Eastgroup Properties Inc

NYSE:EGP

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the EastGroup Properties First Quarter 2021 Earnings Conference Call and Webcast. [Operator Instructions] This call is being recorded on Wednesday, April 24, 2024.

I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

[Marshall Loeb, executive]

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

[Keena Frazier, executive]

Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.

Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today, and reflect our current views about the company's plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions it has made.

We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events or otherwise. 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.

[Marshall Loeb, executive]

Thanks, Keena. Good morning. I'll start by thanking our team for another strong quarter. The team continues performing at a high level and finding opportunities in an evolving market. Our first quarter results demonstrate the quality of the portfolio we've built and the resiliency of the industrial market. Some of the results produced include funds from operations rising 8.8%, excluding a 2023 involuntary conversion. For over a decade now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term trend. Quarter end leasing was 98%, with occupancy at 97.7%. Average quarterly occupancy was 97.5% which, although historically strong, is down from first quarter 2023. Re-leasing spreads for the quarter were solid at 58% GAAP and 40% cash with cash same-store NOI rising 7.7% for the quarter.

Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 7.8% of rents, down 70 basis points from first quarter 2023 and in more locations. We view our geographic and revenue diversity as strategic paths to stabilize future earnings regardless of the economic environment.

In summary, we're pleased with our performance out of the gate for 2024, while being mindful of the near-term economy. Today, we're focused on value creation via raising rents, acquisitions and development. This allowed us to end the quarter at 98% leased and continue pushing rents throughout the portfolio. On the acquisition front, we continue to patiently search for the right opportunities.

We're excited to acquire Spanish Ridge in Las Vegas, which we announced earlier in the year. This acquisition also allowed us to move to self-management in the market, further raising our returns. In keeping with our strategy of targeting high-growth markets, we're excited near term to enter the Raleigh market, a market we've looked at years. And similar to number of our other markets, we are attracted to its economic stability and growth due to the mix of estate capital, large educational presence, technology companies which follow the university presence, topography constraints for new development and long-term population growth.

Our acquisitions will continue to be guided by 2 criteria: One, to be accretive; and secondly, raising the long-term growth profile of the portfolio, thus creating NAV as well. As we've stated before, our development starts [indiscernible] market demand within our products. Based on our read through, we're forecasting 2024 starts of $260 million and though our developments continue leasing with solid prospect interest, we're seeing longer, deliberate decision-making. As always, we ultimately follow demand on the ground to dictate pace.

Based on the decision-making time frames we're seeing, I expect our stocks to be more heavily weighted to the second half of 2024. Within this environment, we're seeing 2 promising trends. The first thing, the decline in industrial starts. Starts have fallen 6 consecutive quarters with first quarter 2024 being over 70% lower than third quarter 2022 when the decline began. Assuming reasonably steady demand, the markets will tighten later in 2024, allowing us to continue pushing rents and create development opportunities.

The second trend is the rise in investment opportunities with developers who've completed significant site prep work prior to closing and need capital to move forward. This allows us to take years off our traditional development time line and materially reduce site development legal risk. Brent will now speak to several topics, including assumptions within our 2024 guidance. My belief is that when or if interest rates begin to fall and/or global turmoil settles, then confidence and stability within the business community will rise.

[Brent Wood, executive]

Good morning. Our first quarter results reflect the terrific execution of our team, the solid overall performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the midpoint of our guidance range at $1.98 per share compared to $1.82 for the same quarter last year, an increase of 8.8% excluding voluntary conversion gains.

As a reminder, we typically incur about 1/3 of our annual G&A expense in the first quarter primarily due to the accelerated expense of newly granted equity-based compensation for retirement-eligible employees, which totaled approximately $1.7 million during the quarter. From a capital perspective, we continue to access the equity market. During the quarter, we settled shares for gross proceeds of $50 million. And after quarter end, we settled an additional $25 million, all at an average price of $183 per share.

We have an additional $52 million in commitments still outstanding at an average price -- at an average share price of $180. Debt maturities are minimal this year with $50 million in August and $120 million in mid-December. Although capital markets are fluid, our balance sheet remains flexible and strong with increasingly healthy financial metrics. Our debt to total market capitalization was 16.3%, unadjusted debt-to-EBITDA ratio decreased to 4x and interest and fixed charge coverage increased to 10.4x.

Looking forward, we estimate FFO guidance for the second quarter to be in the range of $1.99 to $2.07 per share and $8.17 to $8.37 for the year which is unchanged from our prior guidance. Those midpoints represent increases of 7.4% compared to the prior periods, excluding insurance-related gains on involuntary conversion claims. The range midpoints for cash same-store growth and occupancy remained unchanged from prior guidance. We increased our reserves for uncollectible rent by $500,000 to $2.5 million or 0.39% of revenue. This is the result of our uptick in bad debt in the first quarter that was driven primarily by 3 tenants in varying industries.

Overall, our collections remain healthy. We also increased our G&A guidance by $900,000 to $20.8 million. Much of the increase relates to less capitalized development costs as a result of lowering our projected development starts for the year. In closing, we were pleased with our first quarter results, especially considering the economic uncertainty and prolonged higher interest rate environment. And as we have in both good and uncertain times in the past, we will rely on our financial strength, the experience of our team and the quality and location of our shallow bay portfolio to lead us into the future.

Now Marshall will make final comments.

[Marshall Loeb, executive]

Thanks, Brent. In closing, I'm proud of our first quarter results and the value our team is creating. Internally, we continue to grow earnings while strengthening the balance sheet. Externally, the capital markets and the overall environment remain clouded, which has led to continued decline in starts. In the meantime, we're working to maintain high occupancies while pushing rents. And in spite of the uncertainty, I like our positioning as our portfolio is benefiting from several long-term positive secular trends such as population migration, near-shoring and onshoring trends, evolving logistics chains and historically lower shallow bay market vacancies. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is improving each quarter. Our balance sheet is stronger than ever, and we're expanding our diversity in both our tenant base as well as our geography.

We would now like to open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Jeff Spector from Bank of America.

[Jeffrey Spector, analyst]

Marshall, in your opening remarks, you talked about the resiliency in the sector. Clearly, the market -- there's some angst here, right, on that comment or on the resiliency, I should say. So I guess I wanted to focus my question a bit more on that and the comments around leasing decisions taking a bit longer, economic uncertainty because consumption remains strong. E-commerce has been rising. Like is it simply because of the Fed and rates? Is it tenants took too much space? Like could you just talk about this a little bit more?

[Marshall Loeb, executive]

Okay. Sure. Happy to add my color. And on the resiliency, yes, we see it and believe it's there. And maybe if I take a -- maybe a look back, I look at today and kind of a look ahead. So we've had this great run the last handful of years, all the -- us as well as our industrial peers. And then I think it's -- we've had kind of this historic run right now. You touched on it. I view it as combination of interest rates. And earlier in the year, everyone thought they were about to drop in March, and then it was June, and now it's maybe December that keeps getting pushed out along with just a lot of troubling global unrest.

And I think my kind of analysis, I think, short-term decisions more like retail and things like that, the consumer is holding up well. And if you went through our portfolio, what's been interesting for a couple of quarters now. We have prospects and have conversations on our vacant spaces, I think people are really taking a wait and see. They're maybe waiting for a little more business confidence.

So we've seen supply coming down, and there's just a lot of people on the sidelines. There's been -- we put it in our slide deck, if people have a chance to go to the -- our Investor Relations on our website, it's Slide 14, where renewals have really picked up in our sector. So I think there's a lot of people taking a wait and see. So right now, we're -- I'm glad we're still 98% leased. We're pushing rents, supplies dropped. What we need is that kind of third leg of the stool is a pickup in business confidence. And then I think you'll see -- we'll have probably a several year if not several -- several quarters, several year growth spurt. Again, I see that resiliency, as you mentioned, e-commerce isn't slowing down, onshoring near-shoring people and companies moving to the Carolinas, Florida, Texas, Arizona, all of our markets.

So it's been a great few years longer term. I'm still really excited about where we fit kind of our part of the playground. And I think right now, people are pushing off. I think if you can put off a 40,000, 50,000 foot expansion, which is an awful lot of our development leasing, about 1/3 of it is existing tenants I think people are saying, let's wait a quarter or 2 and maybe get a little more settled environment.

[Jeffrey Spector, analyst]

Okay. And then if I could ask a follow-up. You also commented that you think the markets will tighten later in '24. Anything more to elaborate on that? Any specific timing fourth quarter, third quarter, more into '25?

[Marshall Loeb, executive]

I'm hopeful just look, we've had 6 quarters in counting of a lack -- drops and starts. And our product, thankfully, shallow bay has had less -- significantly less deliveries and availability as a result of availabilities than kind of the bigger box. So I think as people gain this confidence, I'm kind of with our tenants and our prospects. I keep thinking in 90 days, we just need a little bit of economic good news.

And so that's why I think when people do -- if I use a retail analogy, do come back to the store, there won't be much inventory on the shelves. And for our product type, it will go away pretty quickly. And we'll -- that will pick up another leg of pushing rents and then really development that I think so much of our development competition is local regional developers, and they don't have the balance sheet and the teams and we have the land and the permits, we'll be able to come out of the gate on development a lot earlier than our private peers.

[Operator]

[Operator Instructions] Your next question comes from the line of Eric Borden from BMO Capital Markets.

[Eric Borden, analyst]

I just want to talk a little bit about the acquisition opportunities as they appear to be increasing. I mean I was hoping you could speak to the cap rate expectations for the remainder of the year. And how they compare to your development yields in the current pipeline?

[Marshall Loeb, executive]

Okay. Sure. Good question. And really maybe noticing maybe as far back a year ago that our development leasing, although we are signing development leases. So I don't want to discount that. We signed a good half dozen more kind of our projects made movement during the quarter. It's just not moving as rapidly as it was at the peak. But then we noticed acquisitions. We've always been in the market for acquisitions, we were just getting more yeses. So to date, if I roll the Raleigh acquisition that we mentioned in, we'll have -- what excites me as well have bought 7 projects for about $200 million -- a little under $280 million, and those buildings are just over a year old on kind of a weighted average. So everything we've been buying is new, and it raises the growth profile going forward of our company. And we've added a dime on kind of matching the quarter, the equity raised versus the going in gap yield that adds a dime to our earnings.

So we view this as a nice way. You kind of -- to maybe be nimble when the development is slowing, but the acquisition window opens up, let's pivot that way. This year, so we were able to pick up a fair amount, kind of third and fourth quarter last year. This year has been a little more competitive out of the gate. We're still seeing cap rates if it's a portfolio. It's really low cap rates, like sub-5 and things like that, and it doesn't even have to be a large portfolio, but kind of 4 or 5 buildings so people can put some dollars out. That's still very competitive. What we've bought has been more one-off and someone needing to close quickly. That's -- our pitch has been -- we have -- especially when -- with Brent and the team implementing a Ford ATM, we have the funds raised and we can close in roughly about a month, and that wasn't a differentiating factor in the past.

But certainly in the last year, having capital and being able to close quickly has allowed us to kind of move forward. I think it's disappointing on the development leasing front that interest rates look like they're going to be higher for longer, but I do think it will keep the acquisition especially second half of the year, we were able to be more competitive. I think people get their capital allocation at the beginning of the year.

It has been a little more competitive first quarter, although I'm glad we got the Raleigh opportunity, and I'm optimistic on the acquisitions front that we'll still be able to go find basically new development type properties and a GAAP yields that are maybe I think our average has been in the 6.25% to 6.5%. So in our development yields, they've come in above pro forma have been at around 7%. So the team has done a nice job of sourcing some really good opportunities and that delta between development versus a brand-new 100% lease building, where the rents may be slightly below market, we view as a attractive risk return.

And I think that window will slam shut when interest rates start to move. So I think it's a moment in time, and we'll be back to being developers again. But we'll keep trying to buy, but I think it's really what the markets open, and I thought it would be shut by now, but I think it will have another couple of quarters of hopefully finding those opportunities, assuming the capital is available to us as well in the market.

[Operator]

Your next question comes from the line of Craig Mailman from Citi.

[Craig Mailman, analyst]

Marshall, I just want to go back to your commentary clearly that things are taking longer. With that in mind, though, from a leasing perspective, you guys had a big first quarter for new leasing volume. Could you talk a little bit about kind of the cadence of that, and what the pipeline looks like into 2Q so far relative to the what you had in 1Q?

[Marshall Loeb, executive]

Yes. Thanks, again, I'm happy kind of a -- Craig, we actually signed more leases in first quarter this year than we did last year by a few hundred thousand. So that was good news, and it's really flat or roughly flat with fourth quarter of '23. So we've got good leasing volume. And if it's helpful, I got an e-mail from one of our guys in the field and his description was tire kickers abound, so we've got activity, and we've got, in some cases, leases out. And even one of our team members said, I used to get excited when we sent leases out, and I still do, but I'm not -- they don't -- I'm not waiting at the mailbox.

If people want space, I think the dollar commitment has gotten so big, that's what has people hesitating a little more, and there's not a fear of if I don't take this, it won't be available tomorrow. So I feel good, and I think it will be kind of like the acquisition window. I'm hopeful it turns pretty quickly. And if it does, we'll see it, and we'll move our development starts back up. But for the time being, look, it's a cyclical long-term business.

So we said, all right, let's be a little more thoughtful -- we're always thoughtful, but maybe a little more thoughtful on how we -- when do we want to be delivering these buildings. We've said, look, I'd rather wait a quarter or 2, to deliver the buildings and be a quarter or 2 early and wait. So the prospects are out there, it's getting them to pull the trigger, but it's not that there's -- during the GFC by comparison, I remember someone making the comment I'd offer more free rent, but I don't have anyone to offer it, too. There literally weren't prospects.

Now we've got people. We've got leases out in conversations. It's really getting them out of the red zone and leases signed. So that makes me feel a lot better than hey, there's just no tours, and we're holding a broker open house and no one showing up and things like that. It's -- and thankfully, again, I think we've got 2 of the 3 legs of our stool. We're 98% leased. There's no supply, so the inventory is going to be really low when things do turn here.

And we just need a little bit of momentum on the demand side. And I think that will either be kind of the global environment feeling a little more secure and/or at least thinking interest rates are finally going to come back down. And look, I guess, as a flip side, you raised interest rates as fast as we did as a country in 2022, and now you're moving into mid-2024, it starts to weigh on our tenants. It's got to.

[Craig Mailman, analyst]

And apologies if you answered this already, but the quarter, it looked like maybe Orlando and L.A. were partly contributors to that. Is this sort of a one-off kind of hit retention? Or is there something going on? Any other move-outs this year to contend with?

[Marshall Loeb, executive]

No. You broke up just for a moment, Craig, but I think on our L.A. moves, thankfully, this year, we do have 2 tenants moving around. The good news there, knock on wood, we're close -- and one hasn't moved. So we've got really kind of 2 spaces in L.A. It's definitely one of our choppier markets. And as everyone's been talking about L.A. has been messy. But thankfully, if we can get 2 leases signed, we'll backfill both of those spaces. So it's really -- the market is not great, but thankfully, it's a little under, call it, 6% of our NOI.

And if we can land these 2 that we feel reasonably confident as you can get before the signed lease comes back, then that puts L.A. to bed for the balance of 2024. And hopefully, the market has -- which we think it will, longer term, will heal and normalize a little bit before we absent a bankruptcy before we have to deal with anything else in L.A. So we lost 2 tenants, but I think we're going to backfill and one fairly quickly because one tenant hasn't even moved out yet, and we've got a good solid prospect that we're closer to a -- knock on wood, closer to a deal with.

[Craig Mailman, analyst]

Okay. And then just if I could sneak one more in. Guidance assumes a pretty good ramp up through kind of the back half of the year. How much of that is kind of already baked given deliveries and on the development side and commencement timing on leases versus kind of speculative activity that you need to hit to get to that guidance?

[Brent Wood, executive]

Yes. Craig, I will jump in. I would say 3 quarters to go, so it's hard to say it's all baked. But I will say it's not. It's not overly dependent, for example, for development starts. We have that pretty heavily weighted to the back half of the year and even further really more heavily weighted to fourth quarter. So if that was to go back, say, if we were to -- if market were to be slow, and we were rolled development starts back even more, it would have a little less of an impact than we did earlier in the year just because, again, we've got that weighted toward the back end. We've only got about 7 -- I think, 7.5% rollover remaining for this year. So we've already put to bed over half of our role for this year.

So there's obviously 3 quarters ago, there's moving parts, but it's not overly dependent, I would say, on a lot of external factors in terms of a lot of acquisitions or banking on getting a lot of development starts in the second quarter or anything like that. And our occupancy, how they were budgeting it to slowly go down through the year, there's no particular lease or large lease or 2 that you could say is really going to move those numbers one way or the other. So as Marshall said, if demand hangs in there, we feel like that we basically had a good quarter, maintained our guide and feel optimistic about what we've got out there as it relates to, again, not being dependent on any 1 or 2 big factors to occur.

[Operator]

Your next question comes from the line of Bill Crow from Raymond James.

[William Crow, analyst]

Two-parter on lease economics, if I could. How much -- you cited the wait-and-see attitude by the tenants. So I'm wondering how much of that is maybe encouraged by the tenant reps who are maybe seeing some weakness in rent growth and they're thinking the economics might get a little bit better as time goes by. And the second part of that is, have we now seen a peak in annual ramp-up rate, we kind of got up to that 4%, 4.5%. Is that starting to come down a little bit?

[Marshall Loeb, executive]

Bill, I don't -- I think it's kind of plateaued maybe. And again, maybe it's -- I'm a -- self-professed, glass is half full. I think we ran up to 4, I think we're taking a breather. I'd say it's like we're in a construction zone. You're still heading in the right direction. You just got off the freeway, you're in a construction zone. And I'm really optimistic when the economy turns, given where supply and how many private guys that had gotten into the development business have kind of been weeded out or on the sidelines, we'll have to start again. I think there's going to be a pretty big space squeeze.

So we've not seen so much as -- I don't think the tenant rep, brokers not perception isn't saying wait and see. I think it's the tenants themselves, and again, especially -- look, I've always said, our development leasing is less risky than our peers because it's so much dependent on our existing tenants. I think people are pushing expansions off until they have to make a decision right now. And that's what we're seeing.

And we are still seeing those, but I think it's kind of a wait and see, and let's push off the 50,000-foot expansion, another quarter or 2, but we're seeing the economics of the leases hold in there pretty firm other than maybe some free rent here or there, and I'll probably say L.A. is a little bit -- is a choppier market given availability there.

And we really aren't seeing a whole lot of sublease -- the things you would see during a downturn, we're not seeing a lot of sublease. We've seen some -- typically some smaller ones, and our lease term fees are really historically low this year. We're not -- the other thing you see in a downturn is people wanting to buy out of their lease. So I think it's -- we're in more of a -- we're still moving forward. Look, our earnings are projected to grow about 7.5% this year.

We beat our internal guidance in first quarter and even slowing down development starts and some -- and raising bad debt, we're -- I'm happy we were able to maintain in spite of kind of getting -- taking maybe a little more conservative approach towards the balance of the year. And look, I hope we're wrong. And people will say we're conservative historically, and I hope we're proving them right that things get better. And I like that we've got the tenant activity. I think it's -- if you're not worried about the global economy right now, I appreciate that our tenants are a little more thoughtful about it.

[William Crow, analyst]

If I could just follow up increase to the tenant or the bad debt reserve. It's pretty minor. But what's going on with the watch list? Are you starting to grow increasingly concerned? And is that specific to any industry types?

[Brent Wood, executive]

No. Bill, this is Brent. Yes, it was a little bit of a frustrating quarter in that 50% Our total bad debt for the quarter was driven by 1 tenant, a home decor sort of high-end group out of Southern California that wound up -- a bit surprisingly wound up filing for bankruptcy. And so their cash balance wasn't even that high. But when you have a tenant, you deem uncollectible, they had a almost $300,000 straight-line balance. So that was the bigger hit.

So that was 50% of the quarter total amongst 1 tenant. And then we had a logistics company and a jewelry/beauty supply retailer type company. You add those 2 to the other 1 for those 3, and that was 83%. So it just coincidentally, I think, but all 3 of those were in California. But we've only got 10 tenants that have a reserve balance that still occupy their space in total out of over 1,600. So that really hasn't changed much. Our collections remain strong.

So the uptick for the year was really driven more by those occurrences first quarter and just in our internal projections, we really didn't increase our second, third and fourth quarter budgeted amounts that we had in our initial guide. So the overall for the year really is just driven by that -- mainly driven by that one particular tenant. But there's nothing there that's jumping out to us, giving us pause or concern other than just sort of being in a capital environment with 1,600 tenants, there's going to be somebody with something going on.

[Operator]

Your next question comes from the line of Mike Mueller of JPMorgan.

[Michael Mueller, analyst]

I was wondering, what's the game plan now that you've entered Raleigh? Do you anticipate growth over the next few years coming primarily from acquisitions or building a development pipeline?

[Marshall Loeb, executive]

Mike, good question. I would say we're excited about going to Raleigh. And if you think maybe a 2-part answer, we -- you saw us this quarter we sold all but one, and we'll get the last one out the door of our Jackson assets. kind of 40-year-old buildings, and they were all well leased and have performed well over time, but they don't have the growth profile that we view a Raleigh or Nashville that we entered a couple of quarters ago as well.

And as we try to always be pruning our portfolio and moving our capital into better position for growth. We had one suburban office building left in L.A. that we were -- was a long sales process, but we were able to get that closed. Again, it was a 40-year-old, but fully leased office building in suburban L.A. We sold some land that we picked up and a portfolio acquisition.

So moving all that capital, I view it as you're kind of consistently trying to move the median of your portfolio up each quarter, and I think that's a slow process, but we're doing it. And then the way I -- we typically talk is just or think about it is where the market opportunities of late, we've -- and sometimes they find you. We felt like the acquisition market suddenly opened up and we were getting more yeses than we were historically. So we've said, let's buy things that are accretive, that are -- they've all been just over a year old, so they're very high functionality, the right part of town near the consumer. We're excited. Raleigh and Nashville both fit that state capital, large university presence, technology presence, the topography makes it difficult to build there.

So hopefully, we'll keep -- we want to grow in both markets. And if the market presents that -- usually we go in with an acquisition or 2 is a lower risk way to learn a market, to kind of learn the rents. And this is probably our, I'm trying to guess, the fifth or sixth building we've bid on in Raleigh and Nashville and not one. So even losing your offers is a good way to kind of learn the submarkets and get to know the brokerage community.

So if we can find the right land sites in both markets, and I'll be in Nashville this week actually, too, we'll turn over a lot of stones and be patient, but we'd like to grow in both markets. There the markets we're in that we'd be under allocated in a little bit, like you saw us last year in Las Vegas, where we were able to acquire some assets. We're still light probably in allocation to Las Vegas, but we like that market a lot, and we were able to grow and move to self-management and do some other things.

So that's hopefully the same plan that you'll see play out for Raleigh and Nashville is kind of 2 rapidly growing markets with a lot of promising dynamics. And if we can pull capital, whether it's from accretive uses of equity that we raised or selling really from the bottom end of our portfolio, which continues to get better, but it's -- there's always something that's the bottom end of the portfolio. So that's -- I hope that's helpful. Sorry for the long-winded response.

[Operator]

Your next question comes from the line of Todd Thomas of KeyBanc.

[Todd Thomas, analyst]

Marshall, I just wanted to circle back to the company's capital deployment initiatives, I guess, acquisitions, specifically, which I think I heard you comment that pricing you're seeing is in sort of the low to mid-6% range in terms of a cash cap rate that you think you can achieve. Does anything change for the company here as you look at your current cost of capital just given the pullback in your stock in an industrial REIT shares in the last few months? And then have you, or would you change your return hurdles at all for new acquisitions? Is that being contemplated?

[Marshall Loeb, executive]

Yes. I mean we could -- probably wouldn't change the return hurdles. I mean I think if you did that, you probably if it were you and I, I'd say we're really -- you're trading down in quality. So we'll try to maintain that long-term growth. And look, if the market allowed us, we'll grab it. But we don't want to lower the quality. We don't -- our stock price today isn't very useful in terms of issuing equity or going to find acquisitions. But it's -- but we said it's also very -- it's been very volatile.

So debts available and equity are available. They're just not at great opportunities. And look, we'll have internal growth. And look, if the capital markets weren't available, I'm glad, we have internal growth. And where we do get that window, that's where we've tried to be more thoughtful about before we had a luxury of ATM for a long time. And then Brent and the team layered in a forward ATM late last year, and we've even -- just all the different alternatives, we've talked about something we haven't done an overnight offering or a block trade and forever, but we -- it's kind of looking at new markets.

I think we should always be aware of it, and we certainly saw where one of our peers did a convertible debt offering. So there's -- you just want to know what's on the menu, and what kind of matches up. We need the uses first and just kind of see where everything shakes out in the market. And now it's been a pretty volatile market all along the way. Look, we've maintained our guidance in spite of that we'll have 100 million less in starts this year than we had last year.

And that's a hit to our development fees that we earn each year, but we think that's the right long-term decision, and that's I'm glad we're maintaining our guidance in spite of a perch going bankrupt in San Diego and some things like that, that we can kind of weather through that.

And we'll just see where the windows are. And if we need to sit on our hands on acquisitions for a little bit, we will, although -- and we did that last fall. We pulled away from a handful rather than, I don't want to worry people, we won't run up the line of credit, buying assets and just assume we can issue debt later, that's not an attractive option either.

[Todd Thomas, analyst]

Okay. And then if I could just follow up, Marshall, I think you mentioned that the accretion from acquisitions was about a dime. I don't know if that was sort of a rough back of the envelope math. But can you clarify which acquisitions that comment corresponded to specifically? And Brent, can you discuss or clarify what amount of accretion is embedded in the guidance from this year's acquisition and equity issuance that's assumed?

[Marshall Loeb, executive]

Okay. I'll take the first part and Brent, will take the second. Yes, probably I did the calculation, so it probably is back of the envelope or take it. But what I was looking back, the way we did it was I guess the first acquisition we made really probably right at a year ago was Craig Corporate Center in Las Vegas. So if you kind of starting with that one, which is really when it felt like we saw the acquisition and window opening up and then we thought about another 6 buildings. We haven't closed on Raleigh yet, but are reasonably close on it.

Those total a little under $280 million, and then our math was to take the GAAP yield since that's what we'll report and compared it to the cost, basically, our equity cost assigned that quarter when we had closing to match it. So if you take that delta between the gap yields we earn less the equity investment that we raised that near-term cost, it adds over our latest share count.

So that's probably understating it a little bit since our share count has grown over the year, and this is a lot of math to walk you through on the phone, but it adds a dime to recurring FFO ignoring any rent bumps and re-leasing and things like that. And the average age is just a little over 1 year on those buildings. So I think what we've been -- our strategy has been, look, the development window is there, but it's not going -- blazing the way it was for a few years where we were really trying to keep up with demand, but the acquisition window was open.

So let's go with that. And in terms of accretion, I guess, Brent, I would say that dime is on a full year run rate, and 2 of those buildings, Spanish Ridge that we bought in Las Vegas, we bought in first quarter and Raleigh, we haven't closed yet. So those are -- adding the 2 of those up, that's a little over $100 million of the $280 million. We don't quite have -- we won't have on a full year run rate, if that helps, Todd.

[Todd Thomas, analyst]

Yes, that does. Okay. So it's last year's -- all of last year's acquisitions plus Spanish Ridge, plus what's under contract. Okay. Got it.

[Marshall Loeb, executive]

Really, it felt like to me, maybe I should have said it earlier. It was kind of going back where we first noticed of, okay, wait a minute, something's changed in the market when we say we have the ability to close in about a month, 30 days to 40 days. We're getting yeses from buyers and our batting average in terms of acquisition offers, not that we haven't lost out on a bunch, especially on the portfolio side or the bigger dollars, our batting average got a lot better. And we said, okay, this is -- this is a new market. We weren't able to buy new buildings in kind of the mid-to-high 5s cash and maybe the low to mid-6s on a GAAP basis, those would all been 4 yields or below back in '21, early '22.

[Brent Wood, executive]

Yes. And just to finish the thought up there. Todd, agree with what Marshall said. In terms of budget, obviously, all that prior acquisitions and the budget of these couple of acquisitions are dialed into our guidance. And the only -- out of our $160 million in acquisition guidance, there's only $50 million of that that's not -- either that's not earmarked. So we've got -- we baked in $25 million in the third quarter and $25 million in the fourth quarter, just kind of acquisition placeholders, if you will. But -- so again, not overly dependent on that. So if we can do better than that, and that's beyond Raleigh and the other acquisition. So we've got a little bit dialed into the back end of the year, but not a lot. So if we were able to hit some opportunities early in the year that would be accretive to the way we've got it underwritten.

[Operator]

Your next question comes from the line of Aditi Balachandran of RBC.

[Aditi Balachandran, analyst]

Just a question regarding the tenant. So I guess what exactly are they doing to compensate for delaying decisions on needed space as you've talked about? And I guess, are they just running higher capacity through existing property?

[Marshall Loeb, executive]

Yes. I think it's more as they gain business. I think they're trying to -- they're making do they may be crammed in their space, but they're making it work for as long -- I am going to say as long as they can, but for a little bit longer, at least rather than saying, and it's usually the way it goes is and a lot of the conversations, the local warehouse manager or people like that are ready, they're saying they need more space, but corporate is putting that on hold for a bit.

So I think they may do as best they can and have that pent-up demand for space, and it's really probably get stuck at corporate saying, we're going to wait a little bit longer. So that's really the trend or -- and they've been out touring space, have -- some have leases in hand, some we're working towards letters of intent. It is just -- sometimes you have prospects that want to get in the first day of the next month, and sometimes it drags out 90 days.

So that's a little bit where it is. And I think a lot of them are just putting their expansion plans on hold until they feel a little better that we really need this space long term, and it's not a short-term need that we need the space, and that we're going to lose some business because the economy is going to deteriorate on the back end.

So I think that's where it's they need. And I'm making assumptions a little more sturdy footing on the economy than where people probably feel right now. And I think they were feeling it until the March interest rate cut went away and then it sounds like the June interest rates cut went way and things like that.

[Operator]

Your next question comes from the line of Jason Belcher of Wells Fargo.

[Jason Belcher, analyst]

Marshall, you mentioned nearshoring and onshoring briefly in your prepared remarks. Just wondering if you could give us an update on what you're seeing there? And maybe if you could touch on any leasing activity that you've seen within your portfolio that's been driven by onshore and nearshore.

[Marshall Loeb, executive]

No, I think a good question. We still see strength where -- I think Arizona, where 100% leased there Phoenix. Tucson, El Paso. It's been the best market. We've been there probably 25 years. I'm looking at Brent, he used to have El Paso for us. And probably the last 3 years have been the best 3 years of those 25 years. And really even California, where we've seen some struggles, as people talk about, I've mentioned L.A. and others and the Bay Area we've had some negative absorption there as well.

But San Diego has been stronger, at least for us than L.A. or San Francisco and the majority of our product in San Diego and where we're seeing the most strength is really the Otay Mesa area, which is really right along the border. So I think those continue to be strong. I read a stat the other day that over the last 5 years, and I think these are long-term decisions as a percentage of our imports kind of Mexico and into Central America are up 130 basis points, while China is down 250 basis points.

And then as I was kind of thinking about that. That's from 2019 to 2023, my amateur analysis would be post COVID that that's when people really got push to come up with a China Plus 1 manufacturing plan. And so I think it's a long-term trend that we're seeing play out. You certainly see a lot of the chip plants and things like that, that we fund it, so much manufacturing has gone to Dallas and Phoenix, where we want get those manufacturers, but we'll pick up the suppliers to that.

So we feel good long term about that we're going to -- that kind of San Diego through Arizona to El Paso has been really strong markets for us. And continue to be. We looked at an acquisition recently even in Tucson and we're shocked at how aggressive the cap rate. We thought we had a good opportunity, and it lasted -- I don't think it probably has not closed yet, but it quickly surpassed the pricing we thought we'd see in a market like Tucson.

[Operator]

Your next question comes from the line of Ronald Kamdem of Morgan Stanley.

[Ronald Kamdem, analyst]

Just a quick one on the guidance on the same-store NOI. So you reiterate it, but if you think about sort of the 7.7% in 1Q, there is a decent amount, 230 basis points of decel. I guess asking the demand question another way. Is that -- are you guys sort of billing conservatism? Is it sort of the demand slowdown? Just a little bit more color on sort of the rest of the year on that same-store front.

[Brent Wood, executive]

Yes. We show -- Ronald, we basically show just based on our lease-by-lease assumptions, and we roll it all up, but we basically show our same-store portfolio basically kind of just meandering down some through the mid part of the year before kind of picking back up for the end of the year. Again, it's -- that's just budgeted assumptions. Obviously, we would hope to outperform that. But when you look year-over-year, we're projecting at least or budgeting about 120 basis points of decline in same-store occupancy.

We obviously are projecting to a solid same-store end result, but that lower occupancy is just offsetting some of the prolific rent increases that we've enjoyed. And even first quarter, we were up 58%. So still seeing the strength there. But it's just -- the guys in the field, they're subconsciously or consciously influenced with this sort of what they see relative to the tenor and the pace at which they're leasing.

And so that can ebb and flow a little bit, but we hope that it proves conservative, but that's basically just as we have it dialed up. And again, I repeat, it's not really being driven by 1 or 2 known large move-outs that could sway it a lot one way or the other. It's more granular than that. So we'll take a quarter in time. Marshall, we're seeing activity. And so we'd like to think we could beat those.

But we're pleased with showing -- you think about it, showing 120 or 130 basis point projected or budgeted decline potentially in same-store occupancy yet still showing that good of the same-store strength, which, again, I think speaks to the portfolio and the rental rate strength that we continue to enjoy.

[Ronald Kamdem, analyst]

Just beyond the leasing activity. Last year, you did over 8 million square feet, 40% cash spread starting the year with $2 million and 40%. Just what's sort of baked into for the rest of the year in terms of volume and spreads. You could speak high level if that's easier.

[Marshall Loeb, executive]

I'm pleased that first quarter this year, actually, I think we're $1.6 million or a little north of that a year ago and up to $2 million. So I think we will be similar this year, and I'm really not seeing a slowdown in rents. I mean maybe -- it's a 2-part answer. I think market rent growth has slowed. But I think it's going to pick back up again pretty quickly. But I don't -- I think our re-leasing spreads have hung in there. Look, we've been fortunate to have 6 consecutive quarters where our GAAP rent growth has been north of 50%, which I never really thought -- I wouldn't have told you 5 years ago or however many years ago, that was possible.

So I feel pretty good about the leasing volume, and we're making progress on development leasing. We're about 2/3 leased or roughly are moving towards that on what we're delivering this year in our development pipeline and have those prospects. So I think leasing will be similar. It's probably vacancies are sticking around, as Brent talked about on the occupancy, maybe a month or 2 longer than they were at the peak. But that said, last year was a record for occupancy.

So part of our same-store challenge this year was -- it was great setting the record last year. It's not so much fun competing against the record the balance of this year. So -- but I think we'll have certainly a solid year of leasing. It's just off of record pace a little bit, but the best news maybe of that is when you look at the construction starts numbers and things like that and end that in our product type, the shallow bay, there's always historically less availability in it, and that will continue to be the trend. So I think it will tighten when it turns fairly quickly.

[Operator]

Your next question comes from the line of Jessica Zheng of Green Street.

[Jessica Zheng, analyst]

Could you please touch on the subleasing trends in your portfolio? Are you seeing any elevated levels there?

[Marshall Loeb, executive]

Okay. Jessica, no, really not. I mean, it's been mainly some small spaces here or there. And in most cases, maybe another way to watch for it that prospect would usually rather have a direct lease. So it kind of watch our term fees, which are low. So we're not seeing a lot of subleases. We did have -- we've got one that I would say is a little bit larger that picked up in Charlotte, but the tenant just did a 5-year renewal and their rents are pretty -- I'd say just their rents are pretty far below market, and we'll participate in the profits if they do sublet that.

So in pending the lease, we either participate or capture those rents and the prospect would always rather have a direct lease. So in a lot of cases, especially if there's any improvement allowances. So it feels certainly manageable to not out of any kind of historic norm right now within our portfolio. But we've seen it, but we've got it. It's mainly smaller spaces, absent one that I can think of. And thankfully, that one rents are pretty materially below market.

[Operator]

Your next question comes from the line of Samir Khanal of Evercore Canada.

[Samir Khanal, analyst]

Sorry, it's Evercore ISI. So Marshall, just on this -- when I look at your renewal page in the supplement, the average retention rate came down quite a bit. It was like mid-55%. And you look back 70% 1Q of last year, sort of in the 90% in 4Q. Maybe just provide a bit of color. Is that just a function of kind of what we've been talking about, tenants not committing, and how do you think that retention rate sort of plays out for the year?

[Marshall Loeb, executive]

No. I'm glad you asked and that a few of your peers mentioned retention and that was one -- at least in the near term, I viewed it as good news. And here's my logic is that if you're building a model on EastGroup or probably any of our peers, I'd say 70% to 75% retention is kind of historic run rate, a normal run rate. Last year, we -- for the year, we were 79%. And that, to me, kind of is people are sitting tight. The last time we saw retention rates as high as we had was really during COVID.

So I was -- I'm encouraged, look, I wouldn't want to run for the year at 56%. There'd be more expensive TI and leasing commissions and things like that. But the fact that we could get 2 million kind of we did more leasing volume than we did a year ago in first quarter materially and that retention rate means to me, maybe the market might be loosening up a little bit or maybe at least initially in the year, people felt better thinking there was going to be a March rate cut or at least to June and things like that. The things feel like they've gotten a little bit worse at the back end of the quarter than initially.

So we'll look at our retention rate over a trailing 4 quarters to kind of get a more measured response, and that's still on the high end of our range. It's probably come down to about 75% or 76%, which is still historically high. But when it was at its lowest was during 2021, things like that when the market was really booming. So again, I kind of hope that it doesn't stay at 80% that people start -- some of that is people moving into new spaces within our parks and things like that.

So I was -- I'm pleased with the quarter, and we'll see how the next one shakes out, but a really high retention rate is another way of saying people aren't making leasing decisions. Again, if you get a chance and you want to look on our website within -- I think it's Slide 14, roughly, you'll see that renewals, this is a CBRE chart have run historically high that they typically are in the mid-20s as a percentage of the leasing and the last 4 quarters, they've been in the mid-30s, which again is kind of another kind of signal to us that people are taking a wait and see.

So I was happy with the 56%. I don't want to do it long term, but a little bit of tenant movement is probably what we needed.

[Samir Khanal, analyst]

And then if I can just ask one more. This is more of a modeling question. But when I look at your expenses -- the property operating expenses in the quarter, they were up sequentially and year-over-year. I guess how should we think about that sort of for the balance of the year?

[Brent Wood, executive]

Yes. We're -- just a reminder, we're predominantly pretty much everything gets passed through. So we have seen real estate taxes and insurance go up. And so that certainly drives expenses up. But correspondingly with that, we're getting that reimbursed from tenants at 97%, 98% occupancy, you're getting that percentage back. There was one chart in the supplemental that I think shows the expenses rising 14% to 15%, but the income rising less than that, say, 7% or 8%. But a reminder, that income line is rent and CAM.

So a very small percent of that line item is obviously base rents, not impacted by CAM reimbursement, the CAM portion is. So if we had that income line broken out into 2 pieces, you would see the CAM reimbursement percentage increase matching up with the expense increase. But yes, for modeling purposes, it would have a de minimis impact just because if you want to say expenses are going to increase 8% or 16% if you're showing up 97% or so occupancy, then you're getting whatever percent that you say there, you're getting that back via CAM reimbursement.

[Operator]

Your next question comes from the line of Ki Bin Kim of Truist.

[Ki Bin Kim, analyst]

Just sticking with that last question. Typically, the expense reimbursement don't come back in the same exact quarter. Should we expect a bigger reimbursement rate sometime down the line this year?

[Brent Wood, executive]

No, we accrue and match that and adjust on the books to keep that, whether you're collecting or not, we accrue it pretty evenly. So I think you'll see that be very consistent through the year, and it has been. It tracks. Again, if you break CAM and reimbursable expenses with reimbursable income up it matches very closely. And again, true-up in billings at year-end and that type of thing, just being on an accrual basis, ideally, you're keeping that in tandem as you go through the year so that you don't have those big swings. So to that, I would say no, it would -- the expense on property level is really not going to have any impact on the bottom line other than the very small percent you don't collect due to vacancy.

[Ki Bin Kim, analyst]

Okay. And on your balance sheet, I mean, it's in great shape in a very enviable position at 3x leverage. That provides a significant dry capital. And typically, we haven't known EastGroup to be very active in kind of large-scale M&A. But just curious about your kind of overall views on your balance sheet, your dry capital and how over time, we should -- if we -- that change, whether that be through acquisitions or development or M&A?

[Marshall Loeb, executive]

Ki Bin, look, we've had -- the way we view it is we've probably driven leverage down lower than our target for a while they're kind of 2017, '18, '19, as we stepped up development, we wanted a little bit stronger balance sheet and the equity markets were there. Last year, we saw our implied cap rate on our equity and attractive long-term uses of it. So -- and the debt markets have been expensive. So we've leaned into equity while it was there, and we'll probably continue to do so, but pretty flexible just pending again, kind of which window opens.

I do like the fact a little bit longer term kind of near term, when the interest rates do come down, given the strength we put -- Brent and the team have put behind our balance sheet, I think we'll be able to add a fair amount of leverage at hopefully attractive rates at that point in time without needing to go to the equity market. So the fact that we've been able to lean into equity, I think it will flip to the other side, but we'll be patient on that. And I don't know, in terms of M&A and things like that, it's always -- it's harder even on the portfolios.

I know we bought the Bay Area portfolio a few years ago, and we look at those things, and we'll -- again, we'll be patient. There's always a good portion of what you look at that you like and then there's another portion that always feels like that we feel like would slow down our growth. So maybe we're being too selective, but we'll be patient, and I'm glad we were able to grow the company as rapidly as we have been without -- we try to give our shareholders a solid and certainly attractive industrial rate of return with a whole lot less risk, I believe, through a handful of ways compared to some of our peers.

So that would ideally be our goal, unless we saw something that was really attractive, and we needed to move on it, but that's just kind of in your question, that's usually not been the case.

[Ki Bin Kim, analyst]

And Brent, just out of curiosity, you guys did a sort -- well, you raised equity through a forward offering. How much more expensive is it to do a forward versus just the ATM? And why a forward, if you could just raise equity now and earn, I would assume, a higher accretive return on your money market account or something like that versus doing a forward.

[Brent Wood, executive]

Yes. I guess 2 parts. It's really not that much more expensive. It's very attractive from that standpoint. We only pay about a point. Now the forward, the final pricing varies a little bit just based on how long you take it down and dividends paid and interest expense and so forth. But the actual cost of issuing is only about a point the regular way or the forward. The thing we like about forward and you've got a good point in this environment, if we had money outstanding on the revolver, which variable rates say it's somewhere in the low to mid-6s right now, we wouldn't do forward, we would do the regular way to immediately pay it down.

We've not gone so far as to issue and take down a bunch of cash and hold it in the money market and make -- you're right, maybe a very small return there. But ultimately, we don't feel like we're raising the capital to make that spread just on the money market. But the advantage of the forward is it can be sitting out there and then you don't have the share count counting against you until you take the capital down.

To your point, it's not that punitive or you could even argue slightly accretive to do it the other way. But in this environment, I don't think one way versus the other, there's not a big difference, and we've -- there toward the end of the quarter, like to just kind of stockpiling it in shares versus just cash. But you certainly could go either way. And we'll -- again, we'll be flexible with that really more based on what's outstanding on the revolver versus necessarily stockpiling it on the cash side.

[Operator]

Your next question comes from the line of Nick Thillman of Baird.

[Nicholas Thillman, analyst]

Maybe starting a little bit with Brent here on just kind of the bad debt. You guys touched on the 3 tenants in particular, but I was just curious if those tenants were on the watch list prior.

[Brent Wood, executive]

That's a fair question. I don't -- I know that a couple of them were. I'm not sure if the perch was, again, they only had under $100,000 cash outstanding. So I can follow up with you offline on that specifically, but I don't think they were. It just was more of a sudden. If a tenant keeps up with the rent and unbeknownst to us suddenly files bankruptcy, which does happen occasionally, you really got no clarity or lens or idea that that's coming necessarily. And it was a bit that way with them. It was a bit more abrupt and not so much just the -- over time, they've always been a problem and catch up and go back and catch up. So it was a little more -- happened a little more suddenly with that -- with them. But again, overall, the watch list is very healthy and not growing at any unusual pace.

[Nicholas Thillman, analyst]

That's helpful. And then maybe, Marshall, just you kind of touched a little bit about the demand surge in '21 and '22 and kind of occupancy levels today being above historical averages. As we kind of get this more normalized demand, do you see like longer-term occupancies within the portfolio getting back to like that pre-pandemic level of, say, 95%, 96%. So it slowly will come down over time and maybe normalize around that level. Is that kind of what you guys are thinking longer term?

[Marshall Loeb, executive]

It's a good question that we've debated it and that some of our longer tenured board members would always say 95% is full as you can get in our type product that there's always just some frictional vacancy from tenants moving around. But we've been thankfully north of 95% for over a decade now and counting. So to me, it kind of said at some point, the market's just changed. And the last '22 and '23 were record years at averaging 98% occupancy. So I don't know that we'll average that high, but it feels like 97% is the new 95% that I think will stay that certainly for the near term, given -- I think it's going to take a while with demand is going to move more quickly than supply can address it.

And that's where I think it will be a lot of fun there for a little while. That's the optimist in me. So I think we may not stay at 98%, but we won't go back to 95%. And then I think there's going to be a squeeze until all the private developers can kind of raise capital, get sites tied up, get permits in hand and start moving again. And we have a number of those in hand already and should be able to move more quickly than our private peers.

[Brent Wood, executive]

And then just a quick follow-up to your watch list. 2 of the 3 tenants that I mentioned that drove 83%, 2 were on the watch list coming into the year and 1 was not. So what happened within the quarter, and like I say, really not uncommon either way.

[Operator]

Your next question comes from the line of Vikram Malhotra of Mizuho.

[Vikram Malhotra, analyst]

Can you hear me?

[Brent Wood, executive]

Yes, we have you, Vikram.

[Vikram Malhotra, analyst]

So just my first question, you talked about dollar commitments for tenants becoming just very large. And I'm wondering if you can just elaborate upon that, but also just talk about what your prediction for market rent growth is in your main markets?

[Marshall Loeb, executive]

Yes, I guess the way we've had one of the tenant rep brokers describe it was real estate decisions used to be a real -- again, we've had this great run in rents and even tenant sizes as they use their spaces have grown our average tenant size is still in the mid-30s, but that's been up, and we've got certainly multi-tenant buildings where a single tenant has come along and taken it.

So it's moved from a real estate manager decision to a CFO decision. I thought a good way, one of our brokers described it. And I think market rent growth is probably -- it's absent. The L.A. and Bay Area is still more inflationary probably this year, we'll be, call it, 3% to 4% market rent growth, maybe a little bit better in the shallow base space because there's so much less availability of it. So we've been saying if market rent growth is maybe, call it, 3.5%, for example, we're maybe 100 to 125 basis points north of that.

[Vikram Malhotra, analyst]

Got it. Just on your comment on acquisitions. If this pause or just moderation is a little bit extended, let's say, into '25, you talked about relative to your cost of capital, you're seeing deals in the initial 5 stabilizing, maybe 6 is, correct me if I'm wrong, but what's the right -- what's sort of the risk premium you need to see if you have a more protracted normalization or a pause in demand?

[Marshall Loeb, executive]

Yes. What we've acquired, and I'm trying to answer your question, it's been -- what we bought have been -- all of them have been one-off buildings. So that's where we're seeing the opportunity rather than in a portfolio. And it's been kind of mid- to upper 5s, but a going-in gap yield. So not stabilizing, but GAAP yields in the low kind of 6.25-ish kind of range, and we'll look at that. And then we'll look at what the mark-to-market is. And there have been such new buildings that there's not a lot of embedded growth.

But in most of them, there's still embedded rent growth. So what we've liked is, we're buying new building, you take the construction and the leasing risk away and getting attractive yields and they are buildings we really liked for the long term. So if that -- you kind of said what's some of our checklist, that's it, and it's -- and those have been higher yields compared to -- closer to development yields than they've historically been. A couple of years ago, we would say we were developing to a 7 and market cap rates from to 3.5 to 3.75.

So that's when it really -- okay, if that's what the world wants, we're better off being a developer than an acquirer. And right now, it feels like all of a sudden, on one-off unusual situations, failed marketing process, someone had tied up the building and couldn't close. It was a over-leveraged owner-user, I'd say a leveraged owner user. Those have been the kind of things where we've stepped in and bought or a pension fund that needed liquidity and they -- what we were told they couldn't sell their office building, so they needed to close that quarter on a new industrial building.

So those have been the type of opportunities we found. And I don't know how many are out there, but we'll keep turning over stones and I think interest rates staying higher means we'll probably keep leaning in on that opportunity and then it will move away from us. And probably in a fairly short order as soon as people can get cheaper debt and work back to a levered IRR that works for them.

[Vikram Malhotra, analyst]

Got it. Just 1 quick one if I -- one more, if I may. Just Amazon is known to be [indiscernible] 3PL demand is percolating into smaller box demand on the Sunbelt market.

[Marshall Loeb, executive]

Vikram, I apologize. We lost you on that. I heard Amazon and 3PL, but we lost -- I don't know if you were there. We lost you on that.

[Vikram Malhotra, analyst]

Can you hear me okay now?

[Marshall Loeb, executive]

Yes.

[Vikram Malhotra, analyst]

Yes. I was just wondering, Amazon is known to be taken larger boxes, million square footers this first quarter in multiple markets. I'm wondering if Amazon specifically, or just 3PL, can you just comment on that demand percolating down to the smaller box of shallow bay markets that you're in?

[Marshall Loeb, executive]

Yes. No, it's good to see Amazon back in the market. And you're right, what we read about in Phoenix and in Inland Empire, taking a number of big boxes and 3PLs. And look, I think the -- those are kind of the large boxes to move goods across the country. What we like, we like being is near the consumer as we can, almost like a retail location without the visibility. And I like the long-term trend. I think Amazon will build out around those big boxes, and they're our largest customer, but anything that speeds up the way it has been described from when you hit click or when you hang up the phone to get that service person, that delivery, that order, that's where the world's going.

So you'll need the big boxes to move things, whether it's from Mexico or Asia throughout the country and then really you're going to need that last mile delivery within Dallas, Phoenix, Atlanta, Orlando because the traffic is so bad. So I usually think the big box is kind of or the early innings and then they'll build out their network almost like a hub and spoke, but that's where we'll really pick up.

And most of them have, to some degree, but I still think there's a lot of runway on building out quicker and quicker delivery for people and probably rationalizing brick-and-mortar store count and moving to more -- depending on what the item is, quick delivery. And we've seen it in the bulky items, and I hope it can -- that what their SKU count will continue to evolve into more and more distribution or business distribution space and a little bit out of brick-and-mortar too.

[Operator]

We don't have any questions at this time. Presenters, please continue.

[Marshall Loeb, executive]

Thanks, everyone, for your time and for your interest in EastGroup. If we didn't get to your question, Brent and I are certainly available. Post, if there's any other color you want, and we'll see you. There's a couple of conferences coming up. We hope to see you at those as well. Thanks.

[Brent Wood, executive]

Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.