EastGroup Properties, Inc. (EGP) Q1 2023 Earnings Call Transcript
EastGroup Properties, Inc. (NYSE:EGP) Q1 2023 Earnings Conference Call April 26, 2023 11:00 AM ET
Company Participants
Keena Frazier – Director-Leasing Statistics
Marshall Loeb – President and Chief Executive Officer
Brent Wood – Chief Financial Officer
Conference Call Participants
Bill Crow – Raymond James
Craig Mailman – Citi
Connor Mitchell – Piper Sandler
Nick Thillman – Baird
Jason Belcher – Wells Fargo
Jessica Zheng – Green Street
Jeff Spector – Bank of America
Ki Bin Kim – Truist
Todd Thomas – KeyBanc Capital Markets
Michael Carroll – RBC Capital Markets
Vikram Malhotra – Mizuho
Operator
Good morning and welcome to the EastGroup Properties First Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please also note that this event is being recorded today.
I would now like to turn the conference over to Marshall Loeb, President and Chief Executive Officer. Please go ahead, sir.
Marshall Loeb
Good morning, and thanks for calling in for our first quarter 2023 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call. And since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Keena Frazier
Please note that our conference call today will contain financial measures such as PNOI and FFO and that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website. And to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933 and 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 in abate. We undertake no duty to update such statements or remark 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 included in our most recent annual report on Form 10-K for more detail about these risks.
Marshall Loeb
Thanks, Keena. Good morning. I'll start by thanking our team for a strong start to the year. They continue performing at a high level and capitalizing on opportunities in a fluid environment.
Our first quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance, up 9.5% for the quarter. And now for ten consecutive years, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term trend.
Our quarterly occupancy averaged 98.1%, up 80 basis points from first quarter 2022. And at quarter end, we're ahead of projections at 98.7% leased and 97.9% occupied. Quarterly re-leasing spreads were robust at approximately 48.5% GAAP and 32% cash.
Cash same-store NOI set a record at 11% in the quarter.
And finally, I'm happy to finish the quarter at $1.84 per share, helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top ten tenants falling to 8.5% of rents, down 90 basis points from first quarter 2022.
In summary, I'm proud of our start to the year. Statistically, it was one of our best quarters on record all with looming prospects for recession and capital markets dislocation. We continue responding to strengthen the market and user demand for industrial products by focusing on value creation via raising rents and new development. This strength is what allowed us to end the quarter at 98.7% leased, average over 98% occupancy and push rents throughout a wide geography of our portfolio.
As we have stated before, our development starts are hold by market demand within our parts. Based on this readthrough, we're forecasting 2023 starts of $340 million. And while our developments continue leasing up, we're closely watching demand with the goal of a balanced fluid response pending what the economy allows.
What's promising is to see the decrease in industrial starts. To quantify, starts as measured by square footage, fell 25% from third to fourth quarter in 2022. Then comparing third quarter 2022 to first quarter 2023 starts dropped approximately 45%, and I suspect this quarter will be a further decline.
Given the capital markets volatility, we've taken a measured approach towards transactions since mid-2022. That said, when we find the right strategic opportunities, we'll pursue them. The disposition of World Houston 23, which further manages market allocation as an example as well as our Las Vegas acquisition. In Las Vegas, we were able to invest in a newer, well-located building and an underallocated, fast-growing market and achieve development like yields. We're hopeful the choppiness in the capital markets will present other attractive investment opportunities.
Brent will now speak to several topics, including assumptions within our updated 2023 guidance.
Brent Wood
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 quarter exceeded the upper end of our guidance range at $1.84 per share compared to $1.68 for the same quarter last year. $0.02 of first quarter FFO was attributable to an involuntary conversion gain, recognized as the result of roof replacements that were damaged in a hurricane. Excluding the gain, FFO per share was near the upper end of our guidance range at $1.82 per share, an increase of 8.3% over the same quarter last year. The outperformance continues to be driven by stellar operating portfolio results and success of our development brand.
From a capital perspective, we have long stated that we continually analyze all of our potential sources. After a year more weighted towards debt issuances, the stability in our stock price in the first quarter yielded the opportunity to access the equity markets.
During the quarter, we sold $133 million of shares at an average price of $163.51 per share. As previously reported, in January, we closed $100 million senior unsecured term loan with a seven-year term and an effective fixed interest rate of 5.27%.
We also successfully expanded the capacity of our unsecured bank credit facilities from $475 million to $675 million. This step was taken simply to provide additional flexibility in a capital-constrained market. We remain conservatively drawn on the revolver. As a reminder, the company does not have any variable rate debt other than the revolver facilities and our near-term maturity schedule is light with only $50 million scheduled to mature through July 2024. Although capital markets are fluid, our balance sheet remains flexible and strong with healthy financial metrics.
Our debt to total market capitalization was 19.8%. Unadjusted debt-to-EBITDA ratio is down to 4.8 times and our interest and fixed charge coverage ratio was at 7.2 times.
Looking forward, FFO guidance for the second quarter of 2023 is estimated to be in the range of $1.83 to $1.89 per share and $7.49 to $7.61 for the year, a $0.15 per share increase over our prior guidance. Those midpoints represent increases of 8.1% and 7.6% compared to the prior year, respectively, excluding the involuntary conversion accounting gain.
Revised guidance produces an average quarterly same-store growth midpoint of 7% for the year, an increase of 100 basis points from last quarter's guidance. We also increased the midpoint of our average occupancy by 50 basis points from 97.2% to 97.7%. This is the result of outperforming our budget expectations in the first quarter, along with continued optimism for the remainder of the year.
In closing, we were pleased with our first quarter results. And as we have in both good and uncertain times in the past, we were allowing our financial strength, the experience of our team and the quality and location of our portfolio to lead us into the future.
Now Marshall will make final comments.
Marshall Loeb
Thanks, Brent. In closing, I'm proud of the results our team created. We're carrying that momentum forward.
Internally, operations remain historically strong and we're constantly working to strengthen the balance sheet. Externally, the capital markets and overall environment remain unstable. And while never fun to experience, this is leading to a marked decline in development starts. In the meantime, we'll work to maintain high occupancy while pushing rents.
And longer term, I remain excited for EastGroup's future. There are several long-term positive secular trends occurring within last mile shallow bay distribution space and Sunbelt markets that will play out over several years, such as population migration, evolving logistics chains, onshoring, et cetera, which we are well positioned for.
We'd now like to open up the call for any questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Bill Crow with Raymond James. Please go ahead sir.
Bill Crow
Hi, good morning guys. Another great quarter. Marshall, as other people pull back on their construction pipelines and activities, I'm wondering how you're thinking about yours. I know it's a different risk profile and within your existing parks. Have the risks elevated enough to make you pull back? And then maybe talk about the balance, any shift in the balance between acquisitions and developments at this point. Thanks.
Marshall Loeb
Sure. Okay. Good question. Good morning Bill. And thank you. I think on development, you are right, we've – really what I try to remind myself is let the field tell us as much as Brent and me and the team here at corporate. So, you say it's usually within our parks, and it's usually I'll use our Tampa parks where it's been of late and then same in Texas, where it's tenant expansions or relocations within our portfolio. So, I never want to be so hesitant to start that we lose a tenant with really the capital markets, we've been pushing towards higher development yields. That said, last year, we came in north of $7 million. We probably targeting would have dropped into the upper fives a year ago or maybe just over a year ago, and now we're probably a good 100 basis points higher at kind of our development threshold where you're kind of getting that mid upper sixes.
And I think we've tried to just be flexible. I know we raised our development starts this year slightly from $330 million to $340 million, but I've told ourselves, I'm perfectly comfortable if the market tells us that should be $200 million or $500 million, we'll go in that direction. I say that. If it grows, we need to be smart about how we fund that, but we'll react to the market. And then really, it's the guys in the field calling saying, I'm running out of inventory. I've usually got a prospect or two or an existing tenant, and here's how things pencil out. So we'll go that way.
On the acquisition front, and we were happy to find the Las Vegas opportunity. We think, given the capital markets, there is going to be better and better acquisitions on the horizon. We like the newer building, we were able to get a development that really looks more like a development yield than an acquisition yield on that and we've made – in any given time of late, we've had two or three kind of not very aggressive offers out there. And just saying if we can find the right opportunity, we'll close on it and that could also be a substitute a little bit if we could do both development and some smart acquisitions we'd like to. But if we slow down development because of the market, it may – the acquisition market may give us the opportunity to replace that capital.
Bill Crow
Yes, thanks. That's helpful. If I could just ask a follow-up. And that's really a Miami and the performance in that market. We sense that it's a really strong market, but the data the last couple of quarters seems to have been a little bit weaker from your portfolio. Is there anything going on there?
Marshall Loeb
It's one good catch. One vacancy. We had a bankruptcy in Broward County, about 100,000 foot. It was a tenant lost a lawsuit and filed bankruptcy. So we've got 100,000 feet there we need to backfill. And we just kind of internally have put another person on it that really runs Florida for us. So, I think we'll get there. We've just been a little slow getting that space refilled. So, I don't think it's indicative of the market so much as one space that is sub-divisible that we just kind of need to kind of work through our system.
Bill Crow
Got it. Thank you.
Marshall Loeb
Sure, you are welcome.
Brent Wood
Thanks Bill.
Operator
Our next question will come from Craig Mailman with Citi. Please go ahead.
Craig Mailman
Hey, guys, May be, following up on the development piece from a funding and yield perspective clearly, cost of capital has risen. Just trying to figure out how you guys are thinking about this internally, how to price that capital either from a build-to-suit or speculative nature to capture that phenomenon? And are you seeing any pushback on kind of market rent growth in the markets where you're developing?
Marshall Loeb
I'll start and Brent jump in on. Really no pushback on rents where we've lost tenants. It always still seems to be predominantly there combining locations or exiting a market have or have outgrown the space and we can't accommodate it. Again, that's probably like the park setting. But it's not very regular that we lose the tenant over rents. Our rents are usually at market or hopefully, if it's a renewal, you can get a little better beat market by a little bit.
And in terms of returns, we've tried to think – our kind of historic rule has been trying to be 150 basis points over an acquisition cap rate for development yields. And again, all the kind of market yields have been pretty much in flux for a few quarters now, but we feel like we're still achieving that. And I kind of think about it personally, if we can get an attractive yield, say, we're 6.5 to 7 type yield going in, one of the advantages you have as a REIT unlike maybe a merchant developer or private equity, if it's a good location, we're going to be able to hold that location. We're starting at, say, 6.75, and it's only going to improve over time as a market like Orlando or Phoenix or Austin continues to grow.
So we're creating some value on the development, which we're excited about. And then hopefully, that will show up later in same-store NOI as well.
Brent Wood
Yes, I would just add to that, Craig. This is Brent. I would just add to that, we're continually evaluating our best capital sources. Last year, we were – when our stock price initially fell, we were a little happier on the debt. We issued $525 million last year of debt at an average of $3.8 million. We got kind of in front of that and the head of rate hikes. We're very pleased with that result what turned out to be a difficult environment. And only – we did about $75 million in equity first quarter last year and then pretty much we're not able to – or didn't get back in the equity market. But as you saw in the first quarter, we pivoted to equity, view that by far is our most attractively priced component, kind of, call it, a mid-four versus even the revolver now, which is a mid-five. So as a result, we lowered our debt assumptions a little bit, as you saw in our guidance and increased equity.
And based on current environment pricing, we anticipate that we would probably lean towards equity, but we're good balance sheet. We can go either direction. I think the important thing to point out is that our guys in the field continue to find via development or as Marshall said, strategic acquisitions, we continue to find good opportunities to put our capital to work at that still making a good risk-reward spread. And so that's really what's driving the need for capital. So we appreciate that we even need to keep a close eye on it. The guys are finding a way to use the money.
Craig Mailman
That's helpful. And then as we think about – you cited the pullback in construction starts, which likely contracts further now given the financing environment. But as you guys look at the land bank that you have and the competitive landscape across markets where maybe cities they've been overdeveloped now that pulls back a little bit. Where do you see the – in that $340 million of starts, kind of where is the best opportunity to start to monetize the land bank where you guys think you can kind of fill in the gap and fill that void or other developers are capital constrained and you're not?
Marshall Loeb
I don't – good question, and I'm not sure I have – I wish I had as good an answer. It will really play out in parks. Austin is a market that I mentioned it earlier, it seems awfully strong. The population growth there. We feel like there is some opportunities where we've – I like our land bank that we have in Austin today. Atlanta is another market where we're seeing pretty good opportunities. There's a lot of construction in Atlanta, but not a lot of shallow bay construction. There's a lot in the pipeline, but the number of starts is dropping pretty rapidly in Atlanta, too.
So, when I think of specific markets, I think of those two, I'm glad we bought the land in Tampa, Florida in subsequent to quarter end and that we're wrapping up our last park there, Grand Oaks. And it's been a lot of expansions, relocations in Tampa for us. So we kind of need the raw materials to kind of keep going in that market as well. But probably those would be the three that would come to mind. And again, it's – we'll follow the markets where kind of where the tenant demand is, and I like that it's pretty broad based within our markets.
Craig Mailman
If I could slip a third here because you mentioned the Tampa land, -- could you just – it looked like your price per billable square foot was pretty attractive there and then the piece you bought in San Antonio. Can you just kind of talk about the land acquisition market, what you're seeing from a pricing perspective and opportunity set?
Marshall Loeb
Good comment. And we're excited about both of those acquisitions. The land opportunity, it seems like I would – in my mind, I always put land sellers in two categories. There's the generational holders, the farmer, someone like that, and those prices are pretty sticky and probably haven't moved a lot. And if they hold it for a few more years they are probably fine with that. Where we found opportunities in one of a couple of the Austin acquisitions we made, where people were acquiring land, getting it permitted, zoned and then flipping it or selling it on a forward basis, that's where there's probably where the pricing has moved back, maybe 25%, 30%, things like that, and just you have people that are running out of time. And so we've found a couple of those. We've heard of a few more of those, a couple out West that we've looked at and are looking at where it's basically developers with usually the pattern is that don't have a lot, a lot of experience, and they've gotten out over their skis financing-wise, and they can't raise the debt or the equity because as a merchant builder, you don't really know where you could sell the building 15, 18 months from now, unlike where you could have the last few years.
And then both of the acquisitions we acquired and it seems like that with land or especially the better land sites, there is always a back story and that the San Antonio land and I'll complement our team, it was – it's an infill site in San Antonio right along I-35, but it was a – we've described it as a land-rich, cash poor church. And so we help the church relocate to a corner of the site, and we probably worked on it for 4 years now. So we like our land bases there, but that's – we've looked at churches, and water parks, and horse tables, and dark horses and you name it. But that was unusual. And I'll thank Reed and Terra Warren for helping build a church in order to get a good Parkland site.
And then in Tampa, odd land sites, we have experience in Fort Myers, where there was an eagle on site and you have to hire someone to observe the eagle and there are certain times of year you can build. And so we've lived through that in Fort Myers and that helped us on this site just outside Tampa and that there's an eagle on the site, and we'll and hope he stays and we'll try to not disturb him, and we have experience kind of building around that.
But there's always – on the good sites, there's always something kind of atypical. And both of those were where you saw the closing this month in April, but they started three, four years ago, and that's probably what, I think, most investors don't see is how long it takes us to get the zoning permitting and usually an unusual seller situation.
Craig Mailman
Great. Thanks Marshal.
Marshall Loeb
Sure. Thank you, Craig.
Operator
Our next question will come from Connor Mitchell with Piper Sandler. Please go ahead with your question.
Connor Mitchell
Hey good morning. Thanks for taking my question. I guess you guys have touched a good amount on development transaction markets. So, I just want to focus a little bit on any pressure on the tenants. So, you guys talked previously about a bankruptcy. So, I guess just one. Do you see any other issues with your tenants with some of the retailer struggles? And then as a follow-up, I'll include in this is, are you seeing any pressure on tenants due to banks pulling back on the credit?
Brent Wood
Yes. Hey Connor, good morning. This is Brent. Yes, we – pleasantly, I guess, the overall summary is we – our tenants continue to be very strong and not much payment issues. In the first quarter we did record $370,000 of bad debt. About two thirds of that was from one tenant from the situation we described and predominantly, most of that was the straight-line rent balance. And currently, we only have 12 active tenants on our allowance list. And just a reminder, we've got about 1,650 or so tenants. So that number is historically low. It's very low. All our top 10 tenants are current. So as far as the budget goes, we have 370 in the first quarter. So we just maintain that 500 a quarter, second, third, fourth and so it came down a little bit to 1.9. Hopefully, those numbers prove to be conservative. But as we saw in first quarter, you just get one tenant with a certain balance and that can get to a couple of hundred thousand dollars fairly quickly.
So, to answer your question, we've not seen tenants reach out to us or any banking issues or funding issues. We're not aware of any tenants that might have got called out in California with a couple of banks that had troubles there. So from a collections, and receivables and tenant stability standpoint, it continues to be a very resilient, very strong.
Connor Mitchell
Okay, that’s all from me. Thank you.
Brent Wood
Thank you.
Marshall Loeb
Thanks, Connor.
Operator
And our next question will come from Nick Thillman with Baird. Please go ahead with your question.
Nick Thillman
Hey good morning guys. Maybe I wanted to touch a little bit on same-store. Obviously, best performance in company history at 11%, but the guide kind of suggests a little bit of a slowdown, looks like there was some concession burn off in the first quarter, but just wondering if there's any lumpiness as we going through 2023 here and getting down to that 7% range.
Marshall Loeb
Nick good morning, it's Marshall. You're right. We're really happy with our quarter. I think part of our challenge and it's a great problem to have is as we move through the year, we're running up against better and better comps. So as we finished last year in 98s, it will still be moving forward. But really, we're not. This quarter, we picked up on rents and 80 basis points of occupancy. So, that 80 basis points occupancy gain will drift down lower during the course of the year. Again, we're glad we were able to raise our occupancy guide for the year. I think it's just coming up against harder comps. And hopefully, we'll – hopefully, we can continue to be.
Look, we're thrilled to be at 11%. I think the quarters going ahead will be a little bit higher mountains to beat, but we still are showing positive beats. And if our occupancy can hang in there, it has through the end of April. And so far, I've been the nervous one. I've been very nervous about the economy, given all the headlines for several months, but our day-to-day operations don't reflect that. And I hope I'm wrong for just eight more quarters of this year and will be good.
Nick Thillman
That's helpful. And then maybe one question just on your tenant base. Have you noticed any change in the amount of like investment tenants are making into their space recently?
Marshall Loeb
It does seem to be trending up and some of the some of it, you could say inflation and things like that. I think with hiring one thing we've noticed in Arizona and some of the Western markets is – and in Florida too, HVAC space that before you've had fans and things like that, but more air-conditioned space. And I think that's – and we've upped amenities at our parks and things like that, given the difficulty hiring. Tenants have probably made it more accommodating for their employees in our spaces.
And then I think they're always working and finding ways to improve just the efficiency of our buildings, the racking and things like that. And that's where I've always still hope over time, we'll pick up more retail distribution space just because our buildings are so much more efficient than order online, pick up at store option. I don't think the retail format has the physical structure we can offer retailers. So I think that mix will get – that will be another source of demand, but I think that's going to play out over – it started to, but play out over several more years, still.
Nick Thillman
That’s it from me. Thanks guys.
Marshall Loeb
You are welcome Nick.
Operator
Our next question will come from Jason Belcher with Wells Fargo. Please go ahead with your question.
Jason Belcher
Yes, hi good morning. Wondering if you could talk about any additional demand you are seeing from near-shoring or onshoring of manufacturing and production activity and which markets are seeing the biggest impact from those trends? And maybe how we should think about that evolving going forward?
Marshall Loeb
Okay. Happy to take a stab at it. We do talk about what we reading and seeing is kind of the China plus one manufacturing. And where we're seeing those benefits, as you would expect, are really Texas markets, El Paso has been a very strong market for us the past few years, probably the best three or four years in El Paso of the 20 years we've been there. San Diego, we've acquired several opportunities there over the last few years and fill those up quickly. So, we still like San Diego and then Arizona has been a good market.
We've been active in Phoenix, a little less so in Tucson, but we're 100% in those markets. So we like – that's where we're seeing the nearshoring Central Texas has seen a pickup in manufacturing. And some of it with Tesla and chip plants and things like that that have been built in Mesa, out in Phoenix and the same in Austin.
So, I mean we won't get the manufacturer, although I'm glad they're coming to our areas where we pick up, and we've even seen it in San Antonio is picking up the suppliers that are working with the plants that are getting built. So it's another source. I think it will play out over a number of years. I can't imagine the process when you think of where do we open another plant and does it go to India or Vietnam or do we go to Mexico with it and how that plays out.
And it's been interesting, some of the tours we've had especially I think of a couple in San Diego, where you've had the CEOs come tour the space and it tells me to go lease 80,000 or 100,000 feet, that's not something I would expect from a large company. But I'm thinking I'm over-analyzing it probably means a bigger supply chain decision and what are they doing in Tijuana or Juarez and how does that roll through their supply chain. So we're trying to pick up sites. We're actively looking in El Paso. We're full in San Diego and have some land in Phoenix to keep working on that. But I'm – again, as I mentioned, I'm glad that we've got several tailwinds that I think will play out at different philosophies over the next few years.
Jason Belcher
Thanks for all that color. That's helpful. And then just one more for me; if you could give us an update on what you're seeing in terms of materials and labor cost inflation. I noticed the price per square foot increase in your development starts guidance, maybe if you can just comment on the cost inflation front there?
Marshall Loeb
Yes. And I would say on our starts, if helpful, those are usually we'll have those specifically by project. And as they get moved around, sometimes you can get kind of a false positive where it's – we're going to build in Florida rather than Arizona and the price could be higher or lower. But thankfully, we've seen construction costs come down a little bit. The last couple of projects we bid out one in San Antonio, one in Phoenix, where the shell costs have come in a good maybe 5% to 10% where they would have been at the end of the year. So I'm hopeful with the drop in the construction starts, although there's a lot of infrastructure spending and things like that, that will see some pickup as the subcontractors get less busy and things like that.
We'll, and I think the other thing that's helping us too is like electrical panels and steel were so problematic to just get deliveries when the market was really hot, that we're seeing delivery times come down so we can get our buildings to market while it's good or a few months more quickly. And then hopefully the supply – the pricing drops we're seeing, well at least they flattened out thankfully after a few years of pretty heavy increases. And we've actually seen a couple of drops and things up, absent concrete that still seems to be a pretty expensive material and obviously we use an awful lot of it in our buildings.
Jason Belcher
Thanks a lot. That's all for me.
Marshall Loeb
You are welcome.
Operator
Our next question will come from Jessica Zheng with Green Street. Please go ahead with your question.
Jessica Zheng
Good morning. I'm curious to hear your view on how sensitive do you think the 3PL tenants are to overall import volumes. We've seen the import container volumes declined pretty significantly year-over-year in the first quarter. Has that driven any softness in 3PL demand at all?
Marshall Loeb
I think it certainly will in time, if you say within our portfolio, we've not really seen any movement within the 3PLs. And thankfully, the ones we have are like everyone is on long-term leases and things like that. There's a lot of consolidation within the 3PL world, and so far we've not had any issues of them wanting to buy out of their lease, give space back, things like that. I think over time, I have thought that 3PLs can be – they're one of the first tenants to expand rapidly when things are good, and they're also a pretty early tenant to contract. Obviously, it's not like their headquarters location and things like that, and they'll have multiple locations in a submarket. So, there as you – maybe as you pointed out there, they're pretty twitchy tenants. They'll move in one direction, one way or the other but knock on wood we have not really had any – too many – any abnormal amount of moving parts within our 3PL tenancy.
Jessica Zheng
Okay. Great. Thanks for the color.
Marshall Loeb
You are welcome.
Brent Wood
Thank you.
Operator
And our next question will come from Jeff Spector with Bank of America. Please go ahead with your question.
Jeff Spector
Great. Good morning. I just wanted to clarify, Marshall, your concerns over the recession. Is it more tied to kind of the economic forecast, like BofA calling for a recession since last year? Or have you actually seen anything or heard anything from tenants, anything that really is creating that concern on the recession?
Marshall Loeb
Good morning, Jeff, and yes you're right. I mean, I wasn't looking to blame it on the BofA economist, but...
Brent Wood
I mean I hear him taking full responsibility.
Marshall Loeb
But it really is more. We typically use the phrase with our own board at 5,000 feet, things feel pretty good. Like if we're in a recession, and we're 99% leased and raising rents 50% that feels good. And, but when I read the newspaper or watch TV, it feels like there's a lot of banks failing in the banks that have come through that are in our line and have called on us, there's a lot of anxiety out there. So it's a long-winded way of saying, no, it's more headline nervousness, paranoid trying to look around corners, which I think I felt like I should always be doing to some extent, but I don't want to do it to the point that we miss good opportunities. So it's headline anxiety. And then when I talk to the guys in the field, they look at me like I've got two heads because they're trying to find space for tenants and things like that.
Jeff Spector
Thank you. By the way I blame BofA econ all the time, so it's all good. And then second, I just wanted to confirm on your comments on possible opportunities, merchant builders, are you actually seeing anything today? Or again, this is the hope that if that may be down the line there's some distress and each group could take advantage?
Marshall Loeb
There's been a little bit in the sense that a couple of the land sites specifically that I can think that we bought late last year in Austin, we're moving parts. One was a newer merchant developer where they needed to do something and we acquired that. There's a couple of sites out West, Arizona, Las Vegas where we've seen where again, I think one, we passed on – just you'll hear the stories from the broker where they had the site, they had ordered one was the electrical equipment, another was the steel, and now they were scrambling trying to get their financial house in order, either do a joint venture or sell it things like that, and that's not something we have seen in the last few years.
The property we bought in Las Vegas, although there were other bidders, one of the things we really stressed to the tenant was our ability to close using our line of credit that we could move and close in a little over 30 days. And I do think without trying to violate our confidentiality agreement we were told we were not the highest bidder, but we were a certain path to closing, and so we were awarded the contract that way. So we've not seen a lot of distress. If it shows up, it may be more land opportunities, but we – and again, I think on acquisitions and I know I'm talking some of our peers, we have a lot of respect for Blake Baird, and the Torino team, they really think it's going to be a great acquisition environment.
And I want to believe, Blake, so we're trying to have some dry powder and be able when capital is going to be constrained and credit tightening and things like that. If we can have some dry powder, we'll either put it into our development pipeline where the demand is there or if we can find the right acquisitions it's something we hadn't looked at for a good two or three quarters. But we've really started sticking our toe in the water here in the last 60 days a little bit. If we can find some distressed opportunities and pricing in Las Vegas we think we were slightly below replacement cost on a newer building and got a development like yield. So we felt like something that would have been sub-four cap rate a year ago that if we can get close to the mid-6s on a GAAP return, that's a pretty good opportunity.
Jeff Spector
Okay. Great. Thank you.
Marshall Loeb
You are welcome.
Operator
And our next question will come from Ki Bin Kim with Truist. Please go ahead with your question.
Ki Bin Kim
Thanks. Good morning. I want to ask you a question about supply. I realize a new supply out there for shallow-bay product or smaller buildings is only a small slice of the 600 million-plus square feet of deliveries. But I'm curious if you look at that supply that's more comparable to your own product, how would you describe that level of supply in a historical context, just trying to gauge if it is getting tougher or easier that level of supply relative to your portfolio?
Marshall Loeb
I think if I'm answering in. Good morning, Ki Bin. We've seen and I'll use it Atlanta where, and I'm picking it really just the CBRE numbers were a little more granular than some of the other markets. They've talked about the average starts last year were 8 million square feet a quarter. First quarter was under 2 million, 1.7 million square feet, and then maybe a couple of other stats, they throughout in there what's under construction, I'm trying 88% of it is in buildings 200,000 feet and up. And so 200,000 feet is a pretty good size building, you're getting near the higher end for us.
Seven buildings that are over 1 million square feet or over, so we've always been, which I like. We've usually said 10% to 15% of what's in the pipeline is comparable product. I do think stepping back, a lot of our competition isn't – it is a local regional developer with an institutional partner in AEW, Nuveen, Clarion someone like that, and those merchant developers have been hit harder than the larger institutions. So it's just hard to know where your exit is and to raise that capital, be it debt or equity and the cost of that debt has certainly gone up a lot in the last year.
So I think, for example, per CBRE of starts have fallen from third quarter last year to first quarter this year, 45%. I would imagine it will be a pretty material decline from that. And second quarter, I think there's a bigger decline in shallow bay than there is in the overall market. And that's where after I talk about my anxiety and with Jeff Spector, I get excited about 2024. If we can hang on to our own tenancy where you're 98%, 99% and you get to the back half of this year and into 2024, our markets are pretty tight. We're pretty – we're full and there's no new supply that I'm hopeful it gives us some pre-lease development opportunities and abilities to push rents as well. I just hope – I hope that the flip side of that bank credit tightening and Brent spoke about it earlier is that our own tenants, thankfully, there's over 1,600 of them, I'm hopeful they make it through this credit tightening period as well.
Ki Bin Kim
Great. And you guys reported 48% of lease spreads this quarter. I'm just curious if you had any thoughts on what we should expect for the remainder of the year?
Marshall Loeb
And that was about where we ran fourth quarter, thankfully as well. Last year, we averaged about 40%. It feels like a pretty good run rate at this point unless things really slow down, and I like it's pretty spread out throughout our portfolio. The tech before it was California and California is still a strong market. Unfortunately, we don't, fortunately or unfortunately I think it was you that pointed out Ki Bin and to your credit, there's not a lot rolling which most years is a good thing and with rents rising like they are, I wish we had a little more role in California than we do, but thankfully, other markets have offset that. So I think that's a pretty good run rate. Hopefully, we can stay in the 40%, and we'll just – what I like of putting those quarters back to back to back, you're working your way deeper through the portfolio, and rents don't seem to be slowing down yet. That's the other nice thing in the market with the demand feels normalized, not for net like it was, but rents continue to grow in most all of our markets.
Ki Bin Kim
Okay. Thank you.
Marshall Loeb
Sure. You are welcome.
Operator
And our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead with your question.
Todd Thomas
Hi. Thanks. Good morning. I just wanted to; I guess follow on the discussion around leasing and pricing power a bit. Does the pace of development leading pick up over the next several quarters as we think about 2024, just given the decrease in starts that you're discussing for shallow bay? And should we expect the projected stabilized yields to continue moving higher?
Marshall Loeb
I'd like to think our yields will keep moving up. I mean, I don't think dramatically, but they'll keep creeping up rents are going up. And then hopefully, as we bid our projects, I'm optimistic the construction pricing will be flat to maybe slightly down; we'll see. And I would hope our development leasing, we underwrite it. We always have that it's one-year from shell completion to finish. We've been beating that the last several years, and we've had some success with early leasing on projects. If the economy stays where it is today, we'll continue that pattern, and then again, if I – if you said where is your concern, it's not so much on supply.
I see supply is upside in a couple of more quarters as the development pipeline empties out. It's really more tenant demand and if we're in a recession and how deep of a recession. But if things can just kind of stay where we're hovering around a recession, we have enough tailwinds to our last mile shallow bay Sunbelt markets, our development program. I always say we don't need a great economy; we just need an okay economy. If we can stay okay, then probably your thesis will hold up. We should get – we should be leasing fairly rapidly or kind of delivering like we did this quarter, 100% leased projects and getting good returns on those knock on wood.
Todd Thomas
Okay. And then second question, back to acquisitions. So the deal in Las Vegas for $34 million that you completed in April, it sounded like you achieved a premium yield something in the mid-6% range. Is that right? And are there any portfolios that you're tracking that could transact anything of size? And is there appetite to do something larger to the extent that something there are dislocations or something becomes available?
Marshall Loeb
Good question. You're right. That's an accurate description of Las Vegas where it was kind of that yield in the 6s and our building that was about five years old right off the freeway. So we're excited about it, and there's probably higher odds of that. There's – I think there's fewer portfolios in the market just because it's so hard to finance it. I mean I think there's so much dry powder but it doesn't feel like there's that many portfolio deals transacting. We've seen a few, and it always seems – we were excited to buy the Tulloch portfolio last year and that it fit us well, but it always seems like on the portfolio as we just looked at one recently and although the markets lined up well, the quality of the portfolio we're biased, but it wasn't nearly what our portfolio is.
So we passed on it, and there's always a couple of things that we're kicking tires and if we can find one and the big if to that, we were – I think we were happy to transact with the stock price and where that came out on Tulloch a year ago. On a larger transaction we would need a pretty good equity price to have that make sense as well and have it be accretive to our own FFO. So there's a few more hurdles and never say never, but those are – if acquisitions are difficult a portfolio acquisitions and even longer long shot. And look if we buy a building every once in a while, and we develop buildings each quarter, I'm perfectly happy to just kind of grow slow and steady that method without keeping our shareholders up at night. But if we – every once – once in a blue moon, we'll find a portfolio and if we do we'll try to move forward with it, but that would be the exception in the rule.
Todd Thomas
All right. Thank you.
Marshall Loeb
Sure. Thanks Todd.
Operator
And our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead with your question.
Michael Carroll
Yes. Thanks. Marshall, I wanted to touch on your comments about demand. I mean, obviously I think you've been highlighting, still pretty healthy. But how big of a pullback has there been compared to last year? I mean is there a noticeable slowdown in activity just off of those record levels to today? Or you've not really noticed it that much?
Marshall Loeb
The results are similar and where – what we hear in the field from our team is there for a while, it was the – I remember a tenant rep broker saying, this isn't fun being a tenant rep broker, I'll find a space and there's two or three other prospects for it that where you would have multiple showings for the same space and it felt frenetic and almost, and it was fun but in a scary way because it didn't feel sustainable where rents were going up, parabolic was one phrase someone used. Now it's more, there's one or two prospects, and it feels more of a manageable process than a scramble for space and or Amazon out running rapidly leasing up space and things like that, that this – it was fun but it didn't feel sustainable. This feels more of a normalized 2019 pre-COVID market. So we have prospects just not multiple, and again also in those days everybody was becoming an industrial developer. We've got it, it was like your Uber driver when they're giving you stock tips it's time to move your money to bonds or cash, I guess. But I think the number of active developers will slow – is slowing down or have slowed down rapidly in our markets, too. And I think that thankfully feels more sustainable.
Michael Carroll
Okay. And then also you talked about your development yields that you thought that they might start ticking higher. Is that just due to construction costs dropping? Or is that due to rents improving? And I guess, how does the whole financing costs kind of get included in that calculation? I mean, with interest rates where they are today. I mean has that pressured or reflected on your development yields at all?
Marshall Loeb
It does. Maybe I'll take the first time, rent the second. Yes, on the first part, I really do. I think we'll have some slight improvements from against where we underwrote it on our numerator and a little bit higher rents than where we originally thought. And then I think construction pricing. We've always done underwriting where we haven't projected rents. We'll use current market rents or ideally last rents on the building we built in that part. But those rents continue rising and maybe a little bit of a drop in construction pricing, too. So I think that's where we could pick up 10 to 30 basis points, hopefully, on our development yields, although they were strong last year, I think just what we're underwriting seems to creep up. And we have – because of the financing costs we have raised our target development yields.
And Brent, I'll let you how we look at this.
Brent Wood
Yes. As Marshall mentioned earlier, we had historically said or typically said we wanted that 150 basis point or so spread between our cost of capital and the yield we're getting in that think over time kind of got lost in the shuffle because we kind of got spoiled there. We had a period where we're basically doubling our money. We're building in a low to mid-6s and I said, call it, a mid-3 to high-3 cap environment. And that has tightened obviously with the increase of cost of capital, but we're still making what – again on a historical basis we'd call it good spread, call our cost of capital when you blend equity and the debt together maybe around 5 or somewhere in that area, equity cheaper debt a little more expensive than that. But as Marshall said, you're hitting that upper 6 to 7 range; it's still a good spread, still good opportunity. So we monitor it. It certainly gives you less wiggle room than you had when you had such a wide gap. But we're still in a position where it's very accretive and continues to be a good NAV creator for us.
Michael Carroll
Okay. Great. And thanks just if I can sneak in one more. That 150 spread, I mean, how close are we to that 150 level right now? I mean do you just need to get a development yield anywhere near a mid-6 and that's kind of, you can justify it?
Marshall Loeb
That's, I think that's reasonably – every market will be a little different, but I think a brand-new well-leased building, I think, you're going to get 5 or below. There's been – as I said, we've looked at acquisitions and we bought a building and some land. There are still people out there transacting and especially on the smaller assets and things like that. So if it were a building or two that we build, they would be buyers out there. I think we just saw like a four one transaction and as we underwrote at cap rate in Phoenix and some things like that. One in San Diego that we bid on is going to go ultimately price much higher than we thought that we had – where we were hoping. So I think a 5 still feels like a safe cap rate in spite of where debt yields are and it's really it's based on how much industrial rents are outpacing inflation probably compared to other property sectors.
Michael Carroll
Okay. Great. Thank you.
Marshall Loeb
You are welcome.
Operator
Our next question will come from Ronald Kamdem with Morgan Stanley. Please go ahead with your question.
Unidentified Analyst
Hello. Good morning guys. This is Timmy for Ronald Kamdem. Just a question on some of the Houston dispositions that we've seen kind of over the past couple of quarters. I thought that you had completed on this quarter. I think the pricing was a little under $100 a foot. Just curious if that's kind of the pricing we expect going forward for Houston asset sales for the remainder of the year and beyond or if that's kind of a one-off? Just curious how you guys are looking at that.
Marshall Loeb
Yes. I think that was a little more one-off. It was one of our earlier buildings in World Houston. It was a building for the tenant at the time. So there was some unusual features to that building. It had been as we try to manage our Houston size, we always kind of ask our team if the building were vacant, what would you want to exit. And this building had recently gone vacant, and as we were re-leasing it we said, all right, we've got a nice gain here. It's work. We got a good yield on the initial development, and we'd like to keep developing in Houston. So if we can develop to a 7 and rounding and sell to a 5 or below, we like that model. So it needed a fair amount of work to re-tenant it and we thought that was a good time to exit that. But I think you would expect – I would expect more of our dispositions to still be north of $100 a foot and this was a little bit of a tenant-specific building that we had built in 15, 20 years ago.
Unidentified Analyst
Great. And then just a follow-up. The portfolio is obviously around 99% occupied today. Maybe just historically when you see that level of vacancy, where is market rent growth typically been? And just on that question, like what do you expect for the remainder of the year for market rent growth? You talked about slowing starts. So just curious about the outlook for that?
Marshall Loeb
Yes. I would think probably a wider range; maybe call it 7% to 12%, 15% rent growth market year-over-year for the balance of the year. And at 99%, I guess, Brent and I both have been an industrial, probably more years than we both want to add-up just because it wouldn't make us feel old. But I never thought you'd see rent growth that we've had in industrial the last several quarters. But at 99%, I remember the rule of thumb early on someone told me anytime vacancy is below 10%. It's a landlord market and above 10% becomes a tenant market. And I think that I do suspect that vacancies will pick up nationally. It sounds like, again most of that will be big box, just where deliveries will be this year.
But I think we'll continue to have rent growth and especially on our product type, I think will be hopefully sheltered from a lot of that supply as it comes out of the pipeline. So I hope we kind of can continue on the path we're on and where we are probably every once a while each market is a little different, where you'll see some that might drift one way or the other in a quarter, it will just be more on the mix. But I think all in all we were last year. We're off to a heavy start this year at – I'm quoting GAAP numbers because that gets the rent – the free rent and the rent bumps in there as well, where we've been able to increase the rent bumps to last few years kind of where it was a 2.5%, 3% market to now a 3.5%, 4-plus market, depending which market you're in.
Unidentified Analyst
Great. Thank you, guys.
Marshall Loeb
Sure. Welcome.
Operator
And our next question here will come from Vikram Malhotra with Mizuho. Please go ahead with your question.
Vikram Malhotra
Thanks for taking the questions. I just wanted to clarify some of the comments and you talked about the rent spreads and maybe I did not hear, so sorry if I'm repeating. Just first on market rent growth you talked about the GAAP rent spreads, but can you just talk about where you see market rent growth across maybe the top two or three markets playing out in 2023. And then just specifically, I think there were some comments around Miami, I'm just wondering if you were to sort of – you talked about normalization. If you were to sort of rank your markets, Miami, parts of Texas, California, where are you seeing the most rapid normalization where are you still seeing sort of trends above the 2022 levels? Thank you.
Marshall Loeb
Okay. In rent growth, and again my crystal ball, if it were as accurate as I wish it was. I'd be happy to take you to my island type thing. But we're thinking, I don't mean to be too core, but high single digits, mid-teens level, I think, kind of overall within our markets. I think Miami, we've got a specific vacancy kind of the Weston submarket, so Southwest Broward County that we'll get backfill, but that market is a strong market, and we feel – we'd love to find some other opportunities in South Florida still.
Our best markets and I've talked about Austin, the Central Florida markets still awfully strong, Dallas is a strong market, Phoenix, and people talk about supply in Phoenix, and I agree the numbers are big, but we're 100% leased in Phoenix and have had strong rent growth there. The California, the Bay Area, L.A., Orange County, San Diego were good markets. I like our geographic diversity, that's something we spend a lot of time working on our tenant diversity and our geographic diversity to try to make it as much a bulletproof portfolio as you can in the real world type thing.
So our – before we would have definitely said California are our best markets, and they're still good but we're seeing California type growth the last, call it, 18, 24 months and leased in terms of rents, in the major Texas markets, Dallas, Austin, El Paso even and then in Central Florida, Atlanta, Charlotte some of those markets as well.
Vikram Malhotra
Thanks. So just to clarify, I guess you're saying you would have said California is the strongest, but are you saying there's a bit of a reversion where California is strong, but maybe normalizing faster. And then just to clarify, if you're seeing on average 10% market rent growth, wouldn't your cash rent spreads accelerate through the year from the Q1 levels?
Marshall Loeb
They would. I guess, it will depend on the mix of just how old the lease is that's rolling. But you're right overall. They should and hopefully, pick up, and California isn't a bad market. We've seen a little bit of slowdown in the Bay Area, and I think part of that is every tech company has laid people off it. I say that, we've got two vacancies we're working on in the Bay Area, and we'll get those backfilled. The California markets that they used to be more standout markets to us, but some of the other markets have caught up with California.
Vikram Malhotra
Okay. Thank you.
Marshall Loeb
Welcome.
Operator
And this concludes the question-and-answer session. I'd like to turn the conference back over to Marshall Loeb for any closing remarks.
Marshall Loeb
Thank you. Thank you, everyone, for your time this morning. We appreciate your interest in EastGroup. If we didn't get to your question or you have some follow-up questions, Brent and I are certainly available and we look forward to seeing many of you at Nareit here in just over a month. Thank you.
Brent Wood
Thank you.
Operator
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.
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