Good morning, thanks for calling in for our second quarter 2020 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. 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 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.
Thanks, Keena. Good morning, thank you for your time. We hope everyone and their families remain well and out of harm's way. I'll start by thanking our team. They've done a great job transitioning our operating strategy quickly and doing so while working remotely. Our second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market. The team had a solid quarter producing such stats as funds from operations came in above guidance of 9% compared to second quarter last year. This marks 29 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. For the year, FFO per share is up 9.5%. Our quarterly occupancy was high, averaging 96.6%, leaving us 97.5% leased and 97% occupied at quarter end, ahead of our projections.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last-mile delivery trends. Also benefiting our occupancy is a high year-to-date retention rate of 84%. Releasing spreads were strong for the quarter at 13.8% GAAP and 7.9% cash. Year-to-date leasing spreads are higher at 20.1% GAAP and 11.5% cash. Finally, same-store NOI was up 4.1% for the quarter and 3.9% year-to-date. In sum, during an extremely choppy environment, I'm proud of our team's results. Our strategy remains one of maintaining occupancy and cash flow with an eye on liquidity. I'm hopeful our strategy will shift again later in 2020 to focus on growth. In terms of liquidity, I'll thank Brent and our finance team, as at quarter end, we had the highest availability on our line in the company's history and one of the lowest percentages drawn on our line in decades.
Brent will give you color commentary, our upcoming debt placement further improves our liquidity while lowering our cost of capital. I'm grateful we ended the quarter generally full at 97.5% leased. Houston, our largest market at 13.8% of rents, is 97.9% leased, has roughly a 4% square footage roll through year-end, and a five-month average collection rate on rents of over 99%. My five months used being the length of this pandemic to date. Company-level rent collections remain resilient. For July thus far, we've collected 95% of rents. The unknown is when the economy truly reopens, how fast it will reopen, in which cities, and are there any shutdowns remaining. We and everyone else simply have less clarity than normal, even several months into this.
Brent will speak to our budget assumptions, but I'm pleased that with our second quarter results and a realistic plan, we can reach $5.28 per share in FFO or only $0.02 shy of our original pre-pandemic expectations. Towards that end, we thankfully also have the most diversified rent roll in our sector, with our top ten tenants only accounting for 7.5% of rents, down almost 200 basis points over the past few years. As we've stated before, our development starts are pulled by market demand. With the shutdown, we reduced projected 2020 starts to reflect first quarter actual starts, as well as some level of pre-lease conversations underway. In other words, we're not forecasting new spec developments at this time. We're also looking at acquisitions and value add investments in the same light.
Given the positive long-term distribution trends we foresee, we're working on several land sites which we view as valuable development parcels when the economy stabilizes. In the meantime, we view operations, working with our tenants, and maximizing liquidity as the key goals until we reach the next market phase. Now Brent will review a variety of financial topics, including our updated 2020 guidance.
Good morning. Our second quarter results reflect the resiliency of our team and strong overall performance of our portfolio amidst unprecedented conditions. FFO per share for the second quarter exceeded our guidance range at $1.33 per share, and compared to second quarter 2019 of $1.22, represented an increase of 9%. The outperformance was primarily driven by our operating portfolio maintaining occupancy and collections better than we had estimated in April, which was the initial onset of the pandemic. I will center my comments around our capital status, rent collections, and deferment requests, and assumption changes that increased the midpoint of our FFO per share estimate. During the second quarter, we raised $30 million of equity at an average price of $123 per share, and earlier this month, we agreed to terms on two senior unsecured private placement notes totaling $175 million.
The $100 million note has a 10-year term with a fixed interest rate of 2.61%. The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%. We anticipate closing on both notes in October. That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength, which is serving us well during this time of uncertainty. Our debt to total market capitalization is 21%, debt to EBITDA ratio is 5.1 x, and our interest and fixed charge coverage ratios are over 7.2 x. Our rent collections have been equally strong. We have collected 98.1% of our second quarter revenue and entered into deferral agreements for an additional 0.8%, bringing our total collected and deferred to 99% for the second quarter.
As for July, we have collected 95.5% of rents thus far and have entered into deferral agreements on an additional 0.7%, bringing the total of collected and deferred for the month to 96.2%. That is slightly ahead of June's pace. Last April, we reported that 26% of our tenants had requested some form of rent deferment. In the three subsequent months, that has only risen to 29%. We have denied 79% of the requests, are in various stages of consideration on 8%, and have entered into some form of deferral agreement with 13% of the requests. The rent deferred thus far totals $1.5 million, which only represents approximately 0.4% of our estimated 2020 revenues. As we stated last quarter, the depth and duration of the pandemic and its impact on the economy is undeterminable.
However, the immediacy and degree of potential tenant financial stress and loss of occupancy we had budgeted for in April did not occur in the second quarter. As a result, our actual performance and revised assumptions for the remainder of the year increased our FFO earnings guidance by 2.1%, from a midpoint of $5.17 per share to $5.28 per share, or a 6% increase over 2019. Among the changes were an increase in average occupancy from 95.2% to 96%, and a decrease in reserves for uncollectible rent from $3.8 million to $3.6 million. Note that the reserve for potential bad debt for the third and fourth quarter of $2.4 million is not attributable to specific tenants. Rather, it is a general assumption that there will be some companies who succumb to the disruption in the economy caused by the pandemic.
Other notable revisions include a lower average interest rate on new debt and the increase of equity issuances by $95 million. In summary, we were very pleased with our second quarter results. We will continue to rely on our financial strength, the experience of our team, and the quality of our portfolio to navigate us through the remainder of the year. Now, Marshall will make some final comments.
Thanks, Brent. In closing, I'm proud of our second quarter results. We've said the past few years our fear wasn't shallow bay oversupply as much as a black swan economic event. You don't want either, now we have just that. Our company and our team have worked through these before, while different, we're working through this one, too. As the economy stabilizes, it's the future that makes me the most excited for EastGroup. Our strategy, which has worked well the past few years, will come out of this pandemic with trends that we're hearing of, including companies carrying additional safety stock inventory, shopping habits that have changed, accelerating the consumer to e-commerce, new industrial users as a result of these shopping habits, and increased U.S. manufacturing or nearshoring in Mexico. Meanwhile, our bread-and-butter traditional tenants will remain and continue needing last-mile distribution space in fast-growing Sun Belt markets.
All of these, along with the combination of our team, our markets, and our properties, have me optimistic about our future. We'll now open up for any of your questions.
At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You can always remove yourself from the queue by pressing the pound key. Once again, star and one for questions. We do ask that you limit your questions to one and one follow-up. May queue with any other follow-ups. Thank you. We'll take our first question from James Feldman with Bank of America. Please go ahead.
Good morning, guys. This is Elvis, on for Jamie. Just a quick question. If we can just drill into Houston and what makes your rent collections there stronger relative to the rest of your portfolio? Then number two, any outlook you can share on supply, demand, rent changes that you're seeing, in your sub-markets relative to the rest of the market, that would be helpful.
Good morning, Elvis. It's Marshall. I'll take a start at that. In Houston, probably a couple of three things. One, it's always hard to quantify from outside, but we have a really good, experienced team that's worked well together for a long time in Houston. We've kidded them, Houston has a downturn about every few years, so they've gotten a lot of experience. They have done a good job and been very diligent about chasing down tenants. Maybe comparing it to some other parts of the country, really probably focusing out west too, Texas is probably a more favorable market in terms of landlord rights when tenants don't pay and things like that. That ability to lock someone out or really push to kind of own that negotiation probably legitimately helps with our collections in Houston.
The third thing, I think that sometimes gets lost in the kind of high-level market overview, but when we shrunk our size, our investment in Houston from a little over kind of the low 20% down to below 14% and still dropping today. What we sold were our older kind of standalone buildings, and what we've kept are really the buildings that EastGroup has developed that are in parks. The quality of what's left, and this statistic is a couple of years old by now, but I remember as we were selling, the average age of what we were selling was in the high 30s, like 38 years is what I remember. The average age of what we still have was eight years. It's a new, highly functional, well-located, EastGroup develop type parks of what we've got left.
I think that attracts credit quality tenants that I think even if they're smaller spaces, one of the things that's kind of gotten lost the last few months on us is a general kind of painting of, okay, EastGroup has smaller spaces, that must mean mom and pop tenants. There's a lot of national and public or private, well-capitalized companies that need last-mile space. You're seeing that in our company collections. Our Houston team has just done a great job and been after it to be over 99% the past five months. I'll admit, surprises me how well we've done, and fingers crossed, we'll keep after that. In terms of any specific sub-markets, it's been pretty broad brush. The trouble we've seen within our tenants, it's not so much by size of space as to what they're doing.
It's markets that concern us a little bit. There's Houston, because of the supply. I think people get lost in how much of that is big box, not shallow bay. The other statistic, which gives us some comfort. Of the 18.8 million sq ft in Houston under construction, it's roughly 50% leased, 49.2% leased per CBRE. Most of that space is accounted for. That leaves a little over 9 million sq ft, absorption year-to-date has been over 6 million sq ft, even during the pandemic in Houston. Hopefully we'll work our way through that as a market. A lot of that, thankfully, the majority of it by far is not shallow bay. I'm trying to think of any specific markets. The tourist markets concern me a little bit.
Just because like a Las Vegas, we need the Strip to be open, tourists to be coming to town. It's not a large market for us, but that certainly helps. Our tenants need the economy to be open. The same with Orlando, for example. Tampa's been a very stable, strong market. We've had some great re-leasing spreads there and things like that. Orlando, we've hung in there, and I guess Disney's reopened now, but with Disney and Universal Studios and conventions slowing down in Orlando, those are the markets we've said have been hit a little harder than a Dallas or a Charlotte or some markets that are a little more stable like that Austin, for example.
Thank you. That's very helpful. Just one more question, either for Marshall or Brent. On what you were thinking when you lowered guidance with 1Q release and then obviously increasing guidance now. What did you see from tenants then versus now? Is it that the markets have reopened? Is it that some of those industries that you thought would not survive are actually thriving? What exactly are you seeing that's different quarter-over-quarter?
I'll take it and Brent jump in, or we'll both kind of try to answer. I think as we've pulled together, to us, as we've kind of said, this shutdown really started, and it was like a curtain coming down in an instant. That Friday, March 13th, it felt like things came to just a dramatic, shocking stop. A month later, as we were pulling together our guidance, one, you're just kind of watching the news, watching the economy, and all working remotely as we were pulling this together. We just said with this kind of shutdown, it's going to really impact our tenants, and people aren't leaving their homes, so the ability to backfill space is going to be very difficult.
What surprised us or me to the good is just how critical our space is to our tenants, even those that have been in trouble, some of our bad debt, we're still working with those tenants to try to figure out ways they're trying to stay in their space or bring an investor on board and do things like that. I've been pleasantly surprised. With things shutting down, it has accelerated as people read e-commerce so much. There's more and more companies with social distancing that has led to incremental demand. The Amazon, the home building, the e-commerce tenants have really grown pretty rapidly this year and continue that. We've picked up probably our market share of that. Probably seeing that happen that quickly surprised me. You think it makes sense that it's going to happen.
We probably didn't expect it to happen as fast as it did. I'm really surprised that our average occupancy for the quarter at 96.6% is the same as last year, and last year was a record year. If you had asked me in April, our odds of our occupancy staying the same, I would've been wrong, but I would've bet you a lot that it was going down, and thankfully it hung in there. Brent, any color, commentary? What have I missed?
No, I think that's right on. The reality is, in April, it was so soon, we just didn't know. Now we have a little bit of data, and like Marshall said, very pleased with how everything has held up. There's still some uncertainty, even maybe toward the end of the year. We've got a few things dialed into guidance to hopefully adjust for that. Yeah. I would say in April, we just were so early into it, you just didn't know, and you felt like you needed to do something to adjust with any knowledge of what might happen. Again, we're very pleased with where we are, Elvis.
Great. Congrats on the quarter, guys.
Thank you.
Our next question is from Daniel Santos with Piper Sandler. Please go ahead.
Hey, good morning. Thanks for taking my question. I guess the first one is, I was wondering if you could give some more color on why you're baking in such conservative guidance for occupancy in the back half of 2020, just given the first half has been better than expected, one would expect that the second half would kind of continue that trend. Just some color on that would be helpful.
We hope you're right. Our thoughts, and today, thankfully, at least speaking kind of here at the end of July, maybe one more month into it, since quarter end, we've hung in there. The economy's reopened, but not exactly reopened. Restaurants at 50%. I don't know that things won't get shut down again, different places where you've heard of different states, different cities shutting down bars, shutting down this, that gyms or different things. That I think that over time has to stress our, with 1,600 tenants, has to stress our tenants' balance sheets over time. I hope you're right. I hope we're being conservative, but we thought that we're not out of this yet. As the months build upon each other, it's got to be a drag on some of our tenants. It's not anything specific.
There's not any one market, any two or three tenants specific, any large ones that really drive it. It is just more of a, "I'm not sure," or, "I don't believe we're through the end of this." Over time, more of our tenants have to get almost kind of picked off by a weak economy.
Got it. That's helpful. My second question is on distribution. I appreciate the comment on the incremental demand from e-commerce, how much would you say COVID has really changed distribution and last mile in a permanent way versus something, just a temporary change between now and when things go back to quote unquote "normal?
Okay. Good question. I think the spike that we read about in terms of how much, pick any retailer almost, much less an Amazon and things that what the numbers I've seen, the e-commerce growth in terms of retail sales were within the high teens, and it had jumped up into the low 30s as a percent growth. That people were expecting it to moderate back into maybe the 20s. I don't think things will go back to the way they were, or some of the things we've read and actually seen that this shutdown has demystified e-commerce for a large segment of the population. I think the way people shop and maybe the way they live, too, which I think will help us over time in Sun Belt markets live and work. I think those trends have started. This has all accelerated that.
They were all coming this way. E-commerce from last-mile was coming our way. Company relocations, people relocating to fast-growing Sun Belt markets was happening. I think this will add fuel to the fire coming out of this, and it really will accelerate it. Almost the other side, as you see shopping malls die, I think they were dying, but somebody said this is euthanasia for some of them. It's pushed it ahead two or three years.
Got it. Thank you.
Sure. You're welcome.
Thanks, Dan.
Go next to Manny Korchman with Citi. Please go ahead.
Good morning. This is Katy McConnell. I'm for Manny. Can you discuss the potential impact of the PPP program rolling off for your tenant base and risk to rent collections or increased deferrals that you might be factoring into your estimates for the balance of the year?
Yeah. Hey, this is Brent. Good morning. Obviously, we have had some direct feedback from tenants that have initially put in requests, then we got feedback later, "Hey, we received some PPP money and got caught up." Certainly, we've seen some tenants benefit from that. It's hard to tell out of our 16 to 1,700 customers exactly to what extent that's helped. We did do a cross-reference of our tenant base to the public list of companies that have received PPP money. We used 150,000 sort of as a minimum. We were looking at people that received 150 or greater. It appears that somewhere around 20% of our tenant base did receive some form of PPP money, which seems to make sense to what we expected.
As Marshall mentioned, we have only had 29% of our tenants at some, and most of that, 26% of the 29%, occurred back in April, requested some relief. In terms of whether they extend the program, if that'd be helpful, I think anytime you put money into people's pockets, certainly that would be beneficial. I think, 80%+ of our tenants have shown a good resiliency without that. It's really not a lot we can control in that. Certainly, if it's part of the program, we would expect that would be incrementally better. If they don't, our tenant base been longtime customers of ours, and we'll continue to work with them. It's hard to tell what impact that might would have, whether it does or doesn't happen.
Okay, thanks. Maybe following up on Houston. For the leases you have expiring there this year and next, can you talk about your expectation for retention as well as backfill demand there?
Probably the good news, I think given the choppy environment, what we've got rolling between now and year-end is only about 4%. Not a ton. To date, company level, our retention, I think this uncertainty has led our tenants to renew. Usually, people were working on growth, and we were talking about kicking off new buildings here and there in certain cases, and they've understandably put those on hold until the economy feels a little more solid. Our tenant retention as a company is 84% year-to-date. If you were building your model on EastGroup from scratch, I would tell you 70% is usually our long-term, and most everybody else's long-term retention rate. Uncertainty has led to a higher retention rate in Houston and in other markets. My guess is we have more rolling in 2021.
As the economy stabilizes, hopefully, I think we'll probably keep that and work our way through. Rents have come down in Houston, probably 5%-10% as a market. The good news is, anything that you had that may be two to three years, those that are coming up or expiring are going to be anywhere probably from three to five years. There's still embedded rent growth there. Maybe it's down. I think as with supply stopping really across the country, for the most part, I think because industrial's held up, supply will probably pick up a little more in the back half of the year. I think Houston, we'll work our way through those, and I would expect probably 70%+ retention rate, and probably it'll start to Hopefully, things normalize the back half of 2021 and things like that. Nothing alarming to date.
Okay, great. Thank you.
Thanks, Katy.
Our next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, this is Selina on for Vikram. Congrats on the awesome quarter. Just could you provide a little bit more color on your expectations for development starts? I know you said that you're not going to have any future spec development starts, but given your confidence on the outlook, just curious why not push development a little bit more?
Sure. A good question, probably as we think about it, almost if you divide the second half of the year into quarters really, into another half, we've stopped our spec starts because the economy was so uncertain in second quarter. We're feeling better about things, although still cautious here in late July. Probably will not have any starts in third quarter. Then as we roll into fourth quarter, in between third and fourth quarter, there are some pre-lease conversations we're having where if we get a lease signed, we'll build a building for that tenant, and we have a number of proposals out. That's probably the biggest part of the difference of the spec development, which is about $70 million in starts between now and year-end. Probably what we are thinking about a little bit differently, they're markets like Charlotte, Phoenix, Northeast Dallas.
There's several markets where I think if these were normal economic times, we already would've started that next phase. The next couple of buildings are then an existing park. We've really put those on hold. Probably what's giving us a little pause is really watching our own portfolio, but also watching the market. We've said, thankfully, we're 97%+ leased. Delivering that next building, you want to make sure your peers are also pretty full. We really thought construction prices are dropping with this slowdown because of not only has industrial slowed down, but hotels, retail, office, entertainment-type development has really stopped. We are seeing the benefit of waiting in terms of construction pricing a little bit.
We also wanted to just see what the vacancy rates in our kind of sub-market by sub-market, how those went, or which of our tenants what vacancy we may get within our own portfolio. Thankfully, we've not, knock on wood, seen much of that today.
Just to follow up on some markets. It looks like from the core market operating statistics that rents were a little bit weaker, at least same property NOI was a little bit weaker in the California market. Can you just talk about what was going on there last quarter?
Last quarter, well, one that was weaker, for example, is San Francisco, and there, at a good property in Hayward, we've got a vacancy there. It was vacant the entire quarter, and last year it was full. The good news is we have an agreement, and we'll see if it comes back signed. We have an agreement with a prospect and a lease out for review and hopefully signature there. Probably the same thing, just kind of looking through the quarter or year to date. Fresno is not a large property there. It's a park that we've owned in Fresno since the late 1990s, 400,000 sq ft, and just a little bit of a pickup in vacancy there.
The biggest one, and we've had some still really strong re-leasing spreads as you look at kind of in San Francisco of mid 50 type percent. It'll be one of those type spaces when we get it re-leased. It's taken a little bit longer, I would say that space. The markets East Bay, kind of Hayward area towards Oakland and San Francisco is 2% vacancy, sub 2%. One of our markets that's been shut down probably a little bit longer, being California than, say, Georgia or the Carolinas. It's drug that vacancy out a little bit longer, and that hit us in second quarter there.
Great. Thanks so much.
You're welcome.
Next question is from Michael Carroll with RBC Capital Markets. Please go ahead. Michael, please check the mute function on your phone.
There we go. Sorry. Marshall, can you provide some color on your comments that companies plan on increasing safety stock? I know that's been a conversation that's been going around now for the past couple of quarters. Have your tenants indicated that they plan or need to hold more inventory to sustain some of these potential supply chain shocks? Have they voiced that directly to you yet?
Certainly it's more us reading and hearing about it and hearing it at conferences and conversations with brokers than direct, I would say. I guess the tricky part from April to now, we've been in front of our tenants less than typical. You may have phone calls and things, but you're certainly not traveling and walking through spaces where you kind of get a sense for how they're using it. What we're hearing directly, a little bit through tenants and then more through brokers and other people, is just because people got caught so short sourcing from China and had less inventory that they're going to need to carry more inventory.
As another broker once said to us, "Any time when someone hits click to when it gets delivered to your doorstep, that speeds that up." That's where the world's going, and that excites us given our type properties and how close we are to rooftops, and typically higher end, better educated rooftops, more e-commerce oriented. I think coming through that, companies before it was a logistics center, they'll still have those on the edge of town, in Chicago and South Dallas, South Atlanta. Now they need to carry more and more inventory near rooftops when you go from Amazon, we're delivering in two or three days to Amazon Prime and Amazon Prime Now.
I think that in itself is leading to more inventory and I was thinking, I did read where, I'm trying to think of which company is relocating already Craftsman tools from China to Fort Worth, which is one of our markets. They'll manufacture there. Some of these long-term trends, you're seeing maybe the, I'll use a broker phrase, green shoots of that, but I think it's pretty early on, but hopefully it continues to come our way.
I guess, how broad-based do you think this will be among tenants? Will the larger tenants be the ones mostly driving the higher inventory, or do you think smaller tenants will need to do that, too? I guess if so, they do hold more inventory, where are they going to hold it out at? Is it going to be in the infill or shallow bay space that you have, or is it going to be more in the outskirts of some of these major cities?
Probably a little bit of both. I think early on in this, kind of this being the downturn, we saw the national tenants still being the most active ones, kind of our conversations. Home Depot, Lowe's, Wayfair, Tesla, some of those type names. In the last 30, 45 days, it's been more local regional tenants. Probably as the economy stays open and gets a little more certain, it's nice to see those local kind of regional tenants start to be active. I think they will all need to keep more inventory or probably think about that. They probably have that inventory in their warehouse, depending on how local, regional. I think it's the national companies.
I do think, I guess as we talk about a Lowe's and a Home Depot, it's so much cheaper for them to keep their inventory with us than it is in a strip center type property. The large, bulky items that you're not leaving your home with. That's where you would order a washer-dryer, and it gets delivered from an EastGroup warehouse in Atlanta or Tampa or Miami, and that's cheaper than keeping it. I'm only picking on them because they're Florida, than, say, a Regency Centers that's somewhere else in Florida or something like that. I think that trend will keep coming our way because our rents are probably a third to a quarter, on a gross basis, what a typical strip center retail rent would be.
I think that's all coming our way, and people will figure out, just go work on their supply chain and chipping away at cost, and that pushes more and more inventory our way. We've seen it, as I'm thinking about Florida, where it's another group we're having conversations with, Nike, they've got space for Nike and their different brands with us because it's cheaper to use us as backup store given all the tourists and the outlet malls in Orlando. They run hourly van service back and forth to our buildings. For Nike and Hurley and some of their concepts to continue growing and using our type buildings.
Okay, great. Thanks.
Sure.
Our next question is from Bill Crow with Raymond James. Please go ahead.
Hey, good morning. Congratulations, guys. Marshall, a couple of topics that seem to surface pretty often. I just wanted to get an update from you. Number one, what are your tenants telling you about their ability to source labor? Number two is just any color on construction costs. We know the growth had been coming down. Are we actually seeing material declines in construction?
Well, we've seen our shell costs come down. A good question. Good morning, Bill, I guess, backing up. We've seen our shell cost on buildings come down $1 or $2 per square foot . It starts to be a meaningful number. At different times, people have thought nationally that rent growth would be flat for 2020. I'm starting to think it'll pick up some in the back half of the year, given how strong, as we talk to our peers and read their reports and things like that I do think rents will maybe pick up the back half of the year. Labor certainly has picked up. It has to.
With unemployment, it used to be such a big part of conversations of tenants of where, "If I come to this location, where am I going to source labor?" Tight markets, and especially tight construction markets, where in a couple of cases, the general contractor had fenced the site where they were building our buildings so that they basically would lock the workers in, because during breaks, the competition would show up and try to hire the workers away. That gives you an idea of how tight labor was, and that was going on. I don't know that that's completely stopped, but I would think where unemployment is, labor, and what we're hearing is labor is more available, certainly on construction, but a little bit less efficient, and rightly so, because of safety distancing requirements and things like that.
We've kind of continued our development construction on buildings we have underway, drug our heels a little bit because prices were coming down, and we think rents will bounce back a little bit. Part of that, you're trying to time when do you really start developing again. It's early, and it just depends on how you think. You can get real nervous about thinking about kids going back to school and things like that about another shutdown. We're being a little bit cautious about that.
Marshall, on land, development land, any indication that competition for the land is easing a little bit, or that more owners are looking to liquidate land in order to maybe pay for other investments given this economic environment?
Yeah. A good question. We've not seen distress in terms of industrial assets. If anything, it seems like demand may have picked up. On land, however, it does seem like there is less competition for land. The prices have been sticky. And part of our thinking has been If we had met at NAREIT last November, we would've said our long-term concern is it's awfully hard to find good industrial land sites in fast-growing markets, that it's been so picked over and land gets priced out of range for industrial. We're trying to tie it up as long as the seller would let us have our funds go at risk as late as possible.
Have been happy and that we've been able, and some of it's been in the press, but to tie up some contiguous land near us in Charlotte at our Steele Creek, which has been a very successful development. Tie up some land in Northeast Dallas where we could continue developing a good park there. San Antonio.
Again, contiguous land, as I'm kind of thinking through our portfolio in Fort Myers, where we're building what would be the last building in a park, the eighth building in a park. We're out of land. They were able to source some adjacent land because once you get that many tenants as we have there, really the next thing to do, and it makes our development risks, I feel like, so much lower than maybe some of our peers, is you're just waiting for one of your existing tenants to raise their hand and say, 'I need another 30,000, 40,000 sq ft . We'll move you into building nine or 10 and backfill your space at a higher rent.
We're trying to use this opportunity to bolt on a little bit to some of our existing parks, whether it be Charlotte or Fort Myers or Northeast Dallas or places like that where you can pick up land here or there. Because we think coming out of this for the reasons we talked about earlier, whether it's e-commerce or manufacturing or safety stock or just relocation to Sunbelt markets out of kind of mass transit markets in the Northeast, as those pick up, that land is only going to become more and more near and dear. If we can use this downtime to slowly add, and again, land gets a little scary. We want to add a reasonable amount of land so that you don't get stuck carrying it for too long. That's how we're thinking about it.
Unfortunately, when we talk to the brokers about distressed sales, they'll kind of kid and say, "I'll put EastGroup here into the Es because I've got a Rolodex of names of people that want to buy distressed industrial right now.
Sure, I get it. All right. Well, thanks for the color. I appreciate it, guys.
Sure. Thanks, Bill.
Go next to Eric Frankel with Green Street Advisors. Please go ahead.
Thank you, and thank you for working with me on my phone issues. Just an accounting question. Your bad debt assumptions for the second half of the year, can you express what that is going to be on a cash basis?
Hey, Eric. Good morning. It's Brent. We wouldn't know till it occurs. So far out of the $1.2 million or so for the year to date, just over $300,000 of that, about $325,000, that has been cash. The cash component of it will be just like it's been. We would anticipate it being similar to where it would be a smaller % relative to straight line. The $2.4 million, we have $1.2 per quarter. As I mentioned, the lead in, that's just a general overall bad debt allowance, not specific to tenants. We really don't have that necessarily broken down. We do some internal things, it'll be, like I say, I would expect whatever we have occurred.
We certainly hope that proves to be conservative. Whatever it comes to be, I would say it'd be two to three times probably greater on the straight line side versus cash.
Okay. Thanks. That's helpful. I think, Marshall, you kind of expressed this in a couple different ways, but maybe just to clarify specifically, you're leasing this quarter, the average lease term is a little bit shorter than it's been for the last few years. Is that just based on a little bit of uncertainty on tenants as their growth plans have been stalled? I think you're down to roughly 3.5, 3.8 years or so on leases this quarter. Is that a trend you expect to stay? Do you think that will go back to where it's been the last few years?
Good catch. It is a little bit down. It's been there before, kind of late 2016, late 2017. We've been kind of around that four range. It's not dramatically down, but a little bit. It wouldn't shock me given the uncertainty for third quarter to stay there. As the economy gets to sound footing, I think then we go back over the fours, which is where it's kind of 4.1 to 4.5, that type thing. I think it's kind of, again, a good catch. I think it's more uncertainty in the market, and we'll do a three-year renewal because we're not sure and just stick where it is. I would expect, and this is me estimating, that it would normalize hopefully by fourth quarter, first quarter next year, depending on how COVID plays out.
Got it. Thanks. Final question, just related to kind of what you're seeing on the last-mile demand front. How much of this last-mile demand is as you're describing with your Nike example, just like store replenishment versus actual customer delivery or delivery to individual consumers?
It's mostly customer related. It's usually we're going to ship out of an EastGroup building rather than a retail store. I guess the phrase I heard some of our customer use is, "We used to have store level inventory, and now we've moved to market level inventory." That's by and large, most of it. Probably store level storage where you're that back of house. There are a few examples of it, but that's more the exception.
Okay. Thank you.
Sure.
Going next to Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey, guys. Marshall, you mentioned Houston rents are down 5%-10%. Are you seeing any kind of market rent weakness outside of Houston or significant rise in concessions across any of your markets?
No. Good question, Craig. Not really. Where we've seen it, probably not on renewals. Those have stayed pretty consistent. All of our tenants, just about everybody has a tenant rep broker and where it's typically been in the development pipeline or where there's vacancy, it's usually about rounding third base on getting a deal done, and they'll ask for a month or two of free rent. We've seen free rent grow up where the rents have been pretty stable. The annual increases have been pretty stable, where there has been a little bit of market movement as tenants realize there's not as many tenants out in the market. Free rent could chip up a little bit rather than two months on a longer-term lease. Maybe they'll ask for two more or three more, and we'll settle somewhere in the middle.
Outside of Houston, thankfully, rents have probably leveled out but not gone backwards.
We've heard from some other companies that maybe there's been a trend to try to push bumps higher. Have you guys, pre-COVID, were you part of that trend to try to get escalators into that 3.5% range or have you guys kind of Where has your ask been on that side of the lease equation?
Usually the bigger the space and the longer the term, it makes sense, they'll negotiate those bumps probably closer to 2%. We'd love to go higher, we probably typically have been around that 2.5%-3%, if we can go higher than that, we would. Again, I guess that's where it probably boils down between the two brokers. If everybody has a tenant rep broker and you're on a spreadsheet comparing it versus your peers. Probably heading into this, we were trending higher, not materially higher, it's really a case-by-case basis, if you get to a 10-year lease or a bigger space, those tenants are going to push back pretty hard. They're going to get closer probably to 2%-2.5% rather than 3% bumps.
Okay. Then just one last one. I apologize if I missed this, but just looking at kind of the monthly collections here. It looks like there's been a marginal falloff as you get further away from April. I'm just curious, is there anything going on there or what's driving that? Also, your portfolio has been a market set of, at the start of this, kind of more insulated from the impact of COVID versus the Northeast markets and maybe more on the West Coast. Are you seeing an uptick in deferral requests as PPP has burned off and maybe COVID's kind of impacted communities a little bit more?
Yeah, Craig, good morning. I'll answer the second part first. We have not seen an uptick in deferral requests. It's actually gone the other way. The deferral requests, thankfully, sort of knock on wood here, have really trailed off. Our guys, we have a process where we're getting at least weekly reporting from each asset manager in the field. For maybe three or four weeks running now, a lot of those updates have basically been no new update, meaning there's been no new requests. That has certainly trailed off significantly. The AR, we're very pleased with where the collections are. You can see we've deferred very little. Our collections have remained high. Our team's worked hard. There certainly has been, as you mentioned, a minimal decline month-over-month. That is very fluid.
July, we've got reported here 95.5%, and even since we've put the print on this yesterday, that's now 95.9%. Each day, all of those numbers literally change. I think the deeper we go into it, obviously, the opportunity for that to have pressure is certainly there. On the whole, it's just been the one sort of group of tenants that originally asked for some assistance that we've had to keep a closer eye on. The vast majority of our tenants have continued to maintain, hang in there, and pay. It's something to keep an eye on, but where we are in those high 90s, we don't have any alarm bells or anything going off at this point, for sure.
Maybe just slip one more in. What's your exposure to brick-and-mortar retail and apparel-type tenants?
I'm trying to do it from memory. It's funny, we would get questions about retail a couple of years ago, we would say it's not that great, it's actually grown over the last few years. Again, I think with e-commerce, between the Wayfair, the Lowe's, the Home Depot. I can think of, we have Conn's in Charlotte. There's not much. We've had Nordstrom as a tenant for over 20 years in Orange County. It's here and there, we don't have a big JCPenney warehouse or Tuesday Morning, I'm trying to think of different people that we've got some spots here and there. We've got Nike in Orlando, it's in three different locations within a park because they're different brands.
Nothing with Ascena or anything?
Oh, yeah. No, I can't think of anything with Ascena brands or some of those since I left Blanchard. I don't know a few of those.
Repressed memories. All right, thank you, guys.
Sure.
Thanks, Craig.
Go next to Venkat Kommineni with Mizuho. Please go ahead.
Hi, good morning. Just wondering if you can comment on some of the movement in Houston occupancy during the quarter. When I compare occupancy at the end of 1Q to that provided in the June 1st business update, and then to 2Q, it looks like it declined from 98.7 to 97 and then ticked back up to 97.9, and I guess two questions around that. Was that increase in June driven by the lease signed with Agility in Houston as they now show up in your top tenant list? As a follow-up, does that initial occupancy decline in April and May help explain the near 100% collection rate in Houston in Q2 2020 as maybe some weaker or more challenged tenants vacated space?
No. Good eye. Just with the number of tenants, Agility was signed, and it's really more delivery and them taking occupancy of a new building, so that's when they jumped, good thought, into our top 10. They took a couple of buildings. It's a global third-party logistics firm up at our World Houston Park. That moved them into our top 10. We have had some instances, but it's really, I'll compliment our San Antonio team, where we've had some problem tenants, where they've been able to negotiate getting those tenants out and backfill. Houston, I think it was just collections and really kind of organic movement of tenants in and out or occupancy. It'll always, in any market, kind of ebb and flow a little bit. Unless it's one of our smaller markets where probably fewer moving parts.
With Houston, with 5.5 million sq ft , there's always someone kind of coming and going, almost like an apartment complex, if you could think about that. Agility was really more delivering a new building and them taking occupancy of that building is what moved them in.
Great. Thank you.
Sure.
It appears we have no further questions. I'll return the floor to our presenters for any closing remarks.
Thank you everyone for your time. Thank you for your interest in EastGroup. Brent, Staci, Tyler, and I are all certainly available for follow-up questions after the call. Hopefully look forward to seeing you all in person again one of these days, whenever the world allows. Take care, and thanks again.
Thanks.
This will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.