Good morning, and welcome to the EastGroup Properties F irst Q uarter 2022 Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the queue, please press star then two. We ask that you limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the question queue. Please note this event is being recorded. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.
Good morning, and thanks for calling in for our first quarter 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views about the company's plans, intentions, expectations, strategies, and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events, or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings, including our most recent annual report on Form 10-K, for more detail about these risks.
Thanks, Keena. Good morning, and thank you for your time. I'll start by thanking our team for another strong quarter. They're performing at a high level and capitalizing on a sustained positive environment. Our first quarter results were strong and demonstrate the quality of our portfolio and the strength of the industrial market. Some of the results the team produced include funds from operations coming in above guidance up 15.9% for the quarter, well ahead of our initial forecast. This marks 36 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend. Our quarterly occupancy averaged 97.3%, up 30 basis points from first quarter 2021. At quarter end, we're ahead of projections at 98.8% leased and 97.9% occupied.
For perspective, these quarter-end results matched our highest percent leased and is our highest percent occupied. Similarly, quarterly re-leasing spreads were strong at 33.5% GAAP and over 21% cash. Finally, cash same-store NOI reached a record 8.5% for the quarter. In summary, I'm excited about our first quarter results and the positioning this gives us for the year. Today, we're responding to strength in the market and demand for industrial product, both by users and investors, by focusing on value creation via development and value-add investments. I'm grateful we ended the quarter at 98.8% leased. To demonstrate the market strength, our last six quarters have each been among the highest quarterly rates in the company's history. Another trend we're seeing is more widespread rent growth.
While first quarter re-leasing spreads are consistent with 2021, we're seeing the impact across a broader geography. I'm also happy to finish the quarter at $1.68 per share in FFO and raising annual guidance by $0.12 at the midpoint to $6.75 per share, up 10.8% from 2021's record. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants only accounting for 9.4% of rent. As we've stated before, our development starts are pulled by market demand within our parks. Based on the market strength we're seeing, we're raising forecasted 2022 starts to $300 million. We'll closely monitor leasing results along the way and expect to update our starts guidance throughout the year.
To position us for this market demand, we've acquired several new sites with more in our pipeline, along with value add and direct investments. More details to follow as we close on each of these opportunities. Brent will now speak to several topics, including our updated projections within the 2022 guidance.
Good morning. Our first quarter results reflect the terrific execution of our team, strong overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the first quarter exceeded our guidance range at $1.68 per share and compared to first quarter of 2021 of $1.45, represented an increase of 15.9%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth. From a capital perspective, during the first quarter, we issued $75 million of equity at an average price over $194 per share, and refinanced a $100 million senior unsecured term loan, reducing the effective fixed interest rate by 60 basis points while the term remained unchanged. We also closed on a $100 million senior unsecured term loan with a total effective fixed interest rate of 3.06% and a 6.5-year term, and repaid a maturing $75 million unsecured term loan with a 3.03% interest rate.
After quarter end, we closed on the private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.03% and a 10-year term. That activity, combined with our already strong and conservative balance sheet, kept us in a position of financial strength and flexibility. Our debt to total market capitalization was 15%. Debt to EBITDA ratio dropped to 4.7x, and our interest and fixed charge coverage ratio increased to a record high 9.6x. Looking forward, FFO guidance for the second quarter of 2022 is estimated to be in the range of $1.63-$1.69 per share and $6.69-$6.81 for the year, a $0.12 per share increase over our prior guidance.
The 2022 FFO per share midpoint represents a 10.8% increase over 2021. A few of the notable assumption changes that comprise our revised guidance include increasing our average month-end occupancy 50 basis points to 97.5%, increasing the cash same-store midpoint from 5.6% to 7.4%, decreasing bad debt by $500,000 to $1 million, increasing development starts by 20% to $300 million, and increasing common stock issuances to $250 million. In summary, we were pleased with our first quarter results. We will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio to carry our momentum through the year. Now Marshall will make final comments.
Thanks, Brent Wood. In closing, I'm excited about our start to the year. The momentum we experienced in 2021 is continuing and is more widespread within our markets. Our company, our team, and our strategy are working well, as evidenced by the results, and it's the future that makes me most excited for EastGroup. Our strategy has worked well the past few years. We're seeing an acceleration in a number of positive trends for our properties and within our markets. Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sun Belt markets. These, along with the mix of our team, our operating strategy, and our markets, has us optimistic about the future and will now open up the floor for any questions.
We will now begin the question- and- answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. We ask that you limit yourself to one question and one follow-up. If you have additional questions, you may reenter the question queue. The first question comes from Jamie Feldman of Bank of America. Please go ahead.
Thank you. Good morning, everyone. You had made the comment that you're seeing rent growth spreading across a wider geography. I was hoping you could provide more color on, you know, how strong it is in across your markets. Can you provide a mark to market on the current portfolio?
Hey, Jamie. Good morning. It's Marshall. Yeah, you know, it's been nice. Last year, you know, our bottom line kind of and I'm talking just GAAP increases was around 31%, and we were a little above that first quarter. Last year, we had some large leases in Southern California that really helped drive that number. While California is still a very strong market in terms of rent increases, we've seen Las Vegas, Phoenix, some of the Florida markets, Austin, El Paso, and a number. It makes me feel like it's more sustainable or it is more sustainable because it's really not kind of waiting for the mix as much as it was last year.
It does feel like there's, you know, with inflation and limited land supply and it's harder to deliver the supply, that there's more upward pressure on rents than there's been, and they're certainly more dynamic. In terms of mark to market, you know, kinda as we think about our portfolio, we've been running at that kind of high teens and this quarter low twenties cash and in the low thirties in GAAP. I don't, kind of as we just mentioned, I don't see that fading. In fact, I think there's more upward pressure on rents given that demand's here today, supply constraints, supply chains sure feel like they're still a mess and will be a mess for a while.
Really on the portfolio basis, we always hesitate a little bit and then just that we don't, the way we've always viewed it, we don't calculate it. We've thought more in terms of really if you think of headwinds, of really what rollovers in the next couple of years, because beyond that, it really if someone has a lease rolling in four to five years, the market will change a number of times before it, we get it. We get that, and we've really seen the market. It's been more dynamic than I've ever seen it career-wise in terms of we've had a few tenants who have hesitated, now I won't say hesitated for long, but for 60, 90 days, three, four months on a new lease or renewal, and we've been able to go back and push rents on those renewals or on a new lease.
That does make me also a little more positive if things do slow down, that to have the embedded rent growth we've got and it's really, we're just trying to take advantage of each at bat as they come up. We'll have about 7% of our leases expiring just over that, the balance of this year and really the 1% of vacancy. It's really in our developments where we're able to push rents as much as well, if that helps.
No, that's very helpful. Thank you. You haven't looked at the portfolio and said, all right, if these rents were at market rents today, it would be X% higher based on your-
Yeah, we don't have an exact number, and we always hesitate. I mean, we'll talk internally, and you know, I guess we do put out projections, but always hesitate. One, it's dated. We really don't use it except in those leases that roll kind of near term. It's such a broad estimate that I, you know, there's so much in what we just released yesterday that's, you know, the accountants do, it gets reviewed. Our auditors look over it versus, you know, Brent, me, and the team. We hesitate to put a number out there, and it'll be dated the next day.
Okay. No, that's fair. You know, well, you didn't make the comment. You just, in your response, you had said, you know, things slow a little bit. I guess on, you know, on that front, can you just talk about, how you think about your portfolio credit quality today and your tenant credit quality today versus prior cycles? If we do start to see a slowdown, I mean, what do you think would be different this time around in terms of your occupancy and credit risk?
Yeah. I'd like to think one, you know, a couple of things, and I'll thank you and your team are kind of one of the groups that have kind of compiled the top ten list when we look at our peers. Our top ten, they came up this quarter when we delivered some Amazon buildings, but it's just over 9%, which is running about half of what the industrial, our sector average is. We have more tenant diversity. In the last downturn, if I use COVID, we kept waiting for a downturn, and it really. The portfolio and as a result of COVID, it, things slowed there the first few months, but then really picked up steam.
I mean, I didn't have the nerve to do it, but we should have kept developing through the entire COVID downturn. Looking back in hindsight, we would have been better off. Last year, we moved a number of our rent relief customers, you know, out of our portfolio. Those were some of the little bit lower retention. It's not always bad. In some of those cases, when the market's this full and we're this full, it's the best time to kind of upgrade your credit quality. We've thankfully run the last five quarters, I believe, we've each had a negative bad debt. We've recovered more than we've written off.
That said, I mean, we would drop in occupancy, but we've been over 95%, which is what we've always historically viewed as full for multi-tenant industrial since mid-2013. As low as we got in the Great Financial Crisis, I'm doing this from memory, was about 89%. I'd like to think we'd fare a little better than that in another downturn. There's so much more demand than supply out there. You see it some in our development pipeline of we've been pleased with how fast our new developments are leasing earlier in the process with the limited supply, especially for limited supply for the product type we build.
Okay. Thank you. I guess just to follow up on that, though, I mean, just thinking about the composition of the tenant base, I mean, would you say it's significantly stronger than prior cycles?
Yeah.
Yeah. I would say. This is Brent, Jamie. You know, it's. I would say it's, you know, we've performed very good in the past, so I don't know that we had a lot of need or room necessarily to significantly enhance the credit. If you look back, even going back to around 2000 during the dotcom recession, and then as Marshall mentioned, you go forward to the financial crisis, you go forward to COVID. We performed in line with peer groups and peers that are often viewed as, well, they've got bigger tenants, so it must be bigger credit or better credit. There's never been a correlation or a discorrelation between, you know, our multi-tenant versus big tenant when it's come to bad debt, occupancy, or anything else. I think it would fare very similarly relative to the other peer groups.
We think overall it would, as Marshall said, fare very strong. I think, you know, there's a lot of tailwinds that I think, you know, a recession, no one's gonna be, you know, completely, you know, insulated from the impacts of that. I do feel like there's some, you know, positives that would help industrial companies like EastGroup perform above normal or better than average through a period like that. Our tenant credit quality's been good, remains good, and we project, as Marshall said, we've strengthened it some, but it's been more on the fringes just because we've got a good tenant credit tenant base.
Okay. All right. Thanks, Brent. Thanks, Marshall.
You're welcome.
The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.
Hey, good morning. Morning down there. Just, you know, question on Marshall for quite a while, for more than a year or two. You guys have been, you know, pushing the occupancy, and you always had previously spoken about expecting a drop off. It sounds like you're not expecting it, and certainly 20% cash spreads sound pretty healthy. The reason that, in your view, that the occupancy is just staying north of 97%, it doesn't sound like you're shy on pushing rents.
Is that just lack of any space for tenants to go, or the tenants are figuring out ways to use the existing warehouses much more efficiently, such that, you know, normally when you push rents, you'd see some churn, but now maybe just because of, you know, issues, whatever those issues are, just relocating or finding space or whatever, the tenants are using their assets more efficiently, which means that you may have even better pricing power going forward?
Yeah, I know. Good question. I think it's maybe the answer is yes. I've got kind of, you know, the fork in the road. There is less space available, less space out there, and I think we're benefiting from that, and our peers are benefiting from it. Even what is getting delivered, we deal with that, the land's more expensive. The steel, the roofing materials, the electrical panels, all those things are more costly and take longer to be delivered to complete. That's hindering supply. That said, I do think our tenants, I'm sure, especially with rising rents, are always working to find ways to kind of maximize their efficiencies.
In the space, I think we'll kind of, as we project ahead or some of the things you read or think about, I think we'll see more and more with the labor shortage, more and more robotics within our warehouses. It'll probably start with the larger tenants that are a little more well capitalized and can afford to make those type investments. I think there'll be more upgrades within the space, which should make those tenants even stickier too, because they're a little more heavily invested in our space as well. I think as companies move to 3PLs and different things, as you try to wring cost out of your own system, we're a cost-effective, efficient box compared to brick-and-mortar retail and other types of distribution.
I think the more people can utilize industrial space in their supply chain and their omni-channel kind of marketing, the better off they'll be because our gross rents are so much lower than some of the other, you know, service center or traditional brick-and-mortar retail.
Okay. The second question is, you know, you talked about the broadening of the rents, which is great to hear. Curious, are you seeing truck parking helping to drive some of that expansion of rent growth, such that as communities push back on having trailers, you know, on roadsides and, you know, shippers and others try to have more product, you know, in stock versus, you know, port delays or supply delays? Are you seeing a benefit more broadening from truck parking? Or is the rent growth that you're talking about purely from the actual box itself across your market?
Yeah. It's really the box itself. That's where we're able to push the rents. That said, if when we do our developments or, you know, one of the things we liked, we bought the buildings at DFW Global, which was really adjacent to the Dallas airport, DFW Airport cargo terminal, that has got a lot of trailer storage there and in parts of LA. If we can work trailer storage in, it certainly lowers our coverage ratio on a site, depending on where that extra land is. But the demand for that continues to go up from our tenants. If the space works, especially the national tenants, if we've got space that works and they need the trailer storage, rent is less. You know, it's down their priority list on decisions.
If you have the right space, what we've seen is companies will pay the rent they need because it's a small item within their overall chain versus, you know, labor and how the space works for them. We'll continue to add trailer storage, or we look at it as being very attractive when we look at acquisitions or value add. If you have that ability to have car parks or trailer storage, if the tenant needs it allows you to push rents that much harder.
Okay, thank you.
Sure.
The next question is from Manny Korchman of Citi. Please go ahead.
Hey, Chris McCurry on with Manny. Just a quick question. I noticed, lease termination income was up in the guidance and is now expected to be up year-over-year. Could you just give us a little more color as to what drove the increased termination expectations?
Yeah. Hey, good morning, Chris. Brent here. Yeah, we had, you know, that basically consists of some known vacates. We had seven terminations during the quarter. Three of those consisted of most of it. One of them was a $ half million dollar early termination fee. Almost in every case, five of the seven, in fact, and that represented almost all of the termination fee income, were situations where we had replacement tenants in hand and basically negotiated an early termination fee and then backfilled with an existing tenant. In those cases, we were getting a higher rent, backfilling for longer term, and then with the term fee, you're getting, you know, excess income for that short period of time.
It's ones where our guys in the field were more coordinating, working with tenants that needed more space versus tenants that maybe were willing to let their space go, and then you negotiate the deal and come out on top of it. It was just, you know, several of those this quarter. They were very strong and beneficial, and so we executed on those. We typically don't budget much in the way of termination fee income, if it's not known, just because they can be cyclical and can vary quite a bit quarter to quarter. You know, we certainly expect more term fee income, honestly, over the course of the year just from doing business, but not quite as strong as that quarter is. That was a, you know, a little bit larger than normal quarter.
Although, again, in all those situations, it was a net positive for the company and again, something that we reacted to and basically helped conduct on our end.
Got it. Yeah, makes sense. Could you give us some color on the Fort Lauderdale sale, specifically, the strategic rationale behind selling in Florida? Was the pricing attractive enough to leave this market, or could you just give us some of your plans for the Florida market?
Sure. I guess, Chris, it's Marshall. We certainly like the state of Florida, and then as we kind of zero in, like, you know, we like the state a lot and like South Florida. Hopefully, our plans, we're continuing to build out our gateway park there. We bid on some other land sites and other opportunities kind of in or within our pipeline within South Florida. It was really more asset specific. For this, it was two buildings, about 55,000 sq ft, really more service center and a little more office product that we had acquired in the mid-nineties. And a little similar to what we sold, and it was on a ground lease.
It was similar to what we sold in Phoenix early in the year, as we're kind of always, I think, you know, a good time to be a seller where the markets are, and we thought this isn't an asset that's going to really drive our growth or perform the same level as the balance of the portfolio. Nothing wrong with the asset, but it didn't have the dock-high distribution that's our kind of bread and butter type product. We said, "All right, this is a good time to prune this asset," and we've got, you know, I think we should always be doing that. A few more in the pipeline that we're working on, not a lot, but, you know, we'll keep managing the size of our Houston allocation.
We like that market, too, and it was really asset specific, much solely rather than market specific here. We'd like to be bigger in South Florida, but we were willing to part with this asset.
Got it. Thank you.
You're welcome.
The next question is from Vince Tibone of Green Street Advisors. Please go ahead.
Hi, good morning. Could you provide a little bit more color on the exact contributors to the increase in cash same-store guidance? It looks like, you know, the changes in occupancy and bad debt assumptions drove about half of the 180 basis points raise. What drove the rest?
Yeah, it's Brent. It's really rent increases. You know, they continue to exceed our expectations in terms of what we're budgeting in. Then you saw we increased our occupancy guide on same-store a little bit as well. It's really the increase there. Obviously, the first quarter beat was quite a bit bigger than we had budgeted in. That 25% being already, quote, "actual and done," you know, that unwound, you know, some beat and raise right there already. It's really in those factors. Again, you see the occupancy increasing, the rents greater than normal. You know, outside of that, we don't report term fee income in there, so that was not a component of it. It's just really strong operations. You know, across the board, there's.
As Marshall mentioned, there's more and more depth to it, although the California markets continue to be, you know, just eye-popping from a rental standpoint. It's just one of those deals, Vince, where we, you know, you add it all up and then the sum of it just becomes a little, you know, greater in total than, you know, than initially anticipated or expected.
That makes sense. Just really quick follow-up on that. I mean, do you think the expenses could contribute to same property too this year? Just looking at the first quarter, you know, expense growth lag revenue growth, and that kind of the benefited same property NOI, let's say about 110 basis points in the first quarter. Like, is that something that's gonna persist, or is that just like a timing thing?
Timing within our same-store and that, you know, I don't say all of them, but 99%+ of our leases are triple net and with full occupancy. We really, you know, we manage the expenses because they certainly flow through to our tenants. It really won't, you know. I like where you were heading, but it really won't help us with our same-store results as much as Brent said, you know, just higher rents than we thought we'd be getting. The market's moved. We expected the market to move up, but it's moved faster than we anticipated, and we've had less vacancies than we anticipated, especially in first quarter, which is usually a little bit of a drop-off after the, you know, beginning of the year.
Got it. Thank you. One more for me. I mean, could you just discuss any recent trends you're seeing in the transactions market for light industrial product? Like specifically, how do you think higher rates have impacted bids from the private players you're competing with?
Maybe a two-part answer. What we're seeing on the type of products where we typically chase, you know, we've been hoping cap rates may rise, and then we've seen nothing to date. We just lost out on a package yesterday or a couple of buildings we were bidding on that'll go in the low threes. The reasoning we're hearing from brokers that even though debt may be up, there's so much of the acquisitions are equity. A large portion of it is dry powder in the form of equity.
Really for me, the primary reason, again, is people are viewing cap rates much more so as a point in time, and that your cap rate may be low going in, but where rents are moving, especially if you've got some near-term roll, we used to view near-term roll as a downside on an acquisition, and now it's upside because the market's moving up so quickly, so people are underwriting and accepting kind of the lower cap rates, but knowing as soon as those leases start to expire, they get a chance to adjust that.
The one area, and I'm kind of repeating what one of the brokerage groups were telling me, where they have seen cap rates come up, and it makes sense, are the long-term bond-like projects where it's a triple net, single-tenant asset on a long-term lease, where, you know, you don't have a chance to take advantage of a rising market. I have heard. I don't know that it's. I don't believe it's anything dramatic, but that those cap rates are starting to creep up. I would expect higher interest rates, and I would expect those would continue to affect those type of assets a little more predominantly.
Great. Thank you.
You're welcome. Thanks.
The next question is from Connor Siversky of Berenberg. Please go ahead.
Morning out there. Thanks for having me on the call. Just wanna bring this topic back from one of the earlier comments. Are you already seeing a sustained push to roll out more automation within your facilities? If so, what does that cost look like from the tenant perspective? What could that look like for EGP in terms of potential tenant improvement costs?
Good morning, Connor. It's Marshall. It really varies by, you know, it'll really be tenant driven. We're seeing some of it, you know, and probably the most extremes. We just delivered two buildings for Amazon, and they've, you know, they put a lot. It was, you know, we've seen the robots in the sort facility. They, you know, I'm estimating they've got about as much in the building as we do probably at this point, especially between the. You know, and some of the tenants will have the racking and conveyor systems and things like that. We are seeing more and more of it. It's really tenant driven where.
I will say where we've been impacted or where we're feeling it is we build the buildings, especially in markets like we've seen the Las Vegas, the Phoenix market, it makes sense. Air-conditioned warehousing, where people are competing to hire employees, and we view it as a long-term improvement to the building. We're seeing more and more of that, and if there's any kind of light manufacturing going on, we know, we've added more of that. It really hasn't impacted our tenant improvements as much, but maybe as we're retrofitting a space or a new development, we've had a little more, you know, HVAC in the warehouse, and, you know, I think depending on how they use the space and how many dock doors are open at any given time, that's a kind of like additional truck court parking.
That's a trend we've seen.
Okay. That's interesting. Thanks for the comments there. Then just thinking about the aggregate development pipeline in the United States and understanding that the current demand environment is strong enough to still be able to push rents in these development projects. I mean, do you have a sense of when it would make sense maybe to dial back development activities as that supply-demand dynamic becomes more elastic?
A good question. It's all the way maybe if this helps, the two ways we viewed it are, one, when you look at the supply numbers, I would say a general rule of thumb for our markets, and in some cases it's been less as CBRE. I'd say 10%-15% of new supply in Dallas, Atlanta, pick the market, Houston, Phoenix, is really comparable product that we might compete with. That buying the, you know, the vast majority of what's getting built, especially with rising costs, I think construction costs, that's pushing people more and more to develop big box and not really kind of move away from our area of the playground. So we like that impact. Then as we think about our own development pipeline, and I don't think.
I'll put it on me. I don't think I've articulated it to the street as well as we could. Really our development model will because it's within a park and because it's really, say, buildings 2 and 3 leased up well, we'll let the park really pull the next project. You know, the worst way we could do it would be Marshall and Brent, you know, read an article or see something on the news and decide to slow down the development pipeline that I like. We've really got a self-regulating development pipeline. If what we're building within our park is leasing well, we'll add a little more inventory to it. We won't build out a park all at once or anything like that.
By the same token, if what we just delivered is leasing up slowly and at rates below what we expect, we certainly won't construct construction on the next project. That's where really, if you say, I'm glad we were able to up our development starts this year, but it didn't come from corporate, it came from, if you look down our development schedule, how many buildings are 100% leased or fairly well leased, and the lead time to getting the supplies to deliver the new building, that's probably where our stress is. Feels like it's more stress in talking to our teams in the field and getting the land and getting the things built at an affordable price than leasing right now. We'll kind of keep going until the market tells us to slow down.
This is helpful, kind of a canary in the coal mine to watch for, is as things roll into our portfolio, you know, there can be any given project that's not 100% leased or 90% leased. If we start to see a number of those, then you know the market's slowing down, and we'll start to tap the brakes on development. We have done that in certain markets over the time. Right now, the market feels good, and we like the spreads on what we're delivering. In first quarter, we delivered about $85-$90 million in 2 projects at 7% yield, and the market's probably half that today. I like that kind of value creation, new FFO.
We don't have to have 100% profits, but I'm sure it's not getting any one quarter, and we'll just kinda keep going until the market tells us it's slowing down. We're actually seeing it speed up right now. We're seeing more activity earlier in the development process than we did a year ago.
Got it. Appreciate the color. I'll leave it there.
Sure. Yeah, you're welcome.
The next question is from Michael Carroll of RBC Capital Markets. Please go ahead.
Yeah, thanks. I just wanted to touch on your acquisition strategy. I mean, it looks like the company completed a number of strategic deals this quarter or year-to-date, focusing on acquiring buildings and adjacent land sites. I mean, I guess if you could build a bigger campus, I guess, is that a fair statement? Does that allow the team to be more aggressive bidding on these types of projects and increasing likelihood of you winning those deals?
You know, I guess I'm trying to follow and Brent jump in. You know, ideally on our acquisitions, I would say, you know, if it's adjacent land, you know, to a successful park, that's our ideal preference. When we finish up a park, if it's the land, you know, around the corner, so to kinda keep a good thing going. Simply put, keep a good thing going. On the other side, we've seen that window. I won't say closed, but just about closed. We were able to buy some vacant, newly constructed buildings from kind of local regional developers and get what we felt like were good returns, taking the leasing risk on in those projects. The market doesn't feel as afraid of vacancy as it used to, or probably in a lot of cases, as we think it should.
We bowed out of some bidding processes on value adds. That's really our preference there. If it's strategic within an existing market or like you say, around the corner, we bought two of our kind of core acquisitions. The only two we made last year, really, or two of them were really adjacent to buildings we owned and were somewhat off market. You know, everything seems to have a little bit of competition right now, but if it's not a fully marketed mass email flyer, those are the hardest, most competitive things to buy. You know, as we've kind of kidded, us having a checkbook is not a competitive advantage or differentiator in the market. We certainly chase those, and we lose an awful lot of those as well.
Can you provide an update on how you're kind of viewing Houston? I mean, obviously the market has kind of firmed up, I guess, across the board. I know, I think earlier you kind of highlighted you still wanna rationalize your exposure there. But in March, you did acquire a few buildings and some land sites. I mean, I guess, how should we think about that exposure going forward? I mean, it still seems like you kind of like the market and your position there.
Yeah, no, we do. That's a fair. I think we've got a good team in Texas and in Houston. Kind of has said, "Let's keep creating value." You know, what we're developing and the value add we acquired, the one. You know, a couple of developments. One was a pre-lease at World Houston that if we can develop into the sixes and seven type returns and at the same time sell some core and stabilized assets in Houston and, you know, we're. I think we're down about 70 basis points from a year ago. I was looking at in terms of our Houston as a % of our rent. So that continues to drift down, and it should. There's some couple of Houston assets we're looking at exiting later this year, market permitting. So we'll grow elsewhere.
Maybe a three-part answer. We continue to grow in other markets. I don't think it makes sense for us to shut the spigot off in Houston if we can develop and create value, but maybe it's a little bit build one or two, sell one or two in Houston and let the rest of the portfolio grow. I even think as much activity and as strong as the Dallas market is, and if I go out, you know, a couple of years, I would expect Dallas. We're doing a lot in Atlanta. It was a later start, but I think Dallas will overtake Houston and become our largest market down the road. It's not a negative on Houston so much as. As big as the Dallas market is and all the activity we've got going there.
Okay, great. Thanks, Marshall.
Sure. You're welcome.
The next question is from Dave Rodgers of Baird. Please go ahead. Dave Rodgers with Baird, please go ahead. Is your line muted? We'll move on to Ki Bin Kim of Truist. Please go ahead.
Thanks. Good morning, out there. Just wanted to go back to your development. You've done some very favorable leasing and improving the timelines and moving up projects this quarter. As you do that and as the capital at risk comes down, you know, what's the likelihood that we can see your development start guidance move beyond $300 million of starts this year?
You know, I hope we do. Good question. Good morning. I hope we do. Look, you know, last year we were $340 million in starts as we kind of started the year, if it helps. But we had the $90 million, you know, Amazon kind of, you know, whale in the system we delivered in first quarter. I thought we would drop this year.
Really, as you pointed out in your piece, the activity has picked up early, and that's really what's pulled forward all of a sudden, you know, I'll get a phone call, and it's like, "Hey, we were under construction, and I leased the building, and now I'm scrambling to get new inventory because if there is someone out there looking for 50,000-80,000 sq ft, we don't have the inventory, so the tenant rep brokers are gonna move on to the next project down the road. I'd like to think where the market is today, I mean, the demand is there that we could bump the $300 million higher, the start number higher. I think the caveat to that is the other.
What's holding us up and what's holding the market up a little bit is the steel deliveries and all the other things that there could be some projects, especially as we get later in the year, that we'd like to start and the market's there. It will be where in line can we get? 'Cause you hate to. We could start it, but then you don't want the GC to stop and wait for. Every week, they were kidding one of our construction people, there's a new delay and some portion of what goes into our building. Just trying to get all the parts at the same time is much harder than it used to be. Building deliveries for forever were about six months, and now they're up to probably eight to 10 months. That could be a.
Some of it could just be bottlenecks, but those will turn into 2023 starts rather than 2022. We don't sense that yet. We've still got time. I'm optimistic, maybe the 300 goes up, but there is some level later in the year where we'll get pushed to 2023.
In terms of your level, what does that translate to in terms of the total dollars that are deployable? Because I think this is one of your kind of key strengths that you do have this very very favorable and large land bank as it pertains to the size of your company. Second to that is, are most of these sites entitled and ready to go?
Most everything on our schedule is. You know, the guys in the field will say their job is to have the permit in hand for the next building. Those are zoning, entitled, ready to go. You know, usually permits will expire, so we'll pull permits for the next couple of buildings within a park. Those are ready. Then, you know, on the other side, I would say too, what you see on our schedule, it's almost like an iceberg that at any given time we're pulling from this land bank quarterly. There's also, you know, if we're doing what we should do, there's another handful of land that's coming into the land bank.
What you're seeing is what's closed, not what we have under contract that we're working through that zoning and permitting and moving towards closing too.
Yeah. Ki Bin, if. On that schedule, there's about $6.6 million that we haven't actually put, you know, placed into under construction or in lease up. That $11 million number includes those items including the ones that are already underway. If you look at that $6.6 million of potential, you know, based on a per sq ft of $150-$200, you know, vary below or above that potential where you are, but you're looking at $1 billion-$1.5 billion of cost. You know, as Marshall alluded to earlier, we've been running 75%-over 100% in value creation or return. You may be looking at $2 billion-$3 billion in terms of total value. I think you're good observation there, Ki Bin.
That, you know, that continues to be where we've created the most value, basically doubling our money via the development pipeline. The guys, especially recently, have done a really good job backfilling some markets with some nice wins on the land inventory side. As you know, they're out there daily and perpetually working on that. It's tough markets, but those guys are seasoned and continue to bring good land inventory into the bank.
Okay, great. Thank you.
Welcome.
The next question is from Dave Rodgers with Baird. Please go ahead.
Good morning, Marshall and Brent. You've covered a lot already. I was curious about when you're underwriting acquisitions and actually closing on those transactions, how do those compare to replacement costs? I guess, as a pretty prolific developer, how do you guys think about closing on acquisitions in kind of this rising inflation environment and kind of paying above replacement costs, but still replacing an asset much quicker and getting it in the cash flow stream? Do you spend a lot of time thinking about that?
We do. I would say it varies. You know, I'll pick, like, the project we bought in Hayward this quarter, and we're actually more 'cause land's moved up so much that it's hard, you know, it's hard to get above replacement cost in some of these markets. So we do look at that. Where I was going with Hayward, there's simply no land around us, and in fact, some of the existing supply in some of our markets is getting repurposed to life science, you know, creative office, things like that. So we certainly am less concerned, or we're a little less concerned about replacement costs where there's no available land left.
I think where it would really be more of an impact, and it's not where we typically want to play, is on the edge of town. If you were building a big box and there were three or four that were sitting there vacant or things like that, where it's more of a commodity product, that's where the replacement cost would really scare me. The other thing where we've probably struggled more with of late, or certainly in our acquisitions, is looking at. We use current market rents. I know some of our peers do the same, but there's certainly more private peers out there that will use projected rents. And so far, they've projected to be more accurate, so it's hard to compete with someone who's raising rents. At some point, we can back into whatever the rent we want.
We've said, "Let's look at current rents and what's our yield, and then do look at what's that per square foot." There's certainly been some land price trades and even some industrial building trades that, what I used to think of as office buildings, are even higher. It's pretty jaw-dropping where, you know, land prices at $70, $80, $90 per sq ft for industrial and buildings trading for $600 per sq ft. I think there's one in L.A. that traded recently for $600 per sq ft, which I never, you know, having been in industrial longer than I wanna add up over the years, that those are numbers I didn't think I would say.
Thanks for that. Just one follow-up. I think when we talk to some of the big box companies, they'll say, you know, land at market today may be 50% of overall construction costs and development. You build a different product, does that math change at all for you guys?
It certainly would be probably accurate. The further out west almost you go, in California, it would be those type numbers. It's probably still more 25%-30% for us on average. But you're right, and there's any number of cases. By the time we'll tie the land up, try to get as far through the permitting and zoning and title before we can close that, for example, I'll use it. I believe it's closed. The piece we closed in Phoenix, there's a comp at what we viewed as a slightly lesser location that just traded. Someone flipped it for about twice what we paid.
We're hearing numbers by the time we've closed that the land value, if we were private, you'd be tempted to sell the land rather than develop it because values have moved that fast on industrial land. I guess the other thing, it certainly speaks that there's more industrial developers out there than there were a handful of years ago. Reading some of the market reports, we see it in Atlanta and Dallas and some of the markets. Just the size of the industrial market is further out there. I believe it was CBRE in Dallas included three new submarkets this quarter. People are getting further and further and further out of the market.
What was it, in the Dallas construction, the number that jumped out to me in their report, just over 70% of the construction is in what CBRE called edge markets, which means you're pretty far out of Central Dallas. That just shows how limited land supply is and how I think the zoning and entitled and permitting is getting tougher because people see the number of trucks and things like that. There's kind of that everybody wants their delivery Amazon Prime in an hour, but nobody wants it to originate from their neighborhood sometimes.
Sounds like a good thing for you guys, though. Thanks, Marshall.
Yeah. It's just hard when you're developing. As an owner, yes. As a developer, no. Yeah.
The next question is from Todd Thomas of KeyBanc Capital Markets. Please go ahead.
Good morning, everyone. This is Artie Cameron on for Todd. Just broadly about demand. I know a lot of demand for industrial is cyclical, but we also have a lot of secular demand stemming from e-commerce and the resetting of the supply chain as everyone's seemingly playing catch up. Do you think in the event of a broader macro slowdown or recessions, that users would be more active in absorbing space relative to maybe what we've seen in prior recessions?
You know, this is me speculating, and I'm an optimist, so with that safe harbor disclosure, I would say yes, I think so, because I think we're a low cost, flexible alternative, as we kind of mentioned a little bit, to using kind of more service center or flex product and especially brick-and-mortar retail. I think as things slow down, any way people can wring costs out of their supply chain, that will lead more and more towards industrial. We still think given the supply chain, that inventory levels are low and that people, you know, that want to have just in case inventory, but the supply chain's not really allowing that yet. I think that will lead. That's still coming.
you know, there's a handful of good secular reasons we kind of hint at that we're excited about our portfolio. I think with the supply chain bottlenecks, the port bottlenecks in China and at L.A. and Long Beach and tensions with China, I think it's a longer term play that there'll be more manufacturing brought back to the U.S. and/or nearshoring. We may not end up with that manufacturer. That's typically not our building, but we'll benefit from the suppliers near that manufacturer.
Yeah, I would just add to that, too, Artie, that, you know, saw a report the other day that, like where, you know, e-commerce as a percentage of retail sales, you know, that accelerated obviously some during COVID, but like from the mid-teens to 19%. That's projected to increase from 19% up to about 32% over the next 10 years. A 68% increase projected over the next 10 years relative to that. Certainly if that happened, I think that would be, you know, another tailwind over that period of time. I think that would equate to more absorption of our type space.
You feel like there's, as Marshall said, some tailwinds there that wouldn't be totally insulated from a slowdown, but feel like, you know, there would be enough momentum behind it to where it wouldn't totally wane away, hopefully.
Got it. Thank you.
Sure.
The next question is from Ronald Kamdem with Morgan Stanley. Please go ahead.
Hi. Yeah, it's Iman for Ronald Kamdem. Just maybe a follow-up to, you know, previous comments and, you know, the questions for me. I think you mentioned, you know, thinking about COVID, you know, you kind of regret stopping a lot of the starts that you had previously planned just 'cause of, you know, the demand that came in, and maybe that was more than expectations. Kind of as I think about inventories building today and, you know, the macro backdrop, do you kind of see yourself in a position where, you know, starts won't necessarily stop today because you think inventories could build kinda irregardless of where retail sales go or where, you know, the general macro backdrop is?
They could, and it was really more, I again, maybe two-part where I was saying, and I think, you know, people would've thought we were crazy if we had kept building during COVID. It's kind of one of those, in hindsight's 20/20, how short the pause was in industrial, and we could have gotten a lot of materials really cheap. We did tie up a bunch of land early on during COVID, which I'm glad we did. We kept that part going, but not the starts. I think if there's a slowdown, you know, again, we really look to the feel of if that demand's there, we try to not regulate it. If it's there, we'll add a little more inventory.
I guess I view it as pretty, which I like. It sounds cliché, but a free market demand. When the demand's there, we'll go as fast as the market will let us in terms of building out buildings and finishing up a park. By the same token, if we're struggling to get projects, you know, leased up, we're gonna slow down too. I'd like to think if there is a macro slowdown, but if people still want, you know, just in case inventory and things like that, or we've got people that are willing to move forward with leasing, we'll, you know, we'll move.
I think COVID was such an extreme example, even though it would've been the right decision in hindsight. It would've been a crazy amount of risk to take that for, you know, something that none of us had any experience like, you know, a pandemic. I think, you know, sitting on our hands, it didn't harm us. It's just in hindsight, we could've kept developing, and it would've looked smart, but we would've been. I think our risk/reward would've been outsized on that.
The next question is from Vikram Malhotra of Mizuho. Please go ahead.
Hi. Good morning. This is Amit in for Vikram. My question is, are you seeing any new sources of tenant demand?
You know, there's always. Yes, I was trying to think of who we've seen of late. You know, there for a while, we've had it and it hasn't gone away, the online pharmaceutical fulfillment was a little bit of an atypical type tenant. We've seen more energy-related, but more green energy related, where it's someone converting, you know, trucks and buses to electrically powered, or they're making batteries and things like that. I don't know that it's not necessarily new, but maybe newer within our portfolio than a number of startups, and you're working through the credit and things like that with those. We've seen a handful.
It's not a huge amount of our portfolio, but in thinking of new and creative uses, we've seen more and more of people, you know, within green energy taking space, whether it's producing batteries or doing different things like that.
Got it. Have there been any changes to your watch list from the last quarter?
Yeah. No, this is Brent. There have not been, you know, all of our top ten are current. As you see from our bad debt or lack thereof, our collections continue to be very, very strong. We had yet another, I guess you would say net positive bad debt, meaning we had more recoveries of previously written off accounts than we did with newly reserved accounts. Our, you know, collections remain very, very strong, and our watch list, you know, only has a dozen or fewer tenants, and you're talking about out of a customer base of over 1,700 customers. You know, thankfully, that continues to be very, very strong.
Got it. Thank you.
Yep.
Sure.
This concludes our question- and- answer session. I would like to turn the conference back over to Marshall Loeb for closing remarks.
Thanks everyone for your time this morning. Thanks for your interest in EastGroup. We're certainly available for any follow-up questions, comments, and look forward to seeing many of you at NAREIT here in about just over a month. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.