EastGroup Properties, Inc. (EGP) Q2 2020 Earnings Report, Transcript and Summary

Good morning, and thanks for calling in for our Second Quarter 2020 Conference Call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

Please note that our conference call today will contain financial measures, such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our Web site 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 and within the Safe Harbor under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release along with our remarks are made as of today, and we undertake no duty to update them whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risk factors in our SEC filings. Marshall Loeb Thanks, Keena. Good morning, and thank you for your time. We hope everyone and their families remain well and out of harm's way. I will start by thanking our team. They've done a great job transitioning our operating strategy quickly and doing so while working remotely. Our second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. The team had a solid quarter producing such that -- as funds from operations came in above guidance of 9% compared to second quarter last year. This marks 29 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. And for the year FFO per share is up 9.5%. Our quarterly occupancy was high averaging 96.6%, leaving us 97.5% leased and 97% occupied at quarter end ahead of our projections. Our occupancy is benefiting from a healthy market with accelerating e-commerce, and last mile delivery trends also benefiting our occupancy is a high year-to-date retention rate of 84%. Re-leasing spreads were strong for the quarter at 13.8% GAAP and 7.9% cash. Year-to-date leasing spreads are higher at 20.1% GAAP and 11.5% cash. Finally, same-store NOI was up 4.1% for the quarter and 3.9% year-to-date, and some during an extremely choppy environment, I’m proud of our team's results. Our strategy remains one of maintaining occupancy and cash flow with an eye on liquidity. I'm hopeful, our strategy will shift again later in 2020 to focus on growth. In terms of liquidity, I'll thank Brent and our finance team, as at quarter end, we have the highest availability on our line in the company's history and one of the lowest percentages drawn on our line in decades. Brent will give you color commentary about our upcoming debt placement, further improves our liquidity while lowering our cost of capital. I'm grateful we ended the quarter generally full at 97.5% leased, while Houston, our largest market at 13.8% of rents is 97.9% leased, has roughly a 4% square footage roll through year-end and a 5-month average collection rate on rents of over 99% [indiscernible] being the length of this pandemic today. Company level rent collections remain resilient. For July thus far, we've collected 95% of rents. The unknown is when the economy truly reopens, how fast it will reopen in which cities and are there any shutdowns remaining. We and everyone else simply have less clarity than normal even several months into this. Brent will speak to our budget assumptions, but I'm pleased that with our second quarter results in a realistic plan, we can reach $5.28 per share and FFO are only $0.02 shy of our original pre-pandemic expectations. Towards that end, we have thankfully also have the most diversified rent roll in our sector with our top 10 tenants only accounting for 7.5% of rents, down almost 200 basis points over the past few years. As we've stated before, our development starts are pulled by market demand. With the shutdown, we reduced projected 2020 starts to reflect first quarter actual starts as well as some level of pre-leased conversations underway. In other words, we're not forecasting new spec developments at this time. We're also looking at acquisitions and value add investments in the same light. Given the positive long-term distribution trends we foresee, we're working on several land sites, which we view as valuable development parcels when the economy stabilizes. And in the meantime, we view operations working with our tenants and maximizing liquidity is the key goals until we reach the next market phase. And now Brent will review a variety of financial topics, including our updated 2020 guidance.

Good morning. Our second quarter results reflect the resiliency of our team and strong overall performance of our portfolio amidst unprecedented conditions. FFO per share for the second quarter exceeded our guidance range at a $1.33 per share and compared to second quarter 2019 of a $1.22, represented an increase of 9%. The outperformance was primarily driven by our operating portfolio, maintaining occupancy and collections better than we had estimated in April, which was the initial onset of the pandemic. I will center my comments around our capital status, rent collections and deferment request and assumption changes that increase the midpoint of our FFO per share estimate. During the second quarter, we raised $30 million of equity at an average price of $123 per share. And earlier this month, we agreed to terms on two senior unsecured private placement notes totaling a $175 million. The $100 million note has a 10-year term with a fixed interest rate of 2.61%. The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%. We anticipate closing on both notes in October. That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength, which is serving us well during this time of uncertainty. Our debt to total market capitalization is 21%. Debt to EBITDA ratio is 5.1x and our interest and fixed charge coverage ratios are over 7.2x. Our rent collections have been equally strong. We have collected 98.1% of our second quarter revenue and entered into deferral agreements for an additional 0.8%, bringing our total collected and defer to 99% for the second quarter. As for July, we have collected 95.5% of rents thus far, and have entered into deferral agreements on an additional 0.7%, bringing the total of collected and deferred for the month to 96.2%. That is slightly ahead of June's pace. Last April, we reported that 26% of our tenants had requested some form of rent deferment. In the three subsequent months that has only risen to 29%. We have denied 79% of the request, are in various stages of consideration on 8% and have entered into some form of deferral agreement with 13% of the request. The rent deferred this far totaled $1.5 million, which only represents approximately 0.4% of our estimated 2020 revenues. As we stated last quarter, the depth and duration of the pandemic and its impact on the economy is undeterminable. However, the immediacy and degree of potential tenant financial distress and loss of occupancy, we had budgeted for an April did not occur in the second quarter. As a result, our actual performance and revised assumptions for the remainder of the year increased our FFO earnings guidance by 2.1% from a midpoint of $5.17 per share to $5.28 per share, or 6% increase over 2019. Among the changes were an increase in average occupancy from 95.2% to 96% and a decrease in reserves for uncollectable rent from $3.8 million to $3.6 million. Note that the reserve for potential bad debt for the third and fourth quarter of $2.4 million is not attributable to specific tenants. Rather it is a general assumption that there will be some companies who succumb to the disruption in the economy caused by the pandemic. Other notable revisions include a lower average interest rate on new debt and the increase of equity issuances by $95 million. In summary, we were very pleased with our second quarter results. We will continue to rely on our financial strength, the experience of our team and the quality of our portfolio to navigate us through the remainder of the year. Now, Marshall will make some final comments.

Thanks, Brent. In closing, I'm proud of our second quarter results. We’ve said the past few years, our fear wasn't [indiscernible] a oversupply, as much as a Black Swan economic event. You don't want either, but now we have just that. Our company and our team have worked through these before and while different we're working through this one too. As the economy stabilizes, it's the future that makes me the most excited for EastGroup. Our strategy, which has worked well in the past few years will come out of this pandemic with trends that we're hearing of, including companies carrying additional safety stock inventory, shopping habits that have changed accelerating the consumer to e-commerce, new industrial users as a result of these shopping habits and increased U.S manufacturing or near shoring in Mexico. Meanwhile, our bread and butter traditional tenants will remain and continue needing last mile distribution space in fast-growing Sunbelt markets. All of these, along with the combination of our team, our markets and our properties have me optimistic about our future. Well now open-up for any of your questions

[Operator Instructions] We'll take our first question from Jamie Feldman with Bank of America. Please go ahead.

Good morning, guys. This is Elvis on for Jamie. Just a quick question. If we can just drill into Houston and what makes sort of your rent collections there stronger relative to the rest of your portfolio? And then number two, any outlook you can share on supply demand, rent changes that you're seeing in your sub markets relative to the rest of the market? That would be helpful.

Good morning, Elvis. It's Marshall. I'll take the start at that. In Houston, and -- probably a couple of three things. One, and it's always hard to quantify from outside, but we have a really good experienced team that's worked well together for a long time in Houston and we've [indiscernible] them. Houston has a downturn about every few years, so they've got a lot of experience. And so they have done a good job and been very diligent about chasing down tenants, maybe comparing it to some other parts of the country really probably focusing out West to Texas is probably more favorable market in terms of landlord rights when tenants don't pay and things like that. So that ability to lock someone out or really push to kind of hone that negotiation probably legitimately helps with our collections in Houston. And then the third thing I think that sometimes gets lost in the kind of the high level market overview when we shrunk our size, our investment in Houston from a little over -- kind of a low 20% down to below 14% and still dropping today, what we sold were older kind of standalone buildings and what we've kept are really the buildings that EastGroup has developed that are in marks. So the quality of what's left and this statistic is a couple of years old by now, but I remember as we were selling the average age of what we were selling was in the high 30s, like 38 years, is what I remember in the average age of what we still had was 8 years. So it's a -- fairly, it's a new highly functional, well located EastGroup developed type parks of what we've got left. And so I think that attracts credit quality tenants that I think even if there are smaller spaces, one of the things it's kind of gotten lost the last few months on us is, a general kind of painting of, okay, EastGroup has smaller spaces that must mean mom and pop tenants. And there's a lot of national and public or private well capitalized companies that need last mile space. And so you're seeing that in our company collections and then our Houston team has just done a great job and been after it to be over 99%, the past 5 months. I'll admit it surprises me how well we've done and fingers crossed we'll keep after that. In terms of any specific submarkets, it's been pretty broad brush, the trouble we've seen within our tenants it's not so much by size of space as to what they're doing. It's markets that concern us a little bit. Certainly there's Houston, because of the supply. Although I think people get lost in how much of that is, most of that is big box, not shallow bay. And then the other statistic, which gives us some comfort of the 18.8 million square feet in Houston under construction, it's roughly 50% leased, 49.2% leased per CBRE. So most of that space is accounted for that leaves a little over 9 million square feet, but absorption year-to-date has been over 6 million square feet, even during the pandemic in Houston. So hopefully we'll work our way through that as a market. And then a lot of that, thankfully, the majority of it by far is not shallow bay. I'm trying to think of any specific markets. The tourist markets concern me a little bit, just because like a Las Vegas, we need the strip to be open, tourists to be coming to town. It's not a large market for us, but that certainly helps our -- our tenants need the economy to be open. And the same way with Orlando, for example, Tampa has been a very stable strong market. We've had some great releasing spreads there and things like that. In Orlando, we've hung in there, but with -- and I guess Disney's reopened now, but with Disney and Universal Studios and convention slowing down in Orlando, those are the markets we've said have been hit a little harder than a Dallas or Charlotte or some markets that are little more stable like that, Austin, for example.

Thank you. That's very helpful. And then just one more question either for Marshall or Brent. On what you were thinking, when you lowered guidance in -- with 1Q release and then obviously increasing guidance now, what did you see from tenants then versus now? Is it that the markets have reopened? Is it that some of those industries that you thought would not survive are actually thriving? What exactly are you seeing that's different quarter-over-quarter?

I'll take and then Brent jump in and we'll both kind of try to answer. I think, as we pulled together, to us, as we've kind of said, this shutdown really started and it was a -- like a curtain coming down in an instant, that Friday, March 13th, that's all like things came to just as dramatic, shocking stop. And then a month later, as we were pulling together our guidance, one year just kind of watching the news, watching the economy it's -- and all working remotely, as we were pulling this together, we just said with this kind of shutdown, it's going to really impact our tenants and people aren't leaving their homes. So the ability to backfill space, it's going to be very difficult. What surprised us or me to the good is just how critical our space is to our tenants, even those that have been in trouble, some of our bad debt, we're still working with those tenants to try to figure out why they're trying to stay in their space or get bring an investor on board and do things like that. So I've been pleasantly surprised. And then when things shutting down, it is accelerated as people read e-commerce so much. So there's more and more companies with social distancing that that has led to incremental demand. As you know, as the Amazon, as the home building, the e-commerce tenants have really grown pretty rapidly this year and continue that, and we've picked up probably our market share of that. So probably seeing that happen that quickly surprised me. You think it makes sense that it's going to happen. I just -- we probably didn't expect it to happen as fast as it, as it did. And I'm really surprised that our average occupancy for the quarter at 96.6% is the same as last year and last year was a record year. So if you had asked me in April, our odds around occupancy staying the same, I would have been wrong, but I would've bet you a lot that it was going down and thankfully it hung in there. Brent, any color or commentary around this?

No, I think that's right on. I mean, the reality is in April it was so soon, we just didn't know. And now we have a little bit of data and like Marshall said, very pleased with how everything held up and there's still some uncertainty even maybe toward the end of the year. We've got a few things dialed into guidance to hopefully adjust for that. But yes, I would say in April, we just -- we're so early into it, you just didn't know and you felt like you needed to do something to adjust for the lack of any -- with any knowledge of what might happen. So again, we're very pleased with where we are, Elvis.

Great. Congrats on the quarter, guys.

Thank you.

The next question is from Daniel Santos with Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking my question. I guess the first one is wondering if you could give some more color on why you're baking in such conservative guidance for occupancy in the back half of 2020, just given the first half has been better than expected. One would expect that the second half would kind of continue that trend, just some color on that would be helpful.

Yes, I hope -- we hope you're right. I mean, we -- our thoughts and to date, thankfully at least speaking at kind of here at the end of July, maybe one more month into it with -- since quarter end we've hung in there. We thought just is this, the economies reopened, but not exactly reopen, restaurants at 50%. I don't know that things won't get shut down again, different places where you've heard of different States, different cities shutting down bars, shutting down this, that gyms are different things that I think that over time has to stress -- the 1,600 tenants has to stress on our tenants balance sheets over time. So I hope you're right. I hope we're being conservative, but we thought that we're not out of this yet. And it is the month build upon each other, it's got to be a drag on some of our tenants. So as we -- it's not anything specific, there's not any one market, any two or three tenants specific, any large ones that really drive it. It is just more of a -- I'm not sure, or I don't believe we're through the end of this. And over time more of our tenants have to get almost kind of kicked off by a weak economy.

Got it. That's helpful. And then my second question is on distribution and how much would you say -- I appreciate the comment on the incremental demand from e-commerce. So how much would you say COVID has really changed distribution and last mile in a permanent way versus something just temporary change between now and when things go back to quote unquote normal?

Okay, good question. I mean, I think the spike that we read about in terms of how much -- pick any retailer almost much less than Amazon and things that what the numbers out, seeing that e-commerce growth in terms of retail sales, where it was in the high teens. And it had jumped up into the low 30s as a percent growth and that people were expecting it to moderate back. And maybe the 20s, but I don't think things will go back to the way they were or some of the things we've read and actually seen that this shutdown has demystified e-commerce for a large segment of the population. So I think the way people shop and maybe the way they live too, which I think will help us over time and Sunbelt markets live and work, I think those trends have started -- this is all accelerated that. If they were all coming this way, e-commerce and last mile was coming our way. Company relocations, people relocating the -- fast growing Sunbelt markets was happening. But I think this will add fuel to the fire coming out of this, and it really will accelerate it, almost the other side, as you see shopping malls dying, I think they were dying, but this is -- somebody said, this is euthanasia for some of them. It's pushed it ahead two or three years.

Got it. Thank you.

Sure. You're welcome.

Thanks, Dan.

We will go next to Manny Korchman with Citi. Please go ahead.

Good morning. This is Katy McConnell on for Manny. Can you discuss the potential impact of the PPP program rolling off for your tenant base and with the rent collections or increased deferrals that you might be factoring into your estimates for the balance of the year?

Yes. Hey, this is Brent. Good morning. Obviously, we have had some direct feedback from tenants that had initially put in request, and then we got feedback later, hey, we received some PPP money and got caught up. And so certainly we've seen some tenants benefit from that. It's hard to tell out of our 1,600 to 1,700 customers exactly to what extent that's helped. We did do a cross-reference of our tenant base to the public list of companies that have received PPP money. We used 150,000 sort of as a minimum. So we were looking at people that received 150 or greater. And it appears that somewhere around 20% of our tenant base did receive form -- some form of PPP money, which seems to make sense to what we expected. I mean, we've, as Marshall mentioned, we have only had 29% of our tenants at some. And most of that, 26% of the 29% occurred back in April requested some relief. In terms of whether they extend the program, that'd be helpful. I think anytime you put money into people's pockets, certainly that would be beneficial. I think, 80% plus of our tenants have shown a good resiliency without that. So it -- really not a lot we can control in that. Certainly if it's part of the program, we would expect that would be incrementally better, but if they don't -- our tenant base been longtime customers of ours and we will continue to work with them, but it's hard to tell what impact that might would have, whether it does or doesn't happen.

Okay. Thanks. And then maybe following up on Houston for the leases you have expiring there, the CR index, can you talk about your expectation for retention as well as backfill demand there?

Sure. probably the good news I think that's kind of given the choppy environment, what we've got rolling between now and year-end [ph] is only about 4%. So not at a time and today at the company level our retention -- I think this uncertainty has led our tenants to renew. Usually you're -- people working on growth and we were talking about, kicking off new buildings here and there in certain cases. And they've pushed -- put those -- understandably, put those on hold until the economy feels a little more solid. So our tenant retention as a company is about 80% -- is 84% year-to-date. And if you were building your model on EastGroup from scratch, I would tell you 70% is usually our long-term and most everybody else's long-term retention rate. So uncertainty has led to a higher retention rate in Houston and in other markets. My guess is we have more rolling in 2021 as the economy stabilizes hopefully. I think we'll have -- probably keep that and work our way through rents have come down in Houston, probably 5% to 10% as a market. The good news is -- anything that you had that may be two to three years, those that are coming up or expiring are going to be anywhere approximately from 3 to 5 years. So there's still embedded rent growth there, maybe it's down. And I think as with supplying stopping really across the country, for the most part, I think because industrial is held up, supply will probably pick up a little more in the back half of the year, but I think Houston we'll work our way through those. And I would expect probably 70% plus retention rate and probably it'll start to -- hopefully things normalize in the back half of 2021 and things like that, but nothing alarming to date.

Okay, great. Thank you.

Okay.

Our next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.

Hi. This is [indiscernible] on for Vikram. Congrats on the quarter. Just, could you provide a little bit more color on your expectations for development starts? I know you said that you're not going to have any future spec development starts, but given the -- your confidence on the outlook, just curious, why -- why not push development a little bit more?

A good question and probably as we think about it, honestly, if you divide the second half of the year and the quarters really into another half, we had [indiscernible], we stopped our spec starts because the economy was so uncertain in second quarter, we are feeling better about things. Although it's still cautious here in late July probably we will not have any starts in third quarter. And then as we roll into fourth quarter, there are some -- between third and fourth quarter, There are some pre-leased conversations we're having where we would -- if we get a lease sign, we would build a tenant -- we'll build a building for that tenant and we have a number of proposals out. So that's probably the biggest part of the difference of the spec development, which is about 70 million in starts between now and year end, and probably what we are thinking about it a little bit differently there markets like Charlotte, Phoenix, Northeast Dallas, there's several markets where I think if these are normal economic times, we already would have started that next space and next couple of buildings within an existing park, but we've really put those on hold. And probably what's giving us a little pause, not is really watching our own portfolio, but also watching the market. We've said thankfully, where 97% plus lease, but delivering that next building, you want to make sure your peers are also pretty full. But we really thought construction prices are dropping with this slow down because of not only has industrial slow down, but hotels, retail, office, entertainment type development has really stopped. So we are seeing the benefit of waiting in terms of construction pricing a little bit. And then we also wanted to just see what the vacancy rates, kind of submarket by submarket, how those went or which of our tenants, what they can see we may get within our own portfolio, but thankfully we've not knocked on woods, seen much of that today.

And just to follow-up on some markets, it looks like from the core market operating statistics that run through a little bit weaker, at least same property NOI was a little bit weaker in the California market. Can you kind of just talk about what was going on there last quarter?

Last quarter, well, one I can -- that was weaker for example, is San Francisco and they're at a good property and Hayward, we've got a vacancy there. So it has been -- it was vacant the entire quarter and last year it was full. So it's really a drop in occupancy. The good news is we have an agreement and we'll see if it comes back signed, but we have a -- have an agreement with a prospect and lease out for review and hopefully signature there. And then probably the same thing just kind of looking through the quarter or year-to-date, Fresno is not a large property there. It's a park that we've owned in Fresno since the late 90s, 400,000 feet and just a little bit of a pickup in vacancy there. But the biggest one, and we should get, we've had some still really strongly leasing spreads as you look at kind of in San Francisco, mid 50% type, that'll be one of those tight spaces when we get it released. It's just -- and it's taken a little bit longer. I would say that space, the markets East Bay kind of Hayward area towards Oakland and San Francisco is 2% vacancy, sub 2%, but one of our markets that's been shut down probably a little bit longer being California then say Georgia or the Carolinas. And so it's drugged that vacancy out a little bit longer and that hit us in second quarter there.

Great. Thanks so much.

You’re welcome.

Next question is from Michael Carol with RBC Capital Markets. Please go ahead. Mike, please check the mute function on your phone.

There we go. sorry. Marshall, can you provide some color on your comments that the company's plan on increasing safety stock? I know that's been a conversation that's been going around now for the past couple of quarters. Have your tenants indicated that they plan or need to hold more inventory to sustain some of these potential supply chain shocks? I mean, have they voiced that directly to you yet?

It's probably -- it's more -- certainly, it's more us reading and hearing about it and hearing it at conferences and conversations with brokers than direct. I would say, kind of between -- I guess the tricky part from April to now, we've been in front of our tenants less than typical, you may have phone calls and things, but you're certainly not traveling and walking through spaces where you kind of get a sense for how they're using it, but what we were hearing and then -- hearing directly a little bit through tenants and then more through brokers and other people is just because people got sourcing from China and had less inventory that they're going to need to carry more inventory and probably carry more inventory as another brokers once said to us at any time when someone hits click to when it gets delivered to your doorstep, that speeds that up, that's where the world's going. And that excites us given higher type properties and how close we are to rooftops and typically higher end, better educated rooftops, more e-commerce oriented. So I think coming through that companies are -- before it was a logistics center and they'll still have those on the edge of town, in Chicago and South Dallas, South Atlanta, but now they're need to carry more and more inventory near rooftops to get when you go from Amazon or delivering in two or three days to Amazon Prime and Amazon Prime now. So I -- and think that in itself is leading to more inventory and we’re -- I think, I did read where I'm trying to think of which company is relocating already craftsman tools from China to [indiscernible], which is one of our markets. So they'll manufacture there. So we’re -- some of these long-term trends you're seeing maybe that I'm using [indiscernible] green shoots of that, but I think it's pretty early on, but hopefully it continues to come our way.

And then I guess how broad base do you think this will be among tenants? I mean, will the larger tenants be the ones mostly driving the higher inventory, or do you think smaller tenants will need to do that too? And I guess if so, they do hold more inventory, where are they going to hold it out at? I mean, is it going to be in the -- into shallow bay space [indiscernible], or is it going to be more in the outskirts of some of these major cities?

Probably. It's probably a little bit both. I mean, and I think we -- early on in the -- in this kind of this being the downturn, we saw the national tenants still being the most active ones, kind of our conversations, Home Depot, Lowe's, Wayfair, Tesla, some of those type of names been in the last 30, 45 days. It's been more local regional tenants probably as the economy stays open and get us a little more certain, it's nice to see those local kind of regional tenants start to be active. I think that we'll all need to keep more inventory or probably think about that. They probably have their inventory in their warehouse, depending on how local, regional, I think it's the national companies. And I do think, I guess, as we talk about like a Lowe's and a Home Depot it's so much cheaper for them to keep their inventory with us than it is in a strip center type property, the large bulky items that you're not leaving your home with, that's where you would order a washer dryer and it gets delivered from an EastGroup warehouse in Atlanta or Tampa or Miami. And that's cheaper than keeping it -- only picking on them because they're Florida then say a regency center that somewhere else in Florida or something like that. So I think that trend will keep coming our way because our rents are probably a third to a quarter on a gross basis what a typical strip center retail rent would be. So I think that's all coming our way and people will figure it out, just don't work on their supply chain and chipping away cost and that pushes more and more inventory our way. We've seen it as I'm thinking about Florida, where -- and it's another group we're having conversations with, but Nike they've got space for Nike and their different brands with us. And -- because it's cheaper to use us as backup store, given all the tourists and the outlet malls in Orlando, they run hourly van service back and forth to our buildings and for Nike, what -- and Hurley and some of their concepts to continue growing and using our type buildings.

Okay, great. Thanks.

Sure.

Our next question is from Bill Crow with Raymond James. Please go ahead.

Hey, good morning. Congratulations, guys. Marshall a couple of topics that seem to surface pretty often. I just wanted to get an update from you. Number one, what are your tenants telling you about their ability to source labor? And number two is just any color on construction costs. We know the growth had been coming down. Are we actually seeing material declines in construction?

Are we seeing that our shell costs come down a good question. Good morning, Bill. I guess backing up that we've seen our shell costs on buildings come down $1 or $2 per square foot. So, it starts to be a meaningful number. We said while rents have kind of -- the rent growth is at different times, people have thought nationally that rent growth would be flat for 2020. I'm starting to think it'll pickup some in the back half of the year, given how strong as we cut -- as we talk to our peers and read their reports and things like that, they think rents will maybe pick up in the back half of the year. Labor certainly has picked up with -- and it has to with unemployment. It used to be such a big part of conversations of tenants, of where if I come to this location, where am I going to source labor and type markets and especially tight construction markets where in a couple of cases, the general contractor had fenced the site where they were building our buildings so that they could lock -- basically would lock the workers in because during breaks, the competition would show up and try to hire the workers away. So that gives you an idea of how tight labor was, and that was going on. I don't know that that's completely stopped, but I would think were unemployment is labor. And what we're hearing is labor is more available, but last certainly on construction, but a little bit less efficient -- and rightly so because of safety, distancing requirements and things like that. So we've kind of continued our development construction on buildings. We have underway drag our heels a little bit because prices were coming down and we think rents will bounce back a little bit. So that's -- part of that you're trying to time, when do you really start developing again in it and it's early and it just depends on how you think you can get real nervous about thinking about kids going back to school and things like that about another shutdown. So we're being a little bit cautious about that.

Marshall, on the way on development land, any indication that it is the competition for the land is easy a little bit, or that more owners are looking to liquidate land in order to maybe pay for other investments given this economic environment?

Yes, we -- good question. We are not seeing distress in terms of industrial assets, if anything, it seems like demand may have picked up. On land, however, it does seem like there's a little less -- there is less competition for land. The prices have been sticky. And part of our thinking has been land has been -- when we’ve made a [indiscernible] last November, we would have said our long-term concern is it's awfully hard to find good industrial land sites in fast growing markets, that it's been so picked over and land gets priced out of range for industrial. So we are trying to tie it up as long as the seller would let us have our funds go at risk as late as possible, but if then happy and that we've been able, and then some of it's been in the press to tie up some contiguous land nearest in Charlotte like our Steele Creek, which has been a very successful development, tie up some land in Northeast Dallas where we could continue developing a good park there, San Antonio. And so we've really -- and again, contiguous land is I'm kind of thinking through our portfolio in Fort Myers where we're building that what would be the last building and a park -- number of the eight building and a park and we're out of land and they were able to source some adjacent land because once you get that many tenants as we have there, really the next thing to do and it makes our development risks. I felt like so much lower than maybe some of our peers, as you're just waiting for one of your existing tenants to raise their hand and say, I need another 30,000, 40,000 square feet. So we'll move you into building 9 or 10 and backfill your space at a higher rent. So we're trying to use this opportunity to bolt-on a little bit to some of our existing parts, whether it be Charlotte or Fort Myers or Northeast Dallas or places like that, or you can pick up land here or there, because we think coming out of this for -- the reasons we talked about earlier, whether it's e-commerce or manufacturing or safety stock, or just relocation to Sunbelt markets out of kind of mass transit markets in the Northeast, as those pickup, that land is only going to become more and more near and dear. So if we can use this downtime to slowly and again, if land gets a little scary we want to add a reasonable amount of land so that you don't get stuck carrying it for too long, but that’s how we're thinking about it. And yes, and unfortunately, when we talk to the brokers about distress sell, they'll kind of kid and say, I'll put EastGroup here into the EEs [ph] because I've got a Rolodex of names of people that want to buy distressed industrial right now.

Sure. I get it. All right. Well, thanks for the color. I appreciate it, guys.

Sure. Thanks, Bill.

Go next to Eric Frankel with Green Street Advisors. Please go ahead.

Thank you. And thank you [indiscernible] with me on my phone issues. Just a -- an accounting question. Can you -- your bad debt assumptions for the second half of the year, can you express what that is going to be on a cash basis?

Hey, Eric, good morning. It's Brent. We wouldn't know until it occurs, what's been happening through the first two quarters. It's probably been running probably 2.5 to 1 straight line versus cash. So, so far out of the $1.2 million or so for the year to date just over 300,000 of that, about 325,000, that has been cash. So the cash component of it will be just like it's been, we would anticipate it being similar to where it would be a smaller percent relative to straight line. The $2.4 million, we have 1.2 per quarter, as I mentioned, the lead in, that's just a general overall bad debt allowance, not specific to tenants. And we really don't have that necessarily broken down. We do some internal things, but it'll be like, say I would expect whatever we have occurred, we certainly hope that proves to be conservative. But whatever it, it comes to be, I would say it'd be 2x to 3x probably greater on the straight line side versus cash.

Okay. That's helpful. And then I think, Marshall, you've kind of expressed this in a couple of different ways, but maybe just to clarify specifically, you're leasing this core of the average lease terms a little bit shorter than it's been for the last few years. So that just based on a little bit of uncertainty on tenants as their growth plans have installed. So I think you're down to roughly 3.5, 3.8 years or so on leasing this quarter. Is that a trend you expect to stay? Do you think that will go back to where it's been the last few years?

Good catch. It is a little bit down. It's been there before kind of late '16, late '17, we've been kind of around that 4 range, but it's not dramatically down, but a little bit. It wouldn't shock me, given the uncertainty for third quarter to stay there. And as the economy gets to sound footing, I think then we'd go back over the 4s, which is where it's tradition -- kind of 4.1 to 4.5 that type thing. So I think it kind of, again, a good catch. I think it's more uncertainty in the market and we'll do a 3-year renewal because we're not sure and just stick where it is. But I would expect and this is me estimating that it would normalize hopefully by fourth quarter, first quarter, next year, depending on how COVID plays out.

Okay. Thanks. Final question, just related to kind of what you're seeing on the last mile demand front. How much of this last mile demand is as you're describing with your Nike [indiscernible], just like store replenishment versus actual customer delivery or delivery to individual consumers?

It's mostly customer related. It's usually we're going to ship out of an EastGroup building rather than our retail store. [Indiscernible] some of our customer use, we used to have store level inventory and now we've moved to market level inventory. So that by and large, most of it probably store level storage where you're that backup house. There are a few examples of it, but that's more the exception.

Okay, great. Thank you.

Sure.

Go next to Craig Mailman with KeyBanc Capital. Please go ahead.

Hey, guys. Marshall, you mentioned, Houston rents are down 5% to 10%, but are you seeing any kind of market rent weakness outside of Houston or significant rise in concessions across any of your markets?

Good question, Craig, and not really. I mean, we've seen it probably not on renewals, those have stayed pretty consistent. All of our tenants, just about everybody has a tenant rep broker and where it's typically been in the development pipeline or where there's a vacancy, where you'll get, it's usually about rounding third base on getting a deal done and they'll ask for a month or two of free rent. So we've seen rent -- free rent grow up where the rents have been pretty stable, the annual increases have been pretty stable, where there has been a little bit of market movement as tenants realize, there's not -- there's not as many tenants out in the market. So free rent could chip up a little bit rather than two months on a longer term lease. Maybe they'll last for two more or three more and we'll settle somewhere in the middle. But outside of Houston, thankfully, rents have been probably leveled out, but not going backwards.

And we’ve heard from some other companies that maybe there's been a trend to try to push bumps higher, or have you guys pre-COVID, or you part of that trend to try to get escalators into that 3.5%? Or if you guys kind of [indiscernible] on that side of the lease equation?

Probably -- usually the bigger the space and the longer the term, they'll make sense. They'll negotiate those bumps probably closer to 2%. We'd love to go higher, but we're probably typically have been around that 2.5% to 3%. And if we can go higher than that, we would. And again, I guess that's where we're probably -- it probably boils down between the two brokers. If everybody has a tenant rep broker and you're on a spreadsheet comparing it versus your peers, so probably heading into this, we were trending higher, but not materially higher. And it's really a case by case basis. And if you get to a 10-year lease or a bigger space, those tenants are going to push back pretty hard. And that's going to -- and they're going to get closer probably to 2% to 2.5% rather than 3% percent bumps.

Okay. And then just one last one. I apologize if I missed this, but just looking at kind of the monthly collections here, it looks like there's been a marginal fall off as you get further away from April. I'm just curious, is there anything going on there or is it -- what's driving that? And also, I mean, your portfolio has been to markets that have [indiscernible] at the start of this kind of more insulated from the impact of COVID versus the Northeast markets and maybe more on the West Coast. Are you seeing an uptick in deferral requests as [technical difficulty] often, maybe COVID kind of impacted communities a little bit more?

Yes, Craig, good morning. I'll answer the second part first. We have not seen an uptick in deferral request and it's actually gone the other way. The deferral request, thankfully, so [indiscernible] here have really trailed off. Our guys, we have a process where we're getting at least weekly reporting from each asset manager in the field and for maybe three or four weeks running now, a lot of those updates have basically been no new update, meaning there's been no new request. And so that has certainly trailed off significantly. The AR we're very pleased with where the collections are. And you can see we've deferred very little. Our collections have remained high. Our teams worked hard. There certainly has been, as you mentioned, a minimal decline month-over-month, that is very fluid. July, we've got reported here 95.5 and even since we've put the print on this yesterday, that's now 95.9. So each day all of those numbers literally change. I think the deeper we go into it, obviously the opportunity for that to have pressure, certainly there. But on the whole, it's just been the one sort of group of tenants that originally asked for some assistance that we've had to keep a closer eye on. But the vast majority of our tenants have continued to maintain hang in there and pay. So we keep an eye on. But it's where we are in those high 90s. It's not -- we don't have any alarm bells or anything going off at this point for sure.

And may be just one more in. What's your exposure to brick and mortar retail and [indiscernible] type tenants?

It's funny, we did get questions about retail a couple of years ago and we would say it's not that great, but it's actually grown over the last few years. And I think with e-commerce, as we -- between the Wayfair, the Lowe's, the Home Depot, I can think of we have Conn's in Charlotte. Almost there's not much we have had Nordstrom as a tenant for over 20 years and Orange County. So it's here and there, but we really don't have a big J.C. Penney warehouse or, Tuesday morning or I'm trying to think of different people that we've got some spots here and there. We've got Nike and Orlando, but it's in three different locations within a park, because it's their different brands. So …

[Multiple speakers] or anything?

I can't think of anything with a [indiscernible] brands or some of those since our [indiscernible]. I don't know what kind of …

Repressed memories. All right. Thank you, guys.

Sure, Craig.

Go next to Venkat Kommineni with Mizuho. Please go ahead.

Hi. Good morning. Just wondering if you can comment on some of the movement in Houston occupancy during the quarter. When I compares it with occupancy at the end of 1Q to that provided in the June 1st business update and then to 2Q, it looks like it declined from 98.7 to 97 and then tick back up to 97.9. And I guess two questions around that. Was that increase in June, driven by the lease signed with Agility in Houston, as they now show up in your top 10 list? And as a follow-up, does that initial occupancy decline in April and May help explain the near 100% collection rate in Houston in 2Q '20 as maybe some weaker or more challenged tenants vacated space?

No, I mean, good [indiscernible]. Just with the number of tenants, Agility was signed and it's really more delivery and then taking occupancy of a new building. So that's when they jumped, good thought into our top 10. They took a couple of buildings. It's a global third-party logistics firm [indiscernible], Houston park. So that moved them into our top ten. We have had some instances, but it's really I'll compliment our San Antonio team where we've had some problem tenants, where they've been able to negotiate, getting those tenants out and backfill. But Houston, I think it was just collections and really kind of organic movement of tenants in and out where occupancy -- long ways in any market kind of ebb and flow a little bit, unless it's one of our smaller markets where probably fewer moving parts. But with Houston, with 5.5 million square feet, there's always someone kind of coming and going almost like an apartment complex, if you could think about that. And Agility was really more delivering a new building and then taking occupancy of that building is what moved them in.

Great. Thank you.

Sure.

And it appears we have no further questions. I'll return the floor to our presenters for any closing remarks.

Thank you, everyone for your time. Thank you for your interest in EastGroup. Brent, Staci Tyler, and I are all certainly available for follow-up questions after the call and hopefully look forward to seeing you all in person again one of these days whenever the world allows. So take care and thanks again.

Thanks.

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.