Good morning, ladies and gentlemen, and welcome to EastGroup Properties' third quarter 2026 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, October 22nd, 2026. I would now like to turn the conference over to Casey Edgecombe, Investor Relations. Please go ahead.
Good morning, and welcome to EastGroup Properties' third quarter 2026 earnings conference call. Today's call will be led by Marshall Loeb, CEO, Reid Dunbar, President, Staci Tyler, CFO, and Brent Wood, COO. Before we begin, I'd like to remind everyone today that our conference call 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 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 reflect our current views of 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 details about these risks.
Now I will hand the call over to Marshall.
Thanks, Casey. Good morning. I want to start by thanking our team. We added a strong quarter to what's been a solid year so far. I'm proud of the results achieved, and our quarterly results demonstrate the portfolio's quality and the resiliency within the industrial market. Some of our quarterly stats were funds from operations for $2.45 per share, $0.04 above our guidance midpoint, and up 7.9% from third quarter 2025. Year- to- date, FFO per share is up 7.7%. For over a decade now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year. Truly a long-term growth trend. Quarter end leasing was 97.3%, with occupancy at 96.5%. Also notable was quarter end same-store occupancy at 97%. Our quarterly re-leasing spreads were 36% GAAP, 21% cash for leases signed during the quarter.
Year- to- date results were similar at 36% and 20% GAAP and cash, respectively. Cash same store NOI exceeded our expectations for the quarter at 7.1% and stand at 8.2% year- to- date. Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 6.5% of rents, down 40 basis points from third quarter last year. We target geographic and tenant diversity as strategic paths to stabilize earnings regardless of the economic environment. In summary, we're pleased with our results, which again allow us to raise earnings guidance. We remain excited about the quantity of the leases we signed during the quarter, along with the ongoing continued prospect activity. Reid will now walk you through more of our quarterly summary.
Thank you, Marshall, and good morning. We delivered strong Q3 results, setting numerous company records across all three pillars of our business: operations, development, and investments. Industrial demand has remained steady, and the operating environment continues to be healthy. The demand we're seeing for our properties is diverse and broad-based. That demand is supported by multiple tailwinds, including e-commerce, advanced manufacturing, and data center related uses. Tenants increasingly want to be near the end consumer in modern, functional buildings, which aligns well with EastGroup's portfolio. The end result, we completed 2.9 million square feet of second gen deals, setting a new record for EastGroup. In development, the supply environment for shallow bay industrial remains favorable. The economics of new development are becoming more challenging for many regional competitors, which should constrain new supply.
As a result, the value of our entitled land, local market expertise, and proven development platform keeps rising. Leasing momentum with the development pipeline gave us the confidence to increase our projected development starts to $390 million, which would be a new record for EastGroup. We also added to our land position this quarter, acquiring three sites. Two sites will expand our development in existing parks, and the third will support a new development in South Florida, which is one of our key growth markets.
Lastly, on the investment side, during the third quarter and through October, we acquired five projects for a total investment of $320 million. Our strong financial position allowed us to take advantage of tighter liquidity in the capital markets. Each of these projects deepens our presence in existing markets, strengthening our platform over the long term. Staci will now speak to several topics, including assumptions within our updated 2026 guidance.
Thanks, Reid, and good morning, everyone. We are proud of our strong third quarter results, reflecting excellent execution by our team, the quality of our portfolio, and the strength of the markets in which we operate. As Marshall noted, third quarter FFO exceeded our guidance midpoint, primarily due to higher than projected same property net operating income. On a cash basis, we exceeded our same PNOI projections by 170 basis points, achieving 7.1% growth compared to third quarter last year. Average month-end same property occupancy of 96.9% exceeded projections by 50 basis points, and our average month-end portfolio occupancy of 96.1% also exceeded projections by 50 basis points. Our occupancy outperformance was complemented by continued strength in new and renewal re-leasing spreads. In addition to a strong quarter of operations, we were also active in deploying capital into both development projects and accretive acquisition opportunities.
In order to fund these and our planned fourth quarter investments, we entered into forward equity share agreements totaling $485 million during third quarter. Combined with forward agreements already outstanding from activity earlier this year, we now have $695 million in forward equity share agreements outstanding at a weighted average price of approximately $202 per share. Our financing plans for fourth quarter include continuing to utilize our $675 million unsecured bank credit facilities, which had a balance of $195 million outstanding as of quarter end. As fourth quarter progresses, we plan to settle forward equity share agreements in order to make repayments on our unsecured bank credit facility, all to fund our near-term investment activity, including $325 million in recent property acquisitions, along with land acquisitions and spending related to increased development starts, in addition to $140 million in fourth quarter unsecured debt maturities.
Our balance sheet remains strong and flexible, with debt to total market capitalization of 14.6% at quarter end, third quarter annualized debt to EBITDA ratio of 3.2x , and interest and fixed charge coverage of 14.7x . This financial strength allows us to pursue attractive development and acquisition opportunities in this ever-changing investment environment. Looking ahead to fourth quarter, FFO is estimated to be in the range of $2.47-$2.53, with a midpoint of $2.50 per share, which is $0.02 ahead of our previous fourth quarter projections. For the year, we increased the midpoint of our 2026 FFO guidance by $0.06 to $9.65 per share, which represents a 7.5% increase over 2025 actual results. We are projecting strong cash same property net operating income results to continue, and we raised the midpoint of our guidance assumption by 70 basis points to 7.5% for the year.
These strong projections are driven by rental rate increases on in-place and budgeted leases and expected same property occupancy of 97%, which is 30 basis points ahead of our prior guidance. Projected average month-end occupancy for our operating portfolio is now 95.9%, a 20 basis point increase over prior guidance. As Reid mentioned, we are pleased to increase our projected 2026 development starts by $65 million to $390 million. Year- to- date, we have started construction of $285 million of development projects, and we are planning for $105 million of starts in the fourth quarter. The overall increase in development starts reflects the strength of both development leasing we have accomplished year- to- date and the current leasing environment. The projects already underway, together with those expected to begin in the fourth quarter, provide a meaningful runway for future earnings growth as these investments lease and stabilize.
We also increased our acquisitions guidance by $145 million to $360 million for the year. To support our increased investment activity, we raised our 2026 gross capital proceeds guidance from $300 million to $625 million. We will continue to monitor the capital markets and remain flexible as the year progresses. Our rent collections currently remain healthy, and our tenant watch list is steady. Now, Marshall will make some final comments.
Thanks, Staci. In closing, we are excited about our performance year- to- date and the momentum it is carrying us towards 2027. Market demand has been steady for several consecutive quarters, and regardless of the environment, our goals are to drive FFO per share growth while raising portfolio quality. If we can do those, we will continue creating NAV growth for our shareholders. Stepping back from the near term, I like our positioning as our portfolio is benefiting from several long-term positive secular trends, such as population migration, e-commerce growth, advanced manufacturing, and more recently, data center suppliers in certain markets. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is continually improving. Our balance sheet is stronger than ever, and we are upgrading our diversity in both our tenant base as well as our geography.
With that, we would like to open up the call for any questions.
Thank you. Ladies and gentlemen, we now begin the question- and- answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We ask analysts to limit themselves to one question. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. If you are using a speakerphone, please lift your hands before pressing any keys. One moment please, while we compile the roster. Your first question comes from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks. Good morning. You took development starts up again to $390 million. Can you just talk about the drivers behind that increase? How much of it is demand pulled versus true speculative projects that you are comfortable launching at current economics? Kind of tied to that, are there any markets where you are running into competition from data center developers or where construction costs or entitlement timelines are keeping you or competitors on the sidelines, even with the demand that you are seeing?
Hey, Blaine, good morning. It is Marshall. Maybe I will take the second one first. With data centers, usually their requirements are so specific with power and things, so we really haven't lost out on sites to data center development that I am aware of. What we do see, though, with some with the data centers and the advanced manufacturing is just steel, rising construction costs, and things like that. So it is more of a ripple effect from them. That is where we are feeling their presence. I would say the good news is our developments, we raised best $65 million, as Reid mentioned, hopefully it is a record. It is really market pull. We got a pre-lease opportunity signed within our pipeline, so that building is 100% leased, and that was one of the bigger jumps.
Just kind of steady progress within what we had, kind of what is in lease up, several new starts. So it was really the team running out of inventory in our Mesa Gateway in Phoenix, for example. They signed a good three, four, five leases during the last quarter. So that pushed us up over 70% with prospect activity. So it was a little bit of a mix of a pre-lease, and then just a lot of 20,000, 50,000, 60,000 ft leases that kind of pulled that ticket for the next. Look, I am hopeful we have got some other opportunities we are working on that are pre-lease that, whether it is late this year or early next year, that we can kind of keep that momentum moving forward.
Yeah, Blaine, this is Reid, and I would just add as far as being pulled, we signed 500,000 sq ft of development leases in the quarter, which takes us to right at 2 million square feet for the year. To put that in perspective, year- to- date, 2 million square feet compares to a full year of last year, right at 1.3 million square feet. It is higher than 2024, higher than 2023. We are seeing a resurgence in development leasing, and the key to our strategy is being able to continue to feed that. With the teams in the field, putting us in a position with the right land sites, we can continue to pull these projects out as demand dictates that.
Thank you. Your next question comes from Craig Mailman with Citi. Please go ahead.
Hey, good morning. Just on the accelerating capital deployment piece here, I mean, the development sounds like there is good demand there. It looks like yields are rising on new starts. Maybe talk a little bit about where replacement cost rents are trending in your market. I know you talked about construction costs going higher, but where we should expect kind of that traditional 7%, 8% yield kind of trending on incremental starts that pass investment committee. Then just how you view the balance of acquisitions, and given sort of the uncertainty there on where cap rates are going, what that mix could look like over the next 12 months, particularly given your capital availability.
Hey, Craig, good morning. It is Marshall. Catch me if I miss something in your comments. Maybe I will start on the acquisitions a little bit, and that is a window we did not expect. Earlier in the year, if we met at, say, Nareit in June, we told people we thought we may miss our acquisition goals rather than exceed it. That the market had been tighter than we expected it in terms of kind of where borrowing costs were and equity pricing. Then it really felt like in third quarter, and it always seems to go this way, when the window opens, it gets flung open, and then it slams shut. We got an acquisition or two, and we kind of internally said it feels like with the rise in the 10-year, cap rates are moving.
Staci and her team did a nice job of match funding it with all the equity we raised, which kind of has we've placed it between acquisitions, developments, and then some debt maturities coming up this quarter. We've continued to see cap rates rise, not on every transaction. There's a few I can think of, Florida, Arizona, where the market didn't seem to really blink, and I think it's still playing out. Then there's one or two, our later acquisitions were at higher yields where we bid, but usually the brokers will give you guidance as you go through the rounds, and we didn't move our pricing up, really kind of saying, "This price works for us. We think cap rates are moving," and we still got the opportunity as we like to say you may not like our price, but we're a certain closer.
That buyer pool seems thinner than it was. You're right. Then on the development side, construction costs are up probably 5%-10% and continue to move up. I don't think between diesel cost and steel that I mentioned, and then just labor being more in demand with all the data center, advanced manufacturing, everything else we're seeing in some of our markets, that construction costs will rise. I think rents have to follow that, or they will, with the demand and just rising construction costs. The other complicating factor, and I'm thankful we've been able to raise the equity. When we raise it, we always make sure we have the uses. What we're buying, we've stayed disciplined on. It's immediately accretive.
It fits the top third, top quartile of our portfolio, and we've bought with rents typically slightly below market, in a market where we feel like rents are going to rise because of construction costs over the next few years, faster than they have the last two years. So we feel good about that. Then I think if you're a merchant developer, I don't really know what'll slow down supply somewhat, although it's picked up a little bit, is I don't know how to solve with all those rising costs and rising treasuries for your exit cap rate. It's just a harder model for them to make work. They've got to really push rents and then hope they don't lose it on their exit as a cap rate. Well, we're not looking for that exit a year, a year and a half from now.
That's a long answer, but I hope I hit everything.
Thank you. Ladies and gentlemen, as a reminder, we ask analysts to limit themselves strictly to one question. Thank you. Your next question comes from Samir Khanal with Bank of America. Please go ahead.
Thank you, everybody, and good morning. Marshall, your spreads accelerated in the quarter. I guess, how much of that is coming from, as you think about embedded mark-to-market versus actual market rent growth? I guess, just to expand a little more, what are you seeing in terms of market rent growth in some of your major markets, especially on the Sun Belt side? I guess what is your view into next year? Thanks.
Good morning, Samir. Good question, and as you would expect, a little uneven across our markets, but probably Carolinas, Georgia, Texas, Arizona. Not that Florida is bad. We are seeing pretty good rent growth, kind of year- to- date, maybe mid-single digits. I think with demand, we are full. Our markets are tightening up, and the rising construction costs that I mentioned, we would expect higher rent growth next year. I am not sure you are seeing it in our releasing spreads. It certainly helps. I think that ramp up is still more to come in terms of our releasing spreads. It has drifted down over the last couple of years. Still healthy numbers, but down from its peak, but I think we will re-inflate given where the environment is today.
We are happy to see those rising rents, and even California stabilizing and recovering a little bit, certainly sub-market by sub-market there, but it is better than it was two years ago or a year ago for sure.
Thank you. Your next question comes from Michael Mueller with JPMorgan. Please go ahead. Michael, your line is open.
Sorry about that. Had a phone issue here. Staci, you talked about beating your expectations on NOI and occupancy. Can you drill down a little bit more on that? Would you chalk it up, is it faster openings, less planned fallouts, or just something tied to bad debts?
Sure. In terms of our actual third quarter occupancy outperformance? Yes. We signed a company record of 2.9 million square feet of second generation leases during third quarter. That certainly helped drive most of the outperformance. I would say the large majority of that 50 basis point occupancy outperformance is attributable to the new and renewal leases that we signed. Obviously, those that were signed earlier in the quarter had more of an impact as those tenants occupied as the quarter progressed. We did have a few tenants, a couple I can think of, that held over by a few weeks or maybe a month past their lease maturity date. That accounts for about 10- 15 basis points of our outperformance.
The large majority was lease signings, and then we had a couple instances also where we were able to get a tenant in a space a few weeks early or a month early, and that helped incrementally as well. I would say overall, it's really just due to the core strength of the operating environment and the continued demand that we're seeing from a broad range of tenants and across a broad range of markets. You can't really point to two or three markets that drove that outperformance. It was broad-based. If I were to list the markets, it would take me a minute to list all of the markets where we saw some outperformance. We're pleased with that, pleased with our tenant retention being higher than we had projected.
Signing those renewal leases and keeping tenants in the space certainly helps continue to drive that outperformance in occupancy as well. It seems every quarter that has gone by this year thus far, we have outperformed our projections, and we continue to do the best we can as we project. We do, when we look to fourth quarter, we do know that, call it 10-15 basis points of that occupancy that was holdover occupancy, but that is not as long-term as the rest of our outperformance. We have increased our occupancy guide for fourth quarter by 40 basis points, and that is really due to those leases that we signed during third quarter now being occupied. Very pleased with the strength of the demand that we are seeing across a variety of our markets.
Your next question comes from Todd Thomas with KeyBanc. Please go ahead.
Yeah. Hi. Thanks. Good morning. I just wanted to go back to acquisitions, and the increased guidance there, which I think accounts for all of your year-to-date acquisition activity at this point. What is the pipeline like today as you begin to shift focus to 2027? Do you see the pace of acquisitions sort of maintaining or picking up from here? Then with regard to the increase in cap rates that you mentioned, Marshall, can you just quantify that a little bit, what you are seeing in instances where you are seeing higher yield opportunities?
Sure. Hey, Todd. Good morning. I would say on cap rates, it is fluid, and that it is still a moving target a little bit, but probably 20-30 basis points, call it 25 basis points is what we have seen to date. You are right. Everything we have in our guidance, we have closed on, and Staci and team have thankfully funded. Look, if we bought something between now and year-end, it will move our numbers in 2027, but not 2026 as much, just given where we are in the year. I would say, and it is atypical that we can, usually there is developments a good opportunity or acquisitions. It is atypical to have both opportunities.
We've certainly spent more time in the last two to three weeks, Reid, Brent, and I, with the teams in the field looking at acquisitions, some things that have been awarded that have come back to market, some things that people aren't getting the pricing and opportunities. I think the key for us is, one, to make sure we don't want to run up our line or do things to get ourselves in a tricky financial position. We want to make sure our stock price supports if we fund it via equity. We can via debt now, but we'll look at both avenues, and make sure mainly we just stay disciplined. If it's something that improves the growth profile, meaning top quartile of our portfolio and is accretive. What we've bought also has had a little bit of vacancy, a few of them have, kind of call it 90%.
So that's helped us get a little bit better premium yields. It feels like that window's still open based on all the calls we're seeing from the field, and then it always feels like it'll close quickly. So you're right. Cap rates are moving higher, but it's given us an opportunity on the flip side to really play offense and raise our growth profile as well. Because usually, we get outbid on things and we're better off building them. But right now we're able to kind of accretively buy some great projects and continue building as well because the demand's been steady for several quarters now.
Yeah, Todd, this is Reid. I would add, we're raising the bar. We're seeing more opportunities, and it feels like there's some pent-up sellers where they were hoping maybe earlier in the year that they would bet on lower interest rates and it obviously did not go their way. So we're seeing more activity, more deals, but we're only going to place bets on acquisitions that are opportunistic and strategic for us. So we're not going to lower our bar and make sure we have good liquidity to access to our capital. So between those, we'll be disciplined, as Marshall said, and find the right opportunities if they present themselves.
Thank you. Your next question comes from Tom Carter-Wood with U.S. Bancorp. Please go ahead.
Excellent. Thank you, and good morning, everybody. Marshall, I wanted to go back to some of your earlier comments about leasing spreads, that tenant retention, Staci mentioned it kind of running higher this quarter, and it has been running higher all year, which is a bit surprising. I know that can fluctuate. Maybe where are you able in your portfolio to push rents right now? Where are you still prioritizing occupancy?
Yeah. Good morning, Tom. I do not know that look, we probably typically always prioritize our occupancy. It is hard to know. Look, there are always things rolling, more of a dollar cost average of let us get spaces leased at market and make the best deal we can and move on. You are right, our retention rate, look, if someone were just picking up coverage of EastGroup, I would say, and really probably any REIT, 70%-75% retention, and we have been running almost 79% year- to- date. So it is great in terms of re-leasing costs and keeping the portfolio full, but it has been surprisingly higher for a longer period of time than I would have guessed in a good economic environment. Usually, it is higher in a bad environment.
Our rents are probably growing fastest, it is those markets that have the data center development and the advanced manufacturing. It seems like it is the same ones, meaning the Texas markets, Atlanta, a little bit in the Carolinas, and in Arizona, specifically Phoenix. We are 100% leased now, thankfully, in Phoenix and things like that. It is not that Florida is bad, it is just maybe not quite, and probably the market where thankfully, demand has turned positive, but rents are not there yet, are still the California markets. It really depends on some areas of markets in California. If it is Class A and it is near Defense or advanced manufacturing, those rents are good or near the Silicon Valley. But by and large, Oakland and South San Diego, Otay Mesa, some of those markets are still flat to negative absorption, unfortunately.
So those are probably our weakest markets, and those are California's 14% of our total NOI. We are 99% leased in L.A. Thankfully, we do not have a lot of vacancy. But those markets are choppy. Our traditional Sun Belt markets, which is kind of the bread and butter, are doing pretty well, and we are able to push rents there and stay full.
Thank you. Your next question comes from Nick Thillman with Baird. Please go ahead.
Hey, good morning. Maybe following off that comment you just made, Marshall, what percentage of the portfolio do you think you have the ability to push rents? Then as we look at your best performing market rent growth over the next 12 months versus your worst performing, what do you think that gap will be between those market performance?
I think our best opportunity, it's probably not fair, but I'd say 90% we can push rents. I'm calling California 14% and probably not all of that. There's probably pending. Some buildings we'll be able We'll have embedded rent growth, but really margin. Then I would, with the preface that I'm not great at predictions. Someone said, if I were, you're welcome to take my yacht to my island with me anytime. But I would say maybe the worst markets will be pretty flat next year, and the best will be low double digits.
Yeah, I think This is Brent, and good morning, Nick. I think the exciting thing, and you see it on our schedules, is that I don't think there's one or two markets that stand out as being the only ones that we can push rents. Going back a few years ago, where L.A. and some of the California markets ran so hot and pushed so far above the other markets. But it's very broad-based. You see our Texas, Florida, Carolina region numbers being very consistent in terms of rent growth. As Marshall alluded to, the California markets have lagged after their hot run. But it's broad-based, really. I think we're going to be in a position to push in most all of our markets, save and except maybe that 14% in California. By and large, those are improving. L.A.'s had four consecutive quarters of positive net absorption.
Really, South Bay, San Gabriel Valley, Inland Empire West, all with very strong results in vacancy. Inland Empire East, still a little flattish and about a double the vacancy rate than the rest of that. I think that's the exciting part, it's broad-based. In terms of the percentage and what I, like Marshall said it, we've been very consistent with our portfolio with that 20%-ish cash increase and that mid-30% gap. That's been sticking. Feels like there's more pressure to the upside with that, considering rise in cost and the markets are still healthy. So it feels like there's more wind at our backs to push that versus not. Of course, that can change based on conditions. But we feel good all across the portfolio about our ability to modestly push.
Thank you. Your next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, morning. Morning down there. Question actually on specific deal that you guys did. At DFW, you bought a ground lease, and I think you have a few other ground leases in the portfolio. Just given that that's caused some angst with other REITs, especially here in New York, just want to get a better sense of how you look at ground leases, what the reset structures are, if they're deals. Basically, it's the resets that seem to create the issue with these. So I'm just sort of curious what the reset is here and how you underwrite them so that it's truly an investment asset versus a defined holding period asset.
Hey, Alex, it's Marshall. Good morning. On the ground leases, look, we're 95%+ fee simple. So yeah, you're right, we prefer to own it. Where we do have ground leases, we've tried to be extremely strategic about them. We've sold some, and really, I can kind of think of two places where we've picked up ground leases. It would be, you're right, at the DFW Airport. Those are 40-year leases. The ground lease payment is a substitute for your taxes, and those are often lower than the tax rate. So you actually have a cost advantage currently, and then they do reset, though. You're right, there is a reset, but we look at that over a longer period of time over the term of the lease. And the tenants like it because they can fix their cost up until whenever the reset hits.
The other place, it makes sense when you think about it, is we have a tribal lease in Arizona where there's literally no land because anything that's fee simple has been built 20 mi in either direction, and we picked up a tribal lease there. It's really land that can't be replaced. I've made several trips to the Pima Indian Reservation in Scottsdale and things like that. Unsuccessfully, I'll add as well. We've tried to be very strategic where these are irreplaceable locations, but they just happen to be on a ground lease. Even that said, if it's a great location, we've sold some to manage that number down and keep it a very minimal part of the portfolio. In one where, if we have one, we better have a really good reason, is kind of how we've looked at it.
Being near the cargo terminal and one of the top 5- 10 airports in the country, or being on tribal land in a city that's sprawled way out beyond that tribal land today and continuing on. That's how we think about it. You're right, it's not our typical business, but this was one that was a secured lot, yard bonded, brand new warehouse leased to a large public logistics company. We felt like we got the pricing that reflected the ground lease as well on it.
Thank you. Your next question comes from John Kim with BMO Capital Markets. Please go ahead.
Thank you. I wanted to ask on some of the demand drivers that you're seeing today. If you could provide an update on how much the data center suppliers were part of your development leasing this quarter versus the 20% last quarter. On e-commerce, just wanted to see if you could provide any views on Amazon Project Mercury, in terms of what you're expecting in terms of impact to your markets overall or to your portfolio specifically.
Yeah. Morning, this is Reid. As far as data center related uses, we signed about 135,000 sq ft in the quarter. Year- to- date, that's about 15% of our overall activity on new leases has been data center related as we defined it. That continues to be one of the tailwinds of the many. I am glad you brought up the e-commerce, because it does feel like e-commerce will see some acceleration. The Amazon Project Mercury, we have read about it. It feels like it is still early stages, but the way it is described between the need for 100,000- 200,000 sq ft facilities and infill locations, feels like that would fit our portfolio and our strategy really well.
I think between the data center, the e-commerce, the advanced manufacturing, plus just our stable overall business of servicing the local economies that we are in, it feels like we have got some great tailwinds to continue to drive demand into the future.
Thank you. Your next question comes from David Rodgers with Raymond James. Please go ahead.
Oh, hey, good morning, everybody. You covered a lot already. Maybe go back to both Marshall and Staci. I think you both addressed bad debt at different points in time in the call, and it sounds very stable today. I guess historically with higher rates, are there any particular parts of the portfolio that you would watch more closely, whether that is tenant-based or location-wise, just given the higher rates?
Sure, Dave. Good morning. Yes. So you are correct that our bad debt has been very steady and in line with our historical average of around 30- 35 basis points of revenue. So we have not seen any deterioration there, have not seen much of a change. The tenant watch list remains steady. Every quarter, we have a few new tenants roll on the watch list and a few tenants roll off. So no concerns, I would say, noted there. In terms of the impact of the overall economy and interest rates on certain tenant types or geographies. There are times, a couple of years ago, we did see a spike in bad debt in the state of California, specifically with 3PLs in California.
We have not seen that since. So we are not detecting anything going on right now with any particular segment of our tenant industries or any geography. 3PLs, as you know, can come more quickly and leave more quickly than some other tenant types. They can ramp up or contract pretty quickly compared to other tenants that are stickier. We are not seeing that right now, and as long as the consumer spending and consumer consumption remains strong, then we do not anticipate issues there. So, we are not detecting in any near or medium term or expecting any issues other than when you have 1,700 leases, you are always going to have a tenant's business that goes wrong for one reason or another. But we are not anticipating any certain geography or tenant type to cause issues for us.
Thank you. Your next question comes from Rich Anderson with Cantor Fitzgerald. Please go ahead.
All right. Thanks. Good morning. So I want to talk a little bit more on the data center side of demand. Particularly given the political and social pushback, so on and so forth. If it is a here to stay long-term demand factor, I do not know what to say about the fate of humanity, but I think the industrial REITs will be good. But you are saying 15% of your leasing has been tied to data centers. If in its absence, for whatever reason, that slows down or plateaus, what does the industrial space fundamentally look like without this data center sort of new demand driver? Was there a plan B for this space that another form of demand would have taken it? Or could there have been just a less effervescent type of fundamental picture for industrial in the absence of this data center component? Thanks.
Hey, Rich. Good morning. It's Marshall. You're right. I would say, look, I'd love to say we saw this all coming, and we built buildings to accommodate this data center kind of wave of new demand. The reality is they found us more than we found them. The land we acquired, our intentions were our traditional users, and in large cases they are. It's an HVAC contractor whose business has grown. It's an electrical company, and their business is growing because they're serving the data center. Our plan B is really what was our plan A, so the tenant improvements and the leases don't look any different, or the buildings any different than the traditional EastGroup buildings.
Thankfully, all but one of the data center leases that I can think of in Atlanta were related to ongoing service to a data center rather than construction. If it all went away, obviously we'd get the vacancy. There are different lease expirations over time, things like that. We'll backfill them with our traditional users or whatever the new It seems like for us, thankfully, every few years, whether it was e-commerce and then green energy or online pharmaceutical fulfillment to a little bit of a degree, and now data centers and advanced manufacturing. There's a new user type that finds flexible last mile distribution buildings. We'll latch on to whatever the next wave is. It's been a nice shot in the arm this year.
As long as we don't make our buildings too wonky or try to be next to a data center that might close down the road or take over humanity, as you said, our hope is we'll kind of manage our way through it. To date, it's about 1.5% of our revenue. We aspire to have a concentration issue or a problem there. You're right, we're monitoring it, and we're not doing anything differently than you've seen us do for the last five years.
Yeah, Rich, I would just add, as I mentioned, only 135,000 sq ft of data center related leases this quarter, and we still had a record quarter that would have been close to a record even without that. Our diversification in geography, product, location, will service all types of uses, not just data center. As Marshall mentioned, we haven't been specifically targeting those. They've found us. If it does slow or go away, I think we still have plenty of growth drivers behind us that will provide good opportunities for the years to come.
Thank you. Your next question comes from Jon Petersen with Jefferies. Please go ahead.
Oh, great. Thank you. I wanted to ask a question on same-store NOI. I realize you're starting from a very high number and you raised guidance, but it does imply a deceleration into the fourth quarter. Maybe if you could talk us through the puts and takes on stepping from 3Q to 4Q on same-store NOI. Then probably maybe related, same-store expenses were up a little over 4%. Just curious how much of that is one time and how much of that is just higher inflation in the economy showing up in that number. Thank you.
Sure, Jon. Yes. I'll agree with your comment. We're very pleased that our same store has been so strong thus far this year, and we're pleased that we've been able to increase our annual cash same store PNOI guidance by 70 basis points to 7.5%. That's really due to continued strong outperformance each quarter of the year thus far. We're projecting additional outperformance in fourth quarter compared to our prior projections. Our projections, as we noted earlier in the year, when we looked at the first half of 2026 versus the second half of 2026, compared to occupancy in 2025. The second half of this year, the second half of 2026, had very strong comps in terms of occupancy from the back half of last year. So, we feel very good about our same store occupancy in third quarter and projected for fourth.
We're just comparing to a very strong back half of 2025. So we're not projecting a deterioration in terms of our 2026 performance so much as the comps just get more difficult as the year progresses. When we compare fourth quarter same store occupancy projections this year to last year, we're comparing against a 97.2% average same store occupancy last year. So that's just a difficult comp. We've increased our projection for same store growth in fourth quarter by 100 basis points over our prior guidance. So we feel better about it. All four quarters together, at 7.5% is a very strong year. We hope we keep giving ourselves and you guys tough comps for next year because that's just part of strong performances. You have to compare yourself against it the following year.
But we feel good about where we are and definitely not a signal or a sign of things slowing down in fourth quarter. It is really more of just a difficult comparative period when comparing to fourth quarter last year.
Thank you. Your next question comes from Michael Griffin with Evercore. Please go ahead.
Great. Thank you. I wanted to ask on the leasing pipeline and tenant demand. Curious if you have seen any change in customer decision-making time frames. Is the leasing pipeline maybe geared toward folks that were a little bit reticent to sign a lease that are finally willing to commit? Or is it more sort of organic, broad-based demand? I realize it is a little early, but as the calendar turns next year, do you expect that demand to accelerate or sort of hold steady at these healthy levels?
Hey. Yeah. Good morning, Michael, it is Brent. I think the latter part of what you said probably hits on it to steady. We did have a strong quarter where some leases that had been worked for some period of time. We did have a strong quarter in Phoenix. Four of our, I think, 11 development leases, in fact, were signed in Phoenix.
Those were a few deals where we had some spec-ready spaces and the deals made rather quickly, which was nice to see because we had not been seeing much of that quicker decision-making. We've seen that increase some in terms of decision-making. We've seen competition on a few spaces that have helped, and obviously once you have that enter the market, we'd like to see that more pervasive, but just seeing that some has certainly helped, I think. I think as it feels right now and heading to next year, I think your comment of steady feels more in line. As mentioned earlier in the call, the high retention that we've got in our portfolio, which has been great and hitting almost 80%.
One of the things that puts a little bit of challenge on the development lease-up side of that is that, the tenants, if they're staying in place, they're not expanding as much and moving into space. I think so far this year, only about 16%-20% of our development leasing has been from expansions. In other years, that's been a little higher. So that could be another possible tailwind if that could pick up with some decision-making. I think steady is a better word. It's just been consistent. It was broad across the markets in terms of rental rate growth. It was broad across markets in terms of where the leases were executed. Talking to the teams in the field, it feels like it's going to continue to be broad-based.
It was probably stronger in the eastern markets and in Phoenix, and then maybe to just a slightly lesser extent, maybe in Texas and in California. We like our footprint. We like where we are. We're in high-growth markets. Never hurts to have job growth and population growth, kind of underlying all of this. You look at markets like Houston, Dallas, even Atlanta, Phoenix or Orlando, the growth in those markets just in general. When you go around those markets, you can tell that they're just different than other parts of the country that you go to. So I think steady is a good term, and the team's real focused, and hopefully we can continue a steady momentum into next year. If it swings more positively, we're ready to play into that as well.
Thank you. Your next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Hey, just a quick two-parter. Back to the data center question. I think you did a great job addressing what would happen if it slowed, but if I could ask the other side of that question, is it possible for that to double or triple next year? I would be interested to hear your comments. The second part of the question is, as you take a step back and you look at the portfolio, I think you made some comments about rent growth potentially accelerating this year. My question would be, how much sort of commence occupancy upside and potential, cash leasing spreads upside could we see? Thanks.
Hey, Ron, it's Reid. Good morning. On the data center-related question, yeah, you read the news, it feels like it could increase substantially from what people are saying. I think from an EastGroup standpoint, we're well-positioned if that occurs, being that a lot of these areas, where you're seeing the data center growth are in our markets, being Dallas and Houston, Atlanta, Phoenix, Charlotte, Carolinas area. So, fingers crossed that happens. But as we stated earlier, even if it does maintain its current pace or slows, we still feel very confident in the way our portfolio is structured and the other demand drivers that we're seeing and feeling today, and what we think could happen in the years to come as well. As far as the other question, I'll let Staci jump in on that one.
Sure. In terms of the rent growth projections for fourth quarter, our projections are generally in line with what we've accomplished thus far this year. We're not expecting as market rent growth continues to remain steady and tick up, we're not expecting a dramatic change with our re-leasing spreads, and we're not in a position to speak to next year yet in terms of specifics. But I think you are on track in thinking that if we continue to see, to experience rent growth in our markets, say if they're in the mid-single digits now, if that were to accelerate, then that would certainly impact our re-leasing spreads as well.
Ron, I'll pile on this question. When you say in terms of data center suppliers, what makes us optimistic about this tailwind, again, we're not building specifically for it, which is a great way to be able to catch it, but based on what's existing today, when you look at the main markets Reid mentioned, the Texas, Arizona, Atlanta, Carolinas, what's planned and permitted, it's typically about 4x, if I picked a number, versus what exists today. Those supplier networks are still being built out, maybe unlike, say, in Northern Virginia, which is the largest today for data centers. Dallas is forecast to overcome Northern Virginia, and that supplier network has not been settled out.
It could be a pretty material. It is a material tailwind already at 20%+ more than I would have expected earlier in the year, and with the potential to really drive demand for us. We will just try to manage it as I hope it is a problem we are dealing with, managing all that demand and how we do not get over-concentrated with it. If what is planned and permitted actually happens, which it sounds like it is from what we read, there is a lot of growth within our data center suppliers. One of the leases Brent mentioned in Arizona, the reason they picked us is because we have extra land for buildings and capacity as they plan their growth.
Thank you. Your next question comes from Michael Lewis with Truist. Please go ahead.
Great. Thank you. I guess a lot of us are on the same page, because I was going to ask if data centers slowed, if that would hurt industrial. Now that you have answered that a couple of times, maybe I will ask more broadly. This was a very positive release and outlook and conference call, all the guidance changes for occupancy, NOI, acquisition, all moving in the same positive direction. Maybe I will ask if there are risks you considered when you raised the guidance, or I know you expect rent to grow next year too. Any risks to keep an eye on headed into next year, whether fundamental or lagging markets or capital markets, or anything besides data centers that you think could spoil the party?
At least data centers. Hey, good morning, Michael. It is Marshall. I think, unlike, say, the green energy kind of wave we had, those were startups, and we knew there were going to be winners and losers. The good thing with the data center suppliers, they are existing companies. Again, maybe they get themselves over-levered, but I feel better about these tenants than I did the kind of the green energy wave, and that they had already been in business and have customers that are not that. I would say things that keep us up at night or keep me up at night, it is always, look, we have got a great team, and a lot of other people know we have a great team, so we have got to keep our team. Then we say we worry much more about demand than we do supply.
Does the consumer get overstretched? What does rising interest rates do to credit card debt and things like that? There will be new supply, but especially for what we build, that is usually pretty moderate because we know how hard it is for us to find good sites and how long that takes today to put those into production. It is kind of that black swan economy that is where we try to have the balance sheet and the team and be as best prepared we can for whatever the next inflection point is. It is really the consumer and the economy and keeping the team would be the two things that would worry me in 2027.
Thank you. Your next question comes from Vince Tibone with Green Street. Please go ahead.
Hi. Good morning. Are you able to share the cap rates on the acquisitions that both closed in 3Q and subsequent to quarter end? Then just curious if you think, the stuff that closed most recently, if that pricing is reflective of the new bid for industrial post the rate move.
Yeah, Vince. Good morning. It is Reid. I would say for the assets that we have purchased really year- to- date, because majority of it has been over this last couple months, our stabilized straight line yield is going to pencil out right around a 6.5%, mid 6% number. We feel good about that. Some of that has some vacancy in it, like we mentioned, but we are adding value. The team will add value by finding some tenants to occupy that space and knowing that some market experts in the area, that feels like a good bet for these assets. As far as cap rates movement, we have not been the most aggressive bidder, but we have been the bidder that probably has the most likelihood to close.
We've seen opportunities where we weren't the highest bidder, and we thought we lost the deal, and then the sellers or the brokers came back to us and said, "Hey, is your numbers still good? Can you perform at this number?" We like that type of environment. We've been able to exploit it and take advantage of it and buy some really high-quality assets that are accretive day one, have additional upside. Most importantly, in these environments, we look at things on a per square foot basis and a replacement value. Being the developers that we are, we can quickly ascertain if it's a good buy or not, just from a per square foot basis. As all those items come in line, we're really excited about the window that's opened, and we'll see how much longer it stays open.
We've got the balance sheet strength and the flexibility to take advantage of it in these environments like we've seen here lately.
Thank you, Vince. There are no further questions on the phone line. I will turn it back to Marshall Loeb for some closing remarks.
Thanks everyone for your time this morning and your interest in EastGroup. If there's any questions, follow-up questions, or anything we didn't get a chance to speak to, please feel free to reach out, and we'll see many of you in a couple of weeks in Atlanta at Nareit. Thanks, everyone.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.