EastGroup Properties, Inc. (EGP) Q1 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the EastGroup Properties First Quarter 2022 Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our first quarter 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website. and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views about the company's plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remark 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.

Thanks, Keena. Good morning, and thank you for your time. I'll start by thanking our team for another strong quarter. They're performing at a high level and capitalizing on a sustained positive environment. Our first quarter results were strong and demonstrate the quality of our portfolio and the strength of the industrial market. Some of the results the team produced include funds from operations coming in above guidance, up 15.9% for the quarter, well ahead of our initial forecast. This marks 36th consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 97.3%, up 30 basis points from first quarter 2021. At quarter end, we're ahead of projections at 98.8% leased and 97.9% occupied. For perspective, these quarter end results matched our highest percent lease and is our highest percent occupied. Similarly, quarterly re-leasing spreads were strong at 33.5% GAAP and over 21% cash. And finally, cash same-store NOI reached a record 8.5% for the quarter. In summary, I'm excited about our first quarter results and the positioning this gives us for the year. Today, we're responding to strengthen the market and demand for industrial product, both by users and investors by focusing on value creation via development and value-add investments. I'm grateful we ended the quarter at 98.8% leased to demonstrate the market strength, our last 6 quarters have each been among the highest quarterly rates in the company's history. Another trend we're seeing is more widespread rent growth. While first quarter re-leasing spreads are consistent with 2021, we're seeing the impact across a broader geography. I'm also happy to finish the quarter at $1.68 per share in FFO and raising annual guidance by $0.12 at the midpoint to $6.75 per share, up 10.8% from 2021's record. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants only accounting for 9.4% of rents. As we've stated before, our development starts are pulled by market demand within our parks. Based on the market strength we're seeing, we're raising forecasted 2022 starts to $300 million. We'll closely monitor leasing results along the way and expect to update our starts guidance throughout the year. To position us for this marketing demand, we've acquired several new sites with more in our pipeline along with value-add and direct investments. More details to follow as we close on each of these opportunities. Brent will now speak to several topics, included our updated projections within the 2022 guidance.

Good morning. Our first quarter results reflect the terrific execution of our team, strong overall performance of our portfolio and the continued success of our time-tested strategy. FFO per share for the first quarter exceeded our guidance range at $1.68 per share and compared to first quarter 2021 of $1.45, represented an increase of 15.9%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth. From a capital perspective, during the first quarter, we issued $75 million of equity at an average price over $194 per share and refinanced a $100 million senior unsecured term loan, reducing the effective fixed interest rate by 60 basis points, while the term remained unchanged. We also closed on a $100 million senior unsecured term loan with a total effective fixed interest rate of 3.06% and a 6.5-year term and repaid a maturing $75 million unsecured term loan with a 3.03% interest rate. After quarter end, we closed on the private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.03% and a 10-year term. That activity, combined with our already strong and conservative balance sheet, kept us in a position of financial strength and flexibility. Our debt to total market capitalization was 15%, debt-to-EBITDA ratio dropped to 4.7x, and our interest and fixed charge coverage ratio increased to a record high 9.6x. Looking forward, FFO guidance for the second quarter of 2022 is estimated to be in the range of $1.63 to $1.69 per share and $6.69 to $6.81 for the year, a $0.12 per share increase over our prior guidance. The 2022 FFO per share midpoint represents a 10.8% increase over 2021. A few of the notable assumption changes that comprise our revised guidance include increasing our average month end occupancy 50 basis points to 97.5%, increasing the cash same-property midpoint from 5.6% to 7.4%, decreasing bad debt by $500,000 to $1 million, increasing development starts by 20% to $300 million, an increase in common stock issuances to $250 million. In summary, we were pleased with our first quarter results. We will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to carry our momentum through the year. Now Marshall will make final comments.

Thanks, Brent. In closing, I'm excited about our start to the year, the momentum we experienced in 2021 and is continuing and is more widespread within our markets. Our company, our team and our strategy are working well as evidenced by the results. And it's the future that makes me most excited for EastGroup. Our strategy has worked well the past few years. We're seeing an acceleration in a number of positive trends for our properties and within our markets. Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sunbelt markets. These, along with the mix of our team, our operating strategy and our markets has us optimistic about the future. And we'll now open up the floor for any questions.

[Operator Instructions] The first question comes from Jamie Feldman of Bank of America.

So you had made the comment that you're seeing rent growth spreading across a wider geography. I was hoping you could provide more color on how strong it is across your markets? And then can you provide a mark-to-market on the current portfolio?

Jamie, it's Marshall. It's been -- last year, our bottom line kind of -- and I'm talking just GAAP increases was around 31%, and we were a little above that first quarter. Last year, we had some large leases in Southern California that really helped drive that number. And while California is still a very strong market in terms of rent increases, we've seen, Las Vegas, Phoenix, some of the Florida markets, Austin, El Paso and a number. So it makes me feel like it's more sustainable or it is more sustainable because it's really not kind of waiting for the mix as much as it was last year. So it does feel like there's inflation and limited land supply and it's harder to deliver the supply that there's more upward pressure on rents than there's been and there's certainly more dynamic. In terms of mark-to-market, when kind of as we think about our portfolio, we've been running at that kind of high teens, in this quarter low 20s cash and in the low 30s in GAAP. I don't -- kind of as we just mentioned, I don't see that fading. And in fact, I think there's more upward pressure on rents. Given that demands here today supplies constrained supply chains, share feel like there's still a mess and will be a mess for a while. And then really on the portfolio basis, we always hesitate a little bit -- and just that we don't -- the way we've always viewed it, we don't calculate it. We thought more in terms of really, if you think of headlights of really what rolls in the next couple of years because beyond that, it really -- if someone has a lease rolling in 4 to 5 years, the market will change a number of times before it we get it. We get that and we've really seen the market. It's been more dynamic than I've ever seen it career-wise in terms of we've had a few tenants who have hesitated -- and I won't say hesitated for long, but for 60, 90 days, 3, 4 months, on a new lease or a renewal, and we've been able to go back and push rents on those renewals on a new lease. So that does make me also a little more positive if things do slow down that to have the embedded rent growth we've got. And it's really -- we're just trying to take advantage of each at that as they come up. We'll have about 7% of our leases expiring just over that's the balance of this year and really the 1% of vacancy. So it's really in our developments where we're able to push rents as much as well, if that helps.

That's very helpful. So you haven't looked at the portfolio and said, all right, if these rents were at market rents today, it would be x percent higher [indiscernible] think of?

We don't have an exact number, and I always hesitate, and we'll talk internally and you hate -- I guess we do put out projections but always hesitate one, it gets -- it's dated. We really don't use it except in those leases that roll kind of near term and it's such a broad estimate that I -- they're so much in what we just released yesterday that's the accountants do, it gets reviewed. Our auditors look over it versus Brent, me and the team. So we hesitate to put a number out there, and it will be dated the next day.

Okay. No, that's fair. And then you made the -- well, you didn't make the comment. You just -- in your response, you had said things slow a little bit. I guess on that front, can you just talk about how you think about your portfolio credit quality today and your tenant credit quality today versus prior cycles? If we do start to see a slowdown, I mean what do you think would be different this time around in terms of your occupancy and credit risk?

I'd like to think one -- a couple of things, and I'll thank you and your team are kind of -- are one of the groups that have kind of compiled the top 10 list when we look at our peers. So our top 10 that came up this quarter when we delivered some Amazon buildings, but it's just over 9%, which is running about half of what the industrial or sector average is. So we have more tenant diversity. And then in the last downturn, if I use COVID, we kept waiting for a downturn and it really -- the portfolio as a result of COVID things slowed there in the first few months, but then really picked up steam. I mean, I didn't have the nerve to do it, but we should have kept developing through the entire COVID downturn, looking back in hindsight, we would have been better off. So -- and last year, we moved a number of our rent relief customers out of our portfolio. So those were some of the little bit lower retention. It's not always bad. And then in some of those cases, when the market is this full and where this full, it's the best time to kind of upgrade your credit quality. We've thankfully run the last 5 quarters. I believe we've each had a negative bad debt, we've recovered more than we've written off. So it will -- that said, I mean, we would drop in occupancy, but we've been over 95%, which is what we've always historically viewed as full for multi-tenant industrial since mid-2013. And is low as we got in the great financial crisis, I'm doing this from memory, was about 89%. I'd like to think we'd fare a little better than that and another downturn. There's so much more demand than supply out there. You see it some in our development pipeline of -- we've been pleasantly -- pleased with how fast our new developments are leasing earlier in the process with the limited supply, especially for limited supply for the product type we build.

Okay. And then I guess just to follow up on that, though. I mean, just thinking about the composition of the tenant base, I mean would you say it's significantly stronger than prior cycles?

Yes, I want to say -- this is Brent, Jamie. It's -- I would say we performed very good in the past. So I don't know that we had a lot of need or room necessarily to significantly enhance the credit. If you look back -- even going back to around 2,000 during the dot-com recession, and then as Marshall mentioned, you go forward to the financial crisis, you go forward to COVID. We performed in line with peer groups and peers that are often viewed as well, they've got bigger tenants, so it must be bigger credit or better credit. And there's never been a correlation or a dis-correlation between our multi-tenant versus big tenant when it's come to bad debt, occupancy or anything else. So I think it would fare very similarly relative to the other peer groups. And we think, overall, it would -- as Marshall said, would fare very strong. And I think there's a lot of tailwinds that I think a recession, no one is going to be completely insulated from the impacts of that, but I do feel like there's some positive that would help industrial companies like EastGroup perform above normal or better than average through a period like that. But our tenant credit quality has been good, remains good, and we project -- as Marshall said, we've strengthened it some, but it's been more on the fringes just because we've got a good credit tenant base.

The next question is from Alexander Goldfarb of Piper Sandler.

So just a question on Marshall for quite a while for more than a year or 2. You guys have been pushing the occupancy and you always had previously spoken about expecting a drop off, it sounds like you're not expecting it. And certainly, 20% cash spreads sound pretty healthy. The reason that, in your view, that the occupancy is just staying north of 97%, it doesn't sound like you're shy on pushing rents. So is that just lack of any space for tenants to go or the tenants are figuring out ways to use the existing warehouses much more efficiently such that normally, when you push rents, you'd see some churn, but now maybe just because of issues -- whatever those issues are, just relocating or finding space or whatever, the tenants are using their assets more efficiently, which means that you may have even better pricing power going forward?

Yes. Good question. I think it's -- maybe the answer is yes. So I've got the fork in the Rhode Island. there is less space available, less space out there. And I think we're benefiting from that, and our peers are benefiting from it and even what is getting delivered and we deal with that though land's more expensive. The steel, the roofing materials, the electrical panels, all those things are more costly and take longer to be delivered to complete. So that's hindering supply. And that said, I do think our tenants, I'm sure, especially with rising rents are always working to find ways to kind of maximize their efficiencies in the space, I think will kind of as we project ahead or some of the things you read or think about, I think we'll see more and more with the labor shortage, more and more robotics within our warehouses. It will probably start with the larger tenants that are a little more well capitalized and can afford to make those type investments. So I think there'll be more upgrades within the space, which should make those tenants even stickier too because they're a little more heavily invested in our space as well. So -- and I think companies move to 3PLs and different things as you try to wring cost out of your own system, we're a cost-effective, efficient box compared to brick-and-mortar retail and other types of distribution. So I think the more people can utilize industrial space and their supply chain and their omnichannel kind of marketing, the better off they'll be because our gross rents are so much lower than some of the other service center or traditional brick-and-mortar retail.

Okay. And then the second question is, you talked about the broadening of the rents, which is great to hear. Curious, are you seeing is truck parking helping to drive some of that expansion of rent growth such that as communities push back on having trailers on roadside and shippers and others try to have more product in-stock versus port delays or supply delays, are you seeing a benefit more broadening from truck parking? Or is the rent growth that you're talking about purely from the actual box itself across your market?

Yes. It's really the box itself, that's where we're able to push the rents. That said, when we do our developments or one of the things we like, we bought the buildings, the DFW Global, which was really adjacent to the Dallas, the airport -- DFW Airport, cargo terminal that's got a lot of trailer storage there and in parts of L.A. If we can work trailer storage in, it certainly lowers our coverage ratio on the site, depending on where that extra land is. But the demand for that continues to go up from our tenants. And if the space works, especially the national tenants, if we've got space that works and they need the trailer storage, rent is less, it's down their priority list on decisions. If you have the right space, what we've seen is companies will pay the rent they need because it's a small item within their overall chain versus labor and how the space works for them. So we'll continue to add trailer storage or we look at it as being very attractive when we look at acquisitions or value add. If you have that ability to have car parks or trailer storage. That's a -- if the tenant needs it, it allows you to push rents that much harder.

The next question is from Manny Korchman of Citi.

Chris McCurry on with Manny. Just a quick question. I noticed that lease termination income was up in the guidance and is now expected to be up year-over-year. Could you just give us a little more color as to what drove the increase to termination expectations?

Chris, Brent here. Yes, we had -- that basically consists of some known vacates. We had 7 terminations during the quarter. Three of those consisted of the most of it. One of them was a $0.5 million early termination fee. But almost in every case, 5 of the 7 in fact, and that represented almost all of the termination fee income were situations where we had replacement tenants that in hand and basically negotiated an early termination fee and then replaced with a back existing tenant so that you're -- in those cases, we were getting a higher rent, backfilling for more term and then with the term fee you're getting excess income for that short period of time. So it's one where our guys in the field were more coordinated and working with tenants that needed more space versus tenants that maybe we're willing to let their space go and then you negotiate the deal and come out on top of it. So it was just -- several of those this quarter, they were very strong and beneficial. And so we executed on those. We typically don't budget much in the way of termination fee income if it's not known, just because they can be cyclical and can vary quite a bit quarter-to-quarter. We certainly expect more term fee income, honestly, over the course of the year just from doing business, but not quite as strong as that quarter that was a little bit larger than normal quarter, although, again, in all those situations, it was a net positive for the company. And again, something that we reacted to and basically helped conduct on our end.

Got it. Yes, makes sense. And then could you give us some color on the Fort Lauderdale sale, specifically the strategic rationale behind selling in Florida? Was the pricing attractive enough to leave this market? Or can you just give us some of your plans for the Florida market?

Sure. Sure. And I guess, Chris, it's Marshall. We certainly like the state of Florida. And then as we kind of 0 in like the state a lot and like South Florida, and so hope and really plans for continuing to build out our gateway park there. We bid on some other land sites and other opportunities kind of within our pipeline within South Florida. It was really more asset-specific for this, it was 2 buildings, about 55,000 square feet, really more service center, a little more office product that we had acquired in the mid-90s. And similar to what we saw -- and it was on a ground lease. It was similar to what we sold in Phoenix early in the year as we're kind of always, I think, a good time to be a seller, where the markets are, and we felt this isn't an asset that's going to really drive our growth to perform the same level as the balance of the portfolio. Nothing wrong with the asset, but it didn't have the dock-high distribution that's our kind of bread-and-butter type products. So we said, this is a good time to prune this asset. And we've got -- I think we should always be doing that. A few more in the pipeline that we're working on, not a lot, but we'll keep managing the size of our Houston allocation. We like that market, too. And it was really asset specific much solely rather than market specific here. And so we'd like to be bigger in South Florida, but we were willing to part with this asset.

The next question is from Vince Tibone of Green Street Advisors.

Could you provide a little bit more color on the exact contributors to the increase in cash same-store guidance? It looks like the changes in occupancy and bad debt assumptions drove about half of the 180 basis point raise. What drove the rest?

Yes, it's Brent. It's really rent increases. They continue to exceed our expectations in terms of what we're budgeting in and then you saw we increased our occupancy guide on same store a little bit as well. So it's really the increase there. Obviously, the first quarter beat was quite a bit bigger than we had budgeted in. So that 25% being already "actual and done", that unwound some beat and raise right there already. So it's really in those factors. Again, you see the occupancy increasing the rents greater than normal. But outside of that, we don't report term fee income in there, so that was not a component of it. It's just really strong operations. And across the board, there's -- as Marshall mentioned, there's more and more depth to it, although the California markets continue to be just eye-popping from a rental standpoint. But it's just one of those deals, Vince where we -- you add it all up and then the sum of it just becomes a little greater in total than initially anticipated or expected.

That makes sense. Just a quick follow-up on that. I mean do you think the expenses could contribute to the same property to this year, just looking at the first quarter, expense growth lag revenue growth and that kind of benefited same-property NOI, let's say, about 100, 110 basis points in the first quarter. Like is that something that's going to persist or is that just like a timing thing?

[ Not ] timing within our same-store and that I don't say all of them, but 99% plus of our leases are triple net and with full occupancy. So we really -- we managed the expenses because they certainly flow through to our tenants, but it really won't -- I like where you are heading, but it really won't help us with our same-store results as much as, as Brent said, just higher rents than we thought we'd be getting the markets moved. We expected the market to move up, but it's moved faster than we anticipated, and we've had less vacancy than we anticipated, especially in first quarter, which is usually a little bit of a drop-off after the beginning of the year.

Got it. One more for me. I mean, could you just discuss any recent trends you're seeing in the transactions market for light industrial product? Like specifically, how do you think higher rates have impacted bids from the private players are competing with?

Maybe a 2-part answer what we're seeing on the type of products where we typically chase, we've been hoping cap rates may rise, and we've seen nothing to date. We just lost out on a package yesterday or a couple of buildings that we're bidding on that will go in the low 3s and the reasoning we're hearing from brokers that even though debt may be up, there's so much of the acquisitions or equity. A large portion of it is dry powder in the form of equity. And then really from the primary reason, again, is people are viewing cap rates much more so as a point in time and that your cap rate may be low going in, but where rents are moving, especially if you've got some near-term role, we used to view near-term role as a downside on an acquisition. And now it's upside because the market is moving up so quickly. So people can -- are underwriting and accepting kind of the lower cap rates, but knowing as soon as those leases start to expire, they get a chance to adjust that. The 1 area, and I'm kind of repeating what one of the brokerage groups were telling me where they have seen cap rates come up and it makes sense at a long-term bond like projects where it's a triple net single-tenant asset on a long-term lease where you don't have a chance to take advantage of a rising market. And I have heard -- I don't know that -- I don't believe it's anything dramatic, but that those cap rates are starting to creep up, and I would expect higher interest rates, and I would expect those would continue to affect those type of assets a little more predominantly.

The next question is from Connor Siversky of Berenberg.

I just want to bring this topic back from one of the earlier comments. So are you already seeing a sustained push to roll out more automation within your facilities? And if so, what does that cost look like from a tenant perspective? And then what could that look like for EGP in terms of potential tenant improvement costs?

It really -- Connor, it's Marshall. It really varies by -- it'll really be tenant-driven. So we're seeing some of that and probably the most extremes, we just delivered 2 buildings for Amazon, and they've -- they put a lot -- we've seen the robots in the sort facility. They -- I'm estimating they've got about as much in the building as we do probably at this point, especially between the -- and some of the tenants will have the racking and conveyor systems and things like that. So we are seeing more and more of it. It's really tenant-driven where -- I will say where we've been impacted or where we're feeling it as we build the buildings, especially in markets like Las Vegas, the Phoenix market, it makes sense, air-conditioned warehousing, where people are competing to hire employees, and we view it as a long-term improvement to the building. We're seeing more and more that if there's any kind of light manufacturing going on, we've added more of that. It really hasn't impacted our tenant improvements as much, but maybe as we're retrofitting a space or a new development, we've had a little more HVAC in the warehouse and I think depending on how they use the space and how many dock doors are open at any given time. That's kind of like additional truck court parking. That's a trend we've seen.

Okay. That's interesting. And then just thinking about the aggregate development pipeline in the United States and understanding that the current demand environment is strong enough to still be able to push rents in these development projects. I mean, do you have a sense of when it would make sense maybe to dial back development activities as that supply demand dynamic becomes more elastic?

A good question and all the way maybe that this helps the 2 ways we viewed it or one, when you look at the supply numbers, I would say a general rule of thumb for our markets, and in some cases, it's been less at CBR. I'd say, 10% to 15% of new supply in Dallas, Atlanta pick the market, Houston, Phoenix is really comparable product that we might compete with that buy in the vast majority of what's getting built, especially with rising cost, I think construction costs that's pushing people more and more to develop big box and not really kind of move away from our area of the playground. So we like that impact. And then as we think about our own development pipeline, and I don't think -- I'll put it on me. I don't think I've articulated it to the Street as well as we could. But really, our development model will -- because it's within a park and because it's really, say, buildings 2 and 3 leased up well, we'll let the park really pull the next project. And so my -- the worst way we could do it would be Marshall and Brent read an article or see something on the news and decide to slow down the development pipeline that I like. We've really got a self-regulating development pipeline. If what we're building within our park is leasing well, we'll add a little more inventory to it. We won't build out a park all at once or anything like that. And by the same token if what we just delivered is leasing up slowly or at rates below what we expect, we certainly won't start construction on the next project. That's where really, if you say -- and I'm glad we were able to up our development starts this year, but it didn't come from corporate, it came from if you look down our development schedule, how many buildings are 100% leased or fairly well leased and the lead time to getting the supplies to deliver the new building, that's probably where our stress is. It feels like it's more stressed in talking to our teams in the field and getting the land and getting the things built at an affordable price than leasing right now. And so we'll kind of keep going until the market tells us to slow down. And we've always said, one of the -- this is helpful kind of a canary in the coal mine to watch for is as things roll into our portfolio, there can be any given project that's not 100% leased or 90% leased but if we start to see a number of those, then you know the market is slowing down and we'll start to tap the brakes on development. And we have done that in certain markets over the time. But right now, the market feels good, and we like the spreads on what we're delivering. In first quarter, we delivered about $85 million, $90 million in 2 projects at 7 yield and the market's probably half that today. So I like that kind of value creation, new FFO. We don't have to have 100% profits, but I'll take it in any 1 quarter. And we'll just kind of keep going until the market tells us it's slowing down, but we're actually seeing it speed up right now. We're seeing more activity earlier in the development process than we did a year ago.

The next question is from Michael Carroll of RBC Capital Markets.

I just want to touch on your acquisition strategy. I mean, it looks like the company completed a number of strategic deals this quarter are year-to-date focusing on acquiring buildings and adjacent land sites. I mean, I guess, if you could build a bigger campus. I guess is that a fair statement? And does that allow the team to be more aggressive bidding on these types of projects and increasing likelihood of you winning those deals?

I guess I'm trying to follow and Brent jump in, ideally on our acquisitions, I would say, if it's adjacent land to a successful part, that's our ideal preference. And when we finish up a park if it's the land around the corner, so to kind of keep a good -- simply keep a good thing going. Where the other side, and we've seen that window, I won't say close, but just about close, we were able to buy some vacant newly constructed buildings from kind of local regional developers and get what we felt like were good returns, taking the leasing risk on in those projects, but market doesn't feel as afraid of vacancy as it used to or probably in a lot of cases as we think it should. We've bought out of some bidding processes on value adds. But that's really our preference there. And if it's strategic within an existing market or like you said, around the corner, we bought two of our kind of core acquisitions, the only 2 we made last year earlier or two of them were really adjacent to buildings we owned, and we're somewhat off-market. Everything seems to have a little bit of competition right now, but if it's not a fully marketed mass e-mail flyer. Those are the hardest, most competitive things to buy. And as we've kind of [indiscernible] us having a checkbook is not a competitive advantage or differentiator in the market. So we certainly chase those, and we lose an awful lot of those as well.

And then can you provide an update on how you're kind of viewing Houston? I mean, obviously, the market has kind of firmed up, I guess, across the board. I know I think earlier, you kind of highlighted you still want to rationalize your exposure there. But in March, you did acquire a few buildings and some land sites. I mean, I guess, how should we think about that exposure going forward? I mean it still seems like you kind of like the market and your position there?

Yes, we do. That's a -- I think we've got a good team in Texas and in Houston, kind of have said, let's keep creating value. What we're developing and the value add we acquired, the one -- a couple of developments. One was a pre-lease at World Houston that if we can develop into the 6s and 7 type returns and at the same time, sell some core and stabilized assets in Houston and I think we're down about 70 basis points from a year ago. I was looking at in terms of our Houston as a percent of our rent. So that continues to drift down and it should. There's some couple of Houston assets we're looking at exiting later this year, market committing. So we'll grow elsewhere, maybe a 3-part answer. We continue to grow in other markets. I don't want to just -- I don't think it makes sense for us to shut to stick it off in Houston if we can develop and create value, but maybe it's a little bit build 1 or 2, sell 1 or 2 in Houston and let the rest of the portfolio grow. And I even think as much activity and as strong as the Dallas market is, if I go out a couple of years, I would expect Dallas. We're doing a lot in Atlanta, it was a later start, but I think Dallas will overtake Houston and will become our largest market down the road, and it's not a negative on Houston so much as all the -- as big as the Dallas market is and all the activity we've got going there.

The next question is from Dave Rodgers of Baird. We'll move on to Ki Bin Kim of Truist.

Just want to go back to your development. You've done some very favorable leasing and improving the time lines and moving up projects this quarter. As you do that and as the capital risk comes down, what's the likelihood that we can see your development start guidance, move beyond $300 million of starts this year?

I hope we did. Good question. And I hope we do. Look, we were -- last year, we did -- we were $340 million in starts as we kind of started the year if it else, but we have the $90 million Amazon kind of whale in the system that we delivered in first quarter. So I thought we would drop this year. But really, as you point out and pointed out in your piece, the activity has picked up early, and that's really what's pull or all of a sudden, I'll get a phone call, and it's like, hey, we were under construction and I leased the building and now I'm scrambling to get new inventory because if there is someone out there looking for 50,000, 80,000 square feet, we don't have the inventory. So the tenant rep brokers are going to move on to the next project down the road. So I'd like to think where the market is today. I mean, the demand is there that we could bump the $300 million higher, the start number higher. I think the caveat to that is the other what's holding us up and what's holding the market up a little bit is the steel deliveries and all the other things that there could be some projects, especially as we get later in the year that we'd like to start and the market's there. It will be where in line can we get because you hate to -- we could start it, but then you don't want the GC to stop and wait for. And every week, they were keeping one of our construction people. There's a new delay and some portion of what goes into our building. So just trying to get all the parts at the same time is much harder than it used to be. And building deliveries forever were about 6 months, and now they're up to probably 8 to 10 months. So that could be -- some of it could just be bottlenecks, but those will -- then they'll turn into 2023 starts rather than 2022. But we don't -- we've still got time don't sense that yet. I'm optimistic maybe that $300 million goes up but there is some level later in the year where we'll get pushed to 2023.

And in terms of your land bank, you have about 11.3 million square feet that's developable. What does that translate to in terms of the total dollars that are deployable? And I think this is one of your kind of key strengths that you do have the very favorable and large land bank as it pertains to the fact of your company. And second to that is most of these sites entitled and ready to go.

Most everything on our schedule is [indiscernible] we get the -- the guys in the field will say their jobs to have the permit in hand for the next building. So those are zoning and titled Ready to go, where usually permits will get -- will expire. So we'll pull permits for the next couple of buildings within a part. But those are ready and then -- the other side, I would say too, what you see on our schedule, it's almost like an iceberg at any given time, we're pulling from this land bank quarterly, but there's also if we're doing what we should do, there's not another handful of land, what's coming into the land bank. What you're seeing is what's closed, not what we have under contract that we're working through that zoning and permitting and moving towards closing.

Yes. Ki Bin, on that schedule, there's about $6.6 million that we haven't actually put place into under construction and lease-up that 11 million number includes those items that including the ones that are already underway. But if you look at that 6.6 million of potential based on a per square foot of 150 to 200, very below or above that potential where you are. But you're looking at $1 billion to $1.5 billion of cost -- and as Marshall alluded to earlier, we've been running 75% to over 100% in value creation or returns. So you may be looking at $2 billion to $3 billion in terms of total value. So I think your good observation there, Ki Bin, that continues to be where we've created the most value, basically doubling our money via the development pipeline. And so the guys, especially recently have done a really good job backfilling some markets with some nice wins on the land inventory side. And as you know, they're out there daily and perpetually working on that. So it's tough markets, but those guys are seasoned and continue to bring good land inventory into the bank.

The next question is from Dave Rodgers with Baird.

Marshall and Brent, you covered a lot already. But I was curious about when you're underwriting acquisitions and actually closing on those transactions, how do those compare to replacement cost? And I guess it's a pretty prolific developer. How do you guys think about closing on acquisitions and kind of this rising inflation environment and kind of paying above replacement cost, but still replacing an asset much quicker and getting it in the cash flow stream. Do you spend a lot of time thinking about that?

We do. And I would say it varies. I'll pick like the project we bought in Hayward this quarter, we actually even [indiscernible] because lands moved up so much that it's hard to get above replacement cost in some of these markets. So we do look at that, and we're always going with Hayward, there's simply no land around us. And in fact, some of the existing supply in some of our markets is getting repurpose to life science, creative office, things like that. So we -- certainly, I'm less concerned -- we are a little less concerned about replacement costs where there's no available land left. I think it would really be more of an impact, and it's not where we typically want to play is on the edge of town. If you were building a big box and there were 3 or 4 that were sitting there vacant or things like that, where it's more of a commodity product, that's where the replacement cost would really scare me. The other thing where we've probably struggled more with of late or certainly in acquisitions is looking at we use current market rents. I know some of our peers do the same, but there's certainly more private peers out there that will use projected rents. And so far, they've projected to be more accurate. So it's hard to compete with someone who's raising rents, but at some point we can back into whatever the rent we want. So we said, let's look at current rents and what's our yield and then do look at what's that per square foot. But there's certainly been some land price trades and even some -- and certainly industrial building trades what I used to think of as office buildings or even higher. It's pretty jaw-dropping where land prices at $70, $80, $90 a foot for industrial and buildings trading for -- if there's 1 in L.A. that traded for recently $600 a foot, which I never having been an industrial longer than I want to add up over the years, those are numbers I didn't think I would say.

And then just 1 follow-up. I think when we talk to some of the bigger box companies, they'll say, land at market today maybe 50% of overall construction costs and development, you build a different product, does that math change at all for you guys?

It certainly would be probably accurate to further out west almost, you go in California, it would be those type numbers. It's probably still more 25%, 30% for us on average. But you're right, and there's any number of cases by the time we will tie the land up, try to get as far through the permitting and zoning and tied up before we can close that -- for example, I'll use it. And I believe it's closed the piece we closed in Phoenix, there's a comp at what we viewed as a slightly lesser location that just traded someone flipped it for about twice what we paid. So we're hearing numbers by the time we've closed that the land value, if we were private, you'd be tempted to sell the land rather than develop it because values have moved that fast on industrial land. And that I guess the other thing, it certainly speaks that there's more industrial developers out there than there were a handful of years ago. And reading some of the market reports, we see it in Atlanta and Dallas and some of the markets, what's the -- just the size of the industrial market is further out there. I believe it was CBRE in Dallas included 3 new submarkets this quarter. So people are getting further and further and further out of the market. What was it in the Dallas construction, the number that jumps out to me in their report, just over 70% of the construction is in what CBRE called edge markets, which means you pretty far out of Central Dallas, and that just shows how limited land supply is and how -- I think the zoning and entitled and permitting is getting tougher because people see the number of trucks and things like that. So there's kind of that -- everybody wants their delivery, Amazon Prime in an hour, but nobody wants it to originate from their neighborhood sometimes. It's just hard when you develop, it's what is [indiscernible] Yes, it's a developer [indiscernible].

The next question is from Todd Thomas of KeyBanc Capital Markets.

This is [ R. D. Cameron ] on for Todd. Just broadly about demand. I know a lot of demand for industrial cyclical, but we also have a lot of secular demand stemming from e-commerce and the resetting of the supply chain as everyone's seemingly playing catch up. Do you think in the event of a broader macro slowdown or recessions that users would be more active in absorbing space relative to what we've seen in prior recessions?

This is me speculating and I'm an optimist. So with that, safe harbor disclosure, I would say yes, I think so, because I think we're a low-cost flexible alternative as we kind of mentioned a little bit to using kind of more service center or flex product and especially brick-and-mortar retail. So I think as things slow down, any way people can [indiscernible] cost out of their supply chain, that will lead more and more towards industrial. And we still think, given the supply chain that inventory levels are low and that people that want to have just in case inventory but the supply chain is not really allowing that yet. So I think that will -- that's still coming. And then there's a handful of good secular reasons we get -- we kind of hint at that we're excited about our portfolio. But I think with the supply chain bottlenecks, the port bottlenecks in China and at L.A. and Long Beach and tensions with China, I think it's a longer-term play, but there'll be more manufacturing brought back to the U.S. and/or near-shoring, and we may not end up with that manufacturer. That's typically not our building, but we'll benefit from the suppliers near that manufacturer.

Yes. And I would just add to that, too, already, that thing that I'll report the other day that the like where e-commerce as a percentage of retail sales, that accelerated, obviously, some during COVID, but like from the mid-teens to 19% and that's projected to increase from 19% up to about 32% over the next 10 years, so a 68% increase projected over the next 10 years relative to that. So -- and certainly, if that happened, I think that would be another tailwind over that period of time, I think that would equate to more absorption of our type space. So you feel like there's, as Marshall said, some tailwinds there that wouldn't be totally insulated from a slowdown, but feel like there would be enough momentum behind it to where it wouldn't totally wane away, hopefully.

The next question is from Ronald Kamdem with Morgan Stanley.

[indiscernible] on for Ronald Kamdem. Just maybe a follow-up to your previous comments and the questions for me. I think you mentioned due to COVID, you kind of regret stopping your -- a lot of the starts that you had previously planned just because of the demand that came in and maybe that was more than expectations, kind of as I think about inventories building today and the macro backdrop, do you kind of see yourself in a position where starts more necessarily stop today because you think inventories could build kind of irregardless of where retail sales go or where the general macro backdrop is?

They could. And it was really more -- again, maybe 2 part. We're always saying that. I think people would have thought we were crazy. I was crazy if we had kept building during COVID and it's kind of on us in hindsight 2020 how short the pause was in industrial, and we could have gotten a lot of materials really cheap. We did tie up a bunch of land during -- early on during COVID, which I'm glad we did. We kept that part going but not the starts. And I think if there's a slowdown again, I would probably still -- we will -- we really look to the field if that demand is there, we try to not regulate it. If it's there, we'll add a little more inventory. I guess I view it as pretty -- which I like, it's [indiscernible], but a free market demand. When the demand is there, we'll go as fast as the market will let us in terms of building out buildings and finishing up the park. And by the same token, if we're struggling to get projects leased up, we're going to slow down, too. So I'd like to think if there is a macro slowdown, but if people still want just in case inventory and things like that or we've got people that are willing to move forward leasing, we'll move. I think COVID was such an extreme example even though it would have been the right decision in hindsight, it would have been a crazy amount of risk to take on to take that for something that none of us had any experience like a pandemic. So I think sitting on our hands, it didn't harness, it's just in hindsight we could have kept developing and it would have looked smart, but we would have been, I think, a risk/reward would have been outsized on that.

The next question is from Vikram Malhotra of Mizuho.

This is [ Amit ] in for Vikram. My question is, are you seeing any new sources of tenant demand?

There's always -- yes, I was trying to think of who we've seen of late, there for a while, we -- and it hasn't gone away, but online pharmaceutical fulfillment was a little bit of an atypical type tenant. And then we've seen more energy-related, but more green energy related, where it's someone converting trucks and buses to electrical powered or they're making batteries and things like that. So I don't know that it's not necessarily new, new, but maybe newer within our portfolio that a number of start-ups and you're working through the credit and things like that with those, but we've seen a handful. It's not a huge amount of our portfolio, but I'm thinking of new and creative uses, we've seen more and more of people within green energy taking space, whether it's producing batteries or doing different things like that.

Got it. And have you -- have there been any changes to your watch list from the last quarter?

Yes. No, this is Brent. There have not been all of our top 10 are current. And as you see from our bad debt or like thereof, our collections continue to be very, very strong. we had yet another, I guess, you would say, net positive bad debt, meaning we had more recoveries of previously written off accounts than we did with newly reserved accounts. So our collections remain very, very strong and our watch list only has a dozen or fewer tenants and you're talking about that of a customer base of over 1,700 customers. So thankfully, that continues to be very, very strong.

This concludes our question-and-answer session. I would like to turn the conference back over to Marshall Loeb for closing remarks.

Thanks, everyone, for your time this morning. Thanks for your interest in EastGroup. We're certainly available for any follow-up questions, comments and look forward to seeing many of you at [indiscernible] here in about just over a month. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.