Eastgroup Properties Inc (EGP) 2021 Q4 法說會逐字稿

Good day, and welcome to the EastGroup Properties Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our Fourth Quarter 2021 Conference Call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.

Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today, and we undertake no duty to update them whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic that may cause actual results to differ materially. We refer to certain of these risks in our SEC filings.

Good morning, and thank you for your time. I'll start by thanking our team for a great quarter and year. They continue performing at a high level and capitalizing on a very positive environment. Our fourth quarter results were strong and demonstrate the quality of our portfolio and the strength of the industrial market.

Some of the results the team produced include funds from operations coming in above guidance, up 17% for the quarter and 13% for the year, well ahead of our initial forecast. This marks 35 consecutive quarters of higher FFO per share as compared to prior year quarter, truly a long-term trend.

Our quarterly occupancy averaged 97.3%, up 40 basis points from fourth quarter 2020. And at year-end, we're ahead of projections at 98.7% leased and 97.4% occupied. Our occupancy is benefiting from a healthy market with accelerating e-commerce and last-mile delivery trends.

Quarterly re-leasing spreads were 31.5% GAAP and 18% cash. Similarly, for the year, those results were at a record pace of 31.2% GAAP and 18.4% cash. And finally, cash same-store NOI rose a healthy 6.4% for the quarter and 5.7% for the full year. In summary, I'm proud of our team's results, creating arguably the best year in our history.

So now on to 2022. Today, we're responding to strengthen the market and demand for industrial product by both users and investors by focusing on value creation via development and value-add investments. I'm grateful we ended the quarter at 98.7% leased, one of our highest quarters on record. And to demonstrate the market strength, our last 5 quarters marked the highest 5 quarterly rates in the company's history.

Looking at Houston, we're 95.9% leased, and Houston is projected to represent under 11% of 2022's NOI total, falling 130 basis points from 2021.

I'm happy to finish the quarter at $1.62 per share in FFO and the year at $6.09 per share, up $0.06 from our most recent annual guidance. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with the top 10 tenants only accounting for 7.6% of rents. Brent will speak to our 2022 guidance, which I'm pleased is to a midpoint of $6.63 per share, up roughly 9% from 2021's record level.

As we've stated before, our development starts are pulled by market demand. Based on the market strength we're seeing, we're forecasting 2022 starts of $250 million. We plan to closely monitor leasing results along the way and expect to update our starts guidance throughout the year. To position us for this market demand, we've acquired several new sites with more in our pipeline, along with value-add and direct investments. More details to follow as we close on each of these opportunities.

Brent will now review a variety of financial topics, including our 2021 results and introduce our 2022 guidance.

Good morning. Our fourth 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 fourth quarter exceeded our guidance range at $1.62 per share and compared to fourth quarter 2020 of $1.38, represented an increase of 17.4%. The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth.

From a capital perspective, during the fourth quarter, we issued $120 million of equity at an average price of $205 per share. And in October, we repaid a maturing $33 million mortgage loan that had a rate of 4.1%. After year-end, we agreed to terms on the private placement of $150 million of senior unsecured notes with a fixed interest rate of 3.03% and a 10-year term. We expect to issue and fund these notes in April.

Also after year-end, we agreed to terms on a $100 million senior unsecured term loan with a total effective fixed interest rate of 3.06% and 6.5-year term. The loan is expected to close on March 31. That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength and flexibility.

Our debt to total market capitalization was a record low 13%. And for the year, our debt-to-EBITDA ratio finished at 5.2x, and our interest and fixed charge coverage ratio was 8.5x. Our rent collections have been equally strong.

Bad debt for the year was a net positive $475,000 as tenants whose balances were previously reserved came current, exceeding new tenant reserves. This trend continues to exemplify the stability, credit strength and diversity of our tenant base.

The dynamic growth of our earnings as well as exhausting a prior tax accounting change benefit, pushed us to increase the dividend for a second time during the year from $0.90 to $1.10 per share, an increase of 22%. We anticipate that the rate of our dividend increase will normalize in 2022.

Looking forward, FFO guidance for the first quarter of 2022 is estimated to be in the range of $1.59 to $1.65 per share and $6.56 to $6.70 per share for the year. 2022 FFO per share midpoint represents a 9% increase over 2021. Among the notable assumptions that comprise our 2022 guidance include: an average occupancy midpoint of 97%; cash same-property midpoint of 5.6%; bad debt of $1.5 million; operating and value-add acquisitions of $76 million, offset by $70 million in dispositions, issuing $375 million in unsecured debt, which will be offset by $75 million of debt repayment; and common stock issuances of $120 million.

As Marshall mentioned, our projected development starts are $250 million, which is down from $341 million in 2021. However, recall that last year's amount includes $90 million for a large build-to-suit in San Diego. Our 2022 start guidance does not include any unknown build-to-suits that might occur through the course of the year.

In summary, we are very pleased with our record-setting 2021 results. As we turn the page to 2022, we will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to maintain our momentum.

Now Marshall will make some final comments.

Thanks, Brent. In closing, I'm excited about the year we just completed. We're now carrying that momentum into 2022. Our company, our team and our strategy are working well, as evidenced by the results posted, and it's the future that has me excited for EastGroup. Our strategy has worked well the past few years, and now we're seeing an acceleration in a number of positive trends for our properties and within our markets.

Meanwhile, our bread-and-butter traditional tenants remain and we'll continue needing last-mile distribution space in fast-growing Sunbelt markets. These, along with the mix of our team, our operating strategy and our markets has us optimistic about the future.

And now we'd like to open up the floor for questions.

(Operator Instructions) Our first question comes from Alexander Goldfarb from Piper Sandler.

So the first question is on the supply chain. Now we have truckers part of the fund and the headlines. But between the ports, factories trying to catch up with orders, shipping and all this stuff, what are your tenants saying as far as when they see the normalization of the supply chain? Because obviously, it's been great for you guys for demand and certainly the just-in-case type conversion on distribution thoughts. So just trying to see how much longer you guys think that will be in this tight supply market?

Alex, it's Marshall. It's -- I guess maybe I'll preface it with a positive with, we have about 1,600 tenants, and (inaudible) a little over 7.5% of our NOI. So that's a pretty low number (inaudible) a wide range of tenants. So maybe with that preface or caveat, I think there's probably a mix of answers. But you're right, whether it's the truckers or backlogs at the port or just pure warehouse workers or the warehouses closed and kind of hiring shortages, I think by and large, most people or our tenants are feeling like the demand is there today and feel optimistic about their business. But we -- I really don't, as we order building materials ourselves and then dealing with our tenants, I think we'll go through 2022 before the supply chain.

There may be improvements during the year, but it will still be kind of a mess. And I think the other kind of help for all the industrial REITs that will participate in as people get moved to more safety stock or a vertical just-in-case inventory and to date, I think there are a number of tenants who would like to do that, but the best description I've heard is someone called it a pipe dream that most of our tenants or most people are out there scrambling to meet current demand, much less where demand is going.

And at least the charts and things you see and read, it looks like the inventory to sales ratios are still pretty historically low. So we think -- I guess, the good news, if you think of, as I or we think about it is we're pretty full, we're pushing rents, it's hard to deliver new product and people still are scrambling to add more inventory. So we -- at least in terms of our planning for this year, and we'll adjust it as best we can on the fly, we think there's going to be more demand than supply and people will be scrambling to meet that growing demand. And it probably won't change until next year.

Okay. And then maybe as a follow-up to that, Marshall. You guys, every year, you say we were -- we got lucky last year. Last year was an amazing year. This year is going to be tough. And I think we're now going on -- I lost count how many years that you guys have beat and raised. The story that you're laying out is still pretty similar to last year, really strong demand, the external environment remains tough, but you guys seem to find a way. It doesn't seem like you have any pushback on pricing, and the capital markets are favorable for you on the financing side.

So what truly gives you pause versus you guys just say, "Hey, we're 97%, maybe it's tougher to exceed from there." But Brent made the point about the dividend going back to a normalized growth level and yet everything that you guys have described on this call speaks to a still robust abnormally superior growth environment.

Yes. No, A fair question. I guess I'd say one, it probably speaks to management or my personality to a great degree. (inaudible) last time I've been to a casino, it's been a while. So I'm trying to be a little bit -- I'll confess to being a little bit conservative. And I hope you -- I'd love for you to be able to say I told you so later in '22 that we were conservative.

You're right, at 97% average occupancy, if we just met our budget, that would be our second highest year in the company's history, second to last year, which was 97.1%. So I don't -- hopefully, we'll get -- maybe we could go a little better on the rent increases, but that will probably benefit 2024 in later years, more depending on when that lease expires. This year, it's probably more the external environment is where I felt like and probably twofold. One, if given the supply chain shortage and the tightness in the market, hopefully, if we get ahead, we're seeing more activity earlier on developments. For spec developments, we usually -- kind of, our rule of thumb is once you tilt the walls, then the tenant rep brokers start to take your delivery dates more seriously and the activity picks up.

But given the tightness in the market, we've seen more activity earlier in our development pipeline. So that gives me some -- or I guess, hope rather than pause. And then hopefully, we can find some acquisitions out there, but we didn't want to kind of it's not in our nature, put some big acquisition targets in our budget and then feel like you have to go meet them because I'd rather look if something makes sense. You're right, the capital markets are attractive and we'll acquire it. But if we go a number of months, and there's really nothing that makes sense to us and as competitive of environment as I've ever seen it to acquire good industrial properties, we're okay being patient sitting on our hands in that regard, too.

The next question comes from Elvis Rodriguez from Bank of America.

Congrats on another good year. Just following up on the external front, Marshall, you bought a piece of property in San Diego, the Siempre Viva, value-add deals, 65% leased. Why would a developer sell this, given how strong the leasing market is? And what opportunities do you see out there to do more of these type of transactions?

Okay. On this one, it's -- the Siempre Viva, you may remember, we own -- in separate transactions, we bought Siempre Viva I, then II. And kind of in last year, early in the year, we had 40 acres that we were really had outlined and worked with the architects who're going to build a business park. And then Amazon came along, and thankfully -- and they said, we'll take all 40 acres. So that's our speed distribution center that's under construction, and we hope to deliver in late first quarter.

And then since then, we've been looking for additional land for opportunities or some (inaudible) value-add opportunity with vacancy. This is -- I guess, without naming them, I don't want to violate our confidentiality, large pension plan, it kind of reached the life of their hold period. They still own buildings in this park and in this submarket. They had a -- they had bought it with the way the market had run, they had a good profit on this investment and had a large tenant, a 200 -- it was 250,000 foot tenant go bankrupt. It's right along the border with Mexico. We're near the border crossing what we liked about it. and they're building a new, better technology, high-speed border crossing that's under construction.

So we're really right there between the 2 border crossings and really building up our presence. It's the same developer, local developer that built this park. So I think it really hit their [hold] period for the pension fund, the state pension plan that owned it. They had a good profit in spite of the vacancy. It was -- as we were bidding on it, it was 50% leased. Kind of during due diligence, we were able to get a 3PL, a tenant in, and so we've got it at about 65% leased today and good activity, and we'll -- as I view it, almost like an assembly line, we'll finish this project up and then find that next opportunity in San Diego.

We like the proximity to the border, if you think long term, that there'll be maybe more nearshoring for manufacturing. It will take years, but leaving China and coming to Mexico and then with the move in San Diego more to life science and creative office, a lot of the traditional office in the center of San Diego is becoming more lab space. So the traditional industrial users are getting pushed south towards the border as well. So we really like the kind of the geographic dynamics of this location. It's a longer answer than you were seeking, but that was what attracted us to this one.

And maybe one from Brent. What's the impact from higher borrowing rates that you're seeing today relative to 2021 in the future? How should we be thinking about capital allocation with rising rates for EastGroup?

Yes. It's something we're keeping an eye on. You saw us act pretty quickly early in the year here, locking in, as we disclosed, $250 million between 2 loans and locked that in at just a shade over 3%, which we were frankly pretty satisfied with. I think that will insulate us some from early part of the year.

Also, we only have one maturing mortgage. It comes up here in a couple of months or at the end of this month, and that rate is over 4%. So again, we're retiring one at a higher rate than I think we'll anticipate incurring. So it's like, we've kept an eye on both lanes. So we are very active on the ATM with equity in the fourth quarter. We really like the pricing.

Again, we've started the early part of the year with placing some of our debt early with anticipation the rates go up. But over time, as we move out, if rates do rise, I mean, that will be part of the environment. But historically speaking, they're still very attractive. And when you compare, whether it's 3%, if that grows to 3.5% or whatever the number turns out to be, when you look at our ability to continue to put money out, especially on the development side at that mid-6% to 7% range, it's not -- we want to make as big a spread as we can. But it's not, I guess, I would say, stressing the yield spread there.

So we'll continue to play both sides. We have a very conservative balance sheet. We've intentionally put ourselves in a position to where if the markets were to turn such on the equity side that would have plenty of runway on the debt side. And you'll -- if both are attractive, which we view it now, you'll probably see us continue to play both sides.

And just to squeeze one more from Marshall. Any read-throughs on what could potentially happen to cap rates?

Yes. To date, we've not seen any -- with the debt market moving up, have not seen any movement in cap rates. I don't -- it's hard to say they're falling, but they probably are slightly or really maybe the biggest difference, say, over 12 months is the differentiation between cap rates that we used to. Maybe outside of Dallas, L.A., Atlanta, there'd be a little bit higher cap rate and Phoenix or Las Vegas, Denver, Charlotte, but those secondary markets are just as intensely competitive and the pricing on those assets are -- it's really not much different than it is in Southern California.

They're just -- still seems to be this wall of capital out there that likes -- and us included that like -- and it's well-located, well-designed industrial product, and we've kind of learned the hard way. Having a checkbook is not a competitive advantage in the bidding process that there's a lot of folks out there with a lot of dry powder trying to buy industrial, and this is more hypothetical. But until people get more comfortable underwriting office buildings and work from home and maybe retail and hotels and things like that, it feels more and more crowded in the industrial space or new competitors arriving every month depending on which market we're talking about.

The next question comes from Craig Mailman from KeyBanc Capital Markets.

Marshall, I just wanted to touch on your commentary about e-commerce. We all know it's extremely strong and definitely the demand is broadening out beyond Amazon. But just kind of curious, this is a tenant that's coming to your market more recently, and the CFO was recently saying they're going to moderate their appetite for industrial. I'm just kind of curious what your thoughts are on that? And whether you see anything on that?

Yes. I guess I'm not -- thanks. I'm not as -- for me -- I don't know the tenant specifically. But in general, we still think whether it's e-commerce or delivery, a number of our buildings get used for delivery. And I think there'll be more and more shifts away from -- you won't close your traditional brick-and-mortar, but you'll have omnichannel retail where it can be, here's our class, our A prototype retail store and the A retail property in town or maybe 2 in town, and you'll have more curbside pickup is where we'd love to go, and we're aware of a couple of tenants that have moved to that within our properties or at least designated those or showrooms in our property that we see, especially like the Ferguson Plumbing, Daltile, Emser Tile and some of those kind of home improvements.

So I think, as one of our directors described it when COVID hit, it demystified e-commerce for a large portion of the population. It's continuing to grow. And I think with Amazon's dramatic growth over the last couple of years, if you and I were at a retailer, we would have to be thinking of how do I shorten my delivery times and keep up with Amazon or they're going to take my market share depending on what where you fit in, but Amazon seems to be getting into about every -- whether it's pharmaceuticals or this or that, about every different type of business, which I think puts more logistics pressure on all the other retailers in time kind of to keep up with Amazon's growth.

So it kind of -- your feeling is even if Amazon kind of pulls back, there's plenty of demand behind them from competitors that you shouldn't see a big fall off?

Yes. I think -- and I'm an optimist, but I think so or telling me, I guess I thought if Amazon has just dramatic amounts of square footage that they've gobbled up. If you're at Lowe's, Home Depot, Best Buy, RH, you name -- Arhaus, you name the retailer or online mattresses and things like that, we see pharmaceuticals getting pushed more and more online as a way to manage cost within our buildings.

I think all those folks would have to just -- if you're from just a business strategy, you have to find ways to meet Amazon delivery-wise. And so many people realize it's so easy and convenient to order online versus driving and especially during COVID and which wave we're in versus traditional brick-and-mortar. And I don't think brick-and-mortar will ever go away. I think it's a social activity, but I think it continues to grow and capture a bigger and bigger piece of the retail buying.

Okay. That's helpful. Then just on development, you guys -- what you started subsequent to year-end, you're kind of already 1/3 of the way to your development start guidance. As you look at the runway, you mentioned you had a big development last year, but do you guys feel like you can close the gap relative to what you did in '21? And then just also on the yield side, I know you guys get asked all the time, yields are kind of sticky in that high 6% range despite inflation and higher land costs. I mean do you feel like the market rent growth aspect of things could continue to keep yields up in that area?

Maybe -- yes, I guess it's 2 thoughts. One, I hope so. I mean we'll go with -- usually kind of our motto is always (inaudible), but we'll go as fast as the market leases our buildings. And then last year went quickly -- I think as one of your peers pointed out, we started the year at -- it just shows how bad I am forecasting, at $205 million in starts and finished at $340 million. And we did have that $90 million seed pre-lease move the needle, obviously, a lot. I hope -- look, I hope the market is as strong as we're thinking it will be and that leasing activity picks up on our developments and that we can beat the $250 million.

So I'd like to think -- as you said, we started a lot this quarter. We're seeing good activity within our leasing, a good movement from last quarter to this quarter as you kind of compare the percent leased. So hopefully, there's upside there.

And then on the development yields, we'll -- our underwriting, we'll use today's construction cost and really today's rental rates because it gets to be a slippery slope if we start projecting where rents will be when we deliver the building. So as we underwrite them, we have seen some degradation in returns. But then by the time, 6, 8 months when we deliver the building and the team starts leasing them up, we have been able to catch up.

And yes, and I guess what hit me, if you look within our supplement, what we pulled out of the development pipeline, it was 17 projects last year, about $280 million. And we were able, and thanks to the team, to average a 7.2% yield. And I think it's unreasonable, you could say a 3.6% market cap rate, just because I can do the math on that. So it really doubles the value of what we pulled out of the pipeline.

So to me, if you say that's 100% profit margin even if we get pulled backwards on some of those yields, if we earn a 70%, 75% value-creation factor, I think that's a great return. And the trick is we'll go as fast as we can. We could start more. It's really more, how fast do they lease up? And then as you saw in fourth quarter, we're trying hard to find whether it's vacancy and value-adds where we can find space near term, while the demand is there and/or find land sites as much competition is out there and the growth we're seeing demand from industrial tenants with record absorptions in about all of our markets, how can we find land that we can pencil and make sense of?

So yes, we're -- we like the value creation component, especially when kind of core leased assets are extremely competitive to bid on. So we're -- that's an awful lot of our focus. Yes, and hopefully, we can hang in there with those yields even with prices going up. We'll do our best. Hopefully, rent can help keep offsetting those increases.

The next question comes from Manny Korchman from Citi.

It's Chris McCurry on with Manny. I was wondering if you could comment on onshoring trends and specifically the impact of labor cost inflation and just hiring shortages on any of these conversations?

Yes. I think a good question. We see a -- it's hard to even call it onshoring. Probably where we've been more effective is, we do see a number of tenant relocations from California to Arizona and Nevada, Texas. We've seen more of that or relocations into the state of Florida. So we definitely see the population growth.

Onshoring, I actually -- as we've talked about it, given the labor shortage and the cost of labor, we feel better about nearshoring maybe that people will -- it will take a while. We'll move plants to Juarez where we're -- where we have a presence in El Paso or building or we talked about South San Diego to Tijuana or even Nogales, Mexico, which is near our kind of our Tucson properties as well as our Phoenix.

So I think longer term, I think with trade tensions with China that even were started before COVID, and the supply chain issues of getting your properties in, we feel we're optimistic longer term about nearshoring. I think that would take a while to close a plant somewhere else and move it into Mexico.

And I think that would be -- would seem to me to be -- and with the preface of what do I know, but would seem more attractive than opening, you'll see some manufacturing, and we certainly see that in Atlanta or in Dallas, but there it's just so competitive for workers and things like that. It's probably a little more difficult, I would imagine, than moving if you're a Home Depot, your supplier to Mexico from China.

Got it. Just one more for me, and I guess it kind of builds off that. But with some of those nearshoring conversations and just like supply chain issues in general, are those impacting any real estate decisions for some of your auto and home building tenants? Or have you seen any long-term or near-term change in trends with those 2 categories?

A little bit of study. I mean -- and maybe give me a month, and this probably speaks more to one of our prospects we're working with and things where they are touring and focused a little bit on nearshoring and their logistics. So we have kind of worked our way. It's kind of interesting timing, just a conversation this week from within their real estate team and even their CEO is out touring some of the assets now. So we're seeing some of that.

We have -- like we did lease a building to a German automotive company in Atlanta within probably 8, 9 months ago. So we're seeing some movement like that. Within homebuilding, we're definitely seeing that activity pick up, and that's probably more just, I guess, in my mind, a function of the housing demand in places like Florida and Georgia and Arizona in place where we are seeing those type tenants definitely pick up. We just -- one of the buildings in Fort Myers was just leased to a Canadian company that serves the homebuilding industry. And we -- it's kind of the other, as an aside, interesting trend we've seen.

We build our same multi-tenant buildings, but we've seen more and more in the last year where a single tenant will come along. And even though we've designed it to be able to multi-tenant build the building, they'll take the entire building. And that's really the other factor that helps -- obviously helps speed up our development pipeline as we'll move to the next building in the park as quickly as we can.

(Operator Instructions) Our next question comes from Samir Khanal from Evercore ISI.

I guess my question is around the guidance of sort of 5.5% at the midpoint for NOI, which is similar to what you did in '21. Considering how strong demand is and all the rent growth you hear about, I would have thought that would have been a little bit higher. Just trying to figure out, are there any sort of headwinds we need to think about or contemplate to get you kind of the midpoint or even the low end here, which is the 5.1%? And I guess I'm trying to see how much conservatism you're baking in here.

This is Brent. I'll jump in there. Our midpoint of guidance is 97%. As Marshall mentioned, that would be our second highest year on record if we even just meet that. That equates to, as you mentioned, a 5.6% same-store midpoint. Most of that, obviously, occupancy being at that level, your occupancy increases, basically, we're not baking into being really a component or part of same-store growth. So then you're really heavily leaning into the [run] rate increase side, which again has been very good for us, the low 30% gap and very, very high teens cash.

And so we're projecting -- I guess what I would say we're projecting similar record type results, but we hope that we can build off those in terms of higher increases. But we'll see as the year plays out, where February of the year. And so that's where we're at, at this point. But really, it's maybe trickier than you think when you're early into a year and you start looking at all the assumptions, our guys in the field go space by space on the rollovers and vacancies, looking at rental rates.

Certainly, if rental rate growth power continues to grow during the year, that could give us some more room to push there and to beat. So again, at the midpoint, it's what factors into our FFO midpoint of guidance. And so we'll see. I would say we probably leaned a little more conservative into our development or spec leasing into the overall budget, maybe more so than the operating side.

The next question comes from Vince Tibone from Green Street Advisors.

Could you discuss the supply landscape for shallow-bay product in your markets? Are there any regions or metros where supply is potentially becoming a concern?

It's Marshall. We've -- I'm really not. I mean there is some supply. For the most part, if you asked me if we were building a model or something, a rule of thumb is we'll typically say where there's -- and I'll pick up a market with a lot. I'm just looking at my Dallas numbers, where Dallas has 55 million under construction, which is probably going to be close to a record. But last year, absorption was 40 million square feet, and over 60% of that is in South Dallas and North Fort Worth where we're not. And probably what would be shallow-bay is probably usually our team estimates 10% to 15% of the total market supply.

So again, maybe for me, as I use a rule of thumb, it's usually about that amount or again, as I'm kind of looking at my market numbers and this one, I even, I'll credit it, hesitate to repeat. But in CBRE's numbers for Atlanta at the end of the year, there's a little over 35 million square feet under construction. And of that, they designate 76,000 square feet of shallow-bay.

So I mean it is just -- that's minimal. There's more competition than -- yes, again, I think 10% is better than the 76,000. I like that number. And there's always -- the tenants always seem to have an option, but if we were starting a development company and I'm biased, maybe it's a grass is greener, it would be easier for you and I, I'll stick with Atlanta to go to South Atlanta, find a site and build an 800,000-foot building and put more capital to work because so many of our peers are bigger or even if you're a local regional developer, your promotes are better, building an 800,000-foot building than a 120,000-foot multi-tenant building.

So that's where we see so much of the competition. And I can't fault them. I say that because those buildings are getting leased and it's working for them, it's just not kind of where we fit on the playground. So we really try to pace it more into demand than -- and there's always an option, but it's usually a local regional developer with a building here or there. There's just not that much shallow-bay supply. I hate to say that out loud on a public earnings call. But it seems to be so much of our competition really falls more into bulkier big-box buildings.

No, that's really helpful because this is what you said in the past. I just find it interesting that especially given the profit margins, EastGroup's developed that in recent years that maybe more people aren't pursuing a similar strategy, but it makes sense on the -- yes, just kind of the different points you laid out. So that's really helpful.

I think part if it helps too, Vince, or just for you to get what we -- one reason we think because we have that same conversation internally, it's awfully hard to find those good infill land sites and you're figuring out how to kind of [Rubik's Cube] a handful of buildings to build our parks, and it takes longer to go through zoning and entitlement and things when they're infill versus the edge of town.

So thankfully, with the REIT model, we can spend a few years like the Charlotte land that we closed, I think we had it under contract for about 1.5 years before we closed it and worked our way through it. So that's just a different model than a lot of the private developers that we thankfully can have the luxury of patience and work on a lot of these sites for, it feels to me like an iceberg that we're working on it, working on it and then you'll all see it when we finally close on it.

The next question comes from Jason Idoine from RBC.

Quick question on the disposition front. So you guys had your first and only disposition of the year in the fourth quarter and then started the year with another disposition. So I guess my question is, what led to the determination to prune these properties from the portfolio? And what are some of the common characteristics that you're looking at when you decide kind of maybe where you can maximize value?

Sure. Jason, good question. The one in Tampa, we acquired it in the '90s is well located, but a lot of small tenants, some of the projects, smaller buildings, smaller tenants, nonsprinkler. So we had it, kind of as we work to, in my mind, it's almost like a batting order. And there, we were, knock on wood, that the team did a good job. We were able to get a little under a 4% cap rate on it for going on a 40-year-old project or maybe just over 40 years.

The property in Phoenix, we -- originally, we thought we were going to have it closed last year. We had to switch fires. The brokers did a good job. We had a backup buyer and it drifted into the first week of this year. But similar and then it's one of our few service centers. We bought it in a portfolio in the '90s, and it was right at a 4% cap, too. And kind of to give you an idea as mentioned the demand out there for industrial product.

I would have put both of those in the 6% -- I'm looking at Brent, as I say it, 6% to 7% cap rates, may be 18, 24 months, and we were able to get 4% caps or just below that on both of those. We've got another small service center out on the market today in South Florida, knock on wood. And then as we kind of -- we'll develop and create the value in Houston, we've got another project in Houston. And so anything that's got a little more office component a little bit more age, I think it's one of our really responsibilities to always going to be pruning our portfolio and typically, we'll ask the team if -- Jason, if you came in, in the morning and you got an e-mail or a call telling you one of your tenants just went bankrupt, what building do you hope that's not in? And that really gives us our disposition list.

And so hopefully, we'll -- it's a form of capital. We like the equity markets and the debt markets, but if we can sell things and if we can sell at a 4% in Tampa and develop into the 6s to maybe even 7% and well into that, we like that model on, and that's really what we've been doing in Houston the last couple of years is we think there's some development opportunities, we closed on some land there, but also sell in the 3s to 4s, if we can kind of keep that model.

Okay. Yes. No, that makes sense. And then touching on Houston, I know on the last call, you guys mentioned that you expected that exposure to drop further. And I guess I was just trying to put some rails around that. So is that from selling assets? Or is that more just from growth in other markets?

A little of both. I mean mostly, predominantly, it's been growth and rising rents in other markets. We still like Houston. We have a good team there, fifth largest city in the country and the value creation, but we're under contract, knock on wood with a Houston asset presently looking at something else. So we'll kind of tread water in Houston a little bit while the other markets where we're under allocated continue to grow.

And thankfully, this year, as we were looking at our kind of projected NOI, it's fallen below 11%. So it continues to just drift lower and lower, and we won't -- certainly won't exit Houston, but we like a geographically diversified portfolio, and we've gotten too heavy being north of 20%, a handful of years ago, and I'm glad we're under 11% this year.

Okay. And then with all the change in the energy markets, I guess, are you seeing any changes in the underlying key drivers in Houston? Are you seeing some of that excess supply maybe get absorbed more quickly or any changes on that front?

Houston, it has -- I guess they had, like a lot of markets, record absorption last year. It was 28 million square feet, which is a big number. There's about a little over 18 million square feet in Houston under construction that's 40% leased. So the market definitely has improved over the last 2 years. Houston is probably better today than it has been at any point in the last couple or 3 years.

We were asking the same thing with oil getting to $90 a barrel and maybe there's just so much uncertainty in that industry, we're not -- we're feeling demand in Houston, but not -- I don't believe increased demand from oil and gas companies there. It's more the tenants we see in other markets.

And as an aside, and we're not seeing that in Houston, but seeing it in some other markets, we are seeing energy-related tenants, but they're more green energy related, where it's a tenant -- one's converts buses from gas to electric, someone making electric batteries and things like that. So we are seeing energy-related tenants, they're green energy related, and they're -- and oddly enough or maybe not, they're in markets like Phoenix and Greenville, South Carolina and Atlanta, they're not in Houston.

The next question comes from [Amit Nihalani] from Mizuho.

Are you guys able to comment on your bad debt reserve for your 2022 guidance? I know back in 2019, you had mentioned you were signing a number of leases with Peloton.

Yes. This is Brent. I guess, 2 parts to that. One, as far as our bad debt guidance of $1.5 million, obviously, in 2021, we had just really an anomaly year, I would call it. We had actually bad debt recovery of $475,000. So just a reminder, when we entered last year or looking back at a year ago, we had a little deeper reserve allowance at that point, not knowing exactly how everything was going to pay out, play out, hard to think. But a year ago, we're still shy of a vaccine.

So this year, our allowance as the years played out, have come down. So we're not entering this year. For example, last year, we had 26 tenants included in the total reserve. This year, entering January, we only have 12 tenants. So I don't think there's going to be nearly as much reversal of bad debt to potentially offset bad debt.

So we look more of a -- from a historical perspective, the $1.5 billion represents 0.33 of 1% of our revenue, which is a trend track record that we've looked at our historical average. Do I hope we beat that? Yes. But when you start talking about 1,600, 1,700 tenants, depending on what size of what tenant may happen, maybe what their straight-line balance is, that type of thing. Again, we're going to enter the year looking more at our past and dialing all of that in rather than just a very quick glimpse.

In terms of Peloton, we have -- I know in South Florida, we leased space to them and maybe another market or 2. But I mean, they're current -- we've had no issues there. And obviously, they've been in the news some lately, but they're not a top 10 tenant. And it sounds like at the end of the day, that credit could, if anything, maybe get enhanced if something were to potentially happen there. But they're something that you see in the news but nothing thankfully that's been anything we've had to deal with specifically.

Great. And just where would you guys like your Houston exposure to be ideally?

Yes, certainly under 11%. It will -- just the reality, it will probably continue to drift down. We said it's 10%, a little under 10%. My goal is -- would always be to have runway in any market in case you do find that kind of aah aah opportunity. And I think we do it under 11% unless we bought something huge there, but it will probably continue to, and I think, over the next year or 2 continue to drift down, and you'll probably see it below 10% here in another 12 to 18 months.

The next question comes from Ronald Kamdem from Morgan Stanley.

(inaudible) on for Ronald Kamdem. Can you just talk a little bit about the guidance reflecting conservative assumptions with the speculative leasing? Just maybe you could provide some color on the type of leasing you're expecting with the current development pipeline, how that compares to 2021 levels? I'm just thinking about 2021. And how the same-store guidance was roughly in line with FFO ultimately came in?

Yes, you're referencing a comment I made earlier. It's just a general assumption where we have a fair amount of our development income (inaudible) budget already covered via existing and prior leasing. Leases, there are a lot of leases that aren't in same-store. You would have to been an asset effective January 1 of '21 to be in the same-store mix for this coming year. So we have a lot in that interim period. So a lot of that income is covered.

But from an operating standpoint, we've got 97% or 98% occupancy, as you're analyzing the rent roll and the rollovers, obviously, it's -- if you can run a 75% or so tenant retention, that's a little easier to guide and project, whereas our development, just the nature of it is pretty much speculative oriented for the most part. And so in those cases, just by virtue of the definition of being spec, we don't have tenants in hand. So the timing of those and then once you sign them, how quickly you might be able to get the permit done, get it built out, get the tenant placed, get the lease started. So that side of things can be, just by its nature, trickier to project.

And so like I said, we tend not to get, I guess, what I would say, aggressive with those writing -- with those assumptions and what that difference might be, it would be hard to tell just because of, again, delivery times and those type things. But again, we have both sides, both on upside on both operating and in development. And as you saw in the guidance, too, even on acquisitions, we're basically showing acquisitions and dispositions being pretty much a wash. So anything that we might could acquire, which again, as you sit here today, nothing under contract, but you never know, and that would be incrementally positive, too, especially if that were to occur earlier in the year.

The next question is a follow-up from Elvis Rodriguez from Bank of America. .

Just a quick follow-up on mark-to-market for the entire portfolio. Are you able to share on a GAAP and cash basis?

Yes. Not very well and not accurately. A number of our peers do that, and we've said it's just having -- thankfully, having seen other sectors, it's easier to do in office, easier to do in retail than it is industrial because whether it's an end-cap space or it's air-conditioned, things like that.

That said, mark-to-market, we've seen in our GAAP numbers and our annual numbers were low 20s. I think it was 22% in '19 -- or 2020, 31% in 2021. And I would -- some of it will be the mix. We had a lot of big leases where we're able to capitalize on some larger increases last year. But certainly would feel comfortable in the 20s this year on a GAAP basis, I would suspect. Maybe if we can get back to 30%, that would be -- I think, the rent pressures there, maybe the mix of leases rolling.

And then on a cash basis, we're probably in the teens on the mark-to-market, and we certainly are seeing what's also helping those GAAP numbers in more and more of our markets where the annual increase used to be 2.5% to 3%. And now we're moving to 3s to 4s in a number of our markets. So that will help those GAAP -- that's obviously helping those GAAP rent increases, too.

So I think they're certainly there. They're a little bit tricky to predict. And in any quarter, it will depend on the mix that rolls. But I would think we'll be back in the upper teens on a cash basis and in the 20s to maybe a 30% if we push things. And I hope I'm conservative on that this year in terms of rent increases.

And just one more. While you made a good statement, a good point there on the new leases having higher rental bumps. Can you talk about that? What percentage of the leases are above 3% today? And where are you seeing your ability to sort of get to that 4% across markets?

Yes. I think the ability -- we're really -- I guess the good news is we're -- we could push for 4%, but you really need it in the market. And so I think given the tightness in the market, we're seeing our peers do that. So you're -- you are seeing that more and more. And it's really not a -- that's probably shifted by market within the last 12 to 18 months. So we haven't implemented -- been able to implement.

We typically roll about 14%, 15% of our portfolio in a given year. And given that the market's just gotten to that in the last 12 months, we still have a lot of runway to go on increasing rents. And I think given where we think the supply chain issues or we've kind of internally said where we struggle to get roofing materials and steel and everything else delivered and it takes longer and is more expensive than it historically has, that's tricky for, call it, the 2.5 million square feet we're trying to build at any given time, but that's great news for the 50-plus million square feet that we own.

So I think that will continue to keep those 4% bumps being the market everywhere, and we'll be able to bump rents when they roll and get that higher increase. And that's why we like GAAP rent numbers. The other thing we're seeing shrink is the free rent period. Usually, tenants will say if I move, I've got moving costs and this and that. And so you can get a look -- we still see some of it, some free rent in there, but there's downward pressure on free rent in the market as well.

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Marshall Loeb for any closing remarks.

Okay. Thank you. Again, we appreciate everybody's time. Thanks for your interest in EastGroup. Hopefully, it feels like we're getting near the point in the year, we'll actually be able to see some people in person, and we look forward to that. And in the meantime, we're certainly available for any follow-up questions. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.