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spk02: Good day and welcome to the East Group Properties fourth quarter 2022 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And 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 Mr. Marshall Lowe, President and CEO. Please go ahead, sir.
spk07: Good morning, and thanks for calling in for our fourth quarter 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call this morning. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
spk00: 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 to as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release along with our remarks are made as of today and reflect our current views about the company's plans, intentions, expectations, strategies, and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events, or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings included on our most recent annual report on Form 10-K for more detail about these risks.
spk07: Good morning. I'll start by thanking our team for a strong quarter and year. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our fourth quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial markets. Some of the results produced include funds from operations coming in above guidance of over 12% for the quarter and almost 15% for the year, well ahead of our initial forecast. This marks 39 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 98.4%, up 110 basis points from fourth quarter 2021, and at year end, we're ahead of projections at 98.7% leased and 98.3% occupied. Quarterly releasing spreads were robust at approximately 49% GAAP and 34% cash. For the year, releasing spreads were also a record, 39% and 25% GAAP and cash respectively. Cash same-store NOI reached 8.7% for the quarter and 8.9% for the year. And finally, I'm happy to finish the quarter at $1.82 per share in FFO, and the year at $7 per share up 14.9% from 2021's record. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants falling to 8.6% of rents. In summary, I'm proud of our 2022 results. Statistically, it was our best year on record, while the majority of the year was marked by economic uncertainty and capital market dislocation. We continue responding to the strength in the market and user demand for industrial product by focusing on value creation via raising rents and new development. I'm grateful we ended the year 98.7% leased, with rent growth more geographically widespread in 2022 creating our record results. Another indicator of the market strength was our average annual occupancy of 98%, setting another record. And as we've stated before, our developments are pulled by market demand within our parts. Based on our read-through, we're forecasting 2023 starts of $330 million. In 2022, we delivered 19 developments, 18 of which are 100% leased. And even when including value-add acquisitions, the weighted average return was 7.1%. Last year's successes aside, we continue to closely watch demand with the goal of a balanced, fluid response pending what the economy allows. Given this capital market volatility, we are taking a measured approach towards new core investments. We are also carefully evaluating development sites given the level of demand and the longer timeframe often required to place sites into production. Brent will now speak to several topics, including our assumptions, within our 2023 guidance.
spk08: Good morning. Our fourth 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 fourth quarter exceeded the high end of our guidance range at $1.82 per share, and compared to fourth quarter 2021 of $1.62, represented an increase of 12.3%. The outperformance continues to be driven by multiple factors, particularly rental rate growth and the successful pace of our development conversions. From a capital perspective, Macroeconomic concerns have caused the stock market to decline, including our share price, and as a result, we only issued $75.4 million of equity during the year, apart from the TOLIC acquisition in June. Virtually all of that issuance occurred in the first quarter of 2022. We have been intentionally deleveraging the balance sheet over the past several years, placing ourselves in a position to pivot to debt proceeds for capital sourcing. During the fourth quarter, we closed on the private placement of two senior unsecured notes totaling $150 million. One note for $75 million has an 11-year term and interest rate of 4.9%, and the other $75 million note has a 12-year term and interest rate of 4.95%. In January 2023, we closed on a $100 million unsecured term loan with a seven-year term and an effective fixed interest rate of 5.27%. Also of note, in January 2023, we successfully expanded the capacity of our unsecured bank credit facilities from $475 million to $675 million. We remained conservatively drawn on the revolver. This step was taken simply to provide additional capital flexibility in a volatile market. As a reminder, the company does not have any variable rate debt other than the revolver facilities, and our near-term maturity schedule is light with only $115 million scheduled to mature through July 2024. Although capital markets are fluid and raising costs, our balance sheet remains flexible and strong with healthy financial metrics. Our debt to total market capitalization was 22.4%, Annualized debt to EBITDA ratio is 5.1 times, and our interest and fixed charge coverage ratio is at 8.8 times. Looking forward, FFO guidance for the first quarter of 2023 is estimated to be in the range of $1.75 to $1.83 per share and $7.30 to $7.50 for the year. The 2023 FFO per share midpoint represents a 6% increase over 2022. Some of the notable assumptions that comprise our 2023 guidance include an average occupancy midpoint of 97.2%, cash-saved property midpoint of 6%, bad debt of $2 million, $330 million in new development starts, common stock issuances of $100 million, and issuing $350 million in unsecured debt, which will be offset by $115 million of debt repayment. In summary, we were very pleased with our record-setting 2022 results. Thank you, each group team members that are listening to the call. As we turn the page to 2023, we will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio to maintain our momentum. Now, Marsha will make final comments. Thanks, Brent.
spk07: As Brent said in closing, I'm proud of the results our team created, and we're carrying that momentum forward. Internally, operations remain historically strong. That said, the capital markets and overall environment remain unstable. And while never fun to experience, a couple thoughts that may prove helpful. First, the industrial market has been red hot the past few years, so some settling of the market we view as healthy for sustained positive environments. Secondly, this is leading to a marked decline in development starts. As a result, we expect construction costs to decline later in the year and a drop-off in new supply. In the meantime, we'll work to maintain high occupancies while pushing rents. And longer term, I remain excited for East Group's future. There are several long-term positive secular trends occurring within the last mile shallow bay distribution space in Sunbelt markets that will play out over years, such as population migration, evolving logistics change, on-shoring, near-shoring, etc., which we are well positioned for. And we'll now open the floor for any of your questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. Please limit yourself to two questions, and if you have further questions, you may re-enter the question queue. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Craig Mailman with Citi. Please go ahead.
spk10: Good morning, everyone. Maybe, Brad or Marshall, I just want to kind of go through some of your underlying assumptions in same store here as it filters into FFO. I guess you guys on the same store side are baking in a little bit of a deceleration, but it seems like you guys have 50 to 75 basis points in there of bad debt reserve, which you guys haven't really recognized much of in the past few years. But, you know, could you go through some of the other puts and takes maybe from, you know, what you're assuming from market rent growth or an embedded mark to market at least on the 2023 roll and whether, you know, the occupancy fall off that you have if you're starting to see the seasonal decline in 1Q or if this is really just a placeholder just in case given, you know, Marshall, your commentary about the uncertain macro environment.
spk08: Yeah. Hey, good morning, everyone. Good morning, Craig. Yeah, I hate to call it a placeholder. We do, as a reminder, build our budgets from the ground up. So we literally go with the guys in the field space by space on leases that are going to roll this year or vacancies, make those assumptions, roll that up. There's some tweaks made to that, but that did produce the 97.2% occupancy, you know, it's more challenging than you might think to go through your portfolio and try to scrub it to a 98 number just as you go space by space to 97.2 as you're looking at it individually feels very full. But, you know, looking back a year ago, we did guide to a 97% flat occupancy and it seems to over about 5.6%. Of course, thankfully, we were able to accomplish a 98% occupancy, which lifted same store to an 8.9% on a cash basis. So certainly if occupancy were to beat and get back or maintain that 98% range, you know, certainly we feel like we could, you know, equal more to last year. We just, you know, on the front end of things, we just, you know, didn't, I guess you would say, stretch or pull that number from 97.2 to 98. It's not specific to a large tenant or two. You know, we probably didn't push overly hard on our rent assumptions during the year in terms of new and renewal activity. But, so, yeah, that's, we hope there's upside. I'd point out, too, just to the group as well, Craig, that, you know, we made a lot of California add to our NOI last year, which we're excited about. I think that'll be a tailwind to future same-store growth. But just a reminder that, for example, that large Tulloch acquisition we made last summer Of our 7.6 million feet that we held in California at 1231, there's 2.9 million feet of that or about 38% of that that's not in the 23 same-store calculation. So, again, that will make its way in once we have full calendar year comparisons for that part of the portfolio. So, yeah, I would say, as we typically do, the grid, the assumptions we give and provide Those are basically the assumptions that produce the midpoint in this case of 740, which was right basically on consensus. Certainly, if we can do better than those, which we hope to do, then certainly there's upside there. But Marshall, if you want to talk about rents or mark to market, I think you mentioned.
spk07: Sure. Good morning, Craig. And I agree with Brent. I would say if it's helpful, you know, and usually we've been thankfully to the low side the last few years in our Roe, we've been projecting kind of a reversion to the mean in terms of bad debt and occupancy, and we've been wrong the last few years. So we have occupancy coming down. We've got bad debt. If we're heading into a recession this year, which many people think we do, going back to kind of a historical, last year we were under $140,000 in bad debt. So we've been I know we get questions about smaller tenants and credit, and the last couple of years we've had very minimal bad debt, thankfully, but we've got that budgeted in. So, again, I hope we get a chance to beat it during the year. Really, this year, I can say our occupancy and percent lease through yesterday is pretty similar to where we ended the year. So rounding, you know, call it 99% leased, 98% occupied. The team in the field is still pretty content, you know, I guess robust. People out touring space, kicking tires, you know, all along the process of from tours to leases out and things like that. So we don't have any, thankfully, large known move outs this year or anything like that that we're worried about, but we just keep thinking, okay, last year was a record high occupancy for the company. that we may go down from that. But we've got pretty good, we've got good embedded rent growth. Thankfully, last year we saw that expand. California, we've had strong releasing spreads, but Florida and Arizona were both north of 40% gap releasing spreads last year. And that doesn't feel like it's slowing down. And then if I jump ahead 12 months, we really saw supply and especially shallow base supply stop when the capital markets got so unstable. So many merchant developers are on the sidelines. So we think as the supply pipelines kind of continue to drop each quarter, there's going to be a lack of new supply. So if we can hang on to this occupancy, you know, hopefully a year from now, we're even more bullish, assuming the economy and our tenants can just hang in there. So that's a lot of info for one question, but I hope that's helpful.
spk10: It is. I just want to circle back because I know you guys don't kind of come up with a portfolio to market per se, but you know, are you assuming, at least in guidance on the roll-up, that, you know, the blended mark-to-mark from the cash and gap basis for 23 expirations are pretty similar to 22, or is there a delta one way or another?
spk07: It's probably, you know, we, the guys in the field, as Brent mentioned, they'll budget each space. So if you said, what do you think? It feels like the mark-to-market, I'm expecting the last, this is on a gap basis, the last couple of years we've been you know, low 30s and then high 30s, it feels like we'll continue, you know, assuming the economy just stays okay and doesn't retreat, that we'll match those numbers. In terms of budgeting, they've probably budgeted a little bit lighter. We typically have budgeted a little below, you know, where our actual comes in, so they put the numbers on each suite, but I think in terms of our mark-to-market, it was interesting, and I think that's more the mix. We've We had a stronger fourth quarter than some of our peers where they deteriorated. And I think the market continues to move upward. And I'd even say for our peers, it was probably more of a mix of who had what leases and where they were in fourth quarter. It's a better measure over a longer period of time. But our mark to market is still solid. And it should look, I would expect 23 to look similar to 22 does in terms of our ability to push rent so far in the year.
spk10: And then just turning to the development starts, you guys are flat year over year, and I know it's an incremental build out of parks. I mean, can you kind of break out how much of that may be bill pursuits because people are running out of space to be more versus, you know, maybe tenant inquiries that make you feel comfortable? I know at 98% occupied, you basically have zero inventory. But just, you know, as we think about risk mitigation, how that stacks up,
spk07: Good question. Ours, and I think maybe that's one difference from our peers, almost all, we'll do a few build-to-suits or a pre-lease is probably more, but it's really all spec development. That said, if I use just Texas, for example, just over a third of our development leasing is existing tenants. So whether it's tenants within the park or some buildings we have around the corner. So we're, as you mentioned, at 99% leased. We've always said, look, if we don't supply that space, and we do, a lot of the tenant retention we lose is we weren't able to accommodate someone's growth needs or had the right space in a quick enough time period. So an awful lot of that will go to tenants within our portfolio. But in terms of pre-lease buildings, at this point, there's not many, although we've got a number of conversations. We've had more and more single-tenant tenants. single tenants take a multi-tenant building. So that's moved us more quickly through the park where someone will come along and say, we'll take the entire building. And then we're trying to move fairly quickly to the next building. And the team in the field feels pretty strong about the $330 million. That was really where we felt coming out. But again, I hope that's a number if the economy can stay okay they would probably, you know, probably were lower on rents than the market, and they're probably higher than the 330 if we let them roll it up just on their own without kind of trying to throttle it back a little bit. And then some of our challenge right now is just the capital market. So it's been a disconnect since second quarter last year of the market is so strong, but debt costs are higher and our stock prices moves around every time the Fed seems to meet or Chairman Powell moves. speaks, our stock price jumps. So some of that challenge is probably more stress on Brent than it's been historically.
spk10: And just on that point, I know I'm over the two-question limit, but if your equity price is not where you want it to be, as Brent, as you look out to the end of 23 or to 24, kind of your pro forma run rate on EBITDA with mark-to-markets and development deliveries, how much could you fund purely with debt without moving your leverage ratio beyond where you guys are comfortable?
spk08: We can fund what we need to do this year with debt and keep our debt to EBITDA in a very good manner. I'd say mid-five or better. And our goal has been throughout this to say we wanted it to always maintain a five handle. We really haven't pushed on an annualized run rate basis. We haven't really pushed near that. But the equity has bounced back here recently, so if it could maintain that, I think... You know, we talk about debt and equity issuance in our guidance table, but I would say those are a couple of the most probably fluid numbers in the entire budget. And what I mean by that is we know we need capital and you begin the year and you plug something in, but the budget certainly won't dictate what we do. What we'll do will be based on availability. And so, you know, equity, our prices improve. So if that were to maintain that, I could see us being much heavier on the equity issuance and lighter on the debt side. But to your point, if we had to go purely from a debt perspective, we could. You saw in the release we added $200 million to our revolver capacity. We've always been a pretty light user of the revolver in terms of not maintaining a large balance, and we still want to keep that sort of prudent approach to keep plenty of dry powder so that we don't have to have any knee-jerk reactions to market conditions. But that just gives us more leeway, too. So, yeah, I feel long-term interest rates for us in terms of Long-term potential debt, they're still high, but they've come down some from the peak. Like I said, equity is more attractive. So I'm more optimistic right now about our capital sourcing and the price of it than, say, three months ago.
spk10: Great. Thanks.
spk02: Again, please limit yourself to two questions. Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk12: Got it. Hey, good morning down there. You guys have a track record of always coming out with very conservative guidance. You know, Marshall, the past few years, you've talked about, you know, reversion to historic just given the outperformance of the portfolio. And this sounds a lot like it. And, you know, given the, you know, interest rates, given, you know, the issues that we've seen, you know, headlines with the economy, you know, you have exposure to like, you know, housing markets like Phoenix, you know, you have exposure to California. I mean, you have exposure to a number of markets that conceivably would see some headwinds and yet nothing in your commentary and nothing on the credit that you've spoken about as far as tenant health indicates anything of a let up. So I'm just sort of curious, you know, Brent, you mentioned that you do build the guidance space by space and you're baking in that 80 BIP But nothing in what you guys have talked about really indicates that. So is it more just a cautionary element to the guys of saying, look, just given everything going on this year, we just feel this is prudent? Or are there actual tangible things that are causing you to consider the occupancy declines or that bad debt goes back to two million from only 140,000 last year?
spk07: Thanks, Alex. A good question, and I think it's more prudent to call it measured conservatism, and look, I hope in hindsight we are conservative. There's no specific tenant issues, move-outs, bad debt, things like that that are driving our assumptions so much as I do get concerned about debt costs, wage costs, all the things like that, and it's I think East Group's balance sheet is in a good spot, but with 1,600 tenants, I do worry about our tenants' ability to make it through maybe the second year of an economic doldrums or heading into a recession. So we keep waiting for signs and paranoid of signs for cracks in the economy, but thankfully to date, we've not seen it. But we're trying to be a little bit anticipatory if it comes, and maybe it's a little bit You know, look, I think at some point things – nothing specific, but hopefully it's prudent to be a little bit conservative. And, look, we'll certainly get several chances each quarter during the course of the year to give you our update. And, again, we'll do our best. This is – you know, we always kind of internally say we have our budgets and then we have our goals. So this is our budget and our goals to beat it.
spk12: And then the second question is, as far as the supply picture – You said that you guys are being more cautious on how you think about new construction, and yet you also said that your competitors, presumably the merchant builders, are pulling back, which is giving you more pricing power. So I'm just trying to understand the two of those points. If your competitors are pulling back, wouldn't that make you feel more confident about investment in new starts? Or is it, again, your caution about the overall economy that independent of what your competitors on the development side are doing, you're nervous about committing new capital in the current environment. But at the same time, you are benefiting as your competitors pull back that it gives you more pricing power on your available space. Just trying to understand the two comments.
spk07: Maybe I'll throw in a third element. You're right. We feel good that our competitors, a lot of them are on the sidelines. We're seeing instances where someone's tied up a site, gotten zoning permitting, and they are not able to get the debt and or equity to move forward, and we've been able to get some repricing. We stepped into a couple of different situations in Texas, one in Austin last year where we bought out private companies that weren't able to perform at the end of their contract. So that's optimistic. The conservatism is okay, when we do deliver these buildings, and thankfully for our product type, especially Shallow Bay, it's a little bit shorter, but it's still nine months out. What type of economy are we going to be delivering into? And since it's mostly almost all spec development, a little more anxious about are the tenants, are people going to start renewing and just staying put rather than continuing expansion plans? So we feel good about supply. We're hoping demand is there. And with our cost and things like that, we've actually, you know, one of the things that I will say, there's a lot of different metrics on our dashboard. And I know a lot of your peers focus on the cash same store NOI, which we do too, but we're continuing to push our development yields up. So this year of that 330 million, we've got specific buildings and you're, pushing, you know, last year what we rolled in, including value adds, came in just north of a seven. We're probably a six, seven this year in terms of development. Hopefully with rents continuing to go up, we'll be able to meet or exceed that. So I'm proud of our development yields and the kind of instant NAV creation that creates. So we feel good about development and or maybe some opportunities where we're seeing things here and there and are probably seeing them more than really chasing them hard at this point where people's construction loans have come due and things. So there may be some, I don't think there'll be a lot of distress out there, but we don't need a lot. There's going to be some people that get caught on the bad side of the capital trades where we can either pick up land sites or partially lease buildings, you know, in addition to our development pipeline this year to create some value and FFO as well.
spk12: Okay. Thank you, Marshall. Sure. You're welcome.
spk02: The next question will come from Todd Thomas with KeyBank Capital Markets. Please go ahead.
spk01: Hi, thanks. First question, I guess I just wanted to follow up on that line of questioning a little bit as it relates to the company's cost of capital. Brent, the stock's off the bottom here, and your cost of capital has improved from where it was over the last several months. How are you thinking about acquisitions today, and do you feel a little bit more optimistic about either or both core investments or non-stabilized deals? And are you starting to see deal flow begin to pick up a little bit?
spk08: Yeah. Marshall and I are obviously daily talk in tandem. As he said, it's unusual to have this much volatility, particularly in our stock price. We're not accustomed to it, especially when you basically have put forth a historic record year from a positive standpoint, yet the equity side of it got crushed last year. So Yeah, I think our sort of sideways guide on capital outlay via development or whatever else was more just a, we felt like a prudent, measured way to come out of the gate. But as you mentioned, if the equity price can hang in there and we can source capital that we feel is attractive and we can make a good spread from, which in today's market, we feel good about that, that can change, like I said, in a press conference these days, it seems like. So that's something that we talk in tandem, the guys in the field, know to keep their eyes open for opportunities. If they can find them, we like our pricing in that moment. We'd like to think there's upside to those numbers with, you know, if we can match good cost of capital with good opportunities, then we'll lean into it. But, you know, we didn't feel like coming out of the year just dialing in a bunch of, you know, of opportunities just kind of buttoned in and that type thing. But so I don't know if that answers it, but yeah, we've We'll work in concert, but, yeah, we feel good. Things have rebounded. Price looks more attractive, more available to us. Interest rates, albeit higher than we were used to, have come down. So, you know, it's a good start to the year, and we feel optimistic to have those chances to use the capital.
spk01: Okay. That's helpful. And then I guess my second question – on the lease up and under construction pipelines. Just any additional comments there on sort of the pace of leasing, you know, how that might compare to 2022 and just looking at those sort of pipelines, you know, for lease up and what's under construction. I mean, do you see potential for some additional conversions to take place ahead of schedule? You had a couple this quarter. You know, maybe some, you know, that are slated for, you know, 23, later in 23, you know, a little bit earlier, and perhaps some of the 24s making their way into 23.
spk07: Good point. We were happy, you know, of the ones that rolled in last year, and really we were 18 of 19, and one of those, the one that's in the 80s, actually had some tenant issues. So it was, knock on wood, it was briefly at 100%. And look, that's about our, may actually be our only vacancy in Orlando, isn't the one that's a little bit shy right now. I hope so. Again, what's been interesting the last few years, we'll always design a multi-tenant building, but more and more, more frequently, we'll have a single tenant take it, and all of a sudden, then it becomes a race to, for our construction guys, how fast can they deliver that building. So, Looking at what's under construction, there's a number of those I think that can move to 100%. Usually the size of our buildings or projects, thankfully, that we can move along fairly quickly. So I'm hoping some of those, which again could be upside to this year's budget, certainly will help next year if we can get them delivered later this year with the tenants in tow. And that really, we would have been a little better in fourth quarter. I'm happy with how the year turned out, but Hurricane Ian slowed down delivery of a couple of fully leased buildings in Fort Myers that we had last year. So, yeah, we feel good. And the activity, I would say last year at this time, it was, you know, things were really red hot in terms of tenants moving, you know, pretty rapidly worrying about finding space and things like that. And then probably about second quarter, I always think of, you know, it's kind of the light switch when Amazon kind of said, hey, we overdid it on our space growth over the last couple of years slightly. That's when things have slowed down. So there's good steady activity, but it's not parabolic. I've heard some of the brokers use where it was kind of late 21, early 22, where it just felt so frenzied. That also makes us, we've all done it long enough, a little bit nervous that anything that takes off like a rocket usually lands as gracefully as a rocket. So it feels like there's you know, prospects for every space, but not five or six or where a tenant rep broker was telling me his job wasn't fun anymore because, you know, every space had a handful of tenants lined up for it. So it's still good. We just need to convert the LOIs into signed leases, but we like the activity we've got in the pipeline.
spk01: Okay, great. Thank you.
spk02: Sure. Thanks, Scott. The next question will come from Jeff Spector with Bank of America. Please go ahead.
spk09: Great, thank you. My first question is a follow-up on the prior discussion. Just to confirm, has there been any change in tenant demand or discussions year-to-date, let's say, versus the second half of 22? Can you characterize, I guess, what you're seeing year-to-date?
spk07: Good morning, Jeff. It feels pretty similar to where it took a little bit of a holiday pause was the way it was described. And that kind of had our antenna up thinking, okay, is this the start of the downturn? But the way it was described, when you think back to this holiday season was the first time people could, given COVID, could really travel to see family and take vacations and do things. So whether it was the tenants or the tenant rep brokers or their attorneys and things like that, things slowed down. you know, for a couple of weeks, the second half of December, maybe the first part of January, but it's picked right back up and tenant activity feels the same as it did, say, third and, you know, early fourth quarter last year. So we feel good and our numbers are really consistent with where we were to, you know, knock on wood late last year. So it doesn't, we're not seeing any slowdown in activity, thankfully.
spk09: Great, thanks for confirming. And then on supply, I'm sorry if I missed this, but did you quantify or can you quantify the decrease you discussed? I think you said you expect a drop off in supply later in the year. So I don't know if you have numbers on kind of second half 23 versus, you know, second half 22 or 23 over 22 and then anything on 24 over 23 at this point?
spk07: Yeah, it's not as specific as I'd like it to be, but maybe my description would be the pipelines, the numbers you'll see are still pretty full by market. I mean, if you look at our major markets, Atlanta, Dallas, Phoenix, some of those, typically, if it's helpful, the numbers are big. What's Tricky is it's still difficult to get electrical equipment, you know, HVAC units, dock equipment. That takes time. So what's in the pipeline moves more slowly than it did, you know, pre-supply chain issues. But I think that will start coming down precipitously. The contractors are still busy. So we're seeing some leveling off of construction pricing. But for every one item that seems to drop in price, another one comes up like concrete. For example, and I think the merchant developers have really been put on the sidelines. There's still things in the pipelines, but what we're hearing from the contractors, they're busy, but they're not bidding new jobs as much looking ahead. So I think as things come out of the pipeline, they won't get replaced or won't get replaced. And I've heard numbers from, say, 30% to 40% drop off and those type. That's kind of the numbers I'm hearing. I will say I think everybody's And you see it on acquisitions, kind of the bid-ask spread has been price discovery. And I think it makes sense if you, me, and Brent were merchant developers, it would be hard to go build a building and know what our exit cap rate is. So that's put them on, it's one that's more difficult besides finding your debt and equity. And I'll compliment Brent and his team, for example, for expanding our line of credit But that was heavier lifting by far than it would have been earlier in the year. And we heard the same from a number of REITs that a number of banks were just have been pencils down on real estate and pretty large banks as well. So that's tricky for us, but it's good news and that it is really putting things in their tracks. And we've seen any number of projects where people, the forward sales where someone would get a site zoned and permitted and you can flip it and make a really good return the last few years or get a building built. We were buying our value ads were often unleased buildings that were newly constructed, but we really got priced out of that market because what we learned is another buyer could underwrite rents at whatever number they wanted and rents were going up 10% a year. So we were being too conservative on a lot of those bids, but all that stopped. So I think Our product type, it's probably down 30% to 40%, and we'll probably keep dropping each month from that. I think I expect that number to grow. I think a lot of people are nervous about the economy, and if you can't get the debt and equity, it's going to really slow things down. And the price discovery is still going on. We've looked at any number of packages that typically that it was on the market, they didn't get the pricing they wanted, and they're looking at bringing it back out to market. So that's a story we keep hearing too, which just tells me the market, there's a disconnect on development pricing and there's a disconnect on pricing existing assets to a pretty good degree. And at some point that'll settle out, but it hasn't yet.
spk09: Great, thanks. Very helpful.
spk02: Sure, you're welcome. The next question will come from Keevin Kim with Truist. Please go ahead.
spk04: Thanks, John. Good morning. Just want to go back to some of your questions on development. So obviously you guys have an excellent track record on development over a number of years. And I realize that where you're developing in your own industrial parts and good cell markets may not directly compete with the larger supply deliveries that might impact the larger MSA. But my question is, if things slow down, How resilient do you think the demand for your specific new developments might be relative to the larger market that might see, you know, much more increased supply in markets like Houston, Austin, or Atlanta? And I mentioned those three because that's where it looks like you have to lamplight to do the next round of development.
spk07: Yeah. Good morning, Keevan. And, you know, look, it's self-serving, but I do think our demand will be more resilient and that ours is more consumer-related. And by that, when you look at where our buildings are, we ideally like to be near a great access to the freeway system and near the end consumers, where the population's growing in Atlanta, the East Valley of Phoenix, where the residential is, things like that. And the consumer may slow down, but that's also pretty sticky. So we're not moving goods from China to New York, for example, so much as getting train air conditioning units delivered around Dallas to Fort Worth and things like that. So I think it'll be more resilient. And then what I like about our model, and I'll put it on me, maybe I don't articulate well enough, I like that our yields are much higher than merchant developer yields and big box yields are higher than. And I also think our development risk is lower when we're It may be a spec building, but we know how the last building that we built in the park leased up, and then typically we have some activity, whether it's our own tenants or just tenant rep brokers in the market, to kind of start that new building. So we may not have a lease signed, but we have activity that we're delivering into. And then the flip side of that, if the economy does slow... it's pretty easy. It's not corporate that's saying, go build a building. It's usually the team in the field calling me saying, hey, I'm out of inventory, or I'm about to run out of inventory. We need to build the next one. And if we know if phase three in Charlotte didn't lease, for example, we know building the next two buildings in phase four isn't the answer to solve phase three. So at any given time, we've stopped development or really hit pause in markets until until demand could catch up with our supply. So we'll go as fast as the market will let us, and that's where we're kind of predicting the $330 million, and I hope we beat that number. The team in the field feels good about those starts, and I think our – a good point. I like your direction. I'd like to think the consumer is going to be a little more sticky than supply chain movements, and that's why we've always kind of avoided ports, and people can make a lot of money on ports port-related industrial, but that's pretty easy to shift over time as everyone has spent so much money and investment modernizing their ports over the last few years all around the country.
spk04: Okay. And any kind of broad commentary you can share on what you think cap rates are for good assets and good markets on stabilized assets and if the bid-ask spread has narrowed a bit here?
spk07: It doesn't feel like it's narrowed. We're not seeing a lot of transactions. We haven't been actively in that market for several months. We've looked at things and what we're hearing from the brokers mainly is that if you've got a long-term, say, single tenant asset, those cap rates, and you've heard all this, those have moved up the most. And it makes sense. Those are the more bond-like assets, so the most interest rate sensitive. But if you've got a multi-tenant project, and then everyone talks in terms of Walt phrase or weighted average lease terms. So if you've got below market leases that are rolling fairly soon, those are, you're probably still in the fours with those, you know, pending the market, maybe threes in Southern Cal, you know, low fours or high threes. And then we've heard of some cap rates and the fives in different markets, but, you know, it's one thing for us to hear, brokers talk about those, and I know they're being sincere, but until we see some of those trade, and that's where it could get interesting. If because there's this disconnect in the market and we can pick up a good asset or two and ideally add some value or add to our strategy in that market, I could see us taking some of our development capital and acquiring an asset or two, but With the drop-off in construction, we're expecting construction pricing to drop, but it'll probably have to be the second half of the year, not the first half of the year. So if we wait a quarter or four or five months to start a new development, I think there'll be a little bit of reward. Again, the demand may be a little – I don't want to miss the demand, but our costs are working our favor because everyone's on the sidelines. Okay, thank you.
spk02: Sure. The next question will come from Samir Kunal with Evercore ISI. Please go ahead.
spk05: Hey, Marshall. Good morning. I guess just going back to the demand side, I mean, you know, if you look at your markets or even from a regional standpoint, you know, whether it's customer behavior, I mean, are tenants taking a bit longer to make decisions or renew at this point? I know, sir, that the timeframe had gotten elongated. I think when we talked maybe at our own merry time period. But has that started to stabilize at this point? Or just wanted to kind of think through that a little bit.
spk07: It feels like deals get through the – good morning, Samir. Deals get through the pipeline, but, you know, you're right. And maybe it speaks more to my impatience. But they do – tenants take a while. It feels like we get deals into the red zone – and then getting them wrapped up, and maybe that's the attorneys, and getting the TI pricing, and all the I's dotted and T's crossed, and the larger the tenant is, the slower that seems to take, and I get it. From their end, the dollars are higher than they were several years ago, so there's sometimes more layers of approval of people to sign off, but the good news is the output is still there, but it It takes a little bit longer to get deals finalized. And then some of that, which would make sense to me, I think if you're a tenant and you're not a little nervous about this economy, every headline you read will make you a little bit nervous. So I don't think, unfortunately, I don't see that going away. And I don't think there's the panic for missing space that people had maybe a year ago. Although that could come back with supply drop-in.
spk05: Right. And I guess just as my second question, I mean, you know, it looks like you acquired more development land in the quarter. Is that where you see more of the opportunity today as we think about 2023 or, you know, sort of the next 18 months versus maybe operating assets where pricing is a little bit uncertain right now?
spk07: I would lean that way. And the ones we bought, a couple of them without violating a confidentiality, you know, it were opportunities where people had things under contract and weren't able to perform. So we were able to pick up what we thought were attractive pricing. And so there are those opportunities out there. We've not picked up any existing assets or partially leased assets, although we've looked at a couple of opportunities and it's along the lines of someone, you know, we'll build a park one or two buildings at a time where someone may have built you know, four to six buildings at once and their construction loans coming due and the lender wants more equity. And we're hearing from banks that their roll-off of their loans isn't what it was a year ago. So it's making their capital more precious and more expensive at the bank level too. So I think we have a chance to maybe pick up some acquisitions this year. We've seen it on land and been able to execute on it. And I think that'll probably be the case, but there may be some people in a capital bind and we're not wishing it on them, but if we can step in and help solve that problem for them in the bank and we get a good asset at the right price, I'm hopeful. We're seeing the opportunities. I hope we have the capital ourselves and we'll be mindful of our own capital as we move through that.
spk05: Thanks very much, Marshall.
spk02: Sure, you're welcome. The next question will come from Bill Crow with Raymond James. Please go ahead. Good morning, guys.
spk11: Thanks. Hey, Marshall, just two quick questions. Any markets out there that you're not seeing a drop off in new construction starts?
spk07: Hey, Bill. Good morning. If it is, it's tiny markets where the new construction has always been. We've got two or three assets in Jackson or New Orleans where the entire city's below sea level and things like that, but Really, probably what you mean, the major markets, the Houston, Dallas, Atlanta, Phoenix, Orlando. The merchant builders is one of our guys. I've said and I've relayed this story. He was in a broker golf tournament, and all the merchant developers said, we'll be a lot better when we see you next year at this event and things like that. So I think supply is dropping off, especially in at least what we view as competitive, because Usually it's a local regional developer partnering with a Clarion, a Heitman, KKR, someone like that, and that debt and equity has gotten a lot harder to come by, and it's a lot harder to pencil your exit than it was a year ago.
spk11: Yeah, okay. The second question is, you know, on the margin, are you seeing your existing tenants more hesitant to take expansion space given kind of the macro issues?
spk07: It seems like the deals take longer, but no, we're still seeing a fair amount of expansions and a number of our proposals. It's not uncommon. It's a proposal to a logistics company, and they're waiting to hear back on a contract, and if they get it, they're going to either need the space or need more space. So the deal time on the tenant side takes a little bit, but But we're still seeing fairly good expansions within our portfolio, and that's what makes us feel good about the development. I love the idea of taking a tenant from a park from Building 3 to kicking off Building 8 because their lease, if it's a couple years old, which it is in that original building by now, it's 20%, call it below market or whatever that number is, and we can... hopefully backfill their space by the time we move them into the new building. So that's what the team's done a really nice job doing the last few years is just kind of moving that Rubik's Cube. And that's one of our big sales pitches to tenants is everybody is determined they're going to outgrow their space when they move in, but we have an entire park and we'll be flexible and move you within the park and can accommodate your growth needs.
spk11: All right. Thank you very much. Sure. Thanks, Bill.
spk02: The next question will come from Young Poo with Wells Fargo. Please go ahead.
spk13: Oh, great. Thank you. Just sorry to go back to the guidance question again. Just regarding your occupancy and bad debt guidance, are there certain industries or markets where you're being a little bit more cautious on your assumptions?
spk08: Yeah, this is Brent. Not particularly. Like I say, it's really a ground-up perspective. component. The bad debt is, again, more applied at the corporate level. It's not tenant-specific or at the property level specifically. So, again, those were sort of the culmination of what we put together. The bad debt number is more a reflection of a historical run rate of about 0.3% of our revenue. We've been well below that the last few years. And no reason to think that we couldn't be below that again. I guess I would just put it under the premise that you've got to start the year somewhere. And so that's Where we are, we hope that that goes positive as the year progresses, but we'll see. But as Marshall mentioned, 45 days or whatever we are into the year, it feels good. It feels as good as we did ending last year. So we're still not seeing any headwinds to the story. And so we feel optimistic about the year. But when you've got four quarters to go, you put the budget together. Again, you just want to start in a measured, prudent manner and then let the year play out and go from there.
spk13: Got it. That's good to know. And just one more. So it looks like the January job print on construction was a little bit better than expected. What are you guys seeing in terms of kind of the home building sentiment or activity down in Sunbelt?
spk07: You know, it does feel like hopefully home buildings and industry, we We worry, obviously, with mortgage rates going up and things like that, and we're in a lot of the in-migration markets, be it Florida, Arizona, Texas, all of those. We're more optimistic that the homes are coming, and then a fair number of our tenants come with the large company relocation. So we see, and a lot of it is We've got tenants moving out of California to Las Vegas, to Arizona, to Texas. We've picked up some suppliers to Tesla in Austin and in San Antonio. And I'm sure there's home building that follows that. So we're bullish long-term about, look, these markets, we've got good sites, and they're only going to become more near and dear over time. And there's still companies and people that are relocating. It's just how fast after... COVID, it picked up really quickly to Florida and Texas, and it may slow with home building, but maybe with the mortgage rates moderating and things like that, it feels pretty good that there's enough companies. That pace of relocations to Texas and the Carolinas and things like that feels pretty steady at this point. Got it. Thank you.
spk02: You're welcome. The next question will come from Dave Rogers with Baird. Please go ahead.
spk06: Hey guys, it's Nick actually on for Dave. Question on following up on land. Where is like pricing today on some of the land parcels that you're seeing versus maybe at the peak in 2022? We had heard kind of that asset prices could be down 20 to 30%, but land could be down as much as 50. And do you guys see any opportunity there?
spk07: Good morning. Good question. We've picked up some opportunities and historically we would say land prices are pretty sticky, and maybe there's two different, at least two different types of land sellers, where it's the long-term owner, you know, wool kid, the farmer, they've owned it for a while and they're content to continue to own it. Where we've seen the opportunity is more someone else has come in, tied up the land, they had a good price and they've tied it up, and usually that contract's gotten extended a time or two, and they've got some money at risk and things like that, or even instances where you've seen some where people have ordered the steel and the electrical equipment, and now they can't get the takeout that they want, a debt or equity or a forward sale, and that's where the pricing has come down, and you're probably right. Because it had run up so much, some of that pricing has come down, 25, 30%. We were able to get some pretty good price reductions where the original person that tied it up still made a little bit of money, but that's the tricky part. Their timing window closed and those land prices have moved backwards pretty quickly. That's probably another thing that's keeping people on the sidelines for new development a little bit is movement. If you're a merchant developer, movement in land prices and construction prices is you'd probably want to wait a little bit to see before you started a new project. And hopefully that's where we can step in and build some spec developments and get at least, especially if it's within our own tenancy or the tenants across the street, while the market's a little unstable.
spk06: That's helpful. And then maybe one quick question on just rents. When you're beginning renewal discussions, are you seeing on the margin any more pushback on the rents from the existing tenants?
spk07: No, thankfully, and our list of reasons when we track our move-outs, it's not that the rent was too high. And thankfully, I think, especially in a rising market like we've been in, 99% of even our renewals, they have a tenant rep broker. So by the time they sit down with us, their own broker has educated them of, okay, you can move and go through that cost, but you're going to be paying about the same rent. This is just where the market is. And I appreciate that our rents are such a low component of their cost structure compared to their wages and transportation costs that it's given us the ability to push rents. And I do empathize with our tenants for their cost structures, whether it's energy costs, wages, rents going up. But knock on wood, so far we haven't gotten pushback Our move-outs aren't due to rent. It's more accommodating growth or consolidating locations or different kind of macro strategy reasons within the tenant more than your rent's too high because hopefully if we're doing our job, we're at market or slightly above and can earn that premium.
spk06: Very helpful. Thanks, Mark.
spk02: You're welcome. The next question will come from Ronald Camden with Morgan Stanley. Please go ahead.
spk03: Apologies, I jumped on late, but just two quick ones. Just going back to the guidance question, I think the occupancy numbers sort of jumped out. Just trying to get a sense of what sort of conservatism is baked into that. What are you thinking about bad debt? What's actually driving that occupancy decline that's in the guidance?
spk08: Yeah, good morning, Ron. Yeah, just to recap on that, it's basically, again, just a roll-up of a space-by-space assumptions. And when you start looking at 80 basis points times our square footage, it's actually, given our size, not that much square feet. But it certainly makes an impact. If we can maintain 98%, then certainly that's to the good. The bad debt, again, is more just a reserve based on historical run rates. We've been well below that the last couple of years. You know, I would remind everyone that, you know, bad debt expense potential does include straight line balances. So a lot of times we may have, I say a lot of times, there can be an occasion where you have a tenant that suddenly files for Chapter 11 or has something happen and they're current on the rent, so you're not even aware that they were in that situation, but the you may have a straight-line rent balance associated with that tenant that you have to reserve. So hopefully those numbers prove to be conservative like we did last year, but as I mentioned earlier, just you've got to start the year somewhere, and we thought just with good measured approach in this environment would be a good way to start, and then we'll just see how the year unfolds.
spk03: Great. And then my second one is, you know, you're talking to a lot of sort of tenants who, I would love to hear your perspective of where we are in the inventory cycle. Do retailers have too much inventory? Have they gone through it? What are you sort of hearing from them on the ground? Thanks.
spk07: Hearing is that, you know, unlike before where it was a, you know, probably pretty scary shortage for inventory, that it's built back and it's gotten better. You know, maybe there's Some retailers that have too much inventory, but it could be characterized as too much of the wrong inventory and things like that. But we still think that kind of restocking or safety stock of inventory, all of our tenants haven't been able to achieve that yet, but they're closer to it than they were a year, 18 months ago. So I think inventory levels are picking back up and that's gotta be, it's hard to know sometimes exactly on our expansions. Is it that their business is better? And probably the answer is yes. Or is it that they'd like to carry a little more inventory? We've certainly seen a lot of activity from the third-party logistics companies. So it tells me people are outsourcing more and more to try to get that inventory. So I think it's better than it was, but there's still room to run on that front to get to where they feel like safety stock needs to be. And we still seem to hear in the news about You know, something that's a shortage of isn't that, you know, shocking in the news anymore. It seems to be every week a new shortage on something.
spk03: Great. Thanks so much. You're welcome. Thanks, Ron.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Mr. Marshall Loeb for any closing remarks. Please go ahead, sir.
spk07: Thank you. We certainly appreciate everybody's time and interest in East Group. We're available after the call if we weren't able to get to your question or if anybody has any follow-up questions, and we look forward to seeing you soon as we dive into conference season next.
spk02: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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