 12% of rents down 140 basis points from a year ago and is projected to continue shrinking. Brent will speak to our budget assumptions, but I'm pleased that we finished the quarter at $1.55 per share in FFO and are raising our 2021 forecast by 15 cents to $6.03 a share. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants only accounting for 7.6% of rent. As we've stated before, our development starts are pulled by market demand. Based on the market strength we're seeing today, we're raising our forecasted starts to $340 million for 2021. This represents an annual record level of starts for our company. To position us for this market demand, we've acquired several new sites with more in our pipeline, along with value add and direct investments. More details to follow as we close on each of these opportunities. And Brent will now review a variety of financial topics, including our 2021 guidance.
spk10: Good morning. Our third quarter results reflect the terrific execution of our team, strong overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the third quarter exceeded our guidance range at $1.55 per share and, compared to third quarter 2020 of $1.36, represented an increase of 14%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth. From a capital perspective, during the third quarter, we issued $49 million of equity at an average price over $176 per share. In July, we repaid a maturing $40 million senior unsecured term loan, and in September, we closed on the refinance of a $100 million unsecured term loan that reduced the effective fixed interest rate from 2.75% to 2.1% with five years of term remaining. In our ongoing efforts to bolster our ESG efforts, we incorporated a sustainability link metric into the amended terms. That activity, combined with our already strong and conservative balance sheet, kept us in a position of financial strength and flexibility. Our debt to total market capitalization was below 17%, debt to EBITDA ratio at 4.7 times, and our interest and fixed charge coverage ratio increased over 8.5 times. Our rent collections have been equally strong. Bad debt for the first three quarters of the year is a net positive $346,000 because of tenants whose balance was previously reserved but brought current, exceeding new tenant reserves. This trend continues to exemplify the stability, credit strength, and diversity of our tenant base. Looking forward, FFO guidance for the fourth quarter of 2021 is estimated to be in the range of $1.54 to $1.58 per share and $6.01 to $6.05 for the year, a $0.15 per share increase over our prior guidance. The 2021 FFO per share midpoint represents a 12.1% increase over 2020. Among the notable assumption changes that comprise our revised 2021 guidance include increasing the cash same property midpoint by 8% to 5.6%, decreasing reserves for uncollectible rent by $900,000, increasing projected development starts by 24% to $340 million, and increasing equity and debt issuance by a combined $95 million. In summary, we were very pleased with our third quarter results. We will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio to carry our momentum through the year. Now Marshall will make some final comments.
spk09: Thanks, Brent. In closing, I'm excited about where we stand this far into 2021. We're ahead of our initial forecast and are carrying that momentum into 2022. Our company, our team, and our strategy are working well as evidenced by the quarterly results, and it's the future that makes me most excited for East Group. Our strategy has worked well the past few years. We're further seeing an acceleration and a number of positive trends for our properties and within our markets. Meanwhile, our bread and butter traditional tenants remain and will continue needing last mile distribution space in fast-growing Sunbelt markets. These, along with the MIPS of our team, our operating strategy, and our markets has us optimistic about the future. And we'll now take your questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We also ask that you please limit yourself to one question and one follow-up. Our first question today will come from Alexander Goldfarb with Piper Chandler.
spk12: Hey, uh, uh, morning, morning down there. Uh, so two, two questions, uh, both are really on the development front. Earlier this year, you guys had talked about, you know, construction costs, land, uh, prices, permitting delays, and all that, uh, fun stuff, uh, eroding your yields and your traditional seven would go down into the sixes. Uh, it's now back to seven. Is the view that either the cost increases or the permitting delays, et cetera, were not as bad as anticipated, or purely just the amount of rent growth that your markets have achieved is driving this increased yield? And if that's the case, should we expect yields to be even higher next year?
spk09: Good morning, Alex. Good question. The cost increases and the delays were there and are there. I guess as we all see in the national news on the supply chain issues and things like that. It takes longer for us to deliver a building and land prices have gone up. The construction prices may have moderated a little bit, but they're still materially higher than they were earlier. It's probably more the latter of rents. The way we will underwrite, we won't assume rent growth on our development. So we're typically, especially as we build, as you think in phases, we'll use as our kind of numerator of the prior rents we got within that phase. Even though probably more so than at any point I can remember intuitively there is rent growth in the market, I hesitate or we hesitate to let people project rent. So our Proforma rents were coming down earlier in the year, and thankfully to date, we've been able to maintain those kind of high sixes near seven developments. I still think we could have some erosion a little bit. We'll stay in the sixes to hopefully, and we'll hopefully continue to beat those mid-sixes on our development yields and maybe the offset to that. Traditionally, we've targeted 150 basis point spread over current market cap rates. And given the demand for industrial, which is why we like our development model, the profits there have gotten even greater because we've seen cap rates come down into the threes to, you know, four is probably a high cap rate in about any of our markets today. So it's really more we're underwriting it the same way we always have, and we'll have current costs and prior rents, and the rents have been able to catch up with it by the time we deliver the building and get it leased.
spk12: Okay. Second question is, You know, the tightness in the markets, clearly you see that in L.A., where you more than doubled the rents in the quarter, but also truck parking, truck courts, you know, seem to be increasingly almost more valuable in some markets than the box itself. As you guys plan out new developments, new industrial parks, and look at acquiring existing assets, are you putting more emphasis on on the truck court parking, or your focus really remains more on the box itself?
spk09: It's a good observation, and it's still both. I mean, we've always focused on the box itself, but you're right. If we can, and that's what we like within some of our parks, if we'll have a piece of land kind of between some buildings, you're not sure which customer or which tenant will use it, but we'll go ahead and pave that area. We just did that in Tampa, and it can be trailer storage or it can also be car parking. With e-commerce and some of those, the headcount within the boxes can pick up. So it's nice to have that flexibility. We've done that in Atlanta and another one of our parks. And the acquisition you saw us make in Dallas in third quarter, that DFW Global, we're in that sub-market, have a handful of properties. We're having strong leasing success. I'll compliment our team in Dallas, but one of the things we really liked about the property we bought, probably two or three things, but it's just beside the cargo airport at DFW airport. So you're the, I think it's the fifth largest airport in the country. We're right off the, near the cargo and airport and it's leased, but it has, we've gotten a question or two about it, about a third of the leases roll the first year, maybe another 20%. It's a little bit of a value add, which is odd because it's leased. We think there's an ability to push rents there, but circling back to where I was going, it also has a lot of trailer storage. There's some excess land on that side, and for those freight forwarders, that's pretty key, and that's a pretty unique commodity to have in that sub-market where it's that land constrained. So we're focused on it more and more and good observation.
spk12: Thank you.
spk09: Sure.
spk07: Our next question comes from Elvis Rodriguez with Bank of America.
spk04: Good morning, guys, and great quarter. Congratulations. Quick question on the under-construction yield quarter over quarter went down 50 basis points. I know Alexander pointed that you were able to maintain yields, but given the higher spec starts this quarter and the lower yield, can you just share perhaps is it higher land prices of these projects? construction costs, labor, anything else you can add to your previous comments could be helpful. Thanks.
spk09: Good morning and tell me if I'm making sure I'm understanding your question. In terms of percent leased within our total under construction, that is down and that's really more of a function of just kind of where those properties fall and so many of them just got underway this past quarter. And then in terms of our stabilized yield, and I think that's where you were going, that did come down. And that's a function, again, as we touched on, a little bit of cost increases and us using current market or even prior rents if it's in an existing park. I hope we can make up some of that 50 basis points. But at the end of the day, even if we don't, if we can do what we expect and get a 6.7% yield, I would take that because that's probably 275, 300 basis points over market cap rate on those developments with cap rates coming down. But there is some downward pressure on our development yields. And kind of as we thought about it, with the rise in pricing and the challenge in getting materials delivered to sites, that it's really hampering supply in any number of our markets. And that's probably tough on this page in our supplement. For the two to three million square feet per year we add, it's going to pressure those yields a little bit. But it's great news for the 51 million square feet that we own because the market's so tight and it's hard to build, add new supply. It should continue to enhance our ability to push rents. And the flip side of that is it puts a little bit of pressure on our development yields as well.
spk10: Elvis, I would just add to that question. That's an average. So each deal, looking at our pipeline under construction, that range is just looking at some internal numbers here from 5.9 to 7.5. So that can fluctuate quarter to quarter. What was our land basis? What market? Certainly in Miami or something like that, a little tighter yield than some other markets. So that's not just a stagnant number that is the same across all markets. Obviously, that fluctuates and depending where you start can influence that as well.
spk04: Thanks, Brent. That's very, very helpful. Just a quick question on in-place rents versus market. Perhaps you can share what that spread is today and maybe where it was at the end of 2Q.
spk09: Yeah. We typically don't disclose that. Each space is a little different depending on... office build out, end cap, storage yard, things like that. But you saw us raise our rents in third quarter, maybe the closest things I can point to, third quarter our cash rents went up 24% and year to date they're 18 to 19. So we definitely are feeling that pickup and embedded rent growth within our markets. And again, it's just, this year's been in a very positive way, an atypical year for us. And you see it in our development starts and that we've really fluctuated between 98% to 99% least. Our markets are full and rents are rising. So that's led us to, hopefully in a disciplined way, scramble to add space, whether we could develop a building or buy vacancy. But we think there's still a fair amount of runway for rent growth within our portfolio and within the industrial market, given... everybody now is going in at a higher basis of everything that's getting delivered, whether it's steel cost, land cost, every component's a little bit higher than it would have been a year or two ago.
spk04: Thanks, guys.
spk09: You're welcome.
spk07: Our next question comes from Emmanuel Corchman with Citi.
spk03: Hey, good morning, everyone. Marshall, in the past, I think you've spoken about your product type and maybe your your parks even, being a little bit under the radar of demand from other capital sources, just from a size perspective and building up the portfolio. Is that statement still true, or is sort of everyone looking here, and I think you mentioned that cap rates are in those threes and fours. Did I hear that correctly?
spk09: Yes. Good morning, Manny. You're correct. It's really... Cap rates are about the same from BitBox to our Shallow Bay product. Those have probably caught up and I wish there were some undiscovered markets, but as we learned going into, I use Greenville, South Carolina, our newest market, we thought maybe we can dip in there and it's maybe a little bit undiscovered, but there's a lot of good competition and good developers. Certainly in Atlanta and Dallas, they're out there as well as Greenville. On our, and I wish this was a Zoom call, on our investor presentation, if anyone's curious, we usually use a CBRE chart, and it'll show 30-year average supply for big box and shallow bay. And on that, our shallow bay, and as they measure it, it's 120,000 feet and below. And our typical buildings may be 80,000 to 200,000 square feet. shallow bay deliveries are still not back to where they were at the great financial crisis. So there's certainly people looking at it, but it's hard to find the land. It's usually trickier to get the zoning and the permitting because we're a little bit more infilled in, say, a big box on the south, far south Atlanta, far south Dallas, southwest side of Phoenix. And one quote I read thinking within Atlanta, and this is an extreme example, and but this is the third quarter CBRE report for Atlanta, but they're quoting 34 and a half million square feet under construction in the metro Atlanta area, but of that, and I had a hard time believing this, only 126,000 square feet of shallow bay. We would typically tell you, here in a couple weeks at NITRD, it's 10 to 15% of whatever the construction is in a given market, but that jumped off the page of me Read that, and that's from a good firm that studies the market pretty well. So I like where we, I've said, fit in the food chain. It helps us get the higher development yields. It's harder and maybe a little bit slower to put out capital for us, and that's why we probably try to spread out geographically our development pipeline as much. But we're not going head-to-head with the big box developers on the edge of town. Those have worked the last few years, and it's just not what we do.
spk03: Thanks for that detailed answer, Marshall. And then maybe on the flip side of that, does the cap rate compression give you the desire to sell more, or are you sort of limited in the fact that it is harder to redeploy some of that capital?
spk09: Yeah, a good problem to have, we like our stock price compared to consensus NAV, and we have the uses. We like the debt markets have been historically low, and Brent and his team have taken good advantage of that. That said, we did offer our guidance for dispositions. We've got really three older buildings that we're taking to market. One in Tampa that's knock on wood under contract, moving towards closing. One in Phoenix. Both of these are a little more service center type oriented, 30 plus years old. One in Phoenix that we're going through the bidding process currently on, and then one where we've listed a service center down in Broward County, South Florida. So, yeah, it's a good time to, as hard as it is to buy, every once in a while it's been fun to be on the other side of the transaction because we usually bid and lose so much. It's fun to get multiple bids in on properties, and it's a seller's market right now. And we're trying to prune the portfolio, which I think is something we should annually always be doing.
spk03: Thanks, Marshall.
spk09: Sure, you're welcome.
spk07: Our next question comes from Dave Rogers with Baird.
spk11: Hey, guys, it's Nick on for Dave. Just a question on development to start. Can you say how much more land you're looking to purchase, I guess, with four to five million square feet able to build on it with like two point five million under construction? That's kind of like two years of capacity. So kind of your thoughts around that at this time.
spk09: Yeah, well, yeah, we're always Chasing land and we would, you know, if you turn the question around and you said what keeps us up at night, we would say finding good land sites and it gets harder and harder as you think and we've talked where, and we're usually the first guys to get priced out of the market because other product types and being industrial can go vertical compared to industrial and just rents aren't there except for, you know, a couple of markets nationally maybe to go vertical. But you're right, we've got a couple years, and we'll go as fast as the market really allows us. That said, and you saw us announce a few closings this quarter, I would take it a little bit, I almost kind of thought it was like an iceberg. So you see the five million square feet that we can develop on, and then the team in the field does a good job of constantly turning over stones, and we've got other sites that, or value-add buildings, where the yields are, right now, at least close to as attractive as development. Typically, they've been a little bit lower, but where we could either buy vacancy, and that's a good way to create value or NAV and FFO for our shareholders. And there's a fair amount of land that we've got tied up, and kind of quarter by quarter, you'll see us announce that, and then hopefully we can run through it as quickly as we can. And I'd also add, Given where land prices are, there's really no cheap land to buy and put on our books. So typically when we acquire the land, you saw the team in Austin do that, we'll buy it and then try to be in the ground with development as quickly as we can before the carry gets going because land prices have elevated.
spk11: Great, thanks. And then a quick question for Brent. look at there's kind of a delta between cash and gap same store and 3Q relative to 2Q. I guess like what's driving that for this quarter specifically and then when can we expect that to reverse?
spk10: Yeah, a good observation. For this quarter particularly, that's why we say a quarter really doesn't make a trim, but we had a lease, a good transaction of musical chairs at our Eastlake property in San Diego earlier in the year where We had taken a lower credit and frankly a problem paying tenant, let them out of their lease, moved another tenant, and we got a large termination fee over $500,000 that we booked in the first quarter. But as part of that deal, we backfilled that almost 200,000 square foot building with Amazon. And as part of that, they needed like five months construction time. And since we were getting a term fee, we offered a little bit of free rent just to help the timing work for them. And so in third quarter, that 200,000 feet had no cash rent, although obviously we had gap rent on it because the lease is in place. So, and there was another, you know, slight deal or two like that in smaller nature, but similar where we're moving and putting a tenant in. But in each of those, all of those cases, we got, you know, significant cash rent increases. That was just a matter of timing, having that gap, that large gap, roll all the way through third quarter. So that will make its way through in fourth quarter, and I think you'll see that tighten back up to a more normal range. But all in all, it was a very good deal. We, like I say, a large termination fee and significantly enhanced our credit, just the timing of it.
spk11: Great, thanks.
spk07: Our next question comes from Craig Mailman with KeyBank Capital Markets.
spk02: Hey, guys. Maybe to circle back on development here. I know it's been a hot topic today, but just curious, you know, the $340 million that starts this year is a record for you guys, but the company's also, you know, grown significantly, market cap and just asset base. I mean, as you guys think internally, I know land availability is a governor, but How do you guys think about how much development you want ongoing? Like, is there room from the 340 to go higher given your kind of risk tolerances, or are you guys coming up to sort of an annual cap-ish?
spk09: Good morning, Craig. It's Marshall. Now, I don't feel like we're getting, you know, to a cap or anything like that. And, look, I'm happy we have good news, bad news. I'm happy we got to $340 million now that it's, late October and you start to think about 2022 and you go, how are we going to get back to that number? Certainly construction and land prices are helping us get closer to those numbers, just the pricing we're seeing in industrial rising so we can get there. We'll build as fast as the market allows and we've been fortunate this year with a couple of pre-leases, like when you look under construction where The next building in Charlotte, we went through two buildings quickly in our Steel Creek Park, and we're about to be underway with our last two buildings in that park. The land we announced this quarter is down the street. We did have the $90 million, the speed distribution Amazon development in San Diego. So that's a big one for us, and we weren't planning on that, but they wanted the entire site. So that really put us in a position with a long-term lease and that credit where we did that. And so I think we can do more. Our team certainly can do more than $340 million. We're adding people to our team kind of in the field here and there as the market dictates. And pricing certainly makes it a little bit easier. But between those and the value adds, it's That's the challenge of growing. We've got to keep the growth rate the same, but we need to also stay disciplined and not buy things or develop things that only work in an upmarket.
spk02: That's helpful. Maybe shifting gears a bit, if you arbitrarily look at your end of 2019 tenant list versus today, you clearly see a little bit of a change with Amazon and FedEx pop up on there. And you guys have talked about just the kind of the tail from e-commerce now coming into your market and, you know, considering your property type for deals. I mean, do you feel like this shareholder or the tenant kind of change will allow you guys to push rents kind of harder than traditionally and maybe, you know, maybe even give a bigger boost to... cap rates for your shallow bay versus what traditionally the spread has been versus traditional warehouse?
spk09: I know I want to say yes to your question, but I don't think it's going to be the market. I mean, you're right. What I like when we go back to 2019, our tenant base is shifting around. Amazon, I guess, foreshadowing into next year will deliver speed distribution, so they've should move from number three to number one, like they are on a lot of our peers' lists. And actually, a percent of our top ten tenants has come down. I can't remember exactly where it was at 2019, but it was probably in the eight to nine percent, which is, we like the tenant diversity and the geographic diversity within our portfolio. But getting back to your question, I really think it's It's the tightness in the market and you're right, maybe with our tenant mix, I can work my way to yes by saying the HVAC contractor, the tile distributor with the home building, what we've called our bread and butter, the beverage distributor, food and beverage, medical supplies, those tenants are still there and as Orlando grows or Austin grows or Phoenix grows, they need space and there's tightness in the market And we're seeing more and more e-commerce tenants show up as an aside, and we'll see where it goes. We hired just things we're trying, a retail broker that knows all the retailers to go out and call on them and turn over stones to see if we can continue to develop that rather than wait for an RFP from a brokerage firm in Dallas and we're in the competition. We're working on pushing that and we have seen those tenants, if you have the right location and the right loading, they are less rent sensitive probably than the traditional tenants too. When it works, you can usually push rents pretty well. The market's moving that way and we're doing our best to help them. I think they're going to all have to keep pace with Amazon as Amazon's grown its footprint so much. If you're in a traditional brick and mortar retailer, you've got to figure out a way to keep pace with that delivery or you'll lose your market share.
spk02: That's helpful. Maybe if I could slip one third one in there. Any color on the Orlando rent roll down on the quarter? Was that specific to a building or any color? Yeah.
spk09: Yeah, no, it is. Maybe I'll mimic Brent and say it was one lease. We had Aetna, so it was a a space within one of our Orlando properties that had a little more office component in it. So it's a small sample size with the use of kind of insurance. It had a little more office build out in it. They moved out and as we released it, we took some of that office out. So the tenant improvements we had worked into the space kind of went away. So it's, you know, the market in Orlando is fine and we like where our year to dates are in Orlando and the kind of 20% in the 20s, and I think we just had a small sample size quarter and an atypical tenant. Great, thank you.
spk00: Sure, you're welcome.
spk07: Our next question comes from Michael Carroll with RBC Capital Markets.
spk05: Yeah, thanks. I wanted to go back to Craig's first question, and the company has done a great job pursuing new development starts, but what's the biggest limiting factor breaking ground on these projects? Is it finding and acquiring attractive land sites, or is it the amount of spec risk the company is willing to take on?
spk09: Land is a factor. I mean, if we just said next year we want to build 350 pick a number, 380 million in starts, we could do it. We could hire the contractors and do that. It's really more, I like that our model, I feel like rather than Brent and me at corporate are deciding where starts should be, if you flip it around, the calls you usually get, it would be Brent and I saying, hey, we built two buildings. I'll use our Settlers Crossing in Austin, for example, and we're 50% leased and we've got prospects and we're ready to go build the next couple of buildings to work our way through the park. We've compared it a little bit. If you think about a retail store, when goods move off the shelves, we restock the shelves. We let the market really pull the supply from us rather than corporate pushing us out. We could go build the square footage, but it's making sure that the market's there. Then the flip side of that, and thankfully it didn't work that way at Settlers Crossing, but had we not If you don't lease up buildings one and two, we don't go build buildings three and four until the market really absorbs that and we want to make sure it worked the way we thought our pro forma did. So a lot maybe compared to our peers and maybe at times I don't articulate it as well, but I think there's lower development risk to our model. The dollars are certainly lower and it's really feeding new supply into demand. So that's When I look back, we started the year, I'm doing it from memory, at 200 or 205 million in starts, and we're going to end the year at 340, but it was really more a function of the market was pulling that supply so much faster than we anticipated earlier in the year. So I hope it stays this way. I don't see it changing near term, and it'll probably accelerate a little bit, and that That's what's putting pressure on us to either find land and or buy vacancy in certain markets.
spk05: Okay, no, that's helpful. And then on the development leasing, where are rents coming in versus your initial underwriting, I guess, today? And do you have offhand what that has been historically? Are rents coming in much higher versus your underwriting than it has been historically?
spk09: Yes, a little bit, and I'm doing it – painting with a roller brush, but generally they're coming in higher than we've performed, because we'll typically look back a few months or current market, and it takes a bit. Oddly enough, if it takes us a little bit longer to lease the building, we'd probably do better on the rents, and on some of these cases, we've leased up pretty quickly. That's helped start the next phase, but all in all, we're probably beating our development yields as a company of what we had underwritten, hope that trend continues and we don't want to change our underwriting discipline. I hope the problem is we're understating some of our development yield projections, but if the market slows and we only get those, we're still at near historic or near historic development yields over market cap rates because there's so much demand out there for good industrial space.
spk05: I mean, is there a way to quantify, I guess, where they are coming in now versus where they have been coming in the past three years or so?
spk09: It's not huge, but we're probably doing 10 to 20 basis points higher than we've underwritten on any number of these. And probably, as you saw, looking back, I think it's 13 buildings that we've pulled out of our development pipeline year-to-date, for example, and 12 of those are at 100%, and one is at It's at 81%, 82%. So that gives you a sense for those that leased up quickly, they're all rolling in full, and we're typically doing anywhere from 10 to 25 basis points better than we anticipated. If something rolls in and it's lower than anticipated or takes us a little bit longer, that usually means at some point we'll move away from our pro forma rent and make a deal to get it filled up. But those have all moved in fairly quickly to be 97% least and a 7% yield on our development pipeline. I'd love to replicate that.
spk00: Okay, great. Thank you. You're welcome.
spk07: As a reminder, if you do have a question, please press star 1 to join our queue. Our next question comes from John Peterson with Jefferies.
spk08: Great. Thanks. Good morning, guys. You mentioned earlier in the call you're happy with your cost of equity, your cost of debt, not necessarily surprising. I guess I'm just curious as we look forward over the next few quarters or into 2022, how you guys decide the split between issuing equity and raising new debt, given where pricing is now for both of those.
spk10: Good morning, John. Yeah, it's not scientific specifically. I mean, Obviously, when both are priced attractively, which we view currently that both are, we're going to tap into both. We've obviously been a little more heavy-handed on the equity side. I would suspect going into 2022, we may err, if you will, in that direction. Our debt to EBITDA down to 4.67 this time. We're very, very pleased, especially given our propensity to have active development going at any given time that has a debt component but not yet an NOI contribution. We like that. Moody's rating likes that. There are some factors there that that bolsters up. We'll go both ways with it. We only have about $75 million maturing between now and December of 22. That's not going to be a big factor in terms of having maturing debt to replace with new debt. I could see it being pretty consistent the way we've been, and that's being a little more heavy-handed with the equity, but mixing in both. Okay.
spk08: All right. That's helpful. And then I was just curious on the rent escalators. What are you guys pushing right now? Does it vary by market or tenant size? I guess, where's your negotiating power now on rent escalators versus a few years ago?
spk09: Good observation. It's picked up. It used to be you know, twos to threes, and that's probably, and it does vary by market, but probably threes to fours, and I'd say it would vary by market and also the, you know, the larger the size of the space, usually the harder the pushback on, and so I like shallow bay too, another plug for it, the larger the space and the longer the term of the lease, it makes sense the tenants will push back a little harder on those escalations. So a 10-year lease with 4% escalators gets a lot more expensive to them than a 35,000, 40,000 foot lease for a five-year deal. So they're definitely picking up, and that's why we like, it's been interesting to see, I've noticed several of your peers focus, we do look at cash releasing spreads, but we like GAAP because the GAAP releasing spreads do capture that free rent and the escalators, and we think those escalators moving into the threes to fours is going to be able to create a lot of value at this point in the cycle.
spk08: That makes sense. All right, that's all for me. Thank you. Sure.
spk07: Thanks, John. Our next question comes from Ronald Camden with Morgan Stanley.
spk06: Hey, good morning. This is Jose on for Ron here. Congrats on another great quarter. Just heading into the holiday season, have you guys seen any inventory restocking accelerate? or have delayed supply chains kind of limited that? And if you have seen that process for some of your retailers, has that led to any expansion of space from those specific tenants?
spk09: We've seen some expansions, and I think a little bit more theoretical. I think last year everybody put their expansion plans on hold, and you probably saw last year we had higher than historical retention rates, and this year we started out with lower retention. tenant retention. It kind of bounced back this quarter. It's usually in the 70 to 75%, I would say, to someone building a model in our company. I think it's still, the good news is, I would say, is we're rounding. We're 99% leased. October looks a lot like September did, plus or minus, same zip code. And I think for our tenants, it's still aspirational to carry that excess inventory or safety stock just in case inventory. So I think that's still coming because people need it, but they're struggling to meet current demand more than carrying that extra inventory. Maybe they're taking a little more square footage in anticipation of that, but I think there's another wave of square footage needs coming as people have learned the cost of carrying that extra inventory is so much less than missing out on the sales they have. Maybe we're seeing it at the fringes, but I think if you're out and trying to buy things, there may be an option of one or none. Just here at the office, you hear of everybody not able to buy whatever it is or having to wait. Anecdotally, we're seeing it, and I think there will be a wave of increased inventory coming. What we're Hearing, one of our directors is a little bit closer to it with FedEx. I'm probably misquoting him, but it's looking like it's going to be well into 2023, mid-2023 up to later before supply chains really get straightened out and maybe the inventory gets to where a Home Depot, a Lowe's, a Best Buy, any of our tire distributors, things like that, are able to get where they want to get to in inventory.
spk06: Awesome. That's very helpful. Thank you. You're welcome. Sure.
spk07: Our next question is a follow-up from Elvis Rodriguez with Bank of America.
spk04: Hey, Marshall. Just a quick strategy question on developments versus acquisitions or M&A, large portfolio deals. But, you know, this quarter you increased your guidance on operating assets and the value add and with the DFW acquisition, in particular the Austin nine-acre acquisition that you plan to redevelop. As it gets harder to acquire land and do development, how are you seeing those two opportunities? Is that changing? I know you've always had a sort of a balance doing more development versus acquiring at market. yields, but just curious on your thoughts given the activity in the quarter. Thank you.
spk09: Good thought. Probably still in that order, if we can develop or especially develop within an existing park, I view that risk return is very attractive. One of your peers had quoted recently that our development margin was an 80% development profit margin, so maybe I didn't And maybe I didn't want to check their math, but that sounds about right. But if we can develop and make those kind of returns and manage risk, that's a great opportunity for our shareholders. We picked up some acquisitions this quarter. Two of the smaller ones were really small buildings adjacent to buildings, one in Phoenix, one in Atlanta, to buildings we already owned. pretty much off-market, where maybe that seller came to us, one I don't think had a broker, we knew the owner, one had a broker, and maybe they talked to two or three people. The Dallas one was interesting or atypical in that it's hard to call a 100% leased project value-add, but in a way, we felt like it has a strong value-add component because of the movement of rent that we were seeing within our neighboring four to five properties that we've got there on the northwest side of DFW Airport. Our Lakeport development that we leased up quickly this year, we saw rents move pretty quickly in that. So with the rent roll at DFW Global, we viewed, which is atypical, 100% acquisition as value-add. So we'll probably still like development, and if we make an acquisition, it's hopefully an adjacent building that's lightly marketed or something like that, or value add. I look at markets like San Diego where we mentioned our Amazon development, so we quickly went from being land rich to land poor, and we like that market where we're back out in that market looking for land or vacancy. If we buy a building, I'd rather have a value add component for you than just us say, We outbid the other 20 bidders, and going forward, we think the market's going to continue to go up. And we won't never say never, but that's really our last choice, and probably our last, last choice would be M&A. Usually the bigger the portfolio, the more people underwrite it, the more competitive and pricey it gets because people like the ability to put that amount of capital out there. So certainly there's not... none that I'm aware of, inexpensive industrial REITs out there today. We'd probably like a portion of their portfolio and a portion of it wouldn't fit us, and it would be a bidding war with some pretty large peers that we like our cost of capital, but probably, you know, Link and PLD and a few others have even less expensive capital. So M&A would be, you know, and I think, you know, That's a lot of underwriting, and you hope you get it right. So we don't feel compelled to make big, risky bets. I'd rather build 20 buildings around the country in 10 different markets and probably 18 different submarkets and make a lot of calculated risk-type bets. That has served us well over the years, and that's where we'll... If we can find the land sites where we'd like to be.
spk04: Thank you, and congrats again. Sure.
spk00: Thanks, all.
spk07: This concludes our question and answer session. I'd like to turn the call back over to Marshall Loeb for any closing remarks.
spk09: Appreciate everybody's time. Thanks for your interest in following this group. We're certainly available for any follow-up questions, Brent and I, for any emails or give us a call, and look forward to seeing many of you in a couple more weeks at Mary. Take care. Thank you.
spk07: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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