Good morning. Welcome to the EastGroup Properties third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during the question- and- answer session. To give everyone an opportunity to ask questions today, we do ask that each person limit themselves to one question plus one follow-up question. You may register to ask a question at anytime by pressing the star and one on your touch-tone phone. Please note this call is being recorded. Now it is my pleasure to introduce Marshall Loeb, President and CEO.
Good morning, and thanks for calling in for our third quarter 2020 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call, and since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under 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.
Thanks, Keena. Good morning, and thank you for your time. We hope everyone and their families remain well and out of harm's way. I'd like to start by thanking our team. They continue performing at a high level amidst a challenging work environment. Our third quarter results were strong and demonstrated the resiliency of our portfolio and of the industrial market. The team produced another solid quarter with statistics such as funds from operations came in above guidance, up 6.3% compared to last quarter, to third quarter last year. This marks 30 consecutive quarters of higher FFO per share as compared to the prior year quarter. Truly a long-term trend. Year-to-date FFO per share is up 7.8%. Our quarterly occupancy, while below prior year, was high, averaging 96.6%, and at quarter end, we're ahead of projections at 97.8% leased and 96.4% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last-mile delivery trends. Also benefiting occupancy is a high 83% year-to-date retention rate. Releasing spreads set a quarterly record at 28% GAAP and 16.1% cash. Year-to-date leasing spreads were solid at 23.1% GAAP and 13.3% cash. Finally, same-store NOI was up 3% for the quarter and 3.6% year-to-date. In summary, during a choppy environment, I'm proud of our team's results. Our strategy is evolving to not only include maintaining occupancy, cash flow, and liquidity, as has been the case since March. Today, we're responding to the strength in the market and restarting development. Looking at each of our goals, I'm grateful we ended the quarter generally full at 97.8% leased, our second highest quarter on record. Houston, our largest market, at 13.5% of rents, is 96.2% leased with an eight-month average collection rate over 99%.
Company-wide rent collections remain resilient. For October thus far, we've collected 97.6% of monthly rents. There are still many unknowns about how fast and when the economy truly reopens and recovers. We all, as a result, simply have less clarity than normal. Brent will speak to our budget assumptions, but I'm pleased that in spite of the uncertainty, we're tracking towards $5.35 per share in FFO. This represents a $0.07 per share increase to our July forecast and $0.05 per share above our pre-pandemic expectations. Helping towards this end, thankfully, we have the most diversified rent roll in our sector, with our top 10 tenants only accounting for 8.1% of rents. As we've stated before, our development starts are pulled by market demand. With the shutdown, we halted new starts.
Given the strength we're seeing in select submarkets, we're planning a few fourth quarter starts. Pending permitting timing, these will continue into first quarter 2021. To position us following the pandemic, we've also been working on several new land sites and park expansions. More details to follow as we close on these investments. Other strategic transactions we've worked on include our 162,000 sq ft value add acquisition in Rancho Cucamonga near the Ontario Airport. Dispositions which hopefully continue towards closing in Houston and on our last property in Santa Barbara. Now Brent will review a variety of financial topics, including our updated 2020 guidance.
Thanks, Marshall. Good morning. Our third quarter results reflect the resiliency of our team and strong overall performance of our portfolio amidst a very challenging year. FFO per share for the third quarter exceeded our guidance range at $1.36 per share, and compared to third quarter 2019 of $1.28, represented an increase of 6.3%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, namely higher occupancy and strong rent collections. From a capital perspective, during the third quarter, we issued $32 million of equity at an average price of $133 per share, and earlier this month, we closed on two senior unsecured private placement notes totaling $175 million. The $100 million note has a 10-year term with a fixed interest rate of 2.61%. The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%.
That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength and flexibility, including the complete availability of our $395 million revolver as of today. Our debt to total market capitalization is 19%, debt to EBITDA ratio is 4.9x , and our interest and fixed charge coverage ratios are over 7.4x . Our rent collections have been equally strong. We have collected 99% of our third quarter revenue and entered into deferral agreements for an additional 0.5%, bringing our total collected and deferred to 99.5% for the third quarter. Last April, we reported that 26% of our tenants had requested some form of rent deferment. In the six subsequent months, that only rose to 28%, and deferral requests have basically ceased. The agreed-upon rent deferrals thus far total $1.7 million, an increase of only $200,000 since our report in July.
That represents just 0.5% of our estimated 2020 revenues. We have consistently stated the depth and duration of the pandemic and its impact on the economy is undeterminable. However, the immediacy and degree of potential tenant financial stress and loss of occupancy we had budgeted for has not materialized. As a result, our actual performance and revised assumptions for the fourth quarter increased our FFO earnings guidance from a midpoint of $5.28 per share to $5.35 per share, or a 7.4% increase over 2019. The revised midpoint exceeds our original pre-COVID guidance at the beginning of the year. Among the budget changes were an increase in average occupancy from 96%- 96.5%, and a decrease in reserves for uncollectible rent from $3.6 million to $2.3 million. Note that the reserve for potential bad debt for fourth quarter of $600,000 is not attributable to specific tenants.
Our continued earnings growth directly contributed to increasing our quarterly dividend by 5.3% to $0.79 per share. Our third quarter dividend was the 163rd consecutive quarterly distribution to EastGroup shareholders and represents an annualized dividend rate of $3.16 per share. In summary, we were very pleased with our third 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 into next year. Now Marshall will make some final comments.
Thanks, Brent. In closing, I'm also proud of our third quarter results. Our company and our team has worked through numerous downturns, and while different, we'll work through this one, too. As the economy stabilizes, it's the future that makes me the most excited for EastGroup. Our strategy has worked well the past few years. Coming out of this pandemic, we foresee 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 Sun Belt markets. These, along with the mix of our team, our operating strategy, and our markets, have us optimistic about the future. We'll now open up the call for your questions.
At this time, if you would like to ask a question, please press the star and one on your touch-tone telephone. You may remove yourself from the queue anytime by pressing the pound key. To ask a question, again, that is star and one. As a reminder, to give everyone an opportunity to ask questions today, we do ask that you limit yourself to one question plus one follow-up question. We will take our first question today from James Feldman with Bank of America Securities. Your line is open.
Good morning. This is Elvis Rodriguez on for Jamie. Great quarter, guys. Just a couple questions. Houston occupancy and lease percentage declined 150 basis points quarter-over-quarter. Was that expected or any specific leases you can discuss?
Yeah, Elvis, good morning. It's Marshall. On Houston, maybe a little bit of an update. I would say, expected, although not Houston specific, we really had thought our occupancy as we thought the last couple of quarters would dip more than it has. Expected move-outs, some moving parts. I think of our bad debts, oddly enough, there's really not been oil and gas. We did have one trouble tenant. It's in the airline industry, so it's really more specific than Houston, just with the slowdown in airlines. They refurbish interiors and things like that. That was one blip in Houston and probably overall expected, although not any specific tenants. Since, I guess, the end of the quarter, we've regained 50 of those basis points.
Houston is back to 96.7, which thankfully is not at our portfolio average, but it kind of rounded just under 97% leased. We are comfortable with Houston. We have also been pleasantly surprised kind of through the pandemic to be at 99% rent collected. Houston has been better than our company average at around 99.5% collected, kind of going back to March, really, when this started. We think Houston, it is probably steady as our team there described it, and that is probably a good answer. It is not our best market. Supply has thankfully slowed down. As you would imagine, most people have stopped. Most of what is being built or newly delivered is more big box, so not directly applicable. We will be fine in Houston. I think The Street, I guess it is all expectations.
The Street has been much more worried about Houston than the reality has been today. We think we'll be kind of that 95%-97% lease, depending how a couple of things play out between now and year-end.
Great. Thank you. Just one follow-up. Your development starts, I know you said you're going to continue or increase developments going forward, but it went from 1 million square feet to 825 million square feet of starts for the year. I know you mentioned some delays from COVID, but maybe can you give us an outlook on what you're thinking for 2021 and supply versus demand in your markets for next year?
Sure. Good question. We had, really as this started, like most of our peers, kind of said, "Let's finish what's in our pipeline, but not start anything new, just to see how this plays out." Thankfully, to date, you're kind of waiting for the bad news, but it's been much less than anticipated, certainly in March, and then again maybe when we reported in July, for example. Happy, our 97.8% leased at quarter end, and we're about there today. Really October, I'd say, looks a lot like third quarter did, is it was our second highest quarter on record. With that, and I'll credit some of our brokers. We've got some internal tenants that are looking for expansion space and people out in the market. You really need to give me some inventory to work from.
We'll start in Charlotte, Phoenix, we're out of space, a couple markets in Northeast Dallas, Fort Worth, some of those Orlando, that where we see the opportunity to start delivering. We're still working on our 2021 budget, but I would say if things not necessarily improve, but just don't deteriorate, reading the same headlines on number of COVID cases, if things don't shut down again, the difference this quarter is really more about timing and when we get things started and permitting and construction crews mobilized. But we feel pretty good about, at this pace, about our 2021 starts, and that they'll be more like a typical year of starts. If we can hang in there at 97%+ leased and starting to see demand either from new tenants, and I think our tenants are getting comfortable enough.
Everybody's maybe getting their sea legs through this to expansion plans that they put on hold to start talking about new space and things like that. I think 2021, without getting too specific, I'm expecting it to be hopefully a good year of starts for us.
Thanks, Marshall, and congrats again on the quarter.
Thanks, Elvis. You're welcome.
We will take our next question today from Daniel Santos with Piper Sandler. Your line is open.
Hey, good morning. Thanks for taking my questions, and congratulations also on the quarter. Just continuing with the development theme, I was wondering if you could walk us through just what you're seeing as far as development costs and yields across your different markets. That would be helpful.
Sure. Good morning, Dan. The good news, what's been interesting to us kind of on a macro level, like I said, we're just getting some of the construction bids finalized and things. I'll use Charlotte, which is probably the furthest along. A couple of others. Our build and shell costs have come down. Land prices have been fairly sticky. We've acquired some land. You saw Fort Myers, some other land that we have under contract and things kind of predominantly adjacent to or around the corner from parks to kind of keep working on that next phase of a park. Land prices have been sticky. Shell costs have come down, maybe not dramatically, but a couple bucks a foot, maybe 5%-7%. Our yields have thankfully hung in there on our product type.
Most of our peers are the bigger box, maybe a little more on the edge of town, where we're typically a business park infill last mile location. I'm pleased to see our yields hanging in there at 7% to even 7.3%, I think, looking back at our supplement between what we're developing and delivering. The trend we've really seen in the last 90 days is a drop-off in cap rates with what we've been told makes sense, lower interest rate costs, and then just the fear of other asset classes, be it office or retail or hotel, that there's been a lot of capital flowing towards industrial. Our development profits have really gone up. If we can maintain our yields and maybe our rents are about the same, our costs coming down slightly, so our yields have been able to hang in there.
We think the value, when we finish the value creation, has increased probably 25 basis points or so or more in the last 90 days.
Got it. That's helpful. Second, based on your rent collections and your occupancy, it's safe to say your portfolio has been fairly well insulated from COVID impacts. In places or markets where there has been a recent spike, could you walk us through maybe some changes in economic activity or tenant behavior that you're seeing in those markets?
Nothing recent so much. Maybe one market that probably comes to mind for me. If you look, Florida is a good market, but talking to our team there and what's interesting may be using our occupancy is fine in South Florida, but looking at our Gateway project , right next to Hard Rock Stadium, we built two buildings. They leased up before we completed them. Lowe's, Peloton, Best Buy. It fits really, I guess, using those as kind of the last mile delivery part. We delivered the third building, and we'll be fine, but it's been slower to lease up. Talking to the team there, Miami has been more shut down economically than, say, Tampa, Jacksonville, Fort Myers, Orlando, the other markets we're in Florida. I think that's where we've seen it. Las Vegas is another market where we acquired three new buildings.
Two of them leased up before we could finish. The third one, we've got activity on both of those, but it's taken a little bit longer to lease, and it's really more about the local economy being shut down the last few months. Because all of a sudden, what we had done, I would've guessed in Miami, our third building would've leased up usually easier than your first building in a brand-new part, but it's been a little bit harder, and I think that's really because of COVID and really the market being closed for the most part.
Got it. Thank you. That's it for me.
You're welcome.
Thank you. We will go next to Emmanuel Korchman with Citi. Your line is open.
Hi, this is Chris McCurry in for Manny. Quick question from us. What are you seeing in the transaction markets now that is giving you confidence in raising guidance for these volumes? How do you think pricing has changed since pre-COVID levels?
Good question. Make sure I'm understanding it. Pricing in terms of finished product, probably 25-40 basis points lower, certainly lower in the major markets. What we've seen of late, they're still top 20 markets, but maybe not the top handful. Being we chased a portfolio in Atlanta that will be in the low fours. Talking to CBRE, at one point, they had three projects under contract that were waiting to close that were all below the lowest cap rate in Atlanta, for example. They were all kind of in that 4.25%-4.5% range. Austin, we're seeing 4.5%-type cap rates, which we have, and prices per square foot nearing $200 a foot in places like Austin. Just as we were kind of getting used to seeing it in L.A. and San Francisco and Miami, where now we're seeing that spread.
Charlotte has a portfolio on the market, and I'm trying to not violate confidentiality agreements and things like that, but we'll go at a low cap rate for Charlotte, probably a record there. Those kind of markets where you want to call it number 6 through 25, we're seeing cap rates down. Again, I think that what we're told is people are comfortable with industrial rent growth going forward, and just lack of appeal of maybe some other asset classes outside of multi-family and industrial right now being the two that are the most in favor.
Yeah. I think, too, Dan, you may be referencing, too, our increase in our value add property acquisitions from none to $30 million. Marshall might touch on those. Those are a couple of deals that we had planned to close last year, and they've leased a little quicker. Those are both under contract and going to close before the end of the year. Those are deals in hand.
Yeah. I guess a little more color. I probably won't get too far ahead, but one of our acquisitions, it really was a value add, and I'll credit John Coleman and his team in the eastern region, were able to get a tenant in hand before the building's finished. What was going to be a value add, and thankfully it was priced like a value add, will now roll in as an acquisition. Then the other one Brent references, which we have announced, is the Rancho Distribution Center, the one in Rancho Cucamonga. We bought it. It's an owner user leasing the building back for about half a year, basically. We think because of that leasing uncertainty, it's very close between two freeways and near the Ontario California Airport, if that helps you. We think we're getting a better pricing by taking that leasing risk on.
Again, if it helps in terms of our confidence, talking with the brokers in Southern California, they describe their market almost like a goalpost, and that things were great first quarter. They really stopped second quarter, and since, it's been a big pickup in business and a lot of activity in that Inland Empire, especially Inland Empire West, where this property is.
Got it. Yeah, that's helpful color. Just a quick follow-up. How do you think about using asset sales versus equity issuance as a source of funds?
Yeah, we're very pleased with the attractiveness of our stock price, and you see we issued some debt this quarter, and we were very pleased that the markets were not only open and available to us, but very attractive. We're not short of capital. Those would be our primary sources of capital. I think as we've been for several years now, that recycling is being good stewards of recycling through some of our lesser assets. I think it's more of that, more so than doing it for capital per se. I think, you'll see us continue to chip away at Houston. We're very pleased to get that down into the 13% area and continue it to decline. We've got a property there that we anticipate closing before year-end. It's more just navigating that aspect rather than capital.
Thankfully, we're in a position where our bottleneck's more opportunities and opportunities that we like versus capital access, which is a good problem to have.
Got it. Thank you.
We will go next to Eric Frankel from Green Street. Your line is open.
Thank you. I was hoping you can give us a little more color on how market rents are generally trending. Just looking at your rental changes by market, it looks like a few markets, understandably California, but even parts of Texas seem to be doing really well, while other markets have decelerated a little bit. Maybe you could provide a little more color?
Sure, Eric. Good morning. It's Marshall. Kind of, you're right. The California markets are still strong, and that helped our leasing spreads this quarter, which we were happy to, oddly enough, set a record during a pandemic. It's kind of one of those where it feels counterintuitive, where the headlines aren't matching what we're seeing day to day. The California markets, maybe Fresno's a little slower certainly than the Bay Area, L.A., San Diego. Probably our bigger markets, Houston, has kind of flattened out. It's steady.
As you'll see over at least year-to-date, I'll say any quarter, pending the batch of leases we have, you can get some anomalies or in some of our smaller markets, like Atlanta has a negative number, but it's really more about which leases have rolled, and we don't have a big enough base there yet to really get a good statistical measure. Houston's a little bit slower. Their rents had gone backwards earlier in the year, improving now a little bit, with activity picking up in Houston. The rest of them probably were steady and starting to pick back up again. I think with the stop in construction and especially at looking at the charts, construction is starting to pick back up.
If you really dig through it, kind of one more layer into the onion, the construction that's starting back up is predominantly big box, and that's why we're a little excited. We are excited about starting our development pipeline back up where we don't have the activity. By the time we deliver, it'll be probably call it second quarter of 2021, and we typically underwrite a year to lease it back up. We think we're going to be ahead of the market with some of our deliveries, and that not many people, I'm not keeping it very private, but not many people are looking at developing shallow bay right now.
Right. Makes sense. One of your peers kind of mentioned, earlier this earning season, that leasing volume might slow up a little bit next year just as the economy opens up and maybe folks change their consuming habits and spend a little bit less on Amazon.com and more on vacations or concerts or whatever services. Do you have any views on what the economic recovery would look like and how that might shape demand?
I guess I'll preface it by saying we're not economists. As we've beaten our guidance a couple of times, Brent and I clearly aren't good economists. That preface. I'd like to think we'll get questions, do you think Amazon is creating a false sense of demand in the market? I would say that's certainly not true, although we are having a number of conversations. Not true in the shallow bay space. I can only speak with what we're dealing in. One broker described it more of a disruptor, and that I think other companies will really have to adapt to Amazon's model and more and more to e-commerce and delivery rather than in store. The other thing, I do think e-commerce won't grow at the rate. Not at 80% rates like it's growing currently.
I also think with each quarter that goes by, even in this kind of abnormal economy, tenants or I describe our own team as we're kind of getting our sea legs. First quarter was normal, second quarter was a huge disruption. I think our own tenants are getting used to it, or there's a couple of cases where we've had tenants speak to us saying they've almost run out of inventory at different times. What we read about first was safety stock. Now we're starting to see it a little more and more. I think the other industry that will benefit EastGroup, we've typically we've got the Ferguson Enterprises and the Daltile, Kohler. Home building picking up, I think that's the other thing.
Home renovation and home building, we're seeing some activity within our portfolio, I think we'll see more of that as the home builders really seem to be ramping up and doing well and population shifts. I'm more optimistic about 2021 than I was 2020.
Our team, we've been able to hang in here better than we thought. I'm more optimistic about 2021, assuming there's not. My danger is I'm assuming there's not another huge curve ball we all get thrown.
Got you. Thanks for letting me take my questions.
Thanks, Eric.
Sure. Bye, Eric.
We will go next to Craig Mailman with KeyBanc Capital. Your line is open.
Hey, guys. Maybe I just want to circle back to the balance sheet and maybe from a higher level. Clearly, your cost of equity's made it very conducive to use the ATM to help fund. The cost of debt is also extremely low for you guys now. Just in the context of lower cap rates for industrial assets, by nature, raise debt to EBITDA, just the way the math works. Just kind of curious, as you guys think about the optimal capital structure to maximize earnings, kind of minimize risk, what are talks internally? How do you guys balance those two things? Does there need to be some upward trend in debt to EBITDA just to be able to maximize everything?
Craig, it's a conversation we have frequently, and thankfully, it's been from the views of two positives. As I mentioned earlier, it's been an attractive cost of equity and also, as you mentioned, an equally attractive cost of debt. We've erred on the side this year being, I guess you would call it a bit conservative, as we put in the release. We actually, as of today, it'll change fairly quickly, but we're not even carrying a balance on our revolver, our almost $400 million revolver, which is the first time I can recall not being drawn in my years with the company. It's an ongoing discussion.
There's times where we feel like maybe we should be a little more levered, and then you have situations like we had earlier in the year, and your price goes to, I don't know, we went to $88 or $90 a share, and then all of a sudden you feel better about being as conservative as you are. It ebbs and flows with where things are. I would point out our debt-to-EBITDA has trended down over time. Although, as you mentioned, Craig, it's a bit of a challenge when you're growing, especially as we do via development, where you're perennially drawn on development costs that aren't yet producing NOI. That makes that a bit more of a challenge.
We did go sub five this past quarter, debt to EBITDA, which overall for us would be a goal, but it's not a goal to the extent where wouldn't preclude us from continuing to develop or ramp up development. If that means debt to EBITDA goes up just a little bit, that's just inherent with the way that works. We're in a good spot. The balance sheet, like I say, it's in good shape, just really more of our time and energy and focus is how do we find those opportunities? Our guys with the boots on the ground do a terrific job looking under rocks and trying to find the things that work for us. Really the focus continue to be there.
I agree with Brent and Craig, I guess I would add, maybe if we went back a couple of, three years ago, when our debt to market cap was more in the mid-30s and our debt to EBITDA was a little bit higher ratios and things like that. Typically, we have targeted 150 basis point spread over market cap rates. Really, the last couple of years or today, we're probably more around 300 basis points, meaning if we can build to a 7-2, it's probably about a 4-2 cap. As we've talked about our strategy and kind of how do we position ourselves, you're tempted. You don't want to push too much product into the market. You want to see it getting absorbed as we keep kind of reloading the inventory for development.
With the value creation there, it's so attractive, kind of the offset to that, kind of waiting for some disruption, we said, if we're going to be a little bit operationally aggressive to take advantage of the environment, let's be balance sheet safe. That's when we really started. Thankfully, the market gave us the opportunity to pull our balance sheet down to where it is today. I don't feel the need to really continue to delever. We might if the opportunity presents itself, but we think we can be comfortable stepping on the gas where the market is really asking for those development opportunities, and we love the spreads we're seeing there. They're as wide as they've ever been in our company history.
It also helps to have a safe balance sheet behind that in case something takes a little bit longer to lease up or several of them do.
No, that's helpful. Appreciate the thoughts there. Just Brent, relative to the same-store guidance, you guys are at 3.6 year-to-date, midpoint is three. Is this just conservatism? It's late in the year, so it's harder to move the numbers. I mean, does this imply sort of a de-sell from 3Q levels in 4Q to get to that midpoint, or should we think more you guys could be at the higher end of that 2.5%-3.5% range?
As we traditionally do, the information we put in that guidance table is just transparency on what equates to that midpoint of FFO. In that case, it does dial up to that 3.0%. As you basically are backing into, that does imply a bit slower fourth quarter than the earlier quarters. As of right now, from a budget perspective, that is what we've got dialed in now as to what happens there. Each quarter here through the year, we have been ahead of where we've anticipated. My hope would be that that proves to err a little bit on the conservative side and i mproves yet again.
Just a reminder, last year, third and fourth quarter were some of our, I think, the highest percentage lease marks we've had in the history of the company. I don't know so much as a deceleration in markets as much as the measuring stick that you're going up against there is pretty darn strong, and you compare that to just, again, budget assumptions aren't our goal or isn't the objective every day, so you hope you beat that. We'll see. Like I say, it's just a quarter to go there, and we're only two months to go there, so like where we are at this point in fourth quarter. Our focus will pretty quickly here turn to kind of see how that stacks up for next year.
Right. Then if I could slip one more in. Marshall, the Rancho Cucamonga deal, is that the $28 million IE West deal that you guys did in the quarter?
You're correct, yes.
Can you just talk about what kind of initial yield is versus what it could be stabilized when the tenant in place kind of moves out and you guys either put capital in or roll the rent up or down?
The owner leased the building back, so the rents are probably at market today, and I would call that mid to higher fours. It is not like we are not going to flip the asset, but if we put a, call it, not a Fortune 1000, five to seven-year tenant in, and it were you, me, and Brent, we could probably sell it in the higher threes today in terms of where market cap rates are.
I think we will stabilize. As we underwrote it, we will maintain that yield. I am a little bit optimistic by the time the tenant moves out, given what is going on in Inland Empire West and how land-constrained that area is, that our rents that we underwrote being, call it 60 days ago, are going to be below market six months from now. That said, I think we will end up a little bit below five.
We'll end up below five. Hopefully, we get pending the tenant , the term, call it four and three-quarter, something like that. I think we're getting a good 75 or plus basis point premium to where a market cap rate would be today.
Nice job. Appreciate it. Thanks.
No, if I add maybe a little color, too, I like none of them are material, and a couple of them we have still to close, but if it telegraphs kind of our thinking, we like strategically to grow in Southern California, try to find an opportunity and be patient, which is awfully hard to do in L.A. I like that we're lining things up, and fingers crossed, to exit Santa Barbara and sell our last R&D building there and then close on another asset in Houston. We're down 30 basis points in terms of what Houston is in our portfolio just from second quarter, then we'll sell something in fourth quarter, hopefully, and just kind of keep turning the dials in the right direction, has been our description.
If that helps, at least in terms of kind of how we're thinking of portfolio allocation. They're not big moves, but they're all maybe baby steps in the right direction on all three of them.
Oh, absolutely. Thanks a lot.
Sure.
We will go next to Bill Crow with Raymond James. Your line is open.
Hey, good morning. Marshall, you've referenced a couple of times today the inflow of capital into the sector from other places, and I guess that leads to kind of a three-part question. Are you seeing new competitors on acquisitions? Is there an erosion in development discipline which might be evidenced in extended lease-up periods on new construction? Three, how do you think this thing ends?
Good morning. I hope I can remember all three of those. Yes, we are seeing, which surprised me during a pandemic, but we are seeing new entrants into industrial, probably more, and it makes sense, more on the acquisition than development side, although we see both. Some new entrants to development in Dallas and things like that. We're not seeing an oversupply. It doesn't mean we won't, but to date, we haven't seen that much development. Typically, like in the case, and I'm trying to remember the specific projects in Dallas, they were more edge of town, big box. You can put more dollars to work if you're coming into the market.
I've gotten calls where I would call it working acquaintances over the time of your career that aren't in industrial, really to talk about industrial and how do we think about it and view it and things like that. It does make you nervous about where things are. With [kid is], it's like your Uber driver giving you stock tips. I think it makes it nervous. We tell them that it's a horrible sector, stay out of it's oversupplied, things like that. We're not seeing oversupply. We are seeing new entrants, and I'm an optimist in that where I think in terms of where it ends, what surprised us back in kind of late 2015, 2016, because everything is so institutionally held, unlike the old days where it was the three of us, I'm looking at Brent, too, and a bank loan.
Development shut down rapidly in Houston in late 2015 when oil and gas turned down. This time, although the industrial fundamentals have held up, as one board member said to me, "I wouldn't know there was a pandemic just reading through the numbers." I do think that our industry is much more disciplined and much more institutionally owned. I think things still have the ability to shut down like they did in Texas in 2016 and like they did earlier this year. I think it ends well. I'm an optimist. The other thing we're seeing is kind of where Amazon is leading so many retailers. I think the growth rate for e-commerce and how the American public shops, whether it's curbside pickup or delivery or online, is just beginning, and we'll see a lot of growth from that.
That's where I look at sometimes it's better to be lucky than good, but our shallow bay infill locations have always worked, and I think we'll pick up over It'll take years, but the next year to five years, a lot of new type customers in our buildings. We're starting to see that and seeing more and more repeat business from customers in our portfolio because of that.
All right. Thank you for your time.
Sure. You're welcome.
Thanks, Bill.
We will move next to Michael Carroll from RBC Capital Markets. Your line is open.
Yeah, thanks. I want to talk a little bit about some of your guys' occupancy trend. It's held up fairly well over the past three quarters better than, I guess, expectations. I guess, what's driving that? Is it that due to the strong leasing volumes that you guys have been able to deliver over the past few quarters? Is it just less tenant issues that you thought possibly could have happened? Was it a little bit of both?
I'll take a stab. Brent jump in. I think maybe two things. Certainly less tenant trouble. I guess at the start of this, looking back, I'll say I felt comfortable about EastGroup given where our balance sheet was. With 1,600 tenants, I was worried that we all won't make it to the other side of this March. Which tenants get kind of taken out by the downturn and the economic really shut down. That attrition has been much less than we would've anticipated. That's helped our occupancy. The other thing, I think with the uncertainty, we typically historically average our retention rate in the low 70%-75%, is probably high and over time. Year to date, I believe it's at 83%.
I think with uncertainty, tenants have put growth plans that they had late 2019, early 2020, have been put on hold. We've been able to keep a number of our tenants. There were tenants we had earlier in the year where we had a budgeted vacate where they said, "I'm just going to do a." Our leasing term has been consistent, a little north of four years where it always is, but where they've just done renewals rather than move out because they were uncertain what was going to happen. I think those have been the two big drivers to me.
The team, as markets reopened, and thankfully, I'm not speaking medically, but just in terms of business economics, thankfully, the majority of our markets opened up earlier than the rest of the country, whether it's Atlanta or the Carolinas, Texas, Florida, and that's where we've really seen that activity. Some of the guys say we're back to pre-COVID levels in terms of leasing velocity these days.
Okay. If you're looking at your, I guess, your tenant roster, have you done an exercise of how many tenants are in sectors that are overly exposed, that are in leisure or event planning, that might have to give back space that could cause some near-term disruptions? Is it so modest for you that you don't really see too much risk on that front?
We certainly look at those sectors. Maybe two things. I'm glad ours has moved around a little bit. Our top 10 tenants are about just north of 8% of our revenues, and that's by far the lowest we've seen within the industrial sector. We like geographic diversity, and we're working on that, and I like rent roll diversity. We certainly have those tenants on our watch list. You worry about Orlando and Las Vegas. Those markets have been, again, internally, surprisingly sticky, where we've hung on to our tenants and had fewer issues than we would've guessed a handful of months or so ago. I think we watched those, but they hung in there. Thankfully, our rent relief request really came in in April.
Since then, tenants move around and we do see those, but our rents are coming in earlier in each of the last three months have improved. We were waiting when the PPP loans kind of ran out, what happens next month in collections? Thankfully, the last three months, September was better than August. October's then coming in earlier than September. It feels like it's improving. Our rent relief requests, they haven't gone away, but they've gone down materially. Surprisingly, at this point, 50 basis points of our revenue, and we've collected a fair amount of that rent that got deferred earlier. We have collected a fair amount of that arrears.
It makes us feel better about the portfolio and able to really raise guidance last quarter and again this quarter. Again, you're kind of waiting for that bad news as this thing's played out, and knock on wood, it hasn't been as harsh on us or any of the industrial REITs as probably all expected back when.
Okay, great. Thanks. I guess last question, then I'll jump off is, I guess, you did talk a little bit about your watch list. How big is that watch list right now, and how did it compare, I guess, with three, six months ago?
Probably it's less than three or six months ago. It's more not by market or even It's really tenants like I mentioned, the one in Houston where you're doing airplane refurbishments and your whole industry gets hit, or we had someone that was in the dental supply business in Atlanta, and when this hit, people stopped going to the dentist for a bit. Those were the tenants that got pulled under. I think with 1,600 tenants, even in a good economy, we have tenants on our watch list, but it's thankfully right now, probably no longer than normal.
Yeah, I would agree. Our bad debt continues to come in less than we had originally anticipated, and the watch list and receivable ledger really has maintained being pretty clear. We continue to be impressed with collections and extremely impressed with our Houston collections and our team there. Kevin and his team have done a terrific job, as Marshall mentioned, for third quarter, between collections and rent deferral, we collected 100% of our rents there in Houston for third quarter, which is just a testament to the team there and our tenant base. The watch list, all things considered, is very manageable.
Thank you. We'll go next to Ki Bin Kim with Truist Securities. Your line is open.
Thanks. Good morning. When you look into your tenant rolls for the next 12 months or so, any pockets of concern that we should be aware of? Also, how do you think about your Mattress Firm tenant today?
Good morning. There's always movement within our tenants. It's more about spaces. I can think of one where we know the tenant has multiple locations and consolidating, so we'll get that space back. Thankfully, there's one in L.A. There's upside on the rents that they're paying today, and we'll refurbish the building and get that lease. Nobody major that jumps up. Again, I would expect our retention rate as the economy stabilizes to drop back from the low 80s more into the lower 70s, where we traditionally are. Hopefully, there's more prospects out there, and in some cases, we're looking at upgrading tenancy, and kind of weeding out. Again, I'm happy we've had 99% collection through the pandemic, so it's not really fair for me to complain about some of our tenants. Here and there, you do get a chance to upgrade the use and tenancy.
Mattress Firm, they've been through everything, I guess, through their bankruptcy and through this. Their leases, we probably are winding through a number of the Mattress Firm leases in the next couple of years. I'm trying to do it from memory, going through the bankruptcy. The good news at the time, they're in multiple locations, and the average building age, I want to say, when they had their bankruptcy maybe 18 months ago, was about six years on those buildings. They're in some new developments in places like Houston and Fort Myers and Tampa. Some markets where there's enough velocity in moving tenants. I think they're in a tough industry, but they're current today, and they're certainly ones you watch just because the industry they're in. We're probably closer to the end on some of those leases than we are the beginning.
We'll take a look at those spaces roll and really learn what their plans are too, I guess.
Okay. Do you have any early estimates for Prop 15 and what that can do to your tax base in California?
I think really virtually all of our California leases are triple net, so that'll get passed through to our tenants. The latest I've read, that people did not expect it to pass, but who knows on that? That it would take a couple of years for the tax assessors, or two to three years to really get through and reassess buildings there. Thankfully for us, it will, I won't say 100%, but well in the mid to high 90s at least, get passed through to our tenants. Really where it would then affect us, say two to three years assessed, passed through the tenants, it would put a damper on our ability to push rents in California, which has been a strong market. I won't say And that's why we like a diversified portfolio that we're trying to grow in California.
That said, it's hard to watch all the headlines in California and not be concerned about the economy in California long term. That makes me appreciate Texas and Florida and the Carolinas as well. We're watching it. It'll be a delayed impact if it passes, and it will slow our ability to push rents because as a tenant has said once to me, "It's a bag of money. I don't care if you call it property tax reimbursements or rents or insurance reimbursements. There's only so many gross rent dollars I can pay." Some of those dollars that would've gone to rents will get pulled into taxes if and when that happens. We'll manage our size in California just like we are working on Houston the last couple of years as well.
Maybe you can, I know, giving an estimate on the impact might be difficult at this point, but maybe you can provide a couple ingredients, like what is your average vintage year in California, and if you have the data, like what the tax bill is currently in total for California?
An awful lot of, again, without trying to interrupt, a lot of what we've got in San Diego, there's a number of assets that we've acquired, like the one in Rancho Distribution Center, where there'd be no impact because we just bought it, and we've been active in San Diego. That said, in L.A. and San Francisco, some of those are legacy assets that we bought in the '90s. Although we've gone up probably 2% a year every year, we get a bigger hit on some of those assets. We'll be out of Santa Barbara, knock on wood. It's a mix of. There's a fair amount in the Bay Area that's older. There's some older in L.A. There's one project in Fresno that would be an older vintage. When I say older, like late '90s kind of vintage on those.
Those will be a little more exposed, depending on where they get assessed, too, I guess is the other thing that's hard to estimate, how aggressive the assessors are and how our appeals work. I apologize, don't have a number for you today on all of that. An awful lot in San Diego, we're probably at market already. They are just about market.
Okay. Thank you.
Sure.
We will take our final question today as a follow-up from James Feldman with Bank of America Securities. Your line is open.
Thank you. Just one more quick one. Brent, you mentioned $200,000 in increases in deferrals from July to now. Anything from those tenants? Are they more tourism related in Houston or anything else that you can share from that?
No. It's continued to be a pretty diverse, many tenants, thankfully, not just single tenants that drive the number up substantially. There's nothing alarming amongst that 200. Again, we're very pleased at the total number. As Marshall alluded to earlier, that seems to have basically just topped out altogether at the $1.7 million. We've already collected $200,000 of that through September. Everything that had been deferred that was due, we have collected through the end of the third quarter. We've already reduced that figure at 9/30, I guess, to $1.5 million outstanding, and all but about $100,000 of that is due to be paid back by December of 2021. Our team did a good job of not prolonging the duration of which we were deferring and allowing them some room to pay that at a later date.
It wasn't anything specific or alarming there on the 200, or for that matter, really on the total. It was a pretty diverse mix of a little bit of help to a lot of different customers.
Great. Thank you.
Yep.
This does conclude our Q&A. I'll turn the call back to our presenters for any additional or closing remarks today.
Okay. Thanks, Priscilla. Thanks, everyone, for your time this morning and your interest in EastGroup. We are certainly available. I know we limited everyone on their questions on their Q&A, but Brent and I are both available if you have any follow-up. Please give us a call, shoot us an email, whatever's easiest, and look forward to seeing you virtually at Nareit, I guess, next. Thanks.
Thanks.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.