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Eastgroup Properties Inc
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Good morning everyone. And welcome to the EastGroup Properties First Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please also note, today's event is being recorded.
At this time I'd like to turn the conference call over to Marshall Loeb, President and CEO. Sir, please go ahead.
Good morning, and thanks for calling in for our first quarter 2021 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and reconciliation of them to our GAAP results.
Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today, and we undertake no duty to update them, whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risks in our SEC filings.
Thanks Keena. Good morning and thank you for your time. We hope everyone and their families are well. I'll start by thanking our team for a great quarter. They continue performing at a high level and reaping the rewards in a very positive environment.
Our first quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. Some of the results the team posted include funds from operations came in above guidance up 10.7% compared to first quarter last year and $0.06 ahead of our own guidance midpoint. This marks 32 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend.
Our quarterly occupancy averaged 97% up 20 basis points from first quarter, 2020 and at quarter end we're ahead of projections at 98.3% leased and 97.2% occupied. Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends. Quarterly releasing spreads are among the best in our history at 25.8% GAAP and 16.1% cash. Finally, our same store NOI rose by 5.9% for the quarter.
In summary, I'm proud of our team's results putting up one of the best quarters in our history. Today, we're also responding to the strength in the market and demand for industrial product both by users and investors by focusing on value creation via development and value add investments. I'm grateful we ended the quarter at 98.3% leased, our highest quarter on record. To demonstrate the market strength, our last three quarters have produced three of the highest four quarters in our company's history.
Then looking at Houston, we're 96.9% leased with it representing 12.8% of our rents down 100 basis points from 12 months ago and is further projected to fall into the low 12s later this year. There is still some unknowns about how fast and when the economy truly reopens and recovers. Brent will speak to our budget assumptions, but I'm pleased and in spite of the remaining uncertainty, we finished the quarter at $1.45 per share in FFO and can raise our 2021 forecast by $0.11 to $5.79 per share.
Helping balance the uncertainty and achieve these results is thankfully having the most diversified rent roll in our sector with our top 10 tenants only accounting for 7.9% of rents. As we've stated before our development starts are pulled by market demand. Based on the market strength we're seeing today our forecast is for 210 million in 2021 starts.
To position us following the pandemic we acquired several new sites during the past two quarters with more in our pipeline along with value-add investments. More details to follow as we close on each of these acquisitions. And to perhaps preempt a question none of the development starts value add investments or land purchases in Houston.
Brent will now review a variety of financial topics, including our 2021 guidance.
Good morning, our first 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 first quarter exceeded our guidance range at $1.45 per share and compared to first quarter 2020 of $1.31 represented an increase of 10.7%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly the quick re-leasing of vacated space during the quarter.
From a capital perspective, during the first quarter, we issued 45 million of equity at an average price over 141 per share. And we closed on a $50 million senior unsecured term loan with a four-year term and an effective fixed interest rate of 1.55%. Also during the quarter, we agreed to terms on the private placement of 125 million of senior unsecured notes with a fixed interest rate of 2.74% and a 10-year term that we anticipate funding in June. Lastly, we retired a $41 million mortgage loan that had an interest rate of 4.75%.
That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength and flexibility. Our debt to total market capitalization is 18%. Debt to EBITDA ratio dropped below five times and our interest in fixed charge coverage ratio increased almost eight times. Our rent collections have been equally strong. We have collected 99.5% of our first quarter revenue and we have collected 1.2 million of the 1.7 million of rent deferred last year.
Bad debt for the first quarter of a net positive $78,000 was the result of tenants whose balance was previously reserved, but brought current exceeding new tenant reserves. Looking forward FFO guidance for the second quarter of 2021 is estimated to be in the range of $1.42 to $1.46 per share and 574 to 584 for the year and $0.11 per share increase over our prior guidance. The 2021 FFO per share midpoint represents a 7.6% increase over 2020.
Among the notable assumption changes that comprise our revised 2021 guidance include, increasing our average month end occupancy to 96.6%, increase in the cash same property midpoint from 4% to 4.4% and decreasing bad debt by 700,000 to 1.1 million, which represents a forecasted year-over-year bad debt decrease of 61%.
In summary, we were very pleased with our first 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.
Thanks, Brent. In closing, I'm excited about our start for the year. We're out of the gate ahead of our forecast, and are still feeling that momentum into second quarter. Our company, our team and our strategy are working well as evidenced by our quarterly stats. As the economy further stabilize it's the future that makes me most excited for each group. Our strategy has worked well the past few years. Coming out of this pandemic we foresee 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 and fast-growing Sunbelt markets. These along with the mix of our team, our operating strategy and our markets has us optimistic about our future.
And we'll now open up the call for questions.
Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Elvis Rodriguez from Bank of America. Please go ahead with your question.
Good morning, gentlemen and congratulations on the quarter. Just a couple of questions, one on lease termination income increased by a little over a third quarter-over-quarter and was about a penny and a half of the beat versus your guidance. Anything you can share on that? Is it one specific tenant that drove that or one specific market?
Good morning, Elvis. Thanks and good catch. I'll tie it in there. It really was one specific tenant and really one specific building. If you remember, last quarter, we had a fairly large straight-line rent write off on a tenant that had been in and out of bankruptcy. We terminated their lease. And then there was another tenant in that same building, it's in South San Diego at East Lake area. And they had closed down during COVID. We collected roughly a $500,000 termination fee from them in first quarter. And then I'll tie it into different pages. In our supplement, you saw Amazon come into our top 10 tenants. So they took that same East Lake building. Basically, what we were trying to do with kind of those chest moves was clear the building out and we signed 191,000 foot lease with Amazon, which was the full building, and it's a 10 plus year lease with them. So we're happy about the outcome. It was - and I'll credit the team for doing it. It was a lot of moving parts to free up the building. But we were able to improve the credit quality and took the write off in fourth quarter and then were able to negotiate a term fee in first quarter and get that done.
Great. Thanks. And my follow up question was going to be on Amazon. During our quarterly call with JLL, they noted that Amazon has been more active in sort of the infill slash mid-size sizes. And I just wondered if your conversations with them are increasing, either in any of your existing markets where you've been - any markets that you may potentially expand to in the near future, anything you can share from that tenant could be really helpful.
Sure. Now, happy to and we would agree with JLL. It seems like kind of globally, most people initially make sense on the e-commerce side worked on getting goods through the ports of LA and Long Beach or whatever ports to say to you in New York or to Chicago or the other major cities. In the last couple of years, it's really focused more and more on that last mile, which we're excited about of as one broker described, anything that speeds up when someone hits click or hangs up the phone till it gets delivered is where the world's going, so our conversations with Amazon where we were happy to get that transaction across the finish line. We're having other conversations with them. And they certainly picked up whether we - whether they picked up somebody else's building. We'll see how those play out. But we are seeing them be more active. And I'll say they seem incredibly busy. And we think they're - I know people have asked us that is the demand going to slow down when Amazon slows down? One, we're not - doesn't - from our stance, which is - we're a long way from Seattle, doesn't feel like they're slowing down. And then two, we think there's a lot of other companies that will have to keep up with Amazon to maintain their market share much less growing.
Thank you and congratulations again on the quarter.
Sure. Thanks Elvis.
Thanks Elvis.
And our next question comes from Tom Catherwood from BTIG. Please go ahead with your question.
Thanks and good morning, everybody. Taking a look at your value-add acquisitions, recent trends have been towards more recently completed buildings where you're taking on the lease up risk. But as you look at your portfolio of value-add projects, how much is that kind of unstabilized developments as compared to assets that maybe need capital improvements or repositioning and is there a yield difference between those two types of value add?
Good morning Tom. Good question. And really, I'll give Brent credit when we started buying these value adds it was similar in that it was a partially leased new development and we liked those as a way just competitive and low as cap rates have gotten for lease product as a way to create that value somewhere along the spectrum between an acquisition and a development internally. Most everything we bought in that value-add bucket has been a vacant building and really the guys in the field have done a nice job where we've acquired things really when the certificate of occupancy has been delivered or for the developer or when we get a lease signed. And so you saw that the last two quarters in Atlanta, they were able to get those buildings leased by the time the certificate occupancy was delivered. So they really came and leased. We bought the building, got a couple leases signed there, have good activity at 70% and I can really only think of one and it was a couple years ago in South Florida that was really in the western area that was really an older building.
And we did some capital work on it, but we're happy with the yields. And we've been in the sixes to high sixes right now on our development pipeline. So it's harder. I think the markets less and less afraid of vacancy, it feels like each quarter, but we like those looking at our supplement today at a six, eight yield. And if we can get the leasing done timely as we underwrite them, we think the values are - depending on the market, but call it four and a quarter, something like that. I will say we did one I forgot and last year near the Ontario Airport, Rancho Cucamonga, you're right, that was an owner user that sold the building to us, they were - they downsized, stayed in the building, we got the balance leased. And so there we felt like we were probably 75 to 100 basis points above the market cap rate on it. It was a lower yield than in the sixes, but we're in the high fours and the market for buildings like that are probably high threes today in Southern California.
Got it, I appreciate that color and some very significant value creation there, which kind of ties into your ground up developments as well. Over the course of the past year there's been maybe 10 basis points of contraction in your yield. So you're still at 7.2%. When we look at kind of the material increase in construction costs, especially recently, how are you mitigating this to maintain your development yields?
Good question and the short answer would be not easily. We are seeing especially steel prices come rise. Thankfully, we don't use much lumber except for out west. So lumber prices are high, the PVC costs are up, although we're hearing those will moderate in time. As we step back, I think at all means we've seen land prices increase as more and more people get into industrial, although thankfully they still - when they enter the market, they typically go into big box development. But I think all that given how tight land is for industrial and a fast-growing Sunbelt market that we struggle to find those sites. I think it's kind of all - continue to put upward pressure on rents. So I don't know that we'll - look, I'd love to say we're going to go from seven to seven three yield on our development yields.
But I think, hopefully with - our development spreads are as high as they've ever been in our company's history, we would typically historically say 150 basis points above a market cap rate, which would put us about depending on what cap rate you use, call it a 56, 57 today, and we're at 7%. So we've got room to come down. But I hope we don't. And the team continues to figure out ways to get to those seven percents and we underwrite today's rents. And typically by the time we build the building and get it leased out, we've been able to beat our rents on what we originally underwrote and a rising market the last few years and I think it will accelerate now with higher land prices and higher components. And I think at least for 12 months supply is going to be constrained because even if you agree to pay those higher steel prices, it takes a while to get deliveries.
Understood we've heard the same in multiple areas and sticking with land, just one last question. One parcel popped up in your prospective development list for two acres in San Diego, California. We didn't see anything come off out of the operating portfolio and nothing you've acquired recently. What is that parcel?
Now, good eye and good observation, I want to say it was late 2019, we bought this site. It was a couple of sites in San Diego and this one is Otay Mesa, so really near the Mexican border - the border with Mexico between the two border entries, the existing one and there's one under construction today that we plan to start construction. It was a salvage yard and as we've worked through with the County of San Diego to get that ready for development, we sense it has income coming off. It was an operating property. But as we get closer to being able to break ground, we cleared the salvage yard tenants which were really there month-to-month and so it really - a good catch, but it's really us getting ready to hopefully break ground this year and we'll - chasing some built to suites that's a strong market and/or spec development there along the border. And similar there's one other asset that falls in San Diego in the Miramar area. We bought what was a car lot along I5 right across the freeway from La Jolla. That's a covered land play. It's parking for the Miramar Navy Base today for the VA hospital. So we have a couple of those, which is a great way to kind of carry the land until we're ready to start development. But that's what happened with that 40 acres and we liked the market a lot. And it just takes a bit to get through all the improvements and entitlements in San Diego, but we're about there.
Got it. That's it for me. Thanks, everyone.
Thanks Tom.
And our next question comes from Daniel Santos from Piper Sandler. Please go ahead with your question.
Hey, good morning. Congrats on a great quarter. I was wondering if you could give us a little bit more commentary on Houston and the rents and what you think rents will do over the next few quarters.
Okay, sure. Good morning, Dan. And Thanks for the compliment on the quarter. If it helps, I'll start with Houston market and then maybe jump into each group, but - and I'll apologize, I'll throw some stats at you. But the vacancy rate Houston and this is from CBRA, where I'm quoting this, down to 6.5%. So that's - we think the market overall is improving, or it is improving. Houston continues to grow vacancies 6.5% and that fall on the last two quarters, constructions right at 21 million and that's thankfully 65% leased, or pre-leased. And JLL is tracking just over 21 million square feet of requirements. So hopefully those requirements turn into leases and that continues to stabilize that market. And then within each group, as you saw we're 96.9% leased. We at quarter end we had 8.7% rolling that's down to just over 7% today with a large portion about 40% of that rolling at year end.
So as we've been saying, Houston's not our best market, but it's certainly a stable market and it continues to shrink within each group. It was - it's down 100 basis points from 12 months ago. And we'll probably do similar to that in the next 12 months. I think I'll credit the team. They got a lot of leasing done during the first quarter, the rents compared to where the prior rents with the annual box roll down where the market is, but the market is improving. I think those - we believe those negative numbers that you see in first quarter will moderate and improve by the end of the year. But that's a market that's still recovering a little bit, was definitely with COVID had slowed down, but is improving and - but we think we'll be fine. We'll be stable in Houston this year and it'll improve, but it won't be our - it's not one of our hottest markets. But at 97% with 7% rolling and activity we've had there we feel pretty good about Houston going forward long-term.
Great, thank you. That is super helpful. So my next question is on occupancy and maybe it kind of feeds into a larger question on guidance and being conservative. When we kicked off the year, it seemed like the team was fairly cautious on occupancy and was - that was the case last year and yet both this year and last year have turned out to be better than expected, I would say. So I guess my question is, are you so cautious on occupancy? And was that driven by sort of a general view? Or did you have sort of key leases in mind? And is that sort of driving your conservativeness on the guidance, given that you beat us by $0.05 which would imply a better year than the $0.11 guidance increase?
Hey, Dan. And this is Brent. Yeah, I think the - what proves to be conservative maybe doesn't quite feel as conservative when we go out there. I mean, finishing the quarter at 98.3% leased, which again, was a record high lease percentage on top of the prior quarter, which had been the prior record. So the team continues to do a terrific job. I would say one thing that was real satisfying this quarter is that we had some known vacates and I'll say especially in Houston, but we had space roll and then yet immediately turned and got re-let. You see our renewal percentage this quarter was a little bit low at right around 59%, 60%. But we point out that we had re-leased a significant part of that for various reasons tenant that didn't renew. And so we wound up taking care of 93% of that space within the quarter. And we just didn't anticipate, among other things, but we didn't anticipate taking care of that vacated space so quickly.
And so everything from that regardless continues to hit well. If you look at our - midpoint of our average month end occupancy, it's within 10, 20 basis points of what we've averaged the last couple of years, we're certainly off to a strong start to the year first quarter. We hope you're right, we hope that the midpoint we have now proves to be conservative yet again. But when you start getting into these sorts of percentages and figures, it's harder than you think, depress yourself to start getting toward forecasting, let's say we're going to have another record quarter next quarter. And so we have good momentum, we'll keep going with it. The team is executing terrifically. But we feel - that said, we feel good about the numbers and April's looking strong coming into the beginning of the second quarter. So we will just continue to execute as best we can.
Great, I appreciate that. Congrats again. And that's it for me.
Dan, thank you.
And our next question comes from Manny Korchman from Citi. Please go ahead with your question.
Hey, Marshall, given the commentary so far, in the call about how competitive industrial markets have become, should we expect or have you given your team any new tools or sort of maybe guardrails about what they should be out there looking for? Or if not, how do you expect to keep growing the company?
Sure. I mean, I think maybe a good question and good morning. Maybe broadly speaking, we want to keep growing our - and when we say growth, we want to keep growing our FFO for sure, but in terms of just absolutely growing volume in terms of assets, we've tried to shy away from that. I mean we want to have the appropriate amount of float on our shares and things like that for our investors. But we really never said we've got to grow by X number of millions per year because I think that leads us to be an on-discipline investor. We can meet those goals. Those are usually pretty easy, but there'll be things you may be picking on us about in two or three years when we're struggling with them. But that said, I mean, we do talk about our cost of capital regularly with the team and have tried to staff up and give them the people under our three regionals that they need and really our best opportunities as we said, we've tried to reduce administrative time, we've - our internal reporting we've changed the way we've done that, a fair amount over the last call it two to four years and learn the phrase from one of our Directors of corrupted sales time.
So we want - we're telling our team go ride around, go to lunch with brokers, go to happy hour with brokers, hosted do things like that, because we think non listed properties are the best opportunities like the sale leaseback that we bought at the Ontario Airport. By the time one of the brokerage groups gets it. They're also good at marketing, it does become a bit of a feeding frenzy. And every once in a while, we'll buy one of those strategically, so they're aware that we can go to lower yields than we could a handful of years ago. And we're - we bid on a lot. We just don't buy a lot. And given where the world is and CBRAs phrase there's a global wall of capital that wants US industrial and so we've tried to tell ourselves rather than outbid that global wall of capital, everybody's got a check book, everybody wants it, we're better off creating it than outbidding people. So we like development a lot. We like value add, where it makes sense. And we'll pick up some acquisitions here or there.
I know we lowered our guidance this year. It's not that we're shying away from acquisitions. We'll chase on just as much. But that represents a property we have under contract and one of our sub markets, we're in our due diligence on it. And I hope that the number we beat we just recognize just when we think it's competitive that next year gets more competitive. The phrase we've heard is that top 20 markets are now the top 40 markets out there. So it's surprising how much competition there is in Tampa and Denver and Las Vegas we expected and LA, Atlanta, Dallas, those major markets, but even what people would call a kind of our next 10 to 30 markets around the country are incredibly competitive. We were recently in Greenville, South Carolina which is certainly a smaller market and just the number of players they're out bidding for properties and how cap rates have come down. We like the market a lot. But we'll just be - I think our best serve for our shareholders is to be a patient disciplined investor, and we'll find our opportunities here and there and luckily doing that the company continues to grow and maybe in spite of hard conservatism at times.
Great, appreciate that. And maybe the complete opposite of that, you talked about leasing up the building in San Diego to Amazon on what sounds like a whole building basis. What's the thought process between either keeping that in the portfolio long-term and then sort of what's the upside in doing that versus selling that to fund some of this more expensive acquisition and development activity?
That's a thought we - and I guess, we just got the lease signed. So we thought we'd a little bit let the ink dry before we come up with our plan. We just wanted to signature we can. And we were going to order a set of pens and have them delivered with Amazon Prime in Seattle and things like that trying to get the lease signed. And so yeah, we - there was I mean, arguably as we could have grade as much as $0.50 a share in NAV, I'll credit the team for getting that done in terms of cap rate swing on that building. And it's one we could sell although it's a - and it's one we've owned for 20 years; I'll take the blame or the credit. It was one I had acquired even way back when I was out west in the 90s. So we liked the asset, we liked the location. There's really no value we can add for a number of years. So to me the dispositions it's always a batting order, and will prune our weaker assets and there's so little land in San Diego. Well, let's talk about it the next Citi conference, I would argue that it's an over a 10-year lease that when this Amazon lease burns off and over 10 years, there's going to be that much land left in San Diego between Camp Pendleton and Pacific Ocean and Mexico and mountains that we like that infill Southern California market like San Diego, but that's probably a good discussion we'll have and we're happy to get the lease signed. I promise we'll get back to work and not take time off and figure out what do we - now that we've caught the bus what do we do with it?
Thanks, everyone.
Sure, thanks.
Thank you.
Our next question comes from Vince Tibone from Green Street Advisors. Please go with your question.
Hi, good morning. I have a question on your full year guidance for the reserves for uncollectible rent. I'm curious if the guide and revision was solely due to the kind of unexpected recoveries in the first quarter of previously written off rent or have your views on overall tenant health changed over the past few months?
Yes, Vince, probably a combination of both. The first quarter, as you see that we actually turned out to be a positive 78,000 as it comes to bad debt. And that was simply we had reserved a few tenants that we had deemed and thought would be uncollectible at 1231. And it turned out those tenants' fault and got current. And so we basically were reversed what we had previously allowed for. And then that does - wasn't backfield with new collection concerns. So for the first quarter that turned out to be basically no bad debt. And so we did ratchet back the second quarter for the total, we brought down to 1.1. But we were looking at the second quarter. We had put about 225,000 there and then about 500,000 in the third - fourth quarter. And we feel good even through April here. We're looking good. Collections have been very, very strong. We collected in the mid 99% of first quarter rents, which is basically the same as we did last year. And so we feel good about collections.
We hesitate to bring it down lower at this - you get two or three tenants when you've got 1600, 1700 customers, and when you're saying that just a handful could absorb the number you have in there, you're hesitant to take it down even further, but we feel good obviously real positive about first quarter and those aren't tenant specific. Our allowance is just general again, given that many tenants assuming something will happen, but hopefully we can continue to unwind that. At the 1.1 we're already down just over 60% or forecast to be down just over 60% from what the prior year was. So again, just a testament that our multi-tenant or our quote smaller tenant base has held up just fine and don't want that to get lost on folks because it always seems that when there's some economic reaction that people tend to look at us in smaller tenants, and that didn't happen in the Great Recession. That didn't happen here. And we'd like to think we've debunked that theory, but I'm sure it hasn't. It comes around again, though. They'll come and look for us. But the more we can build a track record, hopefully the more that lays those fears.
Got it. That's really helpful color. One more for me, are you seeing any material differences in tenant demand or just kind of fundamentals between the markets that are now fully open from a COVID mandate perspective versus those where there are still some restrictions in place?
Good morning. Coming up, I'm understanding your question correctly, I would say we're - it feels more like everything shut down, call it a year ago, almost all of our markets and then is really thankfully, the southeastern markets the - Georgia, Florida, Carolinas opened up Texas a little bit. First, we've, we felt that activity and now it feels a little more broad based where it is. California, we struggled leasing some vacancy in the Bay Area and the market was always strong, it was just not many people out looking for space, say compared to Tampa there for a couple of quarters. And we've seen it even - and we feel better. And we'll get there on a Miami development where we built the third building and apart the first to leased up before we could complete them, but Miami was another market where it felt like with COVID, it had slowed down.
So it does feel like more and more of our markets are really fully open or a little more even now, I guess maybe as another way to say it. We were sending out more proposals than we have traditionally. And that's maybe partly why we saw so much new leasing. I'd say that the flip side of that is deals still take a while to get done. So it it's a slow process. And maybe the best answer that I've heard is our rents are higher than they were a few years ago, and spaces have gotten a little bit larger for our tenants. So the level of approval or the amount of scrutiny has gone up. So there's a lot of deals that will happen. But they'll stall out kind of in the red zone until we get signatures, but we've seen more and more pickup in the market in terms of activity and then - and you're right. It really depends on when kind of the government let those markets reopen a little bit over the last year and each quarter. Till now they all feel like they're pretty much open, although some of the like they just reopened here in the last 90 days is more shots caught in arms.
Great, thank you.
Sure. Thanks Vince.
Our next question comes from Dave Rodgers from Baird. Please go with your question.
Hey, guys, it's Nick on for Dave. I had a question. If you've been hearing anything from tenants about employment shortages and it might be impacting the business.
We're certainly seeing that all around the country or it feels like I've heard more about it in service businesses than I have within our tenants as well. But it does feel like people are having a hard time hiring workers, which is crazy right now. But hiring people and - it probably hits the larger the space, the more people intensive. Some of ours aren't quite as in - an 800,000 foot industrial buildings going to have a lot of people in it. And labor is going to be a key decision maker, part of their decision with hires, where it's really that last mile quick delivery. I know there's a - I read about - I was watching a shortage of truck drivers and things like that. And I think that was all going to lead companies more and more towards automation. We're already seeing that but that will pick up. We're not hearing it as directly, but we are glad to see our customers starting to expand that really had slowed down that partially led and Brent commented on our retention rate. But that was one was our tenants are actually starting to expand. But I do worry about the labor shortages that are out there a little bit. It seems more service oriented than warehouse, but it's got to be a little above.
And then just one quick follow up on something you guys said earlier, land as a percentage of construction costs. Where do you guys peg that today?
Land as a percentage of -
Probably it's probably around 25% to 30%. And maybe slightly growing although as Marshall said there's some component costs like steel that are increasing. And the question earlier about the yield and the impact and how we're mitigating that some of that really is going to be the challenge this year. A lot of what's in that pipeline is kind of pre-baked with some of these supply chain conundrums. But it generally - it can vary in different places, but generally going to be in that 25% to 30% range of total all in.
Great thanks.
Welcome.
Our next question comes from Michael Carroll from RBC capital markets. Please go ahead with your question.
Yeah. Thanks. I guess Marshall over the past several quarters, I mean, you've detailed how prospective tenants is kind of broadening out for you, including a much bigger pool of national players looking at your properties, combined with the smaller local players. I mean - and obviously this has changed your top 10 tenant list. I mean, are these national players more active today than those local players and we should continue to expect that top tenant list to continue to evolve.
I think it will continue to evolve. And you did see I guess a couple of new names in it this quarter that we moved in. I hope we've kidded our own board, I hope we have the issue of how big is too big for one of our tenants I like and people certainly get on my soapbox for a moment as people focus on Houston for us in concentration there where I think geographic concentration is important for us to manage risk. But I also think tenant concentration is another great way to manage risk. And we really - I don't know that people focus on that as much I like that we're here below 8%. But I do see as some of our tenants, those national tenants work what's been interesting to me, as we'll see, I mean in Tampa or Orlando or in a market and next thing we know that we're sending out proposals to them throughout the portfolio that I hope we have the issue is, how much is too much Home Depot or Best Buy or Lowe's or Amazon or Wayfair, any of those tenants.
So I do - I think is they all work on their supply chain and logistics, and then they've all been caught without inventory, especially this past year. So we think it will also lead to - is their logistics move our way and will likely carry more inventory as well. We're reading and hearing about over the next few years - we will - I think it's a good prediction that we'll be managing the size of some of those tenants. And maybe I'll go back to Manny's question. Worst case, we create so much value with Amazon and they're so concentrated, we need to sell an Amazon building or two, but be a great a world class problem to deal with, when and if we get there. First, we need to get the leases signed. But I think you're right, I think we'll end up with a little more tenant concentration over time, but that we'd like - and we'll try to manage that number and keep it low as best we can.
I mean you have great tenant diversification today. I mean, what is too much? My guess what's that number? Is that 5% of rents? Or I mean is there a number that we're thinking about right now?
There's not a - we talked about, not a specific number. The other thing is - we've got - you're right. Thank you. It's not a problem today, but you don't want to wait until it is a problem. The other thing I thought we should layer in as we look at that is what are the terms of the leases? I mean, I'd like say [indiscernible] is one of our top 10 tenants. Good company, but they're 3PL typically a shorter-term lease, if someone's 5%. And everything's a three-year lease, that's a different model, than if we've got someone and how many locations is that too. I feel better about having multiple locations because you're probably not going to lose all those locations at once. So to me it would be probably - and I'm good at over analyzing things. It's my personal therapy comment, but how long the lease terms, how many locations and who that tenant is? And I think well, that's probably as we get to each one is probably how we should - that should be the framework we look at.
Okay, and then I guess switching over to developments, I guess, what's the governor of starting new development projects? Is it the ability to find land or is it that you're just trying to manage risks, you don't have too much on leased developments and process at any point in time?
It's really what - a good question. What I love about our model is it's not Brent and me saying really the governor. I would put it back on the market if the fire guys can find the right land sites. And we wouldn't build two competing parks within the same sub market. But we could be we're active in several sub markets and Dallas, Atlanta, and we would - could be in San Diego, some of our larger markets. It's really how fast did your last phase of that building lease off and did it kind of meet or exceed our pro forma and as fast as - we've told the team as fast as you can deliver them and get them leased out, we're ready to go with phase two. So the market really pulls our supply. So that was how our starts got so far out ahead in 2019 of where they - we thought they would be. I hope we have that issue is this year as it plays out although we've got to get the steel for it and all the components and things like that. I could see some delays that way. But it's really - we'll build phase four as fast as you can lease phase three.
And I've always kind of thought of almost like a retail store where we're restocking the shelves as fast as you can sell it and look at it. I like our model. We'll build roughly a $12 million building where our yields are versus market cap rates that will come out being worth about 19 million, which is a great net asset value creator, and how many times can we do that before we run out of land or get too far out over our skis. But if we can do that, in as many markets where the demand is there, that's why you saw us say - buy a site in El Paso where we haven't built in years was that the market strength was there, we had internal tenants who wanted to expand, so the team found a contiguous site to some buildings that we owned. And we'll break ground there later this year. So we'll go a long, long winded way of saying we'll go as fast as the market lenses go.
Okay, great. Thank you.
You're welcome.
And our next question comes from Craig Mailman from KeyBanc Capital Markets. Please go ahead with your question.
Hey, guys, just maybe circling back to the acquisition question and I appreciate your commentary that you don't want to just go with reckless abandon and given a positive cost of capital here. But what we've seen the last decade almost is where everyone's been conservative on underwriting rent growth. And thinking that people that are winning bids are crazy only to see rents grow faster than they expected and cap rates compress, right. And then you have the remorse of not being more aggressive. I'm just kind of curious as you guys sit there today in underwriting committee, how much that factors in particularly for well-located product, where - how much you're willing to stretch to get the foothold in some of these markets where you want a bigger exposure versus not wanting to be as you said, lab acid in two years if something goes sour, right. So I'm just kind of curious on your thought process there. And I guess, putting something else in the mix too, is your markets are now seeing more national tenants come in, those tenants tend to be less price sensitive. So kind of how does all that fit into when you guys are sitting there decide to allocate capital? Which I know it's tough when you have 400 - 300 to 400 basis points present development, but there's only so much land to buy?
Sure. Okay, good thought process. And Brent and the finance team right now, we were thankfully not - we don't feel capital constrained. The equity markets are attractive, the debt markets. So we're not really looking at do we build a building? Or do we buy a building? Thankfully, we have the luxury of - we can do both as long as that that one particular market doesn't get outsized, like you'd manage your stock portfolio and we do feel like we stretch. I've always thought our best decisions when you're buying something, it's half analytical, and we certainly see some people that it's - they're so focused on the computer and the model that you miss really, we have the luxury also of being a long-term owner of what do you think about this location? And where do you think it will be in five, 10, 15 years. We're not private equity, where we need to be thinking about exit within just a handful of years, I think that's a lot harder way to buy an asset.
You're right. Thankfully the market's gone our way all the industrial owners to last a handful of years. So we're - we felt like we're stretching and we'll keep chasing those assets. And we bid on a lot. And maybe we should stretch more than we do. But we kind of - we try to come up with a number early on, and we say, all right at this price before you get too heavily involved. And when you're in the third round of bidding and the buyer interview with just including me, it becomes more emotional. And we've said on how much do we want to pay for this asset early on, and what's our bidding strategy and we try to stay pretty self-disciplined around that because you can get in the bidding and you want to win it. We're all competitive. I don't know that winning out of 20 bidders is really winning and just betting on the market and it keeps setting new highs. But I hate to bet - keep betting that it's going to go to another high and look and if it does, we've got 47 million square feet that will benefit today that will benefit from that as well.
So we'll buy some things, but we try to not buy based on what our stock price is today. But if it's an asset we like and it strategically fits where we're trying to grow in Jacksonville or Austin, Texas and things like that. Look, our company is probably two and a half times the size it was three or four years ago. So we feel like we are growing, we were under 3 billion and some of that stock price growth and things like that. We've grown pretty rapidly. And our development pipeline used to be 100 million a year. So it's grown as well. We'll grow as fast as we feel like we can. But we don't want to - I don't want to blow up a perfectly good 30-year-old REIT, because we wanted to grow too rapidly or things like that. We'd rather find that value for our shareholders. And we'll go as fast as we feel like we can reasonably find those opportunities.
Yeah, I wanted to just add to that Craig that like Marshall said that we view that we're being paid to create value. And we don't necessarily view as our key role is a component but not a key role of being a role of per se. But one thing I think maybe gets lost with the script; you look at our yields relative to perhaps the peer group, given our smaller building multi-tenant approach, which has less competition - some competition, but less. But in the last four years, we've converted the development value add 725 million at cost, that's worth if you put a four and a half cap on it, which probably conservative there as worth over 1.2 billion. So we're making a 60%, 65% return on the last four years in those two buckets. So we spend a lot more time on those, frankly - we look at acquisitions in every market, but we view that as far less accretive to the shareholder, so it's a component. But with today's cap rates, we just don't view it as a key component.
No, that's fair and helpful on your thought process. Just on - maybe one quick follow up to that. When you guys do kind of not end up being the winning bidder, how far off generally are you versus the winner?
It depends, we've - and I've debated it. To better to get - sometimes we don't make it to the second round and you realize, okay, we weren't going to be closed - the market sees something there. And then it varies, sometimes we're right there. We do a lot - usually have a first round bid, they narrow it to a second-round bid, then you have a buyer interview. And then you get a call from the broker saying you're bidding against yourself this entire time of - if you can come up 100,000 or depending on the size of the project 400,000, you can get the property. So those are the ones where you want to be a little more disciplined, but we - it's arranged. We'll usually - if it's something we like, well we usually almost always make it into the second round. And the brokers will guide you through the process a little bit of where you need to be to make that second round or the buyer interview. And sometimes we simply cry out, uncle, but it's amazing.
And then last couple of deals we bought, honestly, they're even after we were awarded it people came in with a higher bid.
There's one in California in the last year and we were in the 20 millions. And even after we were awarded, somebody came in with a million more within their offer. And thankfully the seller stuck to their word and honored it. But it's - I guess the good news - the bad news is it's awfully competitive on acquisitions and we can get close on them. I guess that's the good news, we can't have a high stock price and have people not want to own industrial. So it really pushes us as Brent said, rather than being an asset aggregator, we'd rather create that value. And again, we can create value by raising rents. We admit that we'd rather build it or buy it vacant and/or push rents along the way. So we - I think we'll buy more than 10 million probably by the end of the year. But as we came up with our guidance issue, we stuck with 10 million, because that's what we have under contract. And we'll be patient and we'll find it and that's a hard one to predict. It's the other reason we predicted 10 million because everything gets multiple bids these days.
No, that's helpful then just hopefully a quick one here. Going back to the talk about maintaining development yields and apologies, we haven't been able to go out and see any new developments lately. But are you guys - you guys historically have had more office component in some of your shallow bay, then traditional just distribution is that mix changing at all, which is kind of supporting the yields a bit or you guys kind of stick into that same office percentage historically?
Office percentage has stayed similar and we're at 10% to 15%, which you're right would be bigger than a large box building just by its nature, but we're - office percentage is similar. If there's anything we've seen, and it's probably the nature of where we are. And in Arizona and Las Vegas, we've seen more air-conditioned warehouse uses. If somebody has some kind of line assembly or depending on - we leased space in Las Vegas, we renewed the strip and it was a candy company that distributes to the strip. So it makes sense and we get it's hard to store chocolate in the desert in July without it being air conditioned. But we are seeing more and more demand for that from tenants. So if you said what if - what we've added more parking, we've added more trailer storage over the last few years. I don't think that's really - that helps you stand out when people are looking for spaces, but I don't think it helps our yield. If anything, we'll end up same amount of office and maybe a little more air-conditioned warehouse space than we had six, seven years ago.
Great, thank you.
Sure.
And our next question comes from Bill Crow from Raymond James. Please go ahead with your question.
Good morning, guys. Marshall, a couple of questions on the larger national tenants, you talked about the maneuvering you had to do in San Diego to move Amazon. And I assume that Amazon and a bunch of these other bigger national tenants prefer not to be in multi-tenant properties. So do you find yourself contemplating more larger single-tenant buildings to accommodate these larger tenants as you go forward?
Probably not. I mean, a short answer would be that building was 190,000 feet, and that's on the large end of what we own. And we do see Home Depot and they've come that's buying a 40,000-foot in Charlotte, multi-tenant building. So I think most tenants ideally would like their own building, but it's really been more - last conversation I had, was on a Lowe's project. They were looking in one of our markets about number of doors and trailer storage. So I don't think we'll really - we've grown the size of our average building slightly over the years, but we really - we like where we fit in the food chain. I like our yields at 7% compared to some of the big box yields where I've seen kind of mid- 5s to 6% that people have reported. And so we'll probably keep building the same buildings. It's really getting the location and doors and trailer storage and you're right, they've been - they're less price-sensitive as if you can deliver the right real estate. And for Amazon, it really worked in San Diego. We had the right square footage in the right location for them. But just sticking with them, and you see it on our top 10 that they took 10,000 feet, just using them as an example and Tucson a year or two ago. So that one was kind of interesting and maybe educational for me that to deliver bulky items that they would be willing to go that small, but we have the right location that they needed in Tucson.
No. Are you - a follow-up question here. Are you getting the inbound requests from the tenants to take care of their needs in other markets that - whether you're in those markets or not? Are they starting to generate more leads?
We work on that. I mean we have had some - we're - thankfully, we've developed those relationships, and I'll credit our team in the field. We will go to their corporate office, have those conversations, and companies like Lowe's and Home Depot, where I think they're used to - and I am - this is me assuming as much. That's by retail leases that are much longer and lengthier than in a typical industrial lease, so simply having gotten through the lease process. If we can use one of our conforming leases and take what we did in Charlotte and move it to Austin, I think it makes it - it's easier on the real estate teams because all those companies also seemed to me to be incredibly busy and understaffed right now, broadly speaking. But I think we do have that advantage. And even one tenant was looking at going to a new market. They'd rather leased and owned, but they presented us with that building. In that case, it didn't work out. We really didn't like the building that much, but it was not retail related, but a solid tenant that we have elsewhere. And they approached us on buying the building to lease it back to them. So I love it when things like that happen. And I think if we can kind of keep managing those relationships, Goodman was another company, large AC contractor. When we went to Fort Worth, they were with us in Dallas and kind of made the comment that the traffic was so bad in Dallas, they needed a Fort Worth location. So we were able to accommodate them and take them to Fort Worth as well, for example.
Good, great, thanks. Good times within industrial. All right, thanks appreciate it guys.
Great, thanks Bill.
And our final question today comes from Ki Bin Kim from Truist. Please go ahead with your question.
Hey, thanks, good afternoon. A lot of good questions have been asked already, so just a quick one here. How would you describe the changes in your overall tenant credit profile in your portfolio? And I don't mean how many more tenants are rated by rate investment-grade by Fitch and Moody's, but talking about a real world credit?
Yeah. That's, I guess, an interesting question, Ki Bin. I mean, we've got 1,600, 1,700 customers. I think obviously, we analyze - especially when you're signing a new lease, we have a process that all our asset team follows in terms of analyzing the credit of a tenant various things go into that. I mean, the credit view on an as-is deal where no TI or capital is required, we may look at slightly different than, say, a build-to-suit, where you're committing lots of dollars and, perhaps, a long-term lease. But we revisit those. We run D&B reports for those tenants and that type thing. But, Ki Bin, I guess what I would point to and I mentioned earlier is I think the greatest testament to our tenant credit profile is how we performed relative to, say, comparison to big box peers and/or how we've performed in economic downturns where you can compare some companies that focus on one size versus the other. And again, what we've seen is that there's not a disconnect between how big tenants perform relative to smaller tenants in those situations.
And as we've said before, being in a smaller space, doesn't necessarily mean that you're lesser credit. We think the focus more is what is the business that the tenant does? I mean there's plenty of very, very large companies publicly traded companies out there in the world today that are struggling for a myriad of reasons. And some of them not of their own doing with the pandemic, but nevertheless, they're struggling. And so we spend a lot of time and focus on that, again, especially in new leasing, but we feel like we've put down a track record to show that within the multi-tenant space, we're the high rent provider. We - in our markets, we are the Class A multi-tenant. We're not - as we say, in the field, we're not shading shelter sort of landlords. So along with that comes a better credit profile because they're having to pay up for quality space. So hopefully, that answers it, Ki Bin, but it's - we feel like we've laid down a track record shows a good credit profile.
Yeah, thank you.
You're welcome.
And ladies and gentlemen, with that we'll conclude today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.
Thank you. We appreciate everyone's time this morning. Thanks for your interest and for a number of your ownership as well within East Group. We're happy with the quarter. And we'll get to work on second quarter and look forward to speaking to you in three more months. Take care.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.