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Eastgroup Properties Inc
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Good morning, and welcome to the EastGroup Properties' First Quarter 2022 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.
Good morning, and thanks for calling in for our first quarter 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Please note, that our conference call today, will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
Please also note that some statements during this call are forward-looking statements, as defined in and within the safe harbors, under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and 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 including our most recent annual report on Form 10-K for more details about these risks.
Thanks, Keena. Good morning and thank you for your time. I'll start by thanking our team for another strong quarter. They are performing at a high level and capitalizing on a sustained positive environment.
Our first quarter results are strong and demonstrate the quality of our portfolio and the strength of the industrial market. Some of the results the team produced include funds from operations coming in above guidance of 15.9% for the quarter. Well ahead of our initial forecast. This marks 36 consecutive quarters of higher FFO for share as compared to the prior year quarter, truly a long-term trend.
Our quarterly occupancy averaged 97.3% up 30 basis points from first quarter 2021. At quarter end we’re ahead of projections at 98.8% leased and 97.9% occupied. For perspective these quarter in results matched our highest percent lease and is our highest percent occupied. Similarly, quarterly releasing spreads were strong at 33.5% GAAP and over 21% cash. And finally, cash same-store NOI reached a record 8.5% for the quarter.
In summary, I'm excited about our first quarter results and the positioning his gives us for the year.
Today, we're responding to strengthen 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 98.8% lease. To demonstrate the market strength our last six quarters, have each been among the highest quarterly rates in the company's history.
Another trend we're seeing is more widespread rent growth. While first quarter releasing spreads are consistent with 2021, we're seeing the impact across a broader geography.
I'm also happy to finish the quarter at a $1.68 per share in FFO and raising annual guidance by $0.12 at the midpoint to $6.75 per share up 10.8% from 2021’s record. Helping us achieve these results is thankfully having the most diversified rent role in our sector with our top 10 tenant’s only accounting for 9.4% of rents.
As we've stated before, our development starts are pulled by market demand within our parks. Based on the mark strength, we're seeing we're raising forecast to 2022 starts to $300 million. We'll closely monitor leasing results along the way and expect to update our starts guidance throughout the year.
To position us for this marketing demand we've acquired several new sites with more in our pipeline, along with value add and direct investments. More details to follow as we close on each of these opportunities.
Brent will now speak to several topics, included our updated projections within the 2022 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 a $1.68 per share. And compared to first quarter 2021 of $1.45 represented an increase of 15.9%. The outperformance continues to be driven by our operating portfolio, performing better than anticipated, particularly occupancy and rental rate growth.
From a capital perspective, during the first quarter, we issued $75 million of equity at an average price over $194 per share and refinance a $100 million senior unsecured term loan, reducing the effective fixed interest rate by 60 basis points, while the term remained unchanged. We also closed on a $100 million senior unsecured term loan with a total effective fixed rate of 3.06% and a 6.5-year term and repaid a maturing $75 million unsecured term loan with a 3.03% interest rate.
After quarter end, we closed on the private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.03% and a ten-year term. That activity, combined with our already strong and conservative balance sheet, kept us in a position of financial strength and flexibility.
Our debt-to-total market capitalization was 15%, debt-to-EBITDA ratio dropped to 4.7 times and our interest and fixed charge coverage ratio increased to a record high 9.6 times.
Looking forward, FFO guidance for the second quarter of 2022 is estimated to be in the range of a $1.63 to a $1.69 per share, and $6.69 to $6.81 for the year, a $0.12 per share increase over our prior guidance. The 2022 FFO per share midpoint represents a 10.8% increase over 2021.
A few of the notable assumption changes that comprise our revised guidance include increasing our average month end occupancy, 50 basis points, 97.5%; increasing the cash same-property midpoint from 5.6% to 7.4%, decreasing bad debt by $500,000 to $1 million, increasing development starts by 20% to $300 million and increasing common stock issuances to $250 million.
In summary, we were 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 final comments.
Thanks, Brent. In closing, I'm excited about our start to the year. The momentum we experienced in 2021 is continuing and is more widespread within our markets. Our company, our team, and our strategy are working well as evidence by the results. And it's the future that makes me most excited for EastGroup.
Our strategy has worked well in the past few years. We're seeing an acceleration and a number of positive trends for our properties and within our markets. Meanwhile, our bread-and-butter traditional tenants remain and will continue needing last mile distribution space in fast-growing Sunbelt markets. These along with the mix of our team, our operating strategy and our markets, has us optimistic about the future.
And we’ll now open up the floor for any questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jamie Feldman of Bank of America. Please go ahead.
Thank you. Good morning, everyone. So, you had made the comment that you are seeing rent growth spreading across a wider geography. I was hoping you could provide more color on how strong it is across your markets. And then can you provide a mark to market on the current portfolio?
Hey Jamie, good morning. It's Marshall. It's been nice. Last year our bottom-line kind of – and I'm talking just GAAP increases was around 31%. And we were a little above that first quarter. Last year, we had some large leases in Southern California that really helped drive that number. And while California is still a very strong market in terms of rent increases, we've seen Las Vegas, Phoenix, some of the Florida markets, Austin, El Paso, and a number, it makes me feel like it's more sustainable or it is more sustainable because it's really not kind of waiting for the mix as much as it was last year.
So, it does feel like there's, with inflation and limited land supply and it's harder to deliver the supply, that there is more upward for pressure on rents than there has been. And there's certainly more dynamic.
In terms of mark-to-market, when you kind of as we think about our portfolio, we've been running at that kind of high teens and this quarter, low twenties cash, and then the low thirties and GAAP. Kind of as we just mentioned, I don't see that fading. And in fact, I think, there's more upward pressure on rents, given that demands here today, supplies, constraints, supply chains, should feel like there is still a mess and will be a mess for a while.
And then really on the portfolio basis, we always hesitate a little bit and then just that we don't. The way we've always viewed it we don't calculate it, we've thought more in terms of really, if you think of headlights of really what roles in the next couple of years, because beyond that really if someone has a lease rolling in four to five years, the market will change a number of times before we get it. We get that. And we've really seen the market. It's been more dynamic than I've ever seen it career wise, in terms of, we've had a few tenants who have hesitate and I won't say hesitated for long, but for 60, 90 days, three, four months on a new lease or renewal. And we've been able to go back and push rents on those renewals or on a new lease.
So, that does make me also a little more positive if things do slowdown that to have the embedded rent growth we've got. And it's really; we're just trying to take advantage of each at back as they come up. We'll have about 7% of our leases expiring just over the balance of this year and really the 1% of vacancy. So, it's really in our developments where we're able to push rents as much as well if that's helps.
Yes. That's very helpful. Thank you. But you haven't looked at the portfolio and said, all right, if these rents were at market rents today, it would be X percent higher.
Yes, we don't have that exact number. And we always hesitate. I mean, we'll talk internally, and you hate. I guess we do put out projections, but always hesitate. One, it's dated. We really don't use it except in those leases that roll kind of near term. And it's such a broad estimate that there's so much in what we just released yesterday that's the accountants do, it gets reviewed, our auditors, look over it versus, Brent, me and the team.
So, we hesitate to put a number out there and it gets – it'll be dated the next day.
Okay. No, that's fair. And then you made the – well, you didn't make the comment, you just, in your response; you had said things slow a little bit. I guess on that front, can you just talk about how you think about your portfolio credit quality today and your tenant credit quality today versus prior cycles? If we do start to see a slow down, I mean, what do you think would be different this time around in terms of your occupancy and credit risk?
Yes, I'd like to think one, a couple of things and I'll thank you and your team for one of the groups that have kind of compiled the top 10 list when we look at our peers. So, our top 10, they, they came up this quarter when we delivered some Amazon buildings, but it's just over 9%, which it's running about half of what the industrial, our sector average is. So, we have more tenant diversity. And then in the last downturn, if I use COVID, we kept waiting for a downturn and really the portfolio and as a result of COVID; things slowed there the first few months, but then really picked up stream. I mean, I didn't have the nerve to do it, but we should have kept developing through the entire COVID downturn, looking back in hindsight, we would have been better off.
And last year we moved a number of our rent relief customers out of our portfolios. So those were some of the little bit lower retention. It's not always bad. And then in some of those cases, when the market is this full and we are this full it's the best time to kind of upgrade your credit quality. We've thankfully run the last five quarters, I believe, we've each had a negative bad debt. We've recovered more than we've written off.
So, that said, I mean, we would drop in occupancy, but we've been over 95%, which is what we've always historically viewed as full for multi-tenant industrial since mid-2013 and as low as we got in the great financial crisis on doing this from memory was about 89%. And I'd like to think we'd far a little better than that. And another downturn there's so much more demand than supply out there. You see it, some in our development pipeline of we've been pleased with how fast our new developments are leasing earlier in the process with that limited supply, especially for limited supply for the product type we build.
Okay. Thank you. And then, I guess, just to follow-up on that, I mean, just thinking about the composition of the tenant base, I mean, would you say it's significantly strong than prior cycles?
Yes, I would say – this is Brent, Jamie. I would say we've performed very good in the past. So, I don't know that we had a lot of need or room necessarily to significantly enhance the credit. If you look back even going back to around 2000 during the dot-com recession and then as Marshall mentioned, you go forward to the financial crisis, you go forward to COVID, we performed in line with peer groups and peers that are often viewed as well, they've got bigger tenants, so it must be bigger credit or better credit. And there has never been a correlation or a dis-correlation between our multi-tenant versus big tenant when it's come to bad debt, occupancy or anything else.
So, I think it would fare very similarly relative to the other peer groups. And we think overall, as Marshall said, would fare very strong. And I think there is a lot of tailwinds that, I think, a recession, no one is going to be completely insulated from the impacts of that. But I do feel like there's some positives that would help industrial companies like EastGroup perform above normal or better than average through a period like that. But our tenant credit quality has been good, remains good, and we've project, as Marshall said, we've strengthened it some, but it's been more on the fringes just because we've got a good credit tenant base.
Okay. All right. Thanks, Brent. Thanks Marshall.
You're welcome.
The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.
Hey good morning, morning down there. So just a question on Marshall for quite a while, for more than a year, year or two you guys have been pushing the occupancy and you always had previously spoken about expecting a drop off it. It sounds like you're not expecting it. And certainly 20% cash spreads sounds pretty healthy. The reason that in your view that the occupancy is just staying north of 97, it doesn't sound like you're shy on pushing rents.
So is that just lack of any space for tenants to go or the tenants are figuring out ways to use the existing warehouses much more efficiently, such that normally when you push rents, you'd see some churn, but now maybe just because of issues, whatever those issues are just relocating or finding space or whatever the tenants are using their assets more efficiently, which means that you may have even better pricing power going forward.
Yes, I think, it’s a good question. Maybe the answer is yes. So, I've got kind of the fork in the road. And there is less space available, less space out there. And I think we're benefiting from that, and our peers are benefiting from it. And even what is getting delivered and we deal with that, the land is more expensive, the steel, the roofing material, the electrical panels, all those things are more costly and to take longer to be delivered to complete. So, that's hindering supply.
And that said, I do think our tenants I'm sure, especially, with rising rents are always working to find ways to kind of maximize their efficiencies. In the space, I think, will kind of as we project ahead or some of the things you or think about, I think, we'll see more and more with the labor shortage, more and more robotics within our warehouses. It'll probably start with the larger tenants that a little more well capitalized and can afford to make those type investments.
So, I think there will be more upgrades within the space, which I should make those tenants even stickier too, because they are a little more heavily invested in our space as well. And I think as companies move to 3PLs and different things is you try to ring cost out of your own system we’re a cost effective, efficient box compared to brick and mortar retail, and other types of distribution.
So, I think the more people can utilize industrial space, and their supply chain, and their omnichannel kind of marketing, the better off they will be because our gross rents are so much lower than some of the other service center or traditional brick and mortar retail.
Okay. And then the second question is you talked about the broadening of the rents, which is great to hear. Curious, are you seeing – is truck parking helping to drive some of that expansion of rent growth, such that as communities push back on having trailers on road side and shippers and others try to have more product, in stock versus port delays or supply delays, are you seeing a benefit more broadening from truck parking or is the rent growth that you're talking about purely from the actual box itself across your market?
Yes, it's really the box itself, that's where we're able to push the rents. That said, when we do our developments or one of the things we like, we bought the buildings at DFW Global, which was really adjacent to the Dallas, the airport, DFW Airport, cargo terminal. It's got a lot of trailer storage there and in parts of LA. If we can work trailer storage in, it certainly lowers our coverage ratio on a site, depending on where that extra land is. But the demand for that continues to go up from our tenants. And if the space works, especially the national tenants, if we've got space that works and they need the trailer, storage, rent is less, it's down their priority list on decisions. If you have the right space, what we've seen is companies will pay the rent they need, because it's a small item within their overall chain versus, labor and how the space works for them.
So, we'll continue to add trailer storage, or we look at it as being very attractive. When we look at acquisitions or value add, if you have that ability to either have car parks or trailer storage, that's – if the tenant needs it needs it, it allows you to push rents that much harder.
Okay. Thank you.
Sure.
The next question is from Manny Korchman of Citi. Please go ahead.
Hey, Chris McCurry on with Manny. Just a quick question. I noticed that lease termination income was up in the guidance and is now expected to be up year-over-year. Could you just give us a little more color as to what drove the increased termination expectations?
Yes. Hey, good morning, Chris, Brent here. Yes, we had – that base consists of some known vacates. We had seven terminations during the quarter. Three of those consisted of the most of it, one of them was a $0.5 million early termination fee, but almost in every case five of the seven, in fact, in that represented almost all of the termination fee income were situations where he had replacement tenants that in hand and basically negotiated an early termination fee and then replaced with a back existing tenant. So that in those cases, we were getting a higher rent back feeling for more term. And then with the term fee, you're getting excess income for that short period of time.
So, it's ones where our guys in the field were more coordinating, working with tenants that needed more space versus tenants that maybe were willing to let their space go. And then you negotiate the deal and come out on top of it.
So, it was just – several of those, this quarter, they were very strong and beneficial. And so, we executed on those. We typically don't budget much in the way of termination fee income if it's not known just because they can be cyclical and can vary quite a bit, quarter-to-quarter. We certainly expect more term fee income, honestly, over the course of the year just from doing business. But not quite as strong as that quarter, that was a little bit larger than normal quarter. Although, again in all those situations, it was a net positive for the company and again, something that we reacted to and basically helped to conduct on our end.
Got it. Yes, makes sense. And then could you give us some color on the Fort Lauderdale sale, specifically the strategic rationale behind selling in Florida, was the pricing attractive enough to leave this market, or could you just give us some of your plans for the Florida market?
Sure. I guess Chris, it's Marshall. We certainly like the State of Florida. And then as we kind of zero in like the state a lot and like South Florida and so hope, and really plans were continuing to build out our Gateway Park there, we bid on some other land sites and other opportunities within our pipeline within South Florida. It was really more asset specific. For this it was two buildings about 55,000 square feet, a really more service center, a little more office product that we had acquired in the mid-90s.
Similar to what we sold and it was on a ground lease, it was similar to what we sold in Phoenix early in the year as we're kind of always, I think, a good time to be a seller where the markets are, and we thought this isn't an asset that's going to really drive our growth or perform the same level as the balance of the portfolio, nothing wrong with the asset, but it didn't have the dock high distribution. That's our kind of bread-and-butter type products.
So, we said, all right, this is a good time to prune this asset. And we've got, I think, we should always be doing that a few more in the pipeline that we're working on, not a lot, but we'll keep managing the size of our Houston allocation. We like that market too. And it was really asset-specific much solely rather than market-specific here. And so, we'd like to be bigger in South Florida, but we were willing to part with this asset.
Got it. Thank you.
You're welcome.
The next question is from Vince Tibone of Green Street Advisors. Please go ahead.
Hi, good morning. Could you provide a little bit more color on the exact contributors to the increase in cash same-store guidance? It looks like the changes in occupancy and bad debt assumptions drove about half of the 180-basis point raise. What drove the rest?
Yes, it's Brent. It's really rent increases. They continue to exceed our expectations in terms of what we're budgeting in. And then you saw, we increased our occupancy guide on same-store a little bit as well. So, it's really the increase there. Obviously the first quarter beat was quite a bit bigger than we had budgeted in, so that 25% being already “actual and done”, that unwound some bead and raised right there already.
So, it's really in those factors. Again, you see the occupancy increasing the rents greater than normal, but outside of that, we don't report term fee income in there. So that was not a component of it. It's just really strong operations and across the Board, as Marshall mentioned, there is more and more depth to it although the California markets continue to be just eye-popping from a rental standpoint. But it's just one of those deals, Vince where we you add it all up and then the sum of it just becomes a little greater in total than initially anticipated or expected.
That makes sense. Just really quick follow-up on that. I mean, do you think the expenses could contribute the same property to this year? Just looking at the first quarter, expense growth, lag, revenue growth, and that kind of that a benefited same property NOI, let's say about a 100, 110 basis points in the first quarter. Like, is that something that's going to persist or is that just like a timing thing?
Timing within our same store, I don't say all of them, but 99% plus of our leases are triple net and with full occupancy. So, we managed the expenses because they certainly flow through to our tenants, but it really won't – I like where you were heading, but it really won't help us with our same-store results as much as Brent said, just higher rents than we thought we’ll be getting the markets moved. We expected the market to move up, but it's moved faster than we anticipated. And we've had less vacancies than we anticipated, especially in first quarter, which is usually a little bit of a drop off after the beginning of the year.
Got it. Thank you. One more for me. I mean, could you just discuss any recent trends you are seeing in the transactions market for light industrial product, like specifically, how do you think higher rates have impacted bids from the private players you are competing with
Maybe a two-part answer, what we're seeing on the type of products we're we typically chase, we've been hoping cap rates may rise, and seen nothing to date. We just lost out on a package yesterday, or a couple of buildings that we were bidding on, that will go into low threes. And the reasoning we're hearing from brokers that even though debt may be up, there is so much of the acquisitions or equity, a large portion of it is dry powder in the form of equity. And then really probably the primary reason again is people are viewing cap rates much more so as a point in time, and that your cap rate may be low going in, but where rents are moving especially if you've got some near-term role, we used to view near-term role as a downside on an acquisition. And now it's upside because the market's moving up so quickly. So people can – are underwriting and accepting kind of the lower cap rates. But knowing as soon as those leases start to expire, they get a chance to that.
The one area and I'm kind of repeating what one of the brokerage groups were telling me where they have seen cap rates come up and it makes sense or the long-term bond-like projects where it's a triple net single-tenant asset on a long-term lease, where you don't have a chance to take advantage of a rising market. And I have heard, I don't know that, I don't believe it's anything dramatic but that those cap rates are starting to creep up and I would expect – expect higher interest rates, and I would expect those would continue to affect those type of assets a little more predominantly.
Great. Thank you.
You're welcome. Thanks.
The next question is from Connor Siversky of Berenberg. Please go ahead.
Good morning out there. Thanks for having me on the call. Just want to bring this topic back from one of the earlier comments. So are you already seeing a sustained push to roll out more automation within your facilities? And if so, what does that cost look like from the tenant perspective? And then what could that look like for EGP in terms of potential tenant improvement costs?
It really, good morning, Connor, it's Marshall. It really varies by. It'll really be tenant driven. So we're seeing some of it, and probably the most extremes we just delivered two buildings for Amazon and they've – they put a lot, and we've seen that the robots in the sort facility. I'm estimating, they've got about as much in the building as we do probably at this point, especially between the – and some of the tenants will have the racking and conveyor systems and things like that. So we are seeing more and more of it. It's really tenant driven where I will say where we've been impacted or where we're feeling it is as we build the buildings, especially in markets like Las Vegas, the Phoenix market that makes sense.
Air conditioned warehousing where people are competing to hire employees and we view it as a long-term improvement to the building. We're seeing more and more than if there's any kind of light manufacturing going on, we've added more of that. It really hasn't impacted our tenant improvements as much, but maybe as we're retrofitting a space or a new development, we've had a little more HVAC in the warehouse. And that, I think depending on how they use the space and how many dot doors are open at any given time, that's a kind of like additional truck court parking and that's a trend we've seen.
Okay. That's interesting. Thanks for the comments there.
And then just thinking about the aggregate development pipeline in the United States and understanding that the current demand environment is strong enough to still be able to push rents in these development projects. I mean, do you have a sense of when it would make sense maybe to dial back development activities as that supply demand dynamic becomes more elastic?
Good question and thought, the way maybe that this helps the two ways we viewed it or one when you look at the supply numbers, I would say a general rule of thumb for our markets and in some cases it's been less as – I'd say 10% to 15% of new supply in Dallas, Atlanta picked the market. Houston, Phoenix is really comparable product that we might compete with it. By the vast majority of what's getting built especially with rising cost, I think construction cost, that's pushing people more and more to develop big box and not really kind of move away from our area of the playground. So we like – like that impact.
And then as we think about our own development pipeline, and I don't think I'll put it on me. I don't think I've articulated it to the street as well as we could, but really our development model will, because it's within a park and because it's really, say Buildings 2 and 3 leased up well, will let the park really pull the next project. And so that the worst way we could do it would be Marshall and Brent, read an article or see something on the news and decided to slow down the development pipeline that I like, where we've really got a self regulating development pipeline.
If what we're building within our park is we leasing, well we'll add a little more inventory to it. We won't build out a park all at once or anything like that, and, but by the same token if what we just delivered is leasing up slowly and or rates below what we expect. We certainly won't construct – can construction on the next project. That's where really if you say, and I'm glad we were able to up our development starts this year, but it didn't come from corporate. It came from if you look down our development schedule, how many buildings are 100% leased or fairly well leased. And the lead time to getting the supplies to deliver the new building, that's probably where our stress is.
It feels like it's more stress when talking to our teams in the field and getting – getting the land and getting the things built on an affordable price, then leasing right now. And so we'll kind of keep going until the market tells us to slow. And we've always said one of the – this is helpful, a kind of a canary in the coal mine to watch for is as things roll into our portfolio there can be any given project that's not a 100% leased or 90% leased. But if we start to see a number of those then the market slowing down and we'll start to tap the brakes on development. And we have done that in certain markets over the time, but right now the market feels good and we like the spreads on what we're delivering.
In the first quarter we delivered about $85 million, $90 million in two projects that are seven yield and the markets probably half that today. So I like that kind of value creation, new FFO. We don't have to have the 100% profits, but I'll sure take it in any one quarter. And we'll just kind of keep going until the market tells it's slowing down, but we're actually seeing it speed up right now. We're seeing more activity earlier in the development process than we did a year ago.
Got it. Appreciate the color. I leave it there.
Sure. You're welcome.
The next question is from Michael Carroll of RBC Capital Markets. Please go ahead.
Yes, thanks. I just wanted to touch on your acquisition strategy. I mean, it looks like the company completed a number of strategic deals this quarter or year-to-date focusing on acquiring buildings and adjacent land sites. I mean, I guess so you could build a bigger campus. I guess is that a fair statement? And does that allow the team to be more aggressive bidding on these types of projects and increasing likelihood of you winning those deals?
Yes. I guess I'm trying to follow and Brent jump in. Ideally on our acquisitions, I would say if it's adjacent land to its successful park, that's our ideal preference. And when we finish up a park, if it's the land around the corner, so to kind of keep a good, simply put keep a good thing going where the other side and we've seen that window, I won't say close, but just about closed. We were able to buy some vacant, newly constructed buildings some kind of local regional developers and get what we felt like were good returns, taking the leasing risk on in those projects. The market doesn't feel as afraid of vacancy as it used to, or probably in a lot of cases as we think it should. We bowed out of some bidding processes on value ads, but that's really our preference there.
And if it's strategic within an existing market or like you say around the corner, we bought two of our kind of core acquisitions. The only two we made last year earlier are two of them were really adjacent to buildings we owned and were somewhat off market. Everything seems to have a little bit of competition right now, but if it's not a fully marketed mass email flyer, those are the hardest most competitive things to buy. And as we've kind of kitted us having a check book is not a competitive advantage or differentiator in the market. So we certainly chase those and we lose an awful lot of those as well.
And then can you provide an update on how you're kind of viewing Houston? I mean, obviously the market has kind of firmed up I guess across the board. I know, I think earlier you kind of highlight that you still want to rationalize your exposure there, but in March you did acquire a few buildings and some land sites. I mean, I guess how should we think about that exposure going forward? I mean, it still seems like you kind of like the market in your position there?
Yes. We do, that's a fair. I think we've got a good team in Texas and in Houston. Kind of said let's keep creating value, what we're developing and the value add we acquired the one [indiscernible] returns and at the same time sell some core and stabilized assets in Houston. And we're, I think we're down about 70 basis points from a year ago; I was looking at in terms of our Houston as a percent of our rent. So that continues to drift down and it should.
There's some couple of Houston assets we're looking at exiting later this year. Market permitting so we'll – we'll grow elsewhere, maybe a three-part answer. We continue to growing on other markets. I don't want to just – I don't think it makes sense for us to shut the spigot off in Houston if we can develop and create value, but maybe it's a little bit build one or two, sell one or two in Houston and let the rest of the portfolio grow.
And I even think as much activity and as strong as the Dallas market is, and if I go out a couple years, I would expect Dallas, we're doing a lot in Atlanta, it was a later start, but I think Dallas will overtake Houston and become our largest market down the road. And it's not a negative on Houston so much as all the act as big as the Dallas market is and all the activity we've got going there.
Big, great. Thanks Marshall.
Sure. You're welcome.
The next question is from Dave Rodgers of Baird. Please go ahead. Dave Rodgers with Bard. Please go ahead. Is your line muted?
We'll move on to Ki Bin Kim of Truist. Please go ahead.
Thanks. Good morning out there. Just wanted to go back to your development, you've done some very favorable leasing and improving the timelines and moving up projects this quarter. As you do that and as the capital at risk comes down, what's the likelihood that we can see your development or guidance move beyond $300 million of start this year?
I hope we do. Good question. Good morning and I hope we do. Look we were, I think last year we did, we were $340 million in starts as we kind of started the year, if it helps, but we had the $90 million Amazon kind of whale in the system that we delivered in first quarter. So I thought we would drop this year, but really as you point out and pointed out in your piece the activity has picked up early and that's really what's pulled or all of a sudden I'll get a phone call and it's like, okay, we were under construction and I lease the building. And now I'm scrambling to get new inventory because if there is someone out there looking for 50,000, 80,000 square feet, we don't have the inventory.
So the tenant rep brokers are going to move on to the next project down the road. So I'd like to think where the market is today. I mean, that the demand is there that we could bump the $300 million higher. The start number higher, I think the caveat to that is the other, what's holding us up and what's holding the market up a little bit is the steel deliveries and all the other things that there could be some projects especially as we get later in the year that we'd like to start and the markets there, it will be where in line can we get, because you hate that. We could start it, but then you don't want the GC to stop and wait for, and every week they were getting one of our construction people, there's a new delay and some portion of what goes into our building.
So just trying to get all the parts at the same time is much harder than it used to be. And building deliveries for forever were about six months and now they're up to probably eight to 10 months. So that could be a – some of it could just be bottlenecks, but those will – but then they'll turn into 2023 starts here than 2022. But we don't – we've still got time, don't sense that yet, I'm optimistic maybe the 300 goes up, but there is some level later in the year where we'll get pushed to 2023.
And in terms of your land bank, you have about 11.3 million square feet that's developable. What does that translate to in terms of the total dollars that are deployable? So I think this is one of your, kind of key strengths that you do have very favorable and large land bank as the size of your – as it pertains to the size of your company? And second to that is, are most of these sites entitled and ready to go?
Most everything on our schedule is, we get the gut in the field will say their jobs to have the permit in hand for the next building. So those are zoning entitled, ready to go. We're usually we'll permits will get, will expire so we'll pull permits for the next couple of buildings within the park, but those are ready and then the other side, I would say too. What you see on our schedule, it's almost like an iceberg at any given time we're pulling from this land bank quarterly, but there is also if we are doing what we should do, there is another handful of land, what's coming in to the land bank. What you are seeing is what's close not what we have under contract that we are working through that zoning and permitting and moving towards closing to.
Yes. Ki on that schedule that's about 6.6 million that we haven't actually put placed into under construction and lease up that 11 million number includes those items that including the ones that are already underway. But if you look at that 6.6 million of potential, based on a per square foot of 150 to 200 vary below or above that potential where you are, but you're looking at 1 billion to 1.5 billion half of cost. And as Marshall alluded to earlier we've been running 75%, over 100% in value creation or return. So you may be looking at 2 billion to 3 billion in terms of total value. So I think you're good observation there, Ki and that continues to be where we've created the most value basically doubling our money via the development pipeline. And so the guys especially recently done a really good job back filling some markets with some nice wins on the land inventory side. And as you know, they're out there daily and perpetually working on that. So it's tough markets but those guys are seasoned and continue to bring good land inventory into the bank.
Okay, great. Thank you.
Welcome.
The next question is from Dave Rodgers of Baird. Please go ahead.
Good morning, Marshall and Brent. You've covered a lot already, but I was curious about when you're underwriting acquisitions and actually closing on those transactions, how do those compare to replacement costs? And I guess is a pretty prolific developer, how do you guys think about closing on acquisitions and kind of this rising inflation environment and of paying above replacement costs, but still replacing an asset much quicker and getting it in the cash flow stream. Do you spend a lot of time thinking about that?
We do and I would say it varies. I'll pick like the project we bought in Hayward this quarter, and we're actually haven to win because lands moved up so much that it's hard to get above replacement cost and some of these markets. So we do look at that and where I was going with Hayward, there's simply no land around us. And in fact, some of the existing supply and some of our markets is getting repurposed to life science, creative office things like that. So we certainly I'm less concerned or we are a little less concerned about replacement costs, where there's no available land. Well, I think we would really be more of an impact and it's not where we typically want to play is on the edge of town. If you were building a big box and there were three or four that were sitting there vacant, or things like that, where it's more of a commodity product that's where the replacement cost – cost would really scare me.
The other thing where we've probably struggled more with of late or certainly in our acquisitions is looking at. We use current market rents. I know some of our peers do the same, but there's certainly more private peers out there that will use projected rents. And so far they've projected to be more accurate. So it's hard to compete with someone who's raising rents, but at some point we can back into whatever the rent we want. So we've said, let's look at current rents and what's our yield.
And then do look at what that per square foot, but there's certainly been some land price trades and even some – and certainly industrial building trades that what I used to think of as office buildings are even higher. It's pretty jaw dropping where land prices at $70, $80, $90 a foot for industrial and buildings trading for, if there's one in LA that traded for recently $600 a foot, which I never, having been in industrial longer than I want to add up over the years that those are numbers I didn't think I would see.
Thanks for that. And then just one follow-up. I think when we talk to some of the bigger box companies, they'll say land at market today maybe 50% of overall construction costs and development. You build a different product; does that not change at all for you guys?
Certainly would be probably accurate the further out west almost you go. I mean, California it would be those type numbers. It's probably still more 25%, 30% for us on average, but you're right and there's any number of cases. By the time we'll tie the land up, try to get as far through the permitting and zoning and title before we can close that, for example, I'll use it, and I believe it's closed, at piece we closed in Phoenix. There's a comp at what we viewed as a slightly lesser location that just traded, someone flipped it for about twice what we paid. So we're hearing numbers, by the time we've closed that the land value if we were private you'd be tempted to sell the land rather than develop it because values have moved that fast on industrial land.
And I guess the other thing, it certainly speaks that there's more industrial developers out there than there were a handful of years ago and reading some of the market reports, we see it in Atlanta and Dallas and some of the markets what's the – just the size of the industrial market is further out there. I believe it was CBRE and Dallas included three new submarkets this quarter. So people are getting further and further and further out of – out of the market.
What was it in the Dallas construction? The number that jumped out to me in their report, just over 70% of the construction is in what CBRE called edge markets, which means you're pretty far out of central Dallas. And that just shows how limited land supply is and how I think that zoning and entitled and permitting is getting tougher because people see the number of trucks and things like that. So there's kind of that everybody wants their delivery, Amazon Prime in an hour but nobody wants it to originate from their neighborhood sometimes.
Sounds like a good thing for you guys. So thanks, Marshall.
Yes. It's just harder when you're developing it, as an owner, yes, as a developer, no.
The next question is from Todd Thomas of KeyBanc Capital Markets. Please go ahead.
Good morning, everyone. This is [indiscernible] on for Todd. Just broadly about demand. I know a lot of demand for industrial cyclical, but we also have a lot of secular demand stemming from e-commerce and the refining of the supply chain is everyone seemingly playing catch-up. Do you think in the event of a broader macro slowdown or recessions, that users would be more active in absorbing space relative to maybe what we've seen in prior recessions?
This is me speculating and I'm an optimist. So with that Safe Harbor disclosure I would say, yes, I think so because I think – I think we're a low cost flexible alternative as we kind of mentioned a little bit to using kind of more service center or flex product and especially brick and mortar retail. So I think as things slow down anyway people can ring cost out of their supply chain that will lead more and more towards industrial. And we still think given the supply chain that inventory levels are low and that people that want to have just in case inventory but the supply chain is not really allowing that yet.
So I think that will lead that, that's still coming and then the – there's that handful of good secular reasons we get, we kind of hint at that we're excited about our portfolio. But I think with the supply chain bottlenecks, the port bottlenecks in China and LA and Long Beach and tensions with China, I think it's a longer term play but there'll be more manufacturing brought back to the U.S. and/or near shoring and we may not end up with that manufacturer. That's typically not our building, but we'll benefit from the suppliers near that manufacturer.
Yes. And I would just add to that too, already that thing that saw report the other day, that they are like where e-commerce as a percentage of retail sales that accelerated obviously some during COVID, but like from the mid-teens to 19%, and that projected the increase from 19% up to about 32% over the next 10 years. So 68% increase projected over the next 10 years relative to that. So, and certainly if that happened, I think that would be another tailwind over that period of time. I think that would equate to more absorption of our type space. So we feel like there's as Marshall said, some tailwinds there that would be totally insulated from a slow down, but feel like there would be enough momentum behind it where it wouldn't totally way away hopeful.
Got it. Thank you.
Sure.
The next question is from Ronald Camden with Morgan Stanley. Please go ahead.
Yes, [indiscernible] for Ronald Camden. Just maybe a follow-up to previous comments and the questions for me, I think you mentioned – during the COVID you kind of regret stopping your – a lot of the starts that you had previously planned just because of demand that came in and maybe that was more than expectations. Kind of as I think about inventories building today and the macro backdrop. You kind of see yourself in the position where starts – won't necessarily stop today because you think inventories could build kind of, I regardless of where retail sales go or where the general macro backdrop is?
They could, and it was really more again, maybe too far where I was saying, and I think, people would have thought, we were crazy, I was crazy if we had kept building during COVID and it's kind of one of those in hindsight's 2020 how short the pause was in industrial. And we could have gotten a lot of materials really cheap. We did tie up a bunch of land early on during COVID, which I'm glad we did. We kept that part going, but not the starts.
And I think there's a slowdown, again, I would probably still, we really look to the fields and if that demand is there, we try to not regulate it. If it's there, we'll add a little more inventory. I guess I view it as pretty, which I like sounds cliche, but free market demand when the demand is there we'll go as fast as the market will let us in terms of building out buildings and finishing up a park. And by the same token, if we're struggling to get projects leased up, we're going to slow down too.
So, I'd like to think if there is a macro slow down, but if people still won't just in case inventory and things like that, or you've got people that are willing to move forward with leasing, we'll move. I think COVID was such an extreme example, even though it would have been the right decision in hindsight, it would've been a crazy amount of risk to take on to take that for something that none of us had any experience like a pandemic.
So, I think sitting on our hands, it didn't harness, it's just in hindsight, we could have kept developing and would have looked smart, but we would have been – I think our risk reward would've been outsized on that.
The next question is from Vikram Malhotra of Mizuho. Please go ahead.
Hi, good morning. This is Amit [ph] in for Vikram. My question is, are you seeing any news sources of tenant demand?
There's always – yes, I was trying to think of who we've of late there for a while, and it hasn't gone away but online pharmaceutical fulfillment was a little bit of an atypical type tenant. And then we've seen more energy-related, but more green energy-related where it's someone converting trucks and buses to electrical-powered or they are making batteries and things like that. So, I don't know that it's not necessarily new-new but maybe newer within our portfolio that a number of startups and you are working through the credit and things like that with those. But we've seen a handful, it's not a huge amount of our portfolio, but I'm thinking of new and creative uses. We've seen more and more of people within green energy taking space, whether it's producing batteries or doing different things like that.
Got it. And have there been any changes to your watch list from the last quarter?
Yes, this is Brent. There have not been, all of our top ten are current. And as you see from our bad debt or like thereof, our collections continue to be very, very strong. We had yet another, I guess, you would say net positive bad debt, meaning we had more recoveries of previously written off of accounts than we did with, with newly reserved accounts.
So, our collections remain very, very strong and our watch list only has a dozen or fewer tenants, and you are talking about out of a customer base of over 1700 customers. So, thankfully that continues to be very, very strong.
Got it. Thank you.
Yes, sure.
This concludes our question-and-answer session. I would like to turn the conference back over to Marshall Loeb for closing remarks.
Thanks everyone for your time this morning. Thanks for your interest in EastGroup. We're certainly available for any follow-up questions, comments, and look forward to seeing of you at NAREIT here about just over a month. Thank you.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.