Eastgroup Properties Inc

NYSE:EGP

Earnings Call Analysis

Strong Quarterly Performance Amidst Market Challenges

In the third quarter of 2024, EastGroup Properties showcased its considerable growth potential, reporting a Funds From Operations (FFO) per share of $2.13, marking a notable 9.2% increase from the previous year’s $1.95 (excluding involuntary conversion gains). This success largely stems from adept operational execution, efficient lease terminations, and a reduction in general and administrative expenses, which collectively underscored the resilience of their portfolio in a fluctuating market.

Robust Guidance and Strategic Adjustments

Looking ahead, EastGroup revised its FFO guidance upward for both the fourth quarter and the entire year. The forecast for the fourth quarter is now between $2.13 and $2.17 per share, while total annual guidance is set at $8.33 to $8.37, reflecting a $0.02 increase from previous estimates. These projections imply a 5.9% and 7.9% year-over-year increase for the quarter and the year, respectively, excluding insurance claims. This optimistic outlook is backed by their plan to increase capital proceeds, which are projected to reach $780 million for the year, with about $275 million still to be executed in the fourth quarter.

Portfolio Strength and Diversification Efforts

EastGroup's portfolio remains well positioned, boasting a high occupancy rate of 96.9%. Notably, same-store Net Operating Income (NOI) grew by 5.9% in the third quarter and 6.3% year-to-date. The company effectively reduced dependency on major tenants, as the top 10 tenants now account for only 7.5% of total rents, a decrease of 70 basis points from a year ago. This strategic diversification is expected to stabilize earnings amid varying economic climates.

Navigating Market Conditions and Capitalizing on Development Opportunities

Although development decisions are now more deliberate due to changing market conditions, EastGroup is adjusting its 2024 development starts forecast to $230 million. The ongoing decline in the construction pipeline, now at its lowest since 2017, should create tightening market conditions by 2025, presenting further opportunities for rental increases and development. The company aims to leverage its experienced team to capitalize on this expected demand surge ahead of private competitors.

Challenges with Bad Debt and Tenant Stability

Despite strong operational metrics, EastGroup is cautious regarding bad debt, with 70% of arrears attributed just to four tenants. Most challenges stem from California-based properties, where local regulations complicate tenant transitions. However, overall collection rates remain solid, and the portfolio benefits from diverse revenue streams that should mitigate systemic risks in the current economic environment.

Pursuing Strategic Acquisitions

EastGroup is eyeing several promising acquisition opportunities, such as the Hays Commerce Center in South Austin, which consists of two fully leased buildings. These acquisitions are intended to be immediately accretive and enhance the long-term growth trajectory of the portfolio. The company is currently in negotiations to finalize several projects, positioning itself strongly in an acquisition market that is becoming increasingly competitive.

Potential Long-Term Growth Drivers

Looking further into the future, EastGroup's management expressed optimism about secular trends such as population migration and logistics evolution that could drive increased demand for industrial spaces. With construction costs declining and limited new supply, there lies a strong potential for a renewed spike in rental growth, especially if greater business confidence emerges post-2024 elections.

Earnings Call Transcript 2024-Q3

[Operator]

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

I'd 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 third quarter 2024 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call. 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, including our most recent annual report on Form 10-K for more detail about these risks.

[Marshall Loeb, executive]

Thanks, Keena. Good morning. Before sifting through quarterly results, I want to express our concern for everyone in our markets affected by the recent hurricanes. Our team and their families are thankfully safe and I graciously appreciate their quick professional response to help our tenants get back to business as usual. The buildings themselves, meanwhile, had limited damages, especially considering the strength of these storms. Operationally, I want to thank our team for another strong quarter. They continue performing at a high level and finding opportunities in an evolving market.

Our third quarter results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial markets. Some of the results produced include funds from operations rising 9.2% when excluding involuntary conversions. 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 96.9% with occupancy at 96.5%. Average quarterly occupancy was 96.7%, which although historically strong, is down from third quarter of 2023. Quarterly re-leasing spreads were 51% GAAP and 35% cash. Year-to-date results are slightly higher at 56% and 38% GAAP in cash, respectively. In cash, same-store NOI rose 5.9% for the quarter and 6.3% year-to-date. Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 7.5% of rents, down 70 basis points from third quarter 2023. 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 year-to-date and are optimistic about the prospects for an improving economy along with a lack of new supply. We're focused on value creation via raising rents, acquisitions and development. This allowed us to end the quarter at 96.9% leased and continue pushing rents throughout our portfolio.

On the acquisition front, we're excited to acquire Hays Commerce Center consisting of 2 new 100% leased buildings in South Austin. The property is near our Stonefield development, allowing us greater flexibility long term. We have a couple of other probable acquisitions we're working on, and we'll happily share more detail when timing permits. Overall, our acquisitions are guided by 2 criteria: one, to be immediately accretive; and secondly, raising the long-term growth profile of the portfolio, thus creating NAV per share.

As we've stated before, our development starts are pulled by market demand within our parks. Based on our read through, we're adjusting our 2024 starts forecast to $230 million. While we signed several development leases during the quarter and have promising prospect interest, decision-making remains deliberate and prospects are focusing later in the construction process.

In terms of starts, we ultimately follow demand on the ground to dictate pace as we always have. Longer term, the continued decline in the supply pipeline is promising. The construction pipeline is at its lowest level since 2017. Assuming reasonably steady demand, the market should tighten in 2025, allowing us to continue pushing rents and create development opportunities.

As demand improves, our goal is to capitalize earlier than our private peers on development opportunities based on the combination of our team's experience, our balance sheet strength, existing tenant expansion needs and the land and permits we have in hand.

Brent will now speak to several topics, including assumptions within our updated 2024 guidance.

[Brent Wood, executive]

Good morning. Our third 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 our guidance range at $2.13 per share compared to $1.95 for the same quarter last year, an increase of 9.2%, excluding involuntary conversion gains. The outperformance was driven by solid operating results, successfully negotiating 2 lease terminations and lower G&A.

From a capital perspective, we continue to access the equity market. During the quarter, we directly issued common shares for gross proceeds of $30 million, several forward share agreements for gross proceeds of $50 million with an additional settlement of $50 million after quarter end. Currently, $204 million in forward agreements are available for funding when needed. Collectively, the shares in the third quarter transactions were initiated at an average price of $185.70.

In August, we repaid a $50 million unsecured term loan and have $120 million maturing in mid-December. Although capital markets are fluid, our balance sheet remains flexible and strong with record financial metrics. Our unadjusted debt-to-EBITDA ratio decreased to 3.6x and our interest and fixed charge coverage increased to 11.6x.

Looking forward, we forecast FFO guidance for the fourth quarter to be in the range of $2.13 to $2.17 per share and $8.33 to $8.37 for the year, a $0.02 per share increase from our prior guidance. Those midpoints represent increases of 5.9% and 7.9% compared to the prior periods, respectively, excluding insurance-related gains on involuntary conversion claims.

Our revised guidance includes increased acquisition opportunities and a corresponding increase in capital proceeds. Of the $780 million of capital proceeds forecasted for the year, over $500 million has already been executed, leaving approximately $275 million for the fourth quarter.

In closing, we were pleased with our third quarter results and are well positioned to close out the year. 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 multi-tenant 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 quarterly and year-to-date results and the value our team is creating. Internally, we continue to grow earnings while strengthening the balance sheet and what's been an uncertain climate. Others have described the environment as bottoming, which seems about right. Tenant leasing decisions are deliberate, which when combined with tight capital markets has led to a 7-year low in the construction pipeline.

Within this backdrop, we're doing 3 things: first, we're working to maintain high occupancies while pushing rents; second, we've slowed our overall development pace, we are continuing forward where submarket opportunities allow; and finally, over the past 2 years, we've sourced several attractive new long-term investment opportunities, something which is much more challenging and a steady market.

Stepping back from the near term, 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 logistic 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 geography.

We'd now like to open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Craig Mailman with Citigroup.

[Craig Mailman, analyst]

Just want to follow up on the acquisitions. It looks like you guys have close to $240 million implied in the guidance there. I know you said you'd give a little bit more info as you get closer to closing. But maybe there's just a little bit more than what you've already given in terms of timing, kind of expected yields, whether these are kind of stabilized versus value add? Is there anything that you can offer?

And I guess as another part of that, Brent, you said $275 million of expected capital proceeds and the balance, what's that difference between kind of the acquisition guidance? And that spread, is it just money to pay for continued construction?

[Marshall Loeb, executive]

Craig, it's Marshall. I'll take the first part of the question and then maybe kick it over to Brent on the -- on how we pay for this. But we're excited. It's been a positive and atypical acquisition market in the last couple of years. But in our guidance, we've got -- it's really -- it's 3 projects that we're working towards closing. They're all existing markets. What I like is they're newer buildings, existing markets, really complementary to our portfolio. You're right. They're stabilized assets with below-market rents.

And in terms of yields, maybe if I blend them what's made it an unusual acquisition market, over the last couple of years. What we've been able to buy kind of on a one-off basis here and there has averaged, I want to say 2020s construction and actually north of a fixed yield, I think these 3 -- I'm not sure if we're quite that high, but we're probably well in the higher 5s and new product too. So it will be similar to what you've seen us by over the last couple of years.

And -- so we're hopeful we'll get those closed. They're all scheduled to close, knock on wood, we're in due diligence through that by the end of the year, they won't help 2024 a lot. But in terms of FFO, but going forward, there will be great additions to the portfolio, we think. And then that market on acquisitions does feel like it's tightening fairly rapidly. So I'm glad we found these really before the window closes because the private market has come back to acquisitions, and I'll -- Brent, I'll let you talk on...

[Brent Wood, executive]

Yes. And on the capital proceeds, Craig, yes, we've, to date, have actually received about $307 million, call it, then -- we still have just over $200 million outstanding on forwards, which would represent about $510 million. And as you noted, or as I noted in my opening comments, looking at about $270 million, $275 million in the fourth quarter. We upped our acquisition guidance by $135 million and upped our capital proceeds by about $55 million more than that.

But Craig, that's just the culmination of various factors between development spending and just operating in general for -- from quarter-to-quarter as 90 days change, those kind of changes in your cash flow statement can vary a little bit. So there's nothing in particular there. I mean the main driver in upping the capital proceeds with the acquisitions, but you have just other general operations flowing through that, that can move that number a little bit from quarter-to-quarter.

[Craig Mailman, analyst]

And just to clarify, Marshall, that higher 5% cap rate, that's -- if you roll the rents to market, right, that's a stabilized yield?

[Marshall Loeb, executive]

No. And I'm glad you asked that. That's existing rents. And so these are newer assets with a higher mark-to-market that's kind of down the road. Each one a little bit different weighted average lease term or WALT as the brokers phrase it, but I'd say blended initial cash cap rate is in that higher 5s.

[Operator]

Next question comes from the line of Rich Anderson with Wedbush.

[Richard Anderson, analyst]

So last quarter, Marshall, you described the environment is improving slowly. And today -- and this one, you said the word choppy. I'm wondering if there was, in your mind, any kind of sort of reversal of trend between the second and third quarter? And then related to that, when you mentioned sort of your optimism for 2025, how are things trending into next year now versus how you viewed them trending 3 months ago?

[Marshall Loeb, executive]

Okay. Rich, I guess I would I say choppy or slowly improving. There -- it's not any real reversal there. It's probably the same. This year, it has felt like 2 steps forward, maybe one step back on the leasing front. It feels like it's improved. I have heard of late. And look, there's always a reason, with the way one of our brokers described it to me, waiting on the election, everyone was waiting on interest rates, you've got 2 candidates that have totally different policies. And so people may be putting things on hold, waiting on the election turn. So it feels like you're -- there's always a reason why things are moving slower than we would like, and that's the most recent one.

The good news is, for better or worse, the election will be behind us in a couple of weeks. So that will take one more level away, hopefully, interest rate cuts will pick up steam a little bit, things like that. So that is where this year, look, my timing would have been off personally. I thought things would have been more improved than they've been.

But if I -- as Brent and I were talking, in his comment, was if you step back, there's really not been any positive economic news, whether it's global unrest or interest rate cuts that were supposed to start in March of this year or one of the most unusual elections, I think any of us have seen in terms of candidates dropping out, all kinds of things like that. So there hasn't been a real boost of confidence.

That said, I'm proud of the team. We're 97% leased. We push rents. And where I get excited, and I'll tie it in maybe to my earlier answer in terms of what we're seeing in the private market on acquisitions, I think the fundamentals are there and that we are full, our size product type is about -- if people have a moment and want to look on our own investor slide deck, Page 16, if you look at spaces 100,000 feet and below, there's about a 4% vacancy. There's not much product available out there. So the fundamental setup is really strong in terms of with the delay in recovery, what inventories out there, the pipeline continues to shrink. There's not much inventory out there.

All we need is a little bit of a lift in business confidence and things will turn pretty quickly. I think it will be more of a V than a U-shaped turn. It's just waiting for that turn has taken maybe a quarter or 2 longer than I would have told you I expected earlier in the year.

[Operator]

The next question is from the line of Andrew Berger with Bank of America.

[Andrew Berger, analyst]

Just maybe following up on the last question. Curious if the brokers have talked at all about excess capacity or slack in the system, if that's feeding into the slower decision-making. We've heard this a bit throughout the sector, but not sure if it's as big of a factor for some of the smaller spaces. Just curious if you have any thoughts on that?

[Marshall Loeb, executive]

Andrew, it's Marshall. Yes, I don't think -- I'm saying I've heard about that and read about it. I think on that, I mean, within our size space, a 50,000 foot, 35,000 -- our average tenant size is about 35,000 feet. We really don't have that excess capacity. It's probably -- I think predominantly pertains is the bigger box space and the 3PLs within the bigger box space. So we've not -- we've actually seen subleasing come down a little bit earlier in the year, and I don't think we've got excess capacity, I think what we need is people to fill more confidence about expansions, and that will really ramp up our development pipeline because that's usually where our building -- that next building in the park. It's our own tenants expanding, and that's what we keep kind of waiting to hear. There is discussion of that, but to hear it a little more confidently.

[Operator]

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

[Samir Khanal, analyst]

Marshall, just in terms of market rents here, I mean, what's your updated view? I know in the past, you've talked about certainly being, I think -- correct me if I'm wrong, like mid-single digits. Is that kind of where you are today? Or have you sort of revised your views given what you're seeing on the demand side?

[Marshall Loeb, executive]

Yes. I think that's fairly accurate. I mean, if I moved it around at all, and that may have been at your conference, I'm trying to think when that was, in August, September. So not long ago, I still think this year will be a 4% to 5% kind of rent growth in our product type, 3.5% to 5%. So somewhere in that mid-single digit. And then I think when I look at the fundamentals, and the delay in supply coming, there'll be another rent squeeze like there was 2 years ago, where rents will get pushed higher because there's such little supply.

Dallas, for example, where the construction pipeline has shrunk from about 76 million to under 11 million square feet there's going to be a supply squeeze if there's any kind of pickup. So maybe my analogy is it's almost like the ground just really dry. It won't take much of a lightning strike to get a fire started. And when that happens, we'll be building pretty quickly, and I think there'll be a push on rents.

But at the moment, this year for our product type and then again, maybe absent L.A. or Southern California, which had the run up and it's going backwards, but we're probably in kind of that 4% range for our portfolio, absent Los Angeles.

[Operator]

Next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

I wanted to ask about development and development leasing. You had a couple of leases signed in the quarter, but activity in the lease-up portfolio slowed a little bit relative to prior quarters. And you've generally been ahead of conversions with regard to leasing so far during the cycle.

Do you see that changing as you look to the schedule for anticipated conversions in '25, which really starts to pick up a little bit into the second quarter? And then I'm also just curious if you could elaborate a little bit on development starts as we think about 2025 a little bit just vis-a-vis your comments?

[Marshall Loeb, executive]

Yes. I mean, I think -- Todd, we'll -- I guess the good news on our development pipeline, what I -- a couple of things that I like. I like that what we've rolled in has been averaging fairly high returns that when we are rolling them in, we will average to 7.4. One of the projects that rolled in last quarter wasn't complete, the Hillside in Greenville, but we were able to get that to 100% leased. What we're kind of really seeing on the ground is tenants, as we said, deliberate aren't in a hurry. So it feels like at the peak, we're getting a lot of -- and our peers were too, a lot of leasing during construction. And now it's more that tenants are looking at you as you're finishing the buildings and have the walls tilted and things like that. So it's a little bit later.

We'll roll them in, like we always have 12 months after completion. And in a lot of cases, we'll make it in that 12 months. But in a few, it's more of a 15-, 16-month process. So that's just kind of where we are today. I'm hopeful next year that, again, if there's a little bit of lift in the economy, some of the ones that roll in. Look, I think long term, we're fine. We're creating a lot of value. It just may take 15 months rather than 12 is where we are today, but we're developing into the 7s and what we're seeing in terms of private market cap rates is getting pushed into the 4s pretty rapidly. So we like the value creation there.

It's just right now, we were leasing things up within 6 months of starting construction and now it's moved to about 15 months. But I think it's cyclical, it will cycle back again, especially given how little product is out there.

[Operator]

Your next question comes from the line of Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

Marshall, you've alluded to the election a bit, but I think the discussions around the impact to industrial have been focused on potential impacts from increased tariffs. So just wanted to get your updated thoughts on the subject and whether you have any concerns about the potential impact to your business, your markets or your tenants or on the flip side, maybe even think it could be an additional positive driver related to the near shoring and onshoring impact?

[Marshall Loeb, executive]

Yes, I think -- I mean it's hard -- probably any political advice from me or you should run from, I guess, it would be one bit of my advise. I think long term, that uncertainty, what we are seeing in terms of -- I think just the certainty for our tenants, having certainty about who's in office and who has controls, Congress, maybe more importantly, then the President will give them certainty to plan their businesses. So I think that's positive.

And we're still bullish in terms of -- look, I like that we've got e-commerce, population growth, onshoring, near-shoring. We think that long term, maybe a couple of thoughts in terms of onshoring/near-shoring, when we look at it, it's really San Diego. I mean Dallas and Austin will benefit, but San Diego, Arizona, were Tucson, were Phoenix and Elpaso.Those markets for us have all been well leased the re-leasing spreads are above our portfolio average. So we're benefiting already from that.

And then a couple of other stats when we were looking into onshoring, near-shoring, if you look at the CHIPS funding, kind of at least in terms of onshoring and manufacturing, what the top 5 states, what's been awarded -- just going to Texas and Arizona is about 63% of the top 5 states, those 2 states. So -- and that's still a work in process in terms of getting those plants built, the ripple effects throughout the local economies, things like that.

And then when we look at border crossings, -- we were working with one of our groups, and they went back comparing to 2015 to current the border crossings in all of our markets, whether it's Juarez or Tijuana or Nogales, which is right next to Tucson, up over -- anywhere from a little over 100 up to about 140%. So it's happening, and I believe it will continue to happen regardless of the election.

But -- and then what we do like about the election, I'm optimistic is, I think just stability and predictability will help our tenants in terms of their space needs and their kind of customer planning. And then the tariffs, we'll see how those all shake out with Congress and everything else. But in the meantime, we'll go lease one development at a time regardless of who's in office.

[Operator]

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

[Michael Carroll, analyst]

I want to dive a little bit deeper into the guidance that you provided. I know there's 2 other updates that the lease termination income increased a decent amount. And then also your reserves for bad debt increased a smaller amount. Can you provide some color on what drove those termination fees higher and what's potentially driving bad debt a little bit higher?

[Brent Wood, executive]

Sure, Michael. Yes, sure, on the term fees and happy to add clarity there, our team there had a couple of, what I would describe as, successful negotiations. We had -- in both instances, it was green energy type-related tenants. There were some calculated risk upon entering into those leases. And one case on the larger of the 2, 103,000-square-foot space, the tenant was never behind in rent. They just decided what they were doing was not going to be successful, and they were winding down that location.

The team there has put in a letter of credit to begin with there. And the rents that we basically brought forward there represented about 9 months of gross rent and they've got lease out for half the space, another prospect for 1/4 of the space. So I think in that situation, it's going to be a good win for us in terms of net cash.

And then when you look at the other space that was part of -- that drove the term fee income again, a similar situation where that tenant did get a couple of months behind. But again, just negotiated a termination, we had a large letter of credit that we could draw on, and that represented about 15 months of rent and we've actually verbally agreed to terms with a replacement tenant there.

So I think when the dust settles, that will be a 7-figure win, meaning by the time we replace the tenants at higher rents and the money we took in, subtract a little bit of downtime, and we're going to have come out way ahead. Just the oddity of it right now is it happening in the fourth quarter, we have the impact of getting the term fee, and that pulls a little bit of base run out of the fourth quarter because we've got to turn the spaces but then the residual impact of re-leasing it won't be until 2025.

So if that happened early in the year, we probably wouldn't be as much talking about because you got the term fee quickly released and you could point to all the factors at once. But -- so we feel good about both those instances. That obviously the $1.7 million of term fee income obviously drove some of the bottom line here in the third quarter.

And then quickly on bad debt, frankly, it's been frustrating. Our collections have been good, continue to be good. Our active tenants with the reserves and on the watch list has remained small and pretty constant in terms of numbers. But we've got -- our bad debt year-to-date is contained within about 4 tenants that represent 70% of that year-to-date total. And although it's a slightly different mix of tenants, about 71% of that year-to-date bad debt has been from some of our California-based properties.

And if you said, is there a common thread amongst some of the few bad debt tenants we have? About half of those are in kind of regional or local logistics, 3PL-type companies that have just seen contract business slow down. Not a lot different than what you've seen in some of the bigger box guys, but obviously, when you're a smaller operation, it has more impact.

So when I say it's frustrating, it's just collections have been good. You just got these a handful of sticky situations here, but the guys are -- in some cases are -- we've moved most of those tenants out, getting prospects to backfill. But, again, it's all in all, it's been good collections. We've just had to navigate a little bit of these tenants in California that we've had to deal with. And it's not easy, and it takes some time to move tenants out of space in California relative to other states, for example, in Texas.

And so it prolongs the process, which prolongs your bad debt attached to it because you just can't -- say in Texas, for example, you can lock a tenant out and terminate the lease much more quickly, cut off the revenue, cut off the bad debt, move on, and it's a much more arduous process in California. So we've just had to negotiate that.

[Operator]

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, analyst]

So just sort of wrapping it all together, Brent, it sounds like bad debt is really not a big issue, and it sounds like it's mostly some California specific tenants that you're dealing with. And then overall demand for the portfolio overall sounds pretty good. I didn't hear you guys talk about expectations for rent declines, your ability not to push rent. So is this really just sort of a macro thing where overall tenant demand is, for the most part, good, you're a little nervous on development just because tenants aren't there to pre-lease, but you're comfortable boosting acquisitions? So really, overall, it sounds like the portfolio is performing well. What you need to see is just some increased tenant confidence. It doesn't sound like there's tenant credit issues. It just sounds like people are operating well, and you're just looking for them to feel better about expanding. It sounds like that's really the key.

[Brent Wood, executive]

Yes. I'll let Marshall talk about activity. But any time you got bad debt, I wouldn't describe it as not a big issue. But what I would say is there's not been a rise in -- there's not been a -- what we've been pleased to see throughout the year, there's not been a rise in -- well, we have this number of tenants that we're watching and then it's moved up to this and it's moved up to this. That's been pretty consistent in a very low range. And the overall number of tenants, there hasn't been like a lot of additions to that. It's just been, yes, a handful of situations, like I say, predominantly California base where tenants just haven't made it through the slowdown out there and really related to the California economy in certain markets.

So I would never describe it as not a big issue, but I would say it's not been widespread, not something that we've seen is growing and ideally don't see it as growing. But like I said, it's been frustrating because it's been driven by -- when you look at a portfolio of over 1,300 tenants and you've got 4 or 5 that are kind of have driven it over the last few quarters, it's a little frustrating. But we just deal with it and re-lease the space, but I'll let Marshall talk about this sort of demand overall.

[Marshall Loeb, executive]

Alex, I think you're right. I agree with Brent's comment, bad debt, it's been a handful, and it's made it a heavier year this year and he's right. Without going in the details, it is harder -- the regulations are harder in California than they are in the balance of our portfolio. But that's why we're diversified tenant wise and geographically.

And then the fundamentals are setting up. They're better than what we've seen in a number of years you're right, an increase in demand. I love where supply is. I love where vacancy is, it's better than it's been in a handful of years, and I think the private market is seeing that. So that we're excited about.

And on development, look, we have names and prospects and proposals out. They're just not filling at quite the rate, but that's why you've seen us pull back on development. We've tried to be as nimble as we can be. If developments aren't leasing, building the next phase of the park doesn't solve. And if they're leasing more slowly, we've pulled our developments down -- our starts down about $130 million this year from last year.

But the flip side of while businesses and capital has been a little more constrained or certainly expensive, it's opened the acquisition window. So at the end of the day, we're going to own well-located Shallow Bay multi-tenant product. We've just had better opportunities to buy it and we'll still build it just where our submarket window opens up. And I think that market will be much -- I'm expecting it to be much more there and readily available into '25 than it's been in '24.

[Brent Wood, executive]

That's why one of our starts this year, fourth quarter. So thanks, Alex.

[Operator]

Next question comes from the line of Nick Thillman Baird.

[Nicholas Thillman, analyst]

Just wanted to touch on development because fourth quarter still implies almost $125 million of starts. Should we just view this as like where the field is kind of seeing the demand is it in your traditional Florida and Texas markets where the current pipeline is? Or are you starting to see a little bit broadening out of the opportunity side?

[Marshall Loeb, executive]

It's certainly Florida. Houston has been a good market. Arizona, where we've got some -- a site there near the Mesa airport. So it's a little bit -- it's spread out a little bit. And -- but it's -- I'm trying to look with Greenville, where we moved the building in, I'm trying to think of what else we've got scheduled in fourth quarter. Now we're 100% leased in South Carolina, so we'll kick off the next phase of a park there. So it's a little bit of a nice mix.

And those economies have all done well. And right now, there's not much availability. So by the time we start these buildings in fourth quarter and deliver, we feel pretty good about the environment when you think, call it, 10 months of construction, plus another 12 months is what we'll underwrite to lease it up, that there'll be some pretty good opportunities there. So that's -- those are kind of the markets we're looking at where our starts just kind of chronologically will hit at the end of this year.

[Operator]

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

[Michael Mueller, analyst]

Sticking with development. It looks like your lease-up developments have about a 6.8% yield expectation and what's under construction is about 7.5%. I guess how much of the pickup there is being driven by the movement in the 10-year versus kind of what you're perceiving for market risks? And as a follow-up to that is, as you're thinking about new projects you may be going to the ground on, is 7.5% more in the ZIP code of what you're expecting there?

[Marshall Loeb, executive]

Mike, good question. I think probably not as much tenure driven on a yield, but it would be really what thankfully we've seen is with the construction pipeline really for all product types, slowing down like it has, the costs have come down. So we still had some positive rent growth and costs have come down, that's what's happened.

And then really, that's why -- and maybe the mix to a little bit what's under construction and what we've delivered, both have -- or kind of are in that well into the mid-7s, -- and then the other way we'll underwrite it when we'll approve a project to start construction, they probably started at about a 7% yield because we won't project rents, we'll underwrite to current market rents because it gets pretty dangerous if you let us project rents. What we -- it will be wrong as often as we're right at least.

So -- and those market rents have grown by the time we deliver and lease on, we actually -- typically, if you look back the last couple of years, our development yields have been 80 to 90 basis points above what we initially thought they were because, thankfully, sometimes construction costs can come in a little bit lower and the bigger driver as rents come in a little bit higher than we had underwritten at that time.

And look, we like that incremental yield and NAV creation because over time as a long-term owner, then those rents are just going to keep growing from there. So it if everybody is out buying industrial, they'd like to try to take the approach, let's create it rather than outbid the world. It's just been this rare kind of 2-year window when we've been looking up some things at attractive yields. But we think that window will has gone away or is going away. We've seen any number of trades kind of in the mid- to low 4s here of late, which is not -- is much less attractive to us.

[Operator]

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

[Jessica Zheng, analyst]

So you guys have done a few acquisitions and developments in Austin this year, and you also have a pretty large land bank there as well. Just knowing it's been a market with relatively higher supply deliveries lately, could you please just share some color around what you guys are seeing there?

[Marshall Loeb, executive]

Yes. No -- good question. We've launched Austin, it's -- look, I think it's a great market. Long term, we're really excited between them. And again, it's like Raleigh and a number and Nashville and a bigger like Phoenix and some of our other markets where you've got state capital, education presence and that educational presence usually leans kind of creates technology jobs. And then because of the topography in those markets, it's really -- it limits development.

So Austin is more of a kind of a linear and then out east market. It's had more development. Every developer in Texas went to the University of Texas, it feels like. So they all go to Austin to build things. We picked up some land sites in the downturn. So we're excited about what we were able to pick up at discounted prices there.

But long term, and we've got a good team there. So long term, we're really excited about our presence. In Austin, -- and what we've started on development, we've got a project south of town when we bought Hays Crossing, the both that Hays County, just south of Austin -- couple of tenants that may need expansion space. So we like that clustering of assets and the flexibility it gives us there.

And then north of town up in Round Rock, there's kind of timing of where our competition is and where it's leasing up. So 2 markets where we've watched development and kind of let the market absorb it, but they have great growth long term then Austin and Phoenix. So you're smart -- you're right to pick up on those 2.

Really good fast-growing markets. They've had a little more construction or development than we'd like for our product type, but we're kind of trying to pick our windows where we can kind of sneak in a development within our submarket compared to what else is out there and what's available. But like them both long term, very much.

[Operator]

Next question comes from the line of John Kim with BMO Capital Markets.

[John Kim, analyst]

Just wanted to get back to bad debt, which looks like it's about 65 basis points of ABR this year. Where does that compare to your historical average? How do you see that trending next year? And do you have any exposure to some of the banks that have been out there, including Conn's?

[Brent Wood, executive]

Yes. So on our bad debt, as far as historical trends, it's -- we're running -- the third quarter was around 68. If you look for the year and include what we budgeted for the fourth quarter, for the year, we're running about 50% -- 0.5% or 50 basis points of revenue. That's slightly above. If you look at our longer-term average, it's been in that 30 to 40 basis points. So it's, of course, factored into that was 2 or 3 years post pandemic, where we virtually had 0. So I would describe it as a fairly, at this stage, it's somewhat at or slightly above average. But again, it's been amongst a handful of tenants and hasn't been, again, pervasive at this point.

So in terms of -- I'm trying to think of the second part of that question, John, that you had. Second part...

[John Kim, analyst]

[indiscernible] bankruptcies?

[Brent Wood, executive]

Yes, on the bankruptcy side, the Conn's, yes. So they were in 2 spaces, the smaller space, 26,000 feet. I first would start with saying Conn's is current through October. So it was a bit -- they're a retailer, not a surprise they're struggling, but it was a bit of a surprise when they filed their bankruptcy paperwork. They were current with us -- in current those spaces through October. We do -- they have rejected the small lease of 26,000 feet. But to date, they're still in and occupying the much larger space, which is 300,000 square feet in Charlotte. So they're current through October. The November, December rent remaining for the year represents about, call it, $340,000 for those last 2 months. And so it's just something we'll keep an eye on and keep an ear out to in terms of what they anticipate doing there. But all in all, they're -- that space is divisible and could be re-tenanted as more than one user if we needed to in that building at a higher rent. So we'll just see what happens there. But that's kind of the status there with Conn's.

[John Kim, analyst]

If I could just follow up. Do you have like a watch list that you could share with us and how that's trended?

[Brent Wood, executive]

Yes, the watch list, which I would say is a combination of tenants that we have actual active reserves with and then tenants that we don't reserve but we're watching for whatever reason due to slow pay or maybe comments from the field. But that's been very consistent within a range of 4 to 5 tenants in total numbers you're looking at somewhere in the 16 to 20 tenant kind of category, and that's been steady -- I keep referencing, but that's been steady for consecutive quarters now. And so that hasn't been something that's been growing in number. It's just that some of the tenants that you watch, actually, again, more related to California-based tenants, have gotten more into that areas where they're far enough behind that you just deem them uncollectible and we try to re-tenant the spaces. And that's what our team is doing there.

And we -- again, I would describe collections as good. You just have to -- in this environment, you just have to be with as many tenants have to deal with these few instances as they arise and try to get about it as quick as you can. As we mentioned earlier, it's just a little -- it's a much slower process doing that when it's based on a California type tenant just because of the process that you have to go through and the timing of that.

[Marshall Loeb, executive]

And I guess I would add if it's helpful, I agree with Brent's comments, it's really as much about timing of where in the year. It's been a noisier quarter. I think it was a good order with the bad debt and some of the terminations, I'm proud of the team with the letters of credit, if these had happened earlier in the year, as Brent mentioned earlier, it'd be fine. It's noise. The rent -- the spaces we will get back are good spaces. There was no atypical build-out and the rents are below market. But because of the timing right at the end of the year, those created some downdrafts on our occupancy as we forecast, 10 basis points drop there and a little bit on our same-store NOI.

So it's not a systemic problem as much as -- if we had 6 or 9 more months of the year, we probably could have averaged out and gotten it back, and that will be upside to 2025 because we'll re-lease those spaces at market rents that are typically probably 30% higher on average than what we got back. It just created some noise within our numbers. And on a short term being mainly one quarter, it created some noise in the system, but it's not a long-term systemic problem by any means.

[John Kim, analyst]

Sorry, I just wanted to follow up. So I just wanted to clarify what you mentioned earlier, Brent. But is Conn's included in the bad debt reserve for the year?

[Brent Wood, executive]

They are not. I mean, they're current as of October, so there's literally nothing to reserve.

[Operator]

Next question comes from the line of Brendan Lynch with Barclays.

[Brendan Lynch, analyst]

This has been a topic with some of your peers. I was wondering if you could talk about the potential for converting some of your land bank into data center assets? What markets that might makes sense? And what are the considerations you're balancing when thinking about these opportunities?

[Marshall Loeb, executive]

It's a good question. It's something we've looked at and we've actually engaged with a few different data center brokers. We work with a lot of industrial brokers but and talk to directly with a couple of the data center companies as well. Kind of how we viewed it as, look, the land we own, we like it for industrial development but if there's an opportunity to sell the land or do open, if we could structure it right without putting EastGroup at risk to get outsized returns, we could look into that. It's been markets. I'm trying to think of Dallas, Austin, Phoenix, Charlotte, things like that. And so you need the power there, you need there's clear height issues and things like that, that we've run into so nothing imminent. I mean I wouldn't -- we'll stick to our key business, which is industrial space.

But maybe -- my bad analogy, if we found out there was oil under our land we're willing to flip the land to a data center development, and we'll find another value-add or acquisition or land site to work with. But that said, we're exploring the opportunities out there and one may turn up and what I don't want us to do is -- or what we don't want to do is build a big data center and learned the hard way, some things, that's a business we're not in today. Look, our shareholders, if we can -- however, we can create net asset value and grow earnings. We're all about that. And I don't want to take risk and things that we kid ourselves that we know what we're doing on. But that said, we're going to -- we're trying to see what all opportunities are there out there maximize the value of our land, whether it's a data center or Shallow Bay industrial development.

[Operator]

I will turn the call back over to Marshall Loeb for closing remarks. Please go ahead.

[Marshall Loeb, executive]

Thank you, everyone, for your time and your interest in EastGroup. I hope we got to everyone's questions. If not, Brent and I are certainly available after the call. And we look forward to seeing most of you at NAREIT coming up here in just a couple of weeks. So thanks again.

[Brent Wood, executive]

Thanks, everybody.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.