Good day, and welcome to the EastGroup Properties Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd 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 fourth quarter 2021 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. 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 NOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement to our earnings press release, both available on the investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in 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 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 risks in our SEC filings.
Good morning and thank you for your time. I'll start by recognizing for a great quarter and year. We continue to performing at a high level and capitalizing on a very positive environment. Our fourth 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 17% for the quarter and 13% for the year, well ahead of our initial forecast. This marks 35 consecutive quarters of higher FFO per share as compared to prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 97.3%, up 40 basis points from fourth quarter 2020. At year-end, we're ahead of projections at 98.7% leased and 97.4% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends. Quarterly release and spreads were 31.5% GAAP and 18% cash. Similarly, for the year, those results were at a record pace of 31.2% GAAP and 18.4% cash. Finally, cash streams for NOI rose a healthy 6.4% for the quarter and 5.7% for the full year. In summary, I'm proud of our team's results, creating arguably the best year in our history. Now on to 2022. Today, we're responding to strength in the market and demand for industrial product by both users and investors by focusing on value creation via development and value add investments. I'm grateful we ended the quarter at 98.7% leased, one of our highest quarters on record.
To demonstrate the market strength, our last five quarters marked the highest five quarterly rates in the company's history. Looking at Houston, we're 95.9% leased, and Houston is projected to represent under 11% of 2022's NOI total, falling 130 basis points from 2021. I'm happy to finish the quarter at $1.62 per share in FFO and the year at $6.09 per share, up $0.6 from our most recent annual guidance. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with the top 10 tenants only accounting for 7.6% of rents.
Brent will speak to our 2022 guidance, which I'm pleased is to a midpoint of $6.63 per share, up roughly 9% from 2021's record level. As we've stated before, our development starts are pulled by market demand. Based on the market strength we're seeing, we're forecasting 2022 starts of $250 million. We plan to closely monitor leasing results along the way and expect to update our starts guidance throughout the year. To position us for this market 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 review a variety of financial topics, including our 2021 results, and introduce our 2022 guidance.
Good morning. Our fourth 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 fourth quarter exceeded our guidance range at $1.62 per share and compared to fourth quarter of 2020 of $1.38, represented an increase of 17.4%. 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 fourth quarter, we issued $120 million of equity at an average price of $205 per share. In October, we repaid a maturing $33 million mortgage loan that had a rate of 4.1%.
At year-end, we agreed to terms on a private placement of $150 million of senior unsecured notes on a fixed interest rate of 3.3% and a 10-year term. We expect to issue and fund these notes in April. Also, after year-end, we agreed to terms on a $100 million senior unsecured term loan with a total effective fixed interest rate of 3.6% and six and half-year term. The loan is expected to close on March 31. That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength and flexibility. Our debt-to-total market capitalization was a record low 13%, and for the year, our debt-to-EBITDA ratio finished at 5.2x , and our interest and fixed charge coverage ratio was 8.5x .
Our rent collection has been equally strong. Our debt for the year was a net + $475,000, as tenants whose balances were previously reserved came current, exceeding new tenant reserves. This trend continues to exemplify the stability, credit strength, and diversity of our tenant base. The dynamic growth of our earnings, as well as exhausting a prior tax accounting change benefit, pushed us to increase the dividend for a second time during the year from $0.90 to $1.10 per share, an increase of 22%. We anticipate that the rate of our dividend increase will normalize in 2022.
Looking forward, FFO guidance for the first quarter of 2022 is estimated to be in the range of $1.59-$1.65 per share, and $6.56-$6.70 per share for the year. 2022 FFO per share midpoint represents a 9% increase over 2021. Among the notable assumptions that comprise our 2022 guidance include an average occupancy midpoint of 97%, cash same-property midpoint of 5.6%, added debt of $1.5 million, operating and value-add acquisitions of $76 million, offset by $70 million in dispositions, issuing $375 million in unsecured debt, which will be offset by $75 million of debt repayment, and common stock issuances of $120 million.
As Marshall mentioned, our projected build-to-suit starts are $250 million, which is down from $341 million in 2021. However, recall that last year's amount includes $90 million for a large build-to-suit in San Diego. Our 2022 start guidance does not include any unknown build-to-suits that might occur through the course of the year. In summary, we are very pleased with our record-setting 2021 results. As we turn the page to 2022, we will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio to maintain our momentum. Now Marshall will make some final comments.
Thanks, Brent. In closing, I'm excited about the year we just completed. We're now carrying that momentum into 2022. Our company, our team, and our strategy are working well, as evidenced by the results posted. It's the future that has me excited for EastGroup. Our strategy has worked well the past few years, and now 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 we'll continue needing last mile distribution space in fast-growing Sun Belt markets. These, along with the mix of our team, our operating strategy, and our markets, has us optimistic about the future. Now we'd like to open up the floor for questions.
We'll now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have further questions, you may reenter the question queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, morning. Morning, gentlemen. First question is in the Thomas question. You know, now we have truckers part of the fund, and the headlines between the ports, you know, factories trying to catch up with orders, you know, shipping and all this stuff. What are you kind of saying as far as when they see the normalization of the supply chain? Because obviously it's been great for you guys in demand and certainly, you know, the just-in-case type conversion on distribution thoughts. Just trying to see how much longer you guys think that we'll be in this tight supply market.
Hey, Alex. Good morning. It's Marshall. You know, I guess maybe I'll preface it with a positive with we have about 1,600 tenants and they're a little over 7.5% of our NOI. That's a pretty low number. You know, just a wide range of tenants. Maybe with that preface or caveat. You know, I think there's probably a mix of answers, but you're right, whether it's the truckers or backlogs at the ports or just pure warehouse workers or the warehouses closed because hiring shortages. I think by and large, most people or our tenants are feeling like the demand is there today and feel optimistic about their business. But we order building materials ourselves and then dealing with our tenants.
I think we'll go through 2022 before the supply chain. You know, there may be improvements during the year, but it'll still be kind of a mess. I think the other help for all the industrial REITs that we'll participate in as people get moved to more safety stock or I've heard it called just in case inventory. To date, I think there are a number of tenants who would like to do that. The best description I've heard is someone called it a pipe dream that most of our tenants or most people out there are scrambling to meet current demand, much less where demand is going. At least the charts and things you see and read, it looks like the inventory to sales ratios are still pretty historically low.
We think, I guess the good news if you think of it as I or we think about it, is we're pretty full, we're pushing rents, it's hard to deliver new products, and people still are scrambling to add more inventory. We, at least in terms of our planning for this year, and we'll adjust it as best we can on the fly, think there's going to be more demand than supply, and people will be scrambling to meet that growing demand. It probably won't change until next year.
Okay. Then maybe as a follow-up to that, Marshall, you guys, you know, every year you say, you know, we got lucky last year, last year was an amazing year, this year's gonna be tough. I think we're now going on, you know, I've lost count how many years that you guys have beat rates. The story that you're laying out is still, you know, pretty similar to last year, really strong demand. The external environment remains tough, but you guys seem to find a way. It doesn't seem like you have any pushback on pricing and, you know, the capital markets are favorable to you on the financing side.
What truly gives you pause versus you guys just say, "Hey, we're 97%," you know, maybe it's tougher to exceed from there, you know, Brent made the point about the dividend going back to a normalized growth level. Yet everything that you guys have described on this call speaks to a still, you know, robust, abnormally superior growth environment.
Yeah. No, it's a good question. It probably speaks to management or my personality to a great you know, because it's conservative. Last time I've been to a casino, it's been a while. I'm probably a little bit conservative. I'll confess to being a little bit conservative, and I hope you. I'd love for you to be able to say I told you so later in 2022 that we were conservative. You're right. At 97% average occupancy, if we just met our budget, that would be our second highest year in the company's history. Second to last year, which was 97.1%.
I don't, y ou know, hopefully we'll get, maybe we do a little better on the rent increases, but that'll probably benefit 2024 and later years more, you know, depending on when that lease expires this year. It's probably more the external environment is where I felt like and probably twofold. One, given the supply chain shortage and the tightness in the market, hopefully, you know, if we get ahead, we're seeing more activity earlier on developments. For spec developments, we usually kind of our rule of thumb is once you tilt the walls, then the tenant rep broker starts to take your delivery dates more seriously and the activity picks up. But given the tightness in the market, we've seen more activity earlier in our development pipeline. So that gives me some, I guess, hope rather than pause. Hopefully we can find some acquisitions out there.
We didn't want to kind of as by our nature, put some big acquisition targets in our budget and then feel like you have to go meet them because I'd rather look at something makes sense. You're right, the capital markets are attractive, and we'll acquire it. If we go a number of months and there's really nothing that makes sense to us in a, you know, as competitive an environment as I've ever seen it to acquire good industrial properties, we're okay being patient and sitting on our hands in that regard too.
Okay. Okay. Thank you.
You're welcome.
The next question comes from Elvis Rodriguez from Bank of America. Please go ahead.
Good morning, guys, and congrats on another good year. Just following up on the external front, Marshall, you bought a piece of property in San Diego, the Siempre Viva value add deal, 65% leased. Why would a developer sell this given how strong the leasing market is? You know, what opportunities do you see out there to do more of these types of transactions?
Okay. Good morning, Elvis, and thanks. On this one, it's the Siempre Viva, you may remember we own in separate transactions, we bought Siempre Viva one, then two, and kind of in last year, early in the year, we had 40 acres that we really had outlined and worked with the architects. We're going to build a business park. Then Amazon came along and thankfully, and they said, "We'll take all 40 acres." So that's our spec distribution center that's under construction, and we hope to deliver in late first quarter, and then since then, we've been looking for additional land for opportunities or some, you know, value-add opportunity with vacancy. This is, I guess, without naming them, I don't wanna violate our confidentiality. Large pension plan. It had kind of reached the life of their hold period.
They still own buildings in this park and in this sub-market. They had bought it with the way the market had run. They had a good profit on this investment and had a large tenant, a 200- probably 250,000 sq ft tenant go bankrupt. It's right along the border with Mexico. We're near the border crossing. What we liked about it, and they're building a new, kind of, better technology, high-speed border crossing that's under construction. We're really right there between the two border crossings and really building up our presence. It's the same developer, local developer that built this park. I think it really hit their hold period for the pension fund, the state pension plan that owned it. They had a good profit in spite of the vacancy.
As we were bidding on it was 50% leased. Kind of during due diligence, we were able to get a 3PL, a tenant in, and so we got it about 65% leased today in good activity. We'll, you know, I guess, as I view it, almost like an assembly line. We'll finish this project up and then sign that next opportunity in San Diego. We like the proximity to the border. If you think long term, that there'll be maybe more nearshoring for manufacturing. It'll take years, but leaving China and coming to Mexico. Then with the move in San Diego, more to life science and creative office, a lot of the traditional office in the center of San Diego is becoming more lab space. The traditional industrial users are getting pushed south towards the border as well.
We really like the kind of geographic dynamics of this location. It's a longer answer than you were seeking, but that was our what attracted us to this one.
Maybe one from Brent. What's the impact from higher borrowing rates that you're seeing today relative to 2021 in the future? How should we be thinking about capital allocation, you know, with rising rates? Thank you.
Yeah. Good morning, Elvis. It's something we're keeping an eye on. You saw us act pretty quickly early in the year here, locking in, as we disclosed, $250 million between two loans and locked that in at just a shade over 3%, which we were, frankly, pretty satisfied with. I think we have an insulated sum from early part of the year. Also, we only have one maturing mortgage that comes up here in a couple of months or at the end of this month, and that rate's over 4%. You know, again, we're retiring one at the higher rate than I think we'll anticipate incurring. You know, it's like we've kept an eye on both lanes. We were very active on ATM with equity in fourth quarter. We really like the pricing.
Again, we started in the early part of the year with, you know, placing some of our debt early with anticipation the rates go up. Yeah, over time, as we doubt if rates do rise, I mean, that'll be part of the environment, but historically speaking, they're still very attractive. When you compare whether it's 3% and debt grows at 3.5% or whatever the number turns out to be, when you look at our ability to continue to put money out, especially on the development side, at that mid-6% to 7% range, you know, it's not. We wanna take as big a spread as we can, but it's not, I guess I would say, stressing the yield spread there. We'll continue to play both sides. We have a very conservative balance sheet.
We've intentionally put ourselves in a position to where, you know, if the markets were to turn, say, on the equity side, that we'd have plenty of runway on the debt side. If both are attractive, which we view it now, you'll probably see us continue to play both sides.
Just to squeeze one more from Marshall. Any read-throughs on what could potentially happen to cap rates?
Yeah. To date, we've not seen any. You know, with the debt market moving up, we've not seen any movement in cap rates. You know, it's hard to say they're following, but they probably are slightly or really maybe the biggest difference, say, over 12 months, is the differentiation between cap rates. We used to, you know, maybe outside of the Dallas, L.A., Atlanta, there'd be a little bit higher cap rate. In Phoenix or Las Vegas, Denver, Charlotte. But those secondary markets are just as intensely competitive, and the pricing on those assets are. It's really not much different than it is in Southern California. That there just still seems to be this wall of capital out there that likes, and us included, that like, you know, it's well-located, you know, well-designed industrial product.
We've kind of learned the hard way. Having a checkbook is not a competitive advantage in the bidding process, that there's a lot of folks out there with a lot of dry powder trying to buy industrial. You know, this is more hypothetical, but until people get more comfortable underwriting office buildings and work from home and maybe retail and hotels and things like that, it feels, you know, more and more crowded in the industrial space or new competitors, you know, arriving every month, depending on which market we're talking about.
Thank you.
Sure.
The next question comes from Craig Mailman from KeyBanc Capital Markets. Please go ahead.
Yes. Marshall, just wanted to touch on your commentary about e-commerce. We all know it's extremely strong and definitely the demand is broadening out beyond Amazon. Just kind of curious, t his is a tenant that's come into your market more recently, and the CFO was recently saying they're gonna moderate their appetite for industrial. I'm just kind of curious what your thoughts are on that and whether you've seen anything on that.
I don't know the tenant specifically, but in general, you know, we still think whether it's e-commerce or delivery, you know, a number of our buildings get used for delivery. I think there'll be more and more shifts away from traditional. You won't close your traditional brick-and-mortar, but you'll have omni-channel retail where it can be, here's our class, you know, our eight prototype retail store and a retail property in town or maybe two in town, and you'll have more curbside pickup, which is where we'd love to go.
We're aware of a couple of tenants that have moved to that within our properties, or at least designated those, you know, or showrooms in our property that we see especially like the Ferguson, Tile Town, Emser Tile, some of those kind of home improvements. I think as one of our directors described it, when COVID hit, it demystified e-commerce for a large portion of the population. It's continuing to grow, you know. I think with Amazon's dramatic growth over the last couple of years, if you and I were at a retailer, we would have to be thinking of how do I shorten my delivery times and keep up with Amazon, or they're going to take my market share.
You know, depending on where you fit in, but Amazon seems to be getting into about every, you know, whether it's pharmaceuticals or this or that, about every different type business, which I think puts, you know, more logistics pressure on all the other retailers in time, kind of to keep up with Amazon's growth.
Kinda your feeling is even if Amazon kind of pulls back, there's plenty of demand behind them from competitors.
Yeah.
That you shouldn't see a big fall off.
I think, yeah, I'm an optimist, but I think so. You're telling me, I guess I thought if Amazon is just, you know, dramatic amounts of square footage that they've gobbled up. If you're at Lowe's, Home Depot, Best Buy, you know, RH, you name Arhaus, you name the retailer or, you know, online mattresses and things like that, you know. We see pharmaceuticals getting pushed more and more online as a way to manage cost within our buildings. I think all those folks would have to, just if you're from, you know, just a business strategy, have to find ways to meet Amazon delivery-wise. Many people realize it's so easy and convenient to order online versus driving, especially during COVID and which wave we're in versus traditional brick-and-mortar. I don't think brick-and-mortar will ever go away.
I think it's a social activity, but I think it continues to grow and capture a bigger and bigger piece of the retail pie.
Yeah, that's helpful. There's some development. You guys, you know what you started subsequent to year-end, you're kind of already a third of the way to your development start guidance. You know, as you look at the runway, you mentioned you had a big development last year, but do you guys feel like you can close the gap relative to what you did in 2021? Then just also on the yields, I know you guys get asked all the time. Yields are kind of sticky in that high 6% range despite inflation and higher land costs. I mean, do you feel like the market rent growth aspect of things can continue to keep yields up at that area?
Yeah, maybe. Yeah, I guess it's two thoughts. One, I hope so. I mean, we'll go usually kind of our motto is always in something like that. We'll go as fast as the market leases our buildings, and last year went quickly. I think as one of your peers pointed out, we started the year at $205 million in starts and finished at $340 million. It just shows how bad I am at forecasting. We did have that $90 million seed pre-lease moved, and we've obviously a lot. I hope, you know. Look, I hope the market's as strong as we're thinking it will be, and that leasing activity picks up on our developments, and that we can beat the $250 million.
I'd like to think, as you said, we started a lot this quarter. We're seeing good activity within our leasing. You know, good movement from last quarter to this quarter as you kind of compare the percent leased. Hopefully there's upside there. And then on the development yields, our underwriting, we'll use today's construction costs and really today's rental rates because it tends to be a slippery slope if we start projecting what rents will be when we deliver the building. As we underwrite them, we have seen some degradation in returns. But by the time, you know, six to eight months when we deliver the building and the team starts leasing them up, we have been able to catch up.
Yeah, I guess what hit me as you look within our supplement, what we pulled out of the development pipeline, it was 17 projects last year, about $280 million, and we were able, thanks to the team, to average a 7.2% yield. I think it's unreasonable. You could say a 3.6% cap rate and just because I can do the math on that. It really doubles the value of what we pulled out of the pipeline. To me, if you say that's a 100% profit margin, even if we get pulled backwards on some of those yields, if we earn a 70%-75%, you know, value creation factor, I think that's a great return.
The trick is we'll go as fast as we can. We could start more. It's really more how fast do they lease out? Then as you saw in fourth quarter, we're trying hard to find whether it's vacancy and value adds, where we can find space near-term while the demand's there and/or find land sites. As much competition is out there and the growth we're seeing demand from industrial tenants, you know, record absorptions in about all of our markets. You know, how can we find land that we can pencil and makes sense though. So yeah, we like the value creation component, especially when, you know, kind of core leased assets are extremely competitive to bid on. So that's an awful lot of our focus. Yeah, and hopefully we can hang in there with those yields even with prices going up.
We'll do our best. Hopefully, rent can help keep offsetting those increases.
Great. Thanks.
You're welcome.
The next question comes from Manny Korchman from Citi. Please go ahead.
Hey, it's Chris McCurry on with Manny. I was wondering if you could comment on onshoring trends and specifically the impact of labor costs, inflation, just hiring shortages on any of these conversations.
Yeah, you know, I think a good question. We see a, you know, it's hard to even call it onshoring. Probably where we've been more effective is we do see a number of tenant relocations from California to Arizona, Nevada, Texas. We've seen more of that or relocations into the state of Florida. We definitely see the population growth. Onshoring, no. I actually, as we've talked about it, given the labor shortage and the cost of labor, we feel better about nearshoring maybe. That people will. It'll take a while. We'll move plants to Juárez, where we have a presence in El Paso, we're building or we talked about South San Diego to Tijuana or even Nogales, Mexico, which is near our, you know, kind of our Tucson properties as well as our Phoenix.
I think longer term, I think with trade tensions with China that, you know, even were started before COVID and the supply chain issues of getting your product in, we feel we're optimistic longer term about nearshoring. I think that would take a while to, you know, close a plant somewhere else and move it into Mexico. I think that would be. It would seem to me to be, with the preface of what do I know, but would seem more attractive than opening. You'll see some manufacturing, and we certainly see that in Atlanta or in Dallas, but there's just so much competition for workers and things like that. It's, you know, probably a little more difficult, I would imagine, than moving if you're Home Depot, your supplier is in Mexico from China.
Got it. Yeah. Just one more from me, and I guess kind of builds off that, but with some of those nearshoring conversations and just like supply chain issues in general, are those impacting any real estate decisions for some of your auto and home building tenants, or have you seen any, you know, long-term or near-term change in trends in those two categories?
A little bit of study. I mean, maybe give me a month, you know, and this probably speaks more to one of our prospects we're working with and things where they are touring and focused a little bit on nearshoring and their logistics. We've kind of worked our way. It's a kind of interesting timing, this conversation this week from within their real estate team, and even their CEO is out touring some of the assets now. We're seeing some of that. You know, we have talked. We did lease a building to a German automotive company in Atlanta within, I think that's probably eight to nine months ago. We're seeing some movement like that.
Within home building, we're definitely seeing that activity pick up, and that's probably more just, I guess, in my mind, a function of the housing demand in places like Florida and Georgia and Arizona. You know, we are seeing those type tenants definitely pick up. We just, you know, one of the buildings in Fort Myers was just leased to a Canadian company that serves the home building industry. You know, it's kind of, as an aside, interesting trend we've seen. We build our same multi-tenant buildings, but we've seen more and more in the last year where a single tenant will come along, and even though we've designed it to be a multi-tenant building, they'll take the entire building.
That's really the other factor that obviously helps speed up our development pipeline. We'll move to the next building in the park as quickly as we can.
Got it. Thank you.
Sure. You're welcome, Chris.
Again, if you have a question, please press star then one. Our next question comes from Samir Khanal from Evercore ISI. Please go ahead.
Hey, Marshall. Good morning, there. I guess my question is around the guidance of sort of 5% looking like the NOI, which is similar to what you did in 2021. You know, considering how strong demand is and all the rent growth we hear about, I would've thought it would've been a little bit higher. Just trying to figure out, you know, are there any sort of headwinds we need to think about or compensate to get you kind of the midpoint or even the low end here, which is 5.1%? I'm trying to see how much conservatism you're baking in here. Thanks.
This is Brent. I'll jump in there. You know, our midpoint of guidance is 97%. As Marshall mentioned, that would be our second highest year on record if we even just meet that. That equates to, as you mentioned, 5.6% same-store midpoint. You know, most of that, obviously, occupancy being at that level, occupancy increase is basically we're not baking into you know being really a component or part of same-store growth. You're really, you know, heavily leaning into the rent increase side, which has been very good for us, the low 30% cap and very high-teen cash. We're projecting similar record-type results. I guess what I would say, we're projecting similar record-type results. We hope that we can build off those in terms of higher increases.
You know, we'll see as the year plays out. We're in, you know, February, you know, of the year, and that's where we're at this point. Really, it's, you know, it's maybe trickier than you think when you're early into the year, and you start looking at all the assumptions of how does it feel going state by state on our rollovers and vacancies, looking at rental rates. Certainly, if rental rate growth, however, continues to grow during the year, that can give us, you know, some more room to push there and to beat. You know, again, at the midpoint, it's what, you know, factors into our FFO midpoint guidance. We'll see.
I would say we've probably leaned a little more conservative into our development respect leasing into the overall budget, maybe more so than the operating side.
That's it from you guys. Thanks.
Thanks, Samir.
The next question comes from Vince Tibone from Green Street Advisors. Please go ahead.
Hi, good morning. Could you discuss the supply landscape for shallow bay products in your market? Are there any regions or metros where supply is potentially becoming a concern?
Hey, Vince. Good morning. It's Marshall. You know, really not. I mean, there is some supply. For the most part, you know, if you ask if we were building a model or something, a rule of thumb is we'll typically say where there's, and I'll pick on the market a lot. I'm just looking at my Dallas numbers, where Dallas has 55 million under construction, which has probably got to be close to a record. Last year's absorption was 40 million sq ft and over 60% of that's in South Dallas and North Fort Worth, where we're not. Probably what would be shallow bay is probably usually our team estimates 10%-15% of the total market supply. Again, maybe for me, as I use a rule of thumb, it's usually about that amount.
Again, as I'm kind of looking at my market numbers and this one I even, I'll credit it, hesitate to repeat, but it's CBRE's numbers for Atlanta. At the end of the year, there's a little over 35 million sq ft under construction. Of that, they designate 76,000 sq ft as shallow bay. I mean, it is just. That's minimal. There's more competition than, you know, again, I think 10%'s better than the 76,000. I like that number. There's always. You know, tenants always seem to have an option.
If we were starting a development company and I'm biased, maybe it's the grass is greener, it would be easier for you and I. I'll stick with Atlanta, to go to South Atlanta, find a site, and build an 800,000 sq ft building and put more capital to work because so many of our peers are bigger. Even if you're a local regional developer, your promotes are better building an 800,000 sq ft building than a 120,000 sq ft multi-tenant building. That's where we see so much of the competition. I can't fault them. I say that because those buildings are getting leased, and it's working for them. It's just not, you know, kind of where he said on the playground.
We really try to pace it more into demand than, t here's always an option, but it's usually a local regional developer with a building here or there. There's just not that much shallow bay supply. You know, I hate to say that out loud on a public earnings call, but it seems to be so much of our competition really falls more into bulkier big box buildings.
No, Marshall Loeb, that's really helpful because it's something you've said in the past. I just find it interesting that, you know, especially given the profit margins these groups develop at in recent years, that many more people aren't pursuing a similar strategy because it makes sense on the, again, just kind of the different returns right now. That's really helpful.
You know, I think part of it helps too, Vince, or just for you to get a couple of leads. Well, one reason we think, because we have that same conversation internally, it's awfully hard to find those good infill land sites, and you're figuring out how to kind of almost Rubik's Cube, you know, a handful of buildings to build out of parts. And it takes longer to go through zoning and entitlement and things when they're infill versus the edge of town. Thankfully, with the REIT model, we can spend, you know, a few years. Like the Charlotte land that we closed, I think we had it under contract for about a year and a half before we closed it and worked our way through it.
That's just a different model than a lot of the private developers that we thankfully can have the luxury of patience and work on a lot of these sites for. You know, it feels to me like an iceberg that we're working on it, working on it, and then you all see it when we finally close on it.
All right. That's all helpful commentary. Thank you.
You're welcome, Vince.
The next question comes from Jason Idoine from RBC. Please go ahead.
Hey, good morning, guys. Quick question on the disposition front. You guys had your pro forma disposition of the year in the fourth quarter and then started the year with another disposition. I guess my question is, what led to the determination to bring these properties from the portfolio, and what are some of the common characteristics that you're looking at when you decide maybe where you maximize value?
Sure. Jason, good question. The one in Tampa we had acquired it in the 1990s. It's well located, but a lot of small tenants. Some of the projects. Smaller buildings, smaller tenants, non-sprinklered. So we had as tenants we worked with. In my mind, it's almost like a padding order. There we were knock on wood, the team did a good job. We were able to get a little under a 4% cap rate on it for going on a 40-year-old project or maybe just over 40 years. The property in Phoenix, you know, originally we thought we were gonna have it closed last year. We had to switch buyers. The brokers did a good job. We had a backup buyer, and it drifted into the first week of this year, but similar.
It's one of our few service centers. We bought it in a portfolio in the 1990s, and it was right at a four cap too. That kind of gives you an idea of the immense demand out there for industrial products. I would've put both of those into 6%-7% cap rates. I'm looking at Brent as I say it. Maybe 18-24 months, and we were able to get four caps or just below that on both of those. We've got, you know, another small service center out on the market today in South Florida. Knock on wood. As we'll develop and create the value in Houston, we've got another project in Houston.
Anything that's got a little more office component, a little bit more age, I think it's one of our real responsibilities to always kind of be pruning our portfolio. Typically, we'll ask the team if Jason, if you came in in the morning and you had an email or a call telling you one of your tenants just went bankrupt, what building do you hope that's not in? That really gives us our disposition list. Hopefully we'll. You know, it's a form of capital. We like the equity markets and the debt markets, but if we can sell things and if we can sell at a four in Tampa and develop into the 6%s or maybe even a 7%, it's, you know, it's relative to that. We like that model a lot.
That's really what we've been doing in Houston the last couple years, is we think there's some development opportunities. We closed on some land there, but also sell in the 3%-4%, if we can kind of keep that model.
Okay. Yeah, no, that makes sense. Touching on Houston, I know on the last call you guys mentioned that you expected that exposure to drop further, and I guess I was just trying to put some rails around that. Is that from selling assets or is that more just from growth in other markets?
A little of both. I mean, predominantly it's been growth and rising rents in other markets. We still like Houston. You know, ranked 15 there, fifth largest city in the country in the value creation. We'll, you know, we're under contract, knock on wood, with a Houston asset presently looking at something else. We'll kind of tread water in Houston a little bit while the other markets where we're under-allocated continue to grow. Thankfully this year was as we were looking at our kind of prospective NOI, just it's fallen below 11%. It continues to just drift lower and lower. We won't certainly wanna exit Houston, but we like a geographically diversified portfolio.
We'd gotten too heavy, being, you know, north of 20 a handful of years ago, and I'm glad we're under 11% this year.
Okay. With all the change in the energy markets, I guess, are you seeing any changes in the underlying, key drivers in Houston? Are you seeing some of that excess supply maybe get absorbed more quickly or any changes on that front?
Houston, yeah, it has a lot. They had, you know, like a lot of markets, record absorption last year. It was 28 million sq ft, which is a big number. There's about a little over 18 million sq ft Houston under construction that's 40% leased. The market definitely has improved, you know, over the last two years. Houston's probably better today than it has been at any point in the last couple of three years. You know, we were asking the same thing with oil getting to $90 a barrel, and maybe there's just so much uncertainty in that industry. We're feeling demand in Houston, but not, I don't believe, increased demand from oil and gas companies there. It's more, you know, the tenants we see in other markets.
You know, as an aside, we're not seeing that in Houston, but seeing it in some other markets, we are seeing energy-related tenants, but they're more green energy related, where it's a tenant, you know, one converts buses from gas to electric, someone making electric batteries and things like that. We are seeing energy-related tenants. They're green energy related, and they're in markets like Phoenix and Greenville, South Carolina, and Atlanta. They're not in Houston.
Okay. Thank you.
Sure.
The next question comes from Amit Nihalani from Mizuho. Please go ahead.
Good morning. Are you guys able to comment on your bad debt reserve for your 2022 guidance? I know back in 2019, you had mentioned you're signing a number of leases with Peloton.
Good morning. This is Brent. I guess two parts to that. One is as far as our bad debt guidance of $1.5 million. Obviously, in 2021, we had just, you know, really an anomaly year, I would call it. We had actually a bad debt recovery of $475,000. So, you know, just a reminder, when we entered last year, or looking back a year ago, we had a little deeper reserve allowance at that point, not knowing exactly how everything was gonna play out. Hard to think a year ago, we were still shy of a vaccine. This year, you know, our allowance as the years played out has come down. We're not entering this year. For example, last year we had 26 tenants included in the total reserve.
This year, entering January, we only have 12 tenants. I don't think there's gonna be nearly as much reversal of bad debt to potentially offset bad debt. We look more from a historical perspective. The $1.5 million represents 0.33% of our revenue, which is a trend, this track record that we look at, our historical average. I hope we keep that, yes. When you start talking about 1,600-1,700 tenants, depending what size of what tenant may happen, maybe what their straight line balance is, that type thing, again, we're gonna enter the year looking more at our past and dialing all of that in rather than just, you know, a very quick glimpse.
In terms of Peloton, we have, I know in South Florida, we lease space to them and maybe another market or two. I mean, they're current. We've had, you know, no issues there. Obviously they've been in the news some lately, but they're not a top ten tenant. It sounds like at the end of the day that credit could, if anything, maybe get enhanced, you know, if something were to potentially happen there. You know, they're something that you see in the news, but nothing thankfully that's been, anything we've had to deal with specifically.
Great. Thank you. Just, where would you guys like your leasing exposure to be?
You know.
Ideally.
Under 11. Yeah, certainly under 11. It'll probably, you know, just the reality of it, it'll probably continue to drift down. You know, we said if it's, you know, 10%, a little under 10%, you know. My goal would always be to have runway in any market in case you do find that kinda aha opportunity. I think we do at under 11%, unless, you know, unless we bought something huge there. It'll probably continue to, you know, I think over the next year, just continue to drift down, and you'll probably see it below 10% here in another 12 to 18 months.
Great. Thank you.
You're welcome.
The next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead.
Yes. Ronald Kamdem. Talking about the guidance for 15, conservative assumptions, but the sensitive leasing, just maybe provide some color on the type of leasing you're expecting with the current development pipeline that compares to 2021 levels. I'm just thinking about 2021 and how the, you know, the same store guidance was roughly in mind as far as what's coming in.
Yeah. You're referencing a comment I made earlier, and it's just a general assumption where, you know, we have a fair amount of our development income that's out into the budget already covered via, you know, existing and prior leasing. You know, leases, there's a lot of leases that aren't in same store. Even having been an asset effective January 1, 2021 in the same store mix for this coming year. We have a lot in that interim period. A lot of that income's covered. You know, from an operating standpoint, we've got 97% or 98% occupancy.
As you're analyzing the rent roll and the rollovers, obviously it's, you know, if you're gonna run a 75% or so tenant retention, that's a little, you know, easier to guide and project, whereas, you know, our development, just the nature of it is pretty much speculative oriented for the most part. In those cases, just by virtue of the definition being spec, we don't have tenants in hand. The timing of those, and then once you sign them, how quickly you might be able to get the permit done, get it built out, get the tenants placed, get the lease started. That side of things can be just by its nature trickier to project. Like I said, we tend not to get just what I would say, aggressive with those assumptions.
You know, what that difference might be, you know, it's hard to tell just because of, again, delivery times and those type things. Again, we have both sides, both on upside on both operating and in development. As you saw in the guidance too, even on acquisitions, we're basically showing acquisitions and dispositions being pretty much a wash. So anything that we might could acquire, which again, as you said here today, nothing under contract, but you never know. That would be incrementally positive too, especially if that were to occur earlier in the year.
Yeah, that makes sense.
The next question is a follow-up from Elvis Rodriguez from Bank of America. Please go ahead.
Hey, guys, just a quick follow-up on mark-to-market for the entire portfolio. Are you able to share on a GAAP and cash basis?
Yeah, yeah. Not very well and not accurately. You know, we have a number of our peers do that, and we said it's just, you know, thankfully, having seen other sectors, it's easier to do in office, easier to do than in retail than it is industrial because, you know, whether it's an infill space or it's air-conditioned, things like that. You know, that said, mark-to-market, you know, you've seen our GAAP numbers and our annual numbers were low 20%s. It was 22% in 2019 or 2020, 31% in 2021. You know, some of it'll be the mix. We had a lot of big leases where we're able to capitalize on some larger increases last year, but certainly would feel comfortable in the 20%s this year on a GAAP basis, I would suspect.
Maybe if we can get back to 30%, that would be. I think the rent pressure is there. Maybe the mix of leases rolling. And then on a cash basis, we're probably in the teens on the mark-to-market, and we certainly are seeing what's also helping those GAAP numbers in more and more of our markets where the annual increase used to be 2.5%-3%, now we're moving to 3%-4% in a number of our markets. So that'll help those GAAP. That's obviously helping those GAAP rent increases too. So I think they're certainly there. They're a little bit tricky to predict, and in any quarter it'll depend on the mix, the rolls.
I would think we'll be back in the upper teens on a cash basis and in the 20%s to maybe 30% if we get, you know, if we push things, and I hope I'm conservative on that this year in terms of rent increases.
Thanks, Marshall, and just one more while you made a good statement at some point there on the new leases having higher rental bumps. Can you talk about that? You know, what percentage of leases are about 3% today, and what are you seeing, you know, your ability to sort of get to that 4% across markets?
Yeah, I think the ability we're really, you know, I guess the good news is we're, you know, we could push for 4%, but you really need it in the market. I think given the tightness in the market, we're seeing our peers do that. You are seeing that more and more, and it's really not alike. That's probably shifted by market within the last 12-18 months. We haven't been able to implement. You know, we typically roll about 14%, 15% of our portfolio in a given year. Given that the market's just gotten to that in the last, you know, 12 months, we still have a lot of runway to go on increasing rents.
I think given where we think the supply chain issues are, you know, we've kind of internally said where we, you know, struggle to get roofing materials and steel and everything else delivered, and it takes longer and is more expensive than it historically have. That's tricky for call it the 2.5 million sq ft we're trying to build in any given time. That's great news for the 50+ million sq ft that we own. I think that will continue to keep those 4% bumps being the market everywhere, and we'll be able to bump rents, you know, when they roll and get that higher increase. That's why we like GAAP rent numbers. The other thing we're seeing shrink is the free rent period.
Usually tenants will say, "If I move, I've got moving costs and this and that." We still see some of it, some free rent in there, but there's downward pressure on free rent in the market as well.
Great. Thank you.
You're welcome.
There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Marshall Loeb for any closing remarks.
Okay. Thank you again. We appreciate everybody's time. Thanks for your interest in EastGroup. It feels like we're getting near the point here where we'll actually be able to see some people in person, and we look forward to that. In the meantime, we're certainly available for any follow-up questions. Thanks again.
Conference is now concluded. Thanks for attending today's presentation. You may now disconnect.