Eastgroup Properties Inc

NYSE:EGP

Earnings Call Analysis

Strong FFO Growth and Buoyant Occupancy Rates

EastGroup Properties reported robust growth with funds from operation (FFO) reaching $2.03 per share, up 11.5% for this quarter and marking an 11.3% increase for the year. Occupancy levels were impressive at 98.2%, with the potential for reaching 98.5% if not for a recent acquisition. The company witnessed record re-leasing spreads, with GAAP spreads at 62% and cash spreads at 43%. Cash same-store net operating income (NOI) also showed positive momentum, up by 7.5% for the quarter. Looking ahead, EastGroup is forecasting a development start of $300 million in 2024, influenced by market demand. For 2024, the company provided an FFO guidance range of $1.93 to $2.01 per share for Q1, and $8.17 to $8.37 for the full year, with an average occupancy midpoint of 97.0% and cash same property growth midpoint of 6.0%.

Record Performance and Portfolio Resilience Amid Economic Challenges

The company has set a new benchmark, surpassing previous records with current year-to-date spreads reaching 55% on a GAAP basis and 38% on a cash basis. Cash same-store net operating income (NOI) has seen a robust increase, up 7.5% this quarter and 8% for the year thus far. A contributing factor to this success is the company's highly diversified rent roll, where the top 10 tenants now make up just 7.9% of rental income, down from 8.6% in the previous quarter. The geographic and tenant diversity are strategic advantages that stabilize future earnings, enabling the company to navigate the broader economic environment effectively.

Strategic Growth Through Development, Acquisitions, and Occupancy Rates

The management maintains a strong focus on value creation, leveraging development and acquisitions to enhance market end-user demand for industrial products. Impressively, the company concluded the quarter with an occupancy rate of 98.7%, reflecting their ability to consistently secure tenants and drive rental income. There is an optimistic outlook on development starts, with a projection for $300 million in 2024, despite a more cautious and deliberate market decision-making observed recently. The trend of declining industrial starts suggests a potential market tightening in the forthcoming year, which could provide opportunities to increase rents and development prospects.

Financial Strength and Equity Capital Raising to Support Growth Initiatives

The company showed a strong quarter performance, with funds from operations (FFO) per share rising to $2.03, an 11.5% increase from the prior year. This performance was buoyed by solid operations and growth initiatives. Access to equity markets was effectively used to raise capital, with a total of $235 million in stock sales and a new forward equity program securing $75 million. Looking ahead, the management is guiding 2024 first-quarter FFO between $1.93 to $2.01 per share and full-year FFO in the range of $8.17 to $8.37. Key assumptions include high average occupancy, controlled cash same-property growth, and continued capital raising through equity. The balance sheet remains healthy with low debt relative to market capitalization, which offers ample flexibility for future financial pursuits.

Acquisitive Moves to Augment Development Pipeline

The company has been actively acquiring properties with six buildings bought over the past year for around $225 million. These acquisitions include newer properties, averaging 1.5 years old, with leases slightly below market rates. This strategy has increased the company's run rate by approximately $0.08 per share in FFO. The ability to offer certainty in closings has given the company a competitive edge in the market, highlighting its strong equity position and risk management. The acquired properties are reported to have an average GAAP cap rate return of about 6.5%, signifying healthy return potentials on these investments.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the EastGroup Properties Fourth Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] This call is being recorded.

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

[Marshall Loeb, executive]

Good morning, and thanks for calling in for our Fourth Quarter 2023 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 reflects 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 mark 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. I'll start by thanking our team for a strong quarter and year in which we delivered record FFO per share and record re-leasing spreads. Our team continues performing at a high level and finding opportunities in an evolving market.

Our fourth quarter and full year results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial market. Some of the results produced include: Funds from operations coming in above guidance, up 11.5% for the quarter and 11.3% for the year. For over a decade, 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 occupancy rose 50 basis points from prior quarter to 98.2%. Occupancy would have been 30 basis points higher, but for a leased and occupied late December acquisition.

Our percent lease rose 20 basis points from prior quarter to 98.7%. Average occupancy was 98.1%, which although historically strong, was down 30 basis points from 2022. Quarterly re-leasing spreads reached a record at 62% GAAP and 43% cash. These results broke the previous record set last quarter and pushed year-to-date spreads to 55% GAAP and 38% cash. Cash same-store NOI was strong, up 7.5% for the quarter and 8% year-to-date. And finally, I'm happy to finish the quarter with FFO rising to $2.03 per share. Helping us to achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants falling to 7.9% of rents, down 70 basis points from fourth quarter '22 and in more locations. We view our geographic and tenant diversity as ways to stabilize future earnings regardless of the economic environment.

In summary, I'm proud of the performance last year, especially given the larger economic backdrop. We continue responding to strengthen the market end user demand for industrial product by focusing on value creation via raising rents, development and, more recently, acquisitions. This strength allowed us to end the quarter 98.7% leased and push rents throughout the portfolio. Due to current capital markets, we're seeing broader strategic acquisition opportunities. It's hard to accurately gauge how large the opportunity may be or when the window may close, but we're pleased with our ability to acquire newer, fully leased properties with below market rents at accretive yields.

As stated before, our development starts are pulled by market demand within our parks. Based on our read-through, we're forecasting 2024 starts of $300 million. And though our developments continue leasing with solid prospect interest, we're seeing longer deliberate decision-making. While we forecast $300 million in starts, we'll ultimately follow demand on the ground to dictate the pace. Based on the decision-making time frames we're seeing, I expect starts to be more heavily weighted to the second half of 2024. Further, in this environment, we're seeing 2 promising trends. The first thing, the decline in industrial starts. Starts have fallen 5 consecutive quarters with fourth quarter 2023 being roughly 60% lower than third quarter 2022 when the decline began. Assuming reasonably steady demand, the markets will tighten in 2024, allowing us to continue pushing rents and create development opportunities.

The second trend is the rise in investment opportunities with developers who have completed significant site work prior to closing and need capital to move forward. This allows us to take years off our traditional development time line and materially reduce the site development legal risk.

Brent will now speak to several topics, including assumptions within our initial 2024 guidance. As always, we'll update our forecast as the year unfolds. My belief is that when or if interest rates begin to follow confidence and stability within the business community will rise.

[Brent Wood, executive]

Good morning. Our fourth quarter results reflect the terrific execution of our team, the resilient performance of our portfolio, and the continued success of our time-tested strategy.

FFO per share for the fourth quarter was $2.03 per share, compared to $1.82 for the same quarter last year, an increase of 11.5%. The outperformance continues to be driven by stellar operating portfolio results and the success of our development and acquisition programs. From a capital perspective, the strength in our stock price continued to provide the opportunity to access the equity markets. During the quarter, we sold shares for gross proceeds of $235 million at an average price of $171.55 per share. Additionally, we executed on our forward equity program for the first time, securing gross proceeds of $75 million at an average initial price of $183.92 per share.

Subsequent to year-end, we settled $50 million, with $25 million in commitments still outstanding. Although capital markets are fluid, our balance sheet remains flexible and strong with solid financial metrics. Our debt to total market capitalization was 16%. And for the quarter, our unadjusted debt-to-EBITDA ratio is down to 3.9x and our interest and fixed charge coverage ratio was 9.6x.

Looking forward to 2024, FFO guidance for the first quarter is estimated to be in the range of $1.93 to $2.01 per share and $8.17 to $8.37 for the year. Those midpoints represent increases of 8.2% and 7.4% compared to the prior year, excluding involuntary conversion gain as a result of insurance claims, respectively. Notable operating assumptions that comprise our 2024 guidance include: an average occupancy midpoint of 97.0%, cash same property midpoint of 6.0%, bad debt of $2 million, $300 million in new development starts, and $130 million in strategic acquisitions, $55 million of which has already been executed.

During this period of elevated interest rates, we continue to view equity proceeds as our most attractive capital source. In our guidance for the year, we are projecting $465 million in common stock issuances, $75 million of which has already been secured via the forward equity program, as mentioned earlier. 2024 has minimal debt maturing with $50 million in August and the remaining $120 million not until December.

In summary, we are pleased with our solid 2023 results. Thank you, EastGroup team members that are listening to the call. As we turn the page to 2024, we will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to maintain our momentum.

Now Marshall will make final comments.

[Marshall Loeb, executive]

Thanks, Brent. In closing, I'm proud of the results and the value our team is generating. Internally, operations remain strong, and we continue to strengthen the balance sheet. Externally, the capital markets and overall environment remain clouded. This is leading to the continued decline in starts. So in the meantime, we're working to maintain high occupancies while pushing rents.

And in spite of the uncertainty, I like our positioning as our portfolio is benefiting from several long-term positive secular trends, such as population migration, nearshoring and onshoring trends, and evolving logistics chains, for example. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is continually improving each quarter, our balance sheet is stronger than ever, and we're expanding our diversity in both our tenant base as well as our geography.

With that, we'd like to open up the call for your questions.

[Operator]

[Operator Instructions] Your first question comes from Craig Mailman from Citibank.

[Craig Mailman, analyst]

Marshall, I just wanted to touch on the acquisition environment getting a little bit better for you guys. You've been more of a developer over the last couple of years. What are you seeing from a pricing perspective that on a risk-adjusted basis is compelling relative to where you're developing? And how much of the remaining, kind of -- it was about $80 million, $75 million embedded in guidance, what's the visibility on that? And kind of where are the markets that you guys are targeting?

[Marshall Loeb, executive]

Thanks, Craig. And if you'll allow me, maybe before we dive in, I'll let the people on the call, a little bit of baton switch. We prerecorded the call Brent Wood has the flu or is under the weather today. So you've got Staci Tyler, we're in Staci's capable hands and mind. So if you don't hear Brent, he'll be back tomorrow, but he's under the weather today. On the acquisition environment, we've been encouraged and the sense that it's almost 2 different buckets. On a portfolio of properties, cap rates have remained low and they feel more competitive. And by portfolio, I'm thinking 3 or 4 buildings where our team has been successful in finding opportunities.

And if I go back to about the midpoint last year till today, we've acquired 6 buildings, kind of a little bit of color, if it helps, so a little over, call it, $225 million. The average age is 1.5 years old. So they've been new buildings with rents, typically slightly below market where they got leased up. And it's added about $0.08 a year on our run rate in terms of FFO, if you match it with the equity that we issued in the quarter we closed, is kind of how we were looking at it.

They've all been different and that they've been one-off. But in some cases, it's been a seller who needed to close by certainty. One, it was a group that had a property tied up, had gotten at least and needed funds to close, so we assumed the contract. A marketing process that didn't work out the way the brokers, we weren't originally in it. We came in later. And our pitch has been, we may not be your highest offer, but because of our line and we've been issuing equity, we're your certain path to closing. And 2 years ago, 1 year ago, that really wasn't a point of differentiation. And all of a sudden, it's become an ability. And we've kind of viewed it as we want to own well-located infill industrial buildings in our markets. Whether we build them or acquire them, we'll adjust to kind of where the risk returns are.

And of that batch our average, call it, GAAP cap rate, they're leased, and it's been about a 6.5% type GAAP return. So that's what when you compare it to an equity cost in the 4s, and a GAAP return at 6.5% on a blended average on brand-new buildings that are like -- usually we underwrite a year to lease up a development, and these were 1.5 years old.

So that's -- that has really been a new development in the market. And I'll tie it to interest rates. All of a sudden, people that were underwriting and using low-cost debt, we had a more competitive cost of equity or cost of capital using our equity than we normally do. And I think that window will slam shut on us, unfortunately, when interest rates start coming the other way. But in the meantime, we've kind of turned over a lot of stones and found some really what I'd call unique situations. But it doesn't take that many to add $0.08 a year to our FFO. So it's a longer answer than maybe you were seeking, but that's really kind of how they've played out.

And we've got, I say, visibility. We're always in the market bidding on a handful of properties in our markets, and that's probably where we are today. Nothing big coming. And the last comment I'll make, I've been a little bit on that bottleneck. We could have done more. I'll take the blame for not wanting to use our line -- run off our line and then issue equity. That's really what led us to add the forward component to our ATM in fourth quarter.

So now it allows us to match-fund the acquisitions a whole lot better than we did because, before, I was probably a light switch to the teams in the field saying we've got capital, we don't have capital, and it usually takes 6 weeks to a month to run through more of the bidding process on a property.

[Craig Mailman, analyst]

Okay. And that's really helpful. And so that 6.5% is probably what low 6%, high 5s going in. And so when you compare that to your cash on cash kind of development returns and adjust for cost of carry and risk, you guys kind of view that as very favorable.

[Marshall Loeb, executive]

Yes. If you look, maybe 2 parts in our supplement, and I may be off slightly, but about pages 11 and 12, we're developing to about a 6.9% gap. So if we can buy a 6.5% and take leasing and construction risk away, I will say, and it's been a function of the teams mainly and the market rents, last year, what we developed -- what we delivered all leased, and it was in the higher 7s. So we've been coming out ahead of where we thought we would be, thankfully, on our developments. But a new building and that delta between a development and an acquisition all of a sudden looked more attractive for this moment in time.

[Craig Mailman, analyst]

Okay. And you led me to my next question, is going to be the introduction of forward. So really, you'll kind of use the ATM to fund near-term spend that you need and the forward is more for when you think you're going to be kind of closing on an acquisition, you may employ that if it makes sense.

[Marshall Loeb, executive]

Yes. And I think the other thing, I think that's true. And I know we'll see you here in a month, so more inputs welcome when we sit down. We viewed the forward if it's an attractive price, an attractive meaning at or above our internal NAV, at or above the Street, and we feel pretty good about ideally, the uses, being it's our own development pipeline or acquisitions, if we can get out -- if we have a year to take down the forward, if we can get out ahead of it and really prefund some, so we know we've got that capital, but we don't have to pull it down today, really it's another kind of tool in the toolkit and a nice one, so, because acquisitions are so clunky coming and going.

I didn't want to -- I was nervous. I didn't want to get -- run the line up and then you have to issue equity to kind of get back to where you want to be. Because if we're using debt, is kind of where you were at, you're buying at a low 6% cash and you're funding at a low 6% cash today. So we don't like that. But if we can use our equity and maybe get a little bit ahead and this -- we'll either use it on development, which we know we'll have our leap of faith that, out of the 5 properties we're always bidding on, someone's going to say yes to us eventually.

[Staci Tyler, executive]

Yes. And one thing I would add to that, Craig, is just the timing. So much of the year, we're in blackout due to earnings as a public company. So it just gives us flexibility on the timing of when we can receive the cash. We don't have to be in an open trading window in order to actually receive the funds. So that gives us some additional flexibility.

[Craig Mailman, analyst]

If I could slip one more in, and maybe if I could squeeze in -- by the way, congrats on your promotion.

[Staci Tyler, executive]

I appreciate that. Thank you.

[Craig Mailman, analyst]

The G&A ramp this year looks a little bit more than what you typically have. Is there something onetime in that number?

[Staci Tyler, executive]

The main driver there, about 2/3 of the additional G&A in our '24 guide is due to a slowdown in development starts. So we have our internal development team that spends their time on development and construction activities. We capitalize a portion of the costs related to that team based on the development projects that they're working on.

So in our guide, where in '23 we had $360 million of development starts, and our guide for '24 million is $300 million, so that slowdown in development starts means that we have less in development fees that we'll be recording. When we record those fees, it's a reduction in G&A and it adds to the basis of the properties.

So hopefully, there's some upside in that hopefully G&A ends up being less because we're able to start more development projects. But to be conservative with making prudent business decisions, we felt like it was best to lower the guide for development starts. And in turn, that added about $0.05 of G&A compared to '23. That's the main driver. And then we -- our team is growing as the company grows. So we're adding a few people to the team, and then typical additional investments and other aspects of G&A, ESG and some other matters. But the main driver there is the development phase.

[Craig Mailman, analyst]

Is that partially offset though by lower cap interest drag from starting those projects, so is it a full $0.05? Or is it something a little bit smaller?

[Staci Tyler, executive]

Well, it's really 2 separate things. So we have capitalized interest, but then these internal development costs are really more personnel costs. So the impact to G&A is for our team's time that they spend on the development projects. So it's offsetting salaries and other compensation costs. You're welcome.

[Operator]

Your next question comes from Jeff Spector of Bank of America.

[Jeffrey Spector, analyst]

First question, I know we constantly talk about onshore and nearshoring, Marshall, I know you mentioned it quickly. I guess could we just touch on that? Anything new there in light of what we're seeing in terms of potential impact on ports, et cetera? I guess if we could touch on that first.

[Marshall Loeb, executive]

Sure. I guess we view it, or my view, in case it's wrong, it's really a long-term trend. When people make the decision on their kind of China Plus One manufacturing, which port it comes through. And I think that -- I was kind of reading through some of the pieces on the Suez Canal. That's why there's -- look, you can make money being an owner and a developer around ports, but it really reinforced to me that's a very fluid dynamic environment.

We want to be near the consumer and a growing base of consumers because I don't think that flips from Houston is gaining market share from L.A. and then last year L.A. is gaining it back and things like that, although we like both of those markets. We do feel, when I look at El Paso, we're 100% leased, Phoenix 99%, San Diego is strong. And some of our best rent growth markets and our company are in those -- in our portfolio in those markets.

So we still feel long term strong and it really is a function of we're looking for opportunities in all of those markets to kind of take steps one at a time to grow our portfolio. We're really -- we've looked for that next opportunity in San Diego and El Paso. We're active there. Phoenix, we've got some development land. It's really a timing issue of when we kick that off.

But we like that segment of our portfolio. What I like, and I was reading, when you look at where so many of the EV manufacturers are, besides the nearshoring, which I know it was your question, but on the onshoring, it really, they run through the Carolinas, Georgia and into Florida. And certainly, Texas is seeing a lot of kind of technology manufacturing. I like the tailwinds we have, whether it's green energy, we seem to get an awful lot of it within our footprint in the Carolinas and Georgia. And then what we're seeing in Dallas and Austin, especially in terms of more tech. And again, we won't have the manufacturer, but we'll have the supplier. And if we don't have the supplier, there'll still be that ripple effect of just growth in the local economy.

[Jeffrey Spector, analyst]

Great. And then again, a follow-up on the acquisition guidance. I believe you talked about the $130 million. Is that -- that's strictly for operating properties. Can you talk about, I guess, land purchases in '24?

[Marshall Loeb, executive]

Sure. We've got a little bit of land, yes. And on acquisitions, I'll preface it, that's always a hard -- look, we've usually missed that number. Obviously, we spent a fair amount of that. We had the Spanish Ridge in Las Vegas, which we closed. I hope we beat that number. If we find the right opportunities and we have affordable capital, we'd like to beat that number.

On land, so we have land that we have tied up as EastGroup. Maybe it's kind of come in the last year 2 different ways. Land that we tie up, and we'll try to get as far through the zoning and permitting and wetlands issue and everything else that may come up before closing, to kind of minimize that time between closing. And we've got a few parcels tied up currently, you saw us close. And then some like in Atlanta this year where it's -- the other kind of newer path to finding land has been someone's approached us, and they've done all of that work.

But now you're not selling forward lands on a forward sale that you used to, and that's expenses. So they've come to us, and we've seen it in Denver and Tampa, Atlanta and in Austin a couple of times, where it's another local regional developer has done all the legal work and things are ready and they could use our help in closing. Either we buy it completely for them or work out some kind of venture where they have upside.

And that's been an interesting new path kind of given the constrained capital markets where the legal risk -- because sometimes we don't get through the zoning. Everyone wishes they wants their package delivered quickly, you just don't want it to originate from your neighborhood, so kind of that NIMBY effect, where we've tied up land and sometimes we don't close it, and it's kind of a dry well. You've put some time and money into it and you have to walk away. But we like where people have come to us at the 11th hour to kind of help them get it closed, and that's the other part.

So with the land we have on our balance sheet, we feel good about, and there's always another kind of, to me, like an iceberg, the part you don't see if we've got another 100 to 200 acres tied up here and there where we're kicking tires. And if everything checks out, we'll go ahead and close, but we have it under control, but we haven't closed yet.

So we feel it's market by market. But overall, I'd say we feel pretty good about the land we have. And I think when things -- I think it's things are going to turn given the drop in supply where, when the business environment does stabilize a little bit where I could be optimistic about our starts this year, I think it will be a fairly quick or reasonably quick turn where buildings are going to fill up, and there's not a lot of inventory in the stores, especially in our size range right now. The vacancy is higher in the big box and it's still fairly tight in kind of the 200,000 and below sized buildings.

[Operator]

Your next question comes from Alexander Goldfarb of Piper Sandler.

[Alexander Goldfarb, analyst]

And Staci, echoing Jeff's comments, congrats on all the terms -- on the promotion. So that's awesome.

[Staci Tyler, executive]

Thank you, Alex.

[Alexander Goldfarb, analyst]

And hopefully, the comp committee takes notice. Two questions here. First, just going back to the ATM, Marshall. EastGroup has long used the ATM to fund its investments. Going to a forward is that's sort of a playbook out of what the apartment guys have done more over the past few years. So do you see you shifting in terms of how you use the ATM? Or what was it about the forward issuance now where, traditionally, you guys have been quite comfortable using sort of a traditional ATM mindset?

And then Staci, does this affect timing of the settlement of the shares? You guys have issuance in the guidance, but I'm not sure now if we should think about this settling later in the year or sort of modeling ratable as we normally would.

[Marshall Loeb, executive]

Okay. Alex, on the ATM, look, we still like the ATM a lot, and we'll -- we intend to use both. And really, as we've -- again, we're -- we've thought -- given where our -- you're always historically tempted to use your line. Short-term debt with long-term assets is how you get in trouble as a REIT. But our line cost is higher than our equity cost for this past year. So we'll use the traditional ATM probably until we really get the line to a fairly low or flat balance.

And at that point, if we still like the price given the blackout periods and things like that, that Staci mentioned earlier, that's probably where -- if I generalize, that's where we'll toggle over to the forward. And its money that we know we will have a good use for and we're at attractive pricing. And we can kind of put that on the shelf for it's really when you need it. You give the banks a couple -- 48 or 72 hours' notice and bring it down later.

So that's how we're thinking. We'll still use both and we'll probably have a limit where we will have a limit on how much we have of each. We're not going to get out too far over our skis in terms of uses. But it gives us an ability to kind of have equity on the shelf like when we closed Las Vegas earlier in the year, even though we're in a blackout, we were able to fund that through the forward. And Staci, I'll let you -- I'll echo the congrats, definitely well deserved, but I'll let you talk about the timing.

[Staci Tyler, executive]

Yes. Sounds good. Yes. And I agree with what Marshall was saying that the forward will continue to issue under the regular ATM as well. It's all part of one program. So we can easily toggle back and forth and some of it will just depend on the market, pricing, timing, whether we're in blackout.

But what we have built into our guidance is funding, more heavily weighted to the back half of the year. And that really is in line with the timing of potential development starts and acquisitions. But all of that will obviously change based on market conditions and actual.

But in terms of the actual funding, when we execute forward, like Marshall said, we can have that forward outstanding. And then whenever we need the funding, we just give 24, 48 hours notice and then we issue the shares and actually receive the cash. So it gives us a lot of flexibility in terms of our cash needs. And we know that we have the forwards that we have outstanding on the shelf, we'll hope to add to that. And then in the meantime, we can issue under the regular ATM as long as we're not in the blackout.

[Alexander Goldfarb, analyst]

Okay. Second question is -- and Brent is not on the call, so you guys will have to fill in for his conservative assumptions. But the past -- this year and in the past 2 years, you guys have come out with expectations of occupancy drop and sort of, hey, things could get worse. And in fact, the markets hold up well, your performance holds up well and the occupancy outperforms, everything does well.

Yes, we hear your comments about just normal caution, hey, it's the third year in a row. But still, what -- is it just normal EastGroup caution that's caused me to think occupancy could drop 100 bps? Or are you actually seeing pushback of client -- of tenants or potential for credit issues or trouble backfilling space, longer downtime, et cetera, that's leading you to the occupancy drop?

[Marshall Loeb, executive]

Good question, and I'll -- Staci, jump in. I'll say it's really more return to the norm. The last 2 years, given our 40-year history, we've had our record occupancy in the -- tied at 98% in the last 2 years. So there's no major known move-outs. There's no major identified bad debt or anything that's -- any specific space that's keeping us up at night. Its more things have been really good for a few years. I think at the beginning of the year, especially, are they going to keep on this path? And then especially now with higher interest rates, global unease, that it feels like things could rotate back to the normal a little more.

And then I think the other thing that affects us on our same-store, because people are -- this is unique to EastGroup, a little more deliberate right now, understandably in growing their businesses, about 1/3 at one point of our development leasing was to our existing tenants. And so we still have that, especially Florida and Texas, where our developments are leasing up to customers. And what we were seeing in the budget where before we may have 60 days of downtime, now it's 4 months of -- look, we'll try to minimize it. That's our goal as best we can, but we underwrote a little more vacant -- downtime before when that tenant goes to a phase or Building 6 in a park, for us to re-lease Building 2, will probably take us a couple of more months.

So that hits our occupancy, and it especially hits our same store. But we view it someone's going to -- if one of our tenants needs to grow, someone's going to accommodate that growth. And that's why we like the parts. And that's part of our initial sales pitch when they come in, is we can always tailor your space for you up or down, moving you within a park.

And so that's still happening, and as one broker described it, that was a good way with rents being higher and the lease commitments being higher in dollars, it's moved from a real estate manager decision to a CFO decision at so many of these companies. And so people are being slower and maybe deliberate because of the environment. And again, kind of like acquisitions, except on the flip side, and I may be tying too much to interest rate moves. I think when interest rates do come down, there'll be a little bit of a lag effect, but that's when I'm hoping that pent-up demand will take off, that our retention rates are higher.

And a lot of tenants have renewed, really across the country if you look at some of the stats, but I think people will move back to growth. And what I get excited about is there's been no starts. And if we can keep our balance sheet safe and we have the right land, we'll be able to pick up our development pipeline faster than our private peers will.

[Operator]

Your next question comes from Todd Thomas of KeyBanc Capital Markets.

[Todd Thomas, analyst]

First, can you talk about the leasing activity that's embedded in guidance within the lease-up portfolio? You have a few conversions scheduled for 1Q and 2Q, about 1.4 million square feet in total that's scheduled to transition to the operating portfolio during the year. What's budgeted and guidance in terms of leasing? And can you just talk about your confidence around getting those buttoned up ahead of the conversion date?

[Marshall Loeb, executive]

Yes. Todd, if I'm following you, I think what we would say of our -- kind of looking at our 2024 transfers, we're -- today, as we sit, we're about 60% leased on those. Feel good about the activity. I'd say leasing activity was a little bit slow, and the brokers would probably tell me it's because of holidays. It felt slow in terms of people out kicking tires late last year. It feels like things have picked up or they have in the last 30, 45 days.

So we're -- we have activity. We need to convert that into signed leases. Of the transfers this year, the majority of it is the back half of the year. So we still have some -- look, we've got -- that's really our task this year. We've got that budgeted, leasing up kind of pieces here. And then if we're fortunate, like you saw one there's one of the Orlando projects, we were able to get that leased this quarter, and all of a sudden it jumps from a 2025 stabilization to 2024. So that one will move up the ladder.

The other maybe upside to our budget, if I daydream about it, is we get some leasing done on some of the ones that are projected to stabilize next year, just stabilize early. And that's the other thing that will lead to more starts because we like having that available inventory within our parks, especially, to kind of keep moving through.

And so we've got a -- pro rata amount. I think the back half of the year is our portfolio, we think occupancy will probably -- it usually does dips a little bit through, call it, June, and then it builds towards the back half of the year. And that's probably where the economy will go too. I think as supply dwindles and, hopefully, confidence picks up, that's where I think the back half of our year will be better than the first half of the year. Not that the first half will be bad, I think it'll just be better.

[Todd Thomas, analyst]

Okay. And then you mentioned that activity picked up, I guess, in the last 30, 45 days. We've heard similar commentary on other calls this quarter. Just curious if you can characterize demand and touring activity today relative to pre-pandemic levels, 2019, for example. How would you sort of compare and contrast?

[Marshall Loeb, executive]

Probably very similar to pre-pandemic, other than the lease -- as I mentioned earlier, the lease commitment is greater. And so the description I've heard from one of the tenants, I have more approvals to get, their brokers, like it takes more approvals to get this done, which adds time.

There's activity, I'll say, maybe post-pandemic, and I think that's maybe what happened in Southern California, people had a fear of losing out on space. And so there was -- there was a tenant rep broker told me my job is not fun anymore because, as soon as I leave, there's 2 or 3 other people looking at this space. I would say tenants don't have a sense of urgency right now that they had maybe in late '21 and into early '22. But they're out there and they're looking at it.

And I think people, one of the charts we were looking at in terms of renewals, the last several years, about 1 in every 4 square feet has been a renewal. And then over the last year, it's moved to 1. What I'll say there's pent-up demand about 1 in every 3 square feet. So renewals have jumped up from, call it, 25% to 1/3 of the leasing activity. And I think it -- my amateur analysis of that is that people are probably being patient and waiting to see what happens, whether it's interest rates or global unease or an election year, but once they feel like it's safe to come back in the water, I think the gate will be open.

And that's where I hope we have a head start, either in maybe 2 ways, pushing rents within our portfolio or we've got the land and we'll try to have the -- our goal is to have the permit in hand, and the balance sheet, too, whether it's through the forward or the ATM, to really move several quarters ahead of our private peers, which is really who we compete an awful lot with on our size buildings rather than the bigger groups have more capital they've got to put out. So they lean towards the big box development rather than our $15 million buildings.

[Operator]

Your next question comes from Bill Crow of Raymond James.

[William Crow, analyst]

Marshall and Staci, and I'll say good morning to Brent as well. He should be asleep, but I'm sure he's listening. Marshall, just a follow-up question on the guidance on occupancy. I'm just wondering if fourth quarter occupancy was boosted at all by any seasonal demand that you saw.

[Marshall Loeb, executive]

Bill, not really. I mean we kind of -- it was within our budget, and actually we came out ahead of our budget. Usually, at the end of the year, what we've probably talked about before, is the Post Office or someone like that will take space on a 90-day basis. But I can't really say, I don't think we had any of that this year. It was really just a pickup in demand and, thankfully, our occupancy picked back up. And we've kind of said that's -- if it helps, kind of our goal is, if we can hang on to our occupancy until all this supply gets absorbed, because there's nothing coming in the pipeline behind it, that will be a really good time to play offense.

So it was -- thankfully, it wasn't seasonal. I mean, I do think our occupancy may drift down like it typically does in the first quarter. It may not be 98-plus, but at least through February, we're pretty much in the same ZIP code as where we ended the year. It's still -- it's not like there's been any big movements. I'm sure it's 20 or 30 basis points one way or the other, but it's not much movement.

[William Crow, analyst]

All right. And the second area of guidance I want to challenge you on a little bit is on the equity issuance assumption. I guess I'm more embed than others about where it's coming from, which bucket it's coming from. But maybe, Staci, it would be helpful if you gave us sources and uses. It just feels like you're leaning so heavily and maybe unnecessarily so on the equity portion of funding this year.

[Staci Tyler, executive]

We'll certainly monitor the debt markets as well. We -- just as we were putting the building lots together for '24 guidance, at the time, it just seems more prudent and to make more sense at a lower cost of capital for us to issue equity. We can certainly easily shift that to debt if rates come down or if, for whatever reason, the equity markets were to get away from us.

We have $170 million in debt maturing later in the year. So that's use and we'll need to fund for those repayments. And then for our development starts and acquisitions that we have included in guidance, we just felt, given the cost of capital when we evaluate the options, equity is the lower cost of capital and seems to make the most sense today. But we could easily see where that shifts. And if the total stayed $465 million, maybe $150 million could shift to debt, but that's just not an assumption that we wanted to build in given the current cost of that equity versus debt.

[William Crow, analyst]

At this point, you're assuming that the overall debt outstanding goes down by $170 million this year. Is that fair?

[Staci Tyler, executive]

Yes. Yes. That's fair. With the maturities that we have in August and December. That's correct.

[Marshall Loeb, executive]

It's not we're trying to -- we like our balance sheet today, Bill, if it helps. It's not that we're trying to strengthen it so much, as Staci said. It's just -- I don't remember many of any time in my career where our cost of equity has been materially lower than our cost of short-term debt. But I think as that does evolve, it will -- and it will shift back to kind of assume the historic norm that we'll have a balance sheet in a position where we'll have a fair amount of debt capacity and still have a very safe balance sheet.

[Operator]

Your next question comes from Samir Khanal of Evercore.

[Samir Khanal, analyst]

Marshall, can you provide a bit more color on California? When I looked at the page where you provided the market breakdown, looking at San Francisco, NOI growth slowed considerably. And then, I guess, just expand on kind of what you're seeing in Southern California as well, in L.A. and San Diego.

[Marshall Loeb, executive]

Sure. Samir, I would say San Francisco, we've had -- and we've got -- we had some vacancy there. We had a value add we bought, that's now 100% leased. But it took us a little bit longer than we had hoped to get that -- it's a 60,000 foot vacancy, to get that put to bed. And then in the Tulloch portfolio, there was a 3PL that left. We've got about half of that space leased now and activity on the balance. But that's -- is really vacant. That's what impacted our same-store or pulled our growth down and occupancy down in San Francisco.

It has -- both of those markets, maybe a little bit more San Francisco and L.A., they've been great historically. And those are markets where you watch and it certainly had a lot of layoffs in technology in the Bay Area. It feels like it's stabilized. We're not really in the city. What we read is this, kind of reading through it, the city stats are not great. We're in East Bay and in the North Shore, North Bay market. Those have been a little more stable.

And then in L.A., it feels there, especially as you get into the Inland Empire, and we're not in the Inland Empire East. We have some in the Inland Empire West and some in South Bay, which is the ports and mid-counties markets. That it was so red hot, it really got out almost like you get out over your skis. And then a lot of the 3PLs have given space back and rents have come backwards. They ran up, they more than doubled. And now they're retreating a little bit and kind of finding stability, we think, in those markets.

Thankfully, we've been full, and we've really -- it's been more hearing and reading about L.A. than really impacting our portfolio. We have a couple of spaces turning this year in L.A., not a lot. But for us, it's about 6% of our NOI that we'll address. But that market, if you said which ones that we're in feel like they've had the most instability, it's that one. But it's probably because we've -- I -- it as we look at our own thing, it's something that takes off like a rocket, usually lands about as gracefully as a rocket. So it was one of the hottest markets.

And that's why we like diversity in geography and we like diversity in our tenant base, too. Look, we enjoy the run-up, but it makes you a little nervous when things turn, there's no -- we can go to Florida, right, and buildings or lease and do things like that.

San Diego has been stable throughout. We like San Diego a lot. That's been the most stable of the 3 markets. We'd love to find the next value creation opportunity there. In the Bay Area, we just need to get the space leased. But I'll admit, it's taken a little bit longer than I historically would have thought, that those markets maybe have gone, I don't know, I've talk to one of our peers, who were saying they've gone from good to great maybe -- or great to good, in those markets.

[Samir Khanal, analyst]

Got it. And then I guess just a second question on maybe development starts. I mean you did talk about supply coming down, right, in the second half, which is similar to what your peers have stated. So I mean could we see you ramp up your development starts? I mean, how are you thinking about that?

[Marshall Loeb, executive]

Yes, I hope so. And if it's helpful, maybe 2 slides I'll mention. Here's what the danger. I wish it was a Zoom call rather than a call. On Page 10 of -- if you go to our kind of Investor Relations, our slide deck, starts. So people can look. And that's all sizes. But that will show you kind of how fast they've come down the last year plus now. And I expect first quarter to look similar to fourth quarter last year. It won't be much of a pickup. So there's -- when people do come back, the shelves of the store are going to be pretty empty.

And then on Page 12 is really the vacancy by size range. And to me, that -- these are both CBRE slides, by the way. That's pretty impactful, where you can see the supply that has not gotten absorbed over the past year, it's really in the big box space, that the shallow bay is still pretty full, and our starts have come down as much, if maybe not more, because it's less institutional.

So where we've modeled our starts, and I think we're being prudent, when we see people moving deliberately, we'll go as fast or as slow as kind of the field dictates on our starts. We've modeled $300 million. We've modeled it more towards the back end of the year. That's really heavier for starts.

And as Staci mentioned, that cost us about $0.05 in earnings, which isn't fun. I mean, at least they'll hit our G&A, but we think it's the right -- it's a long-term business, that's the prudent business decision. And I think -- certainly, if people feel better about the economy and want space, we'll try to get inventory on the shelves as quickly as we can. That's why we like having our long-standing relationships with the general contractors, having the permits in hand, having the GCs, everything ready to go.

And I like about industrial compared to some other product types, that we can deliver it pretty quickly. And certainly in this environment, because I think there'll be a lag effect for supply to catch up for demand by several quarters, and that's where I hope that should be a good -- we need to capitalize on it, but that should be a really good opportunity for our company.

[Operator]

Your next question comes from Vincent Tibone of Green Street.

[Vince Tibone, analyst]

I'd like to keep the dialogue going on just the broader supply landscape. So just within your markets, what percentage of new supply do you estimate to be light industrial and competitive with your portfolio? And then also, are there any markets where you're concerned about overbuilding and potentially market rent declines for your type of building in the near term?

[Marshall Loeb, executive]

Yes. Vince, we typically -- we'll say, and I don't think that was any aberration, 10% to 15% of supply is competitive supply. Because although we get questions of can they break up a big box for more shallow bay, really the dimensions, and it almost helps if we had an architect plan in front of us, those spaces get awfully long, awfully narrow and awfully expensive for those landlords. So the loading -- the runs for the forklifts get awfully long, the loading, you get 2 doors rather than 10 doors, dock-loading doors and things like that. So 10% to 15%.

And the markets where we're watching, besides L.A. that I mentioned earlier, that we're watching supply the most, would be Austin and Phoenix. That there's a little bit of supply. We've got good sites there. And that's maybe where we've pulled back on starts and inputs welcome. I've kind of said, in case I'm wrong, it's me, that I'd rather be 1 quarter to 2 late than 1 quarter to 2 early. So we're going to try to let some of the supply that's out there clear the market. And then I think there'll be calm, and again, will take us months to a year to deliver.

So it's not -- we're not putting the space on the shelves today. But when do we pull the trigger. We've got sites that are really like long term in both markets. But we've said, let's be a little bit -- I never want the team in the field to feel pressure from corporate to have a start, to let's be patient and watch it, and we're watching it closely. And as the inventory gets absorbed, how fast do we go?

I've not seen rents come backwards in any market, other than L.A. right now. That's the only one I'm aware of that I'd say where I've seen rents actually turn, and especially turn in our product type because the vacancy is, thankfully, less -- a lower rate than in the big box.

[Vince Tibone, analyst]

That's all really helpful color. Appreciate that. I just have one quick follow-up on the same-store guide. Are you able to provide cash releasing spreads that are assumed within '24 guidance?

[Marshall Loeb, executive]

We really have not. One, because we haven't been all that accurate, I have not disclosed that. I think last year, maybe 2 parts to same-store. Thankfully, our same-store occupancy, and this is in our supplement, was 98.4%. So I think it will be a good number. We've budgeted 97%. So a good number. It's just coming off what I think is a record. And I would expect re-leasing spreads. I think the rent growth will moderate this year. I think it'll still be positive, but will moderate.

But I think with our embedded growth, I would expect our re-leasing spreads to be similar. They actually, on a GAAP basis, got better. Each quarter was better last year for us. I don't see that trend changing materially this year. And so the cash re-leasing should follow -- or will follow that as well. And that's, without saying a number, that's probably pretty much what we've modeled, maybe a hair below it, just in case it does moderate some.

[Operator]

Your next question comes from Ki Bin Kim of Truist.

[Ki Bin Kim, analyst]

Congratulations, Staci.

[Staci Tyler, executive]

Thank you, Ki Bin.

[Ki Bin Kim, analyst]

So Marshall, just wanted to go back to some of the comments you made. I mean, you guys have an excellent balance sheet and significant financial flexibility. And like you mentioned that your cost of equity is lower than your cost of debt. Going back historically, EastGroup has -- I don't think has ever been known to do very large-scale M&A or portfolio deals. But given that the situation is a little bit different for you guys, does that change your thinking at all on larger-scale portfolio deals? Or is it more of a philosophical thing where, when you buy portfolio, you end up having to sell a decent chunk, so maybe that's not as attractive?

[Marshall Loeb, executive]

Yes. Ki Bin, you're right. That's I think, one, we don't want to make reckless moves, but I'd like to think, look, we did buy the San Francisco portfolio, and that was a unique situation. We're just about everything -- 90-plus percent of the NOI was what we wanted.

It's usually twofold. We -- either we don't like enough of the portfolio to make kind of the net cost when you think of the cost of selling those assets, that you don't want and things like that. Or probably I'm being modest, and the real reason we don't -- is we usually just get clobbered by somebody bigger that's willing to underwrite higher rent growth and a lower levered IRR and things like that. So usually, we just -- we ask the homecoming queen out a lot and we don't get a yes.

So we -- look, I'd love to find, if we can find opportunities to grow the portfolio smartly, we're all about it. Usually, portfolios draw more attention and you get more people bidding on them, to a certain scale where it becomes maybe only ProLogis and Blackstone or Link. But outside of that, you usually end up with a lot of competition and we don't win those bids. But if we found one that lined up, like we did in the Bay Area, we're willing to roll up our sleeves and try to make it work at a number that works for, what we think, for our shareholders.

[Ki Bin Kim, analyst]

Do you think portfolio deals have a discount today? And approximately, what does that look like?

[Marshall Loeb, executive]

I don't -- they probably have a discount to where they were. Remember, the broker is saying, if you put things together in a portfolio, they're actually worth more. It's hard because we've done better finding one-off kind of unique situations buying. When I look at -- not every 1 of the 6 we bought in call it the last 6 months, but the majority of them, there was something unusual about it, and it was a timing situation, or something where we've -- I think we've gotten better value than the market really at that moment in time in most all of those.

So I still think -- and where we bid on portfolios, there was one in -- I'd say, Georgia, it was Atlanta. There was one in Texas fairly recently, were a handful of buildings where we did not make it to the second round. And so I still -- I don't think the premiums may be what it was, but there's still a premium or just there's one on the market now, and it's a large portfolio. But even then, and I'm sure they take an offer on all of it, they've broken it into about 5 different buckets that you can bid on.

So usually, people say, we'll take an offer on all of it or any parts of it. But kind of human nature, their preference is probably still to bundle it and get as much of it out the door to one buyer. So we will certainly -- look, I like your thoughts and we've got the balance sheet today. Thankfully, we want to be mindful of that. But if we can find a portfolio acquisition, I'd love to say, well, you'll be the first to know about it, we'll have it. It's just historically, we like 2/3 of it or 3/4 and we don't like the other part, and then we got to sell it and you have the transaction cost and your effective yield goes down with all of that. Or we like it, but there's 10 people in line that are willing to take on more risk than we feel it's worth at that moment in time.

[Operator]

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

[Michael Carroll, analyst]

Marshall, I just wanted to circle back on your comments regarding development. So for EastGroup to kind of be more aggressive pursuing new development starts, do you need to lease up your projects in lease-up right now or in process? Or do you need to see the broader competitive set see some leasing?

[Marshall Loeb, executive]

Michael, yes. Yes, I don't mean to give a short answer, but a little bit of both. I mean I think in Austin and Phoenix, as I mentioned, we're watching the competition on the ground. And there, especially in Phoenix, we're full and we don't have a development underway. But we said, let's feel clear a little bit before we jump in the middle of it.

Typically, it is -- but it's also our existing product. And the way it would work would be we're in Phase 3 of a park. If roles reverse, Staci and I will call you and say, "Hey, Michael, we're 50% leased, I've got another lease out. I've got 3 proposals out. I'm going to run out of the inventory." And the tenant rep brokers want to see that visibility that when they promise their customers it's going to be delivered. So that's why we build spec. And so we'll get out ahead of that and started putting more inventory out there.

And that's really, to me, I like our model. It's reactive to the market, and it makes it really easier for me. Look, we know a Phase 3 isn't leasing up, kind of in your question, building Phase 4 doesn't solve our vacancy issue. And Phase 3 is going really rapidly, we'll try to get to Phase 4 as quickly as we can, and then try to buy the land adjacent to or around that park as close as we can, because we know we've got a proven product, and it really becomes a manufacturing process of just putting similar buildings up, and hopefully, then you get a critical mass of tenants, more than you want to know, and then we're really helping our customers grow and moving them within the park.

So that's really reactive to calls. But every once in a while, like right now, we'll say, even though we're full in Austin and we're full in Phoenix, there's a lot of people that are out there with space on the ground that we'd like to see that clear a little bit before we jump into those markets.

And look, if I picked 2 of our fastest-growing markets in our portfolio, if those aren't the 2, they're right there at it of historically top 5 growth cities in the country. So I think that inventory will get absorbed pretty quickly in those markets. And then we don't need to be the third developer. We may not be the first developer to follow too early, but I don't want to be the third one either.

[Michael Carroll, analyst]

Okay. And those projects that you're kind of mentioning that you want to get leased up in the broader market, are those I guess, shallow bay properties that are directly competitive yours? Or are they more outside the market, kind of the larger buildings that might not directly compete with you?

[Marshall Loeb, executive]

Yes. No, good -- if it's big box that's vacant, that really doesn't -- it may as well be a hotel. That really doesn't affect our thinking. In those markets, there's a decent amount of shallow bay that's out there that's either delivered or being delivered enough to kind of tell us like, look, maybe the right long-term decision, let's wait 1 quarter or 2, and there's really not much downside to being patient.

Hopefully, we get actually -- hopefully there's a reward for being patient and seeing how things play out. Then, hey, we bought this land, we've got to go just because we put it on a sheet of paper that we said we're going to break ground this quarter. So that's kind of how we're looking at it. We'll monitor it. And hopefully, it picks up during the year. As soon as that starts to clear we'll get moving fairly quickly on those.

[Michael Carroll, analyst]

Okay. And then just last one for me, like what are you doing all the predevelopment work on your projects? I mean how quickly once you decide to go vertical can you have it completed and delivered?

[Marshall Loeb, executive]

It got -- it used to be 6 months was kind of our answer. During COVID, it got as long as a year. It's probably back to 9 to 10 months. Electrical equipment, construction costs have come down from the peak, maybe 10% to 15%, thankfully. And right now, we're -- I guess maybe it's the push towards green energy, getting the electrical equipment, transformer, switchgear, all the things like that, we'll order it, but that's still about a year lead time. So the supply chain is better, but it's not perfect.

[Operator]

Your next question comes from Jason Belcher of Wells Fargo.

[Jason Belcher, analyst]

Just wondering if you could talk a little bit about any pockets of strength or weakness you're seeing across your different tenant industries, whether or not there are any groups that might be more aggressive than others in taking space or if others have maybe decreased requirements more abruptly than others?

[Marshall Loeb, executive]

Sure. Food and beverage is kind of one that's picked up off-late. Construction, a little bit, which is odd, but maybe it's the government projects and things like that, homebuilding, maybe some of that. So we've seen some construction, some food and beverage. And then if it -- and as I mentioned earlier, I think things hopefully turn later, the first type tenancy that -- usually the first in either direction are the third-party logistics firms. So we're still seeing activity from them. And I think when things turn, I think they'll be the first ones out there picking up contracts and gobbling up space.

But those that -- we've seen kind of a lot more green energy within our portfolio, and maybe because it was we had so little. But someone storing batteries, distributing batteries, working some kind of conversion, or energy related has been a new pocket of demand. And I think food and beverage. Also within kind of medical. We've seen a pickup in medical. As an aside, one, we have a number of tenants that basically it's an industrial building, but a pharmacy, where you order prescriptions or medical products online. And so we've seen a pickup of that -- a couple of them relocations from California to the Dallas market, for example, that we picked up.

[Jason Belcher, analyst]

That's helpful. And then secondly, can you just talk a little bit about your contractual rent increases or rent bumps and what you all are incorporating into newly signed leases there and whether you're getting any pushback on that aspect of the lease agreement? And then if you can also just remind us where your average escalator is across the portfolio.

[Staci Tyler, executive]

We've definitely seen that increase, say where a couple of years ago we would have been working up toward an average of 3%, now our portfolio average would be in the 3s. And on new leases that we're signing, we're seeing those 3.5% to 4%. In some cases, it's been above that. But I would say the norm has been in the 3.5% to 4% range. So definitely still seeing strength there. We have not seen any pullback from that recently. So continue -- and our expectations would be for that to continue, in the 3.5% to 4% range for new leases that we're signing.

[Operator]

Your next question comes from Ronald Kamdem of Morgan Stanley.

[Ronald Kamdem, analyst]

Two quick ones for me. Just going back sort of the rent growth commentary for the portfolio. I think you said positive. But was curious if you can give a little bit more color around there. And maybe also by market. I think L.A. may be slow. But curious sort of when you go through the markets, what are the ones that are sort of on the higher end, on the lower end? That would be helpful.

[Marshall Loeb, executive]

Okay. Ron, I think our expectations market rent growth, and not our re-leasing spreads, but market rent growth, probably inflationary, maybe a hair above for the market. I think for our product type, I would add 100 to 200 basis points just because the vacancy rate tradition is lower. So maybe you get to -- that may get you to mid-single digits.

And I think it will pick up. I think it will be better in '25 and into '26 with supply/demand, mainly because demand is falling off so much. Our better markets or the Florida markets have been strong. I'd say that Central Florida, Miami, those markets, Las Vegas has been a strong market as well. I know I mentioned Phoenix with oversupply, but that was at 1 of those 2 were our best embedded growth rent markets last year. Atlanta is still a good market.

So thankfully -- a few years ago, we would have told you California is really driving our rent growth. And now it's really spread off throughout the portfolio. And with the falloff in supply, I think that's only going to get better over the next -- it may take 6 to 8 months, but I think it's going to be better over the next 24 months following that.

[Ronald Kamdem, analyst]

Got it. And then just to close the thought, I think we've all sort of touched on that, the balance sheet could be pretty unlevered based on how much equity you're going to be issuing. And I guess, trying to figure out opportunistically, are you seeing anything in the acquisition market today that suggests that there may be sort of either distressed or opportunities for EastGroup to come in? Or is it still at the -- we're sort of in the wait-and-see mode? Just curious where you are in that phase.

[Marshall Loeb, executive]

Maybe not broad brush distress. I mean we're not seeing banks or things, although you read about banks still needing to reduce commercial real estate exposure and that industrial will get pulled into that bucket. And they're not distressed, but we have seen instances. One of the properties we bought, the seller had not owned it all that very long at all, and they -- supposedly they sold it at a loss. But they needed liquidity within their portfolio, and what they were able to sell, what we were told about the brokers, was the industrial, versus it's hard to sell office or maybe some other product types.

So I don't know if I'd call it distress, or people in a capital buying where a group had tied up a vacant building, gotten it leased, and then they were having difficulty sourcing their capital, and we were able to let them make a little bit of money, but we stepped into their position and assumed the contract and still got what we thought was a very attractive yield on the property.

So yes, I guess it's a little bit distressed, but I don't know that it's -- I guess I'm kind of trying to -- without violating our confidentiality agreements on some of those, describe them a little bit where it's a capital squeeze, and whether it may not be an entity level to stress, it's a developer who's having trouble meeting the closing date or someone needs to sell something. And our pitch is we're -- we may not be your highest bid, but we're your surest path to the closing table.

[Ronald Kamdem, analyst]

Right. Okay. So maybe not distressed, maybe just motivated or something. All right.

[Marshall Loeb, executive]

Yes. I like your adjective. Thank you.

[Operator]

Your next question comes from Vikram Malhotra of Mizuho.

[Georgi Dinkov, analyst]

This is Georgi on for Vikram. Just 2 quick ones from me. When you model credit risk, is it a placeholder? Or is it a segment where you anticipate a sector issue? And my second question would be if you can provide any color on broadening of demand from nearshoring.

[Staci Tyler, executive]

Sure. On the credit, tenant credit, and the bad debt that we have included in our guidance, our actual bad debt in '23 was $1.5 million, which represented about 27 basis points in terms of percentage of revenue. And for '24, we have $2 million baked into the guidance, which is about 32 basis points of revenue. And that's really just what an anticipated, I guess, level. If we look back at our 10-year average, our bad debt has run up 20 basis points of revenue. So last year was a bit higher, but we don't really have any reason to believe that there would be a major change from last year.

Just with the growth of the company, the number grows just a bit. And given some uncertainty in the economy, even though we haven't really felt negative impacts, it just seemed reasonable for us to include $2 million in our bad debt guidance. But we don't have any bad debts identified and really have not seen any particular tenant industry or any particular market where we can detect a trend in any credit deterioration.

It's just been each one has a story, but nothing too significant. And if we look at our watch list of tenants that we have a reserve for, out of about 1,600 leases, we're in the 15% to 20% range on number of tenants that we have on our watch list where we might have a reserve. So still a very small percentage of total overall and no trends that we've been able to detect and no overall deterioration.

[Marshall Loeb, executive]

And then on nearshoring, what we like about it, it feels like a slow, steady long-term build rather than a rush, which may be more temporary. But we've seen El Paso has been a strong market now for 3 years, and we've been there 20%, but the best 3 years in the last 3. Phoenix is a strong market on its own, and Tucson, but they've both been solid markets for us. And a little bit -- El Paso is a border market more so where Phoenix and San Diego were their own markets that also benefit from onshoring, nearshoring.

So we're seeing more certainly manufacturing in the southern half of the U.S., whether it's green energy, that type related, and then we're seeing more nearshoring. I think those are certainly long-term decisions that companies make, but it's, whether it's a labor strike in L.A. or the Suez Canal, I have to think all that just volatility will push people -- look, the border is open every day, the ports have their own challenges and benefits in any given quarter. It seems to fluctuate, at least just -- we're not a port-related portfolio, but you see the issues those have.

And I would have to think it pushes manufacturers to, if they can make the numbers work, go to Juarez, go to Tijuana, go to Nogales, Mexico, and just cross the border. And that's where we -- I like that we're not totally dependent on the border in Phoenix and San Diego, but that we all -- that's one more benefit besides growth that those cities offer.

[Operator]

There are no further questions at this time. I would hand over the call to Marshall Loeb for closing comments. Please proceed.

[Marshall Loeb, executive]

Okay. Thank you, everyone, for your time today. I know, if we didn't get your question, Staci and I or Brent too, he's back in the office are certainly available, feel free to e-mail us, call us if there's anything we didn't get to. We'll hopefully see you all here in a few weeks at our upcoming conference. But I appreciate your time, and I hope to speak to you all soon. Take care.

[Operator]

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