EastGroup Properties, Inc. (EGP) CEO Marshall Loeb on Q4 2021 Results – Earnings Call Transcript

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EastGroup Properties, Inc. (NYSE:EGP) Q4 2021 Earnings Conference Call February 9, 2022 11:00 AM ET

Company Participants

Marshall Loeb – President, Chief Executive Officer

Brent Wood – Chief Financial Officer

Keena Frazier – Director of Leasing Statistics

Conference Call Participants

Alexander Goldfarb – Piper Sandler

Elvis Rodriguez – Bank of America

Craig Mailman – KeyBanc Capital Markets

Christopher McCurry – Citi

Samir Khanal – Evercore ISI

Vince Tibone – Green Street Advisors

Jason Idoine – RBC

Amit Nihalani – Mizuho

Ronald Camden – Morgan Stanley

Operator

Good day and welcome to the EastGroup Properties Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. 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.

Marshall Loeb

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.

Keena Frazier

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.

Brent Wood

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 releasing 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 five quarters marked the highest 5-quarterly rates in the company’s history.

Marshall Loeb

Looking at Houston, we’re 95.9% leased and Houston is projected to represent under 11% of 2022s 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 2020 once 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.

Brent Wood

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 out performance 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 the total effective fixed interest rate of 3.06% and six and a half year term.

The loan is expected to close on March 31st. That activity combined with our already strong and conservative balance sheet, has kept us in a position of financial strength flexibility. Our debt to total market capitalization was a record low 13%. And for the year, our debt-to-EBITDA ratio finished at 5.2 times, and our interest and fixed charge coverage ratio was 8.5 times. 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 the 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 assumption 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 issuance’s of a $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-a-suit in San Diego. Our 2022 start guidance does not include any unknown build-a-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.

Marshall Loeb

Thanks, Brent. And closing. I’m excited about the year we just completed. We are 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 will continue needing last-mile distribution space and fast-growing Sunbelt markets. These along with the mix of our team, our operating strategy, and our market has us optimistic about the future. And now we’d like to open up the floor for questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions] If you’re using a speakerphone, please pick up your handset before pressing the keys. [Operator Instructions] Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we’ll pause momentarily to assemble our roster. Our first question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.

Alexander Goldfarb

Hey. Good morning down there. So first question is in — is on the supply chain. Now we have truckers part of the — part of the funds and the headlines but between the ports, factories trying to catch up with orders, plus shipping and all this stuff. What are your accountants 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 adjusting 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?

Marshall Loeb

Hey Alex, good morning. It’s Marshall. I guess maybe I’ll preface it with a positive — we have about 1,600 tenants and they’re of a little over 7.5% of our NOI. So that’s a pretty low number. So just a wide range of tenants. So maybe with that preface or caveat, I think there’s a probably a mix of answers, but you’re right whether it’s the trackers or backlogs and support, or just pure warehouse workers or the warehouse is closed and hiring shortages. I think by and large, most people are our tenants are feeling like the demand is there today and feel optimistic about their business. But we’ve — I really don’t as we older 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’ll still be kind of a math. And I think the other kind of help for all the industrial rates that will participate and his people that move to more safety stock or a vertical just in case inventory. And today, 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 in 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 — the higher 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 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 and supply and people will be scrambling to meet that growing demand. And it probably won’t change until next year.

Alexander Goldfarb

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 been 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 push-back on pricing. And the capital markets are favored — are favorable for you on financing side. So what truly gives you pause versus you guys just say, hey, we’re 97%, maybe it’s tougher to — 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.

Marshall Loeb

First question, I guess I wanted, it probably speaks to management or my personality to a great degree. You can just conservative. Last time I’ve been to a casino; it’s been a while so a little bit concerned. 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 can go a little better on the rent increases, but that will probably benefit 2024 and later years more than — depending on when that lease expires. This year, it’s probably more of 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 — 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 fixed up. But given the tightness in the market, we’ve seen more activity earlier in our development pipeline, so that gives me some, I guess, hope rather than pulse and then hopefully we can find some acquisitions out there, but we didn’t want to as dire 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 will acquire it. But if we go a number of months and there’s really nothing that makes sense to us and our — its competitive 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.

Alexander Goldfarb

Okay. Thank you.

Marshall Loeb

You’re welcome.

Operator

The next question comes from Elvis Rodriguez from Bank of America. Please go ahead.

Elvis Rodriguez

Good morning, guys and congrats on another good year. Just following up on the external front, Marshall, you bought a piece of property in San Diego, the CME per Veeva value-add deal, 65% leased. Why would a developer sell this given how strong the leasing and leasing market is and what opportunities do you see out there to do more of these types of transactions?

Marshall Loeb

Good morning, Elvis, and thanks. On this one, it’s the Siempre Viva. You may remember we own — in separate transactions, we’ve got Siempre Viva I and then II. And last year, earlier in the year, we had 40 acres that we were — really had outlined and worked with the architects, we were 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 value-add opportunity with vacancy. This is of — I guess without naming them, I want to violate our confidentiality, large pension plan. It reached the life of their whole 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 provinces. The same local developers that built this parks. So I think it really hit their whole period for the pension fund, the state mentioned plans and owned it. They had a good profit in spite of the vacancy.

As we were bidding on it, it was 50% lays 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 like I saw 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 to — the proximity to the border, if you think long term, that they’ll be maybe more. Near shoring for manufacturing that 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 and the center of San Diego is becoming more lab space. So the traditional industrial users are getting pushed out towards the border as well. So we really liked the kind of geographic dynamics of this location. A longer answer than you were seeking. But that was what attracted us to this one.

Elvis Rodriguez

Thank you. And maybe one from Brent. What — 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? Thank you.

Brent Wood

Yes. Good morning, Elvis. Something we’re keeping an eye on. You saw us act pretty quickly earlier in the year here locking in, as we disclosed $250 million between two loans and lock that in it just a shade over 3% which we were frankly pretty satisfied with. I think that will insulate 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 rates over 4%. Again, we’re retiring one at a higher rate than I think we’ll anticipate incurring. It’s like we kept an eye on both lanes, so we’re very active on the ATM with equity in fourth quarter, we really like the pricing. Again, we’ve started early part in 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, that’ll 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 six to seven range. It’s not — we want to make as bigger 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 on the equity side that would have plenty of runway on the debt side. If both are attractive, which we view it now you’ll probably see us continue to play both sides.

Elvis Rodriguez

And just to squeeze one more from Marshall, any read throughs on what could potentially happen a cap rates?

Marshall Loeb

To date, we’ve not seen anything. 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 as the differentiation between cap rates, that we used to maybe outside of a 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 intensively competitive and the pricing on those assets are — it’s really not much different than it is in Southern California.

That they’re just still seems to be this Wall of Capital out there that likes, and us included, that like — 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 than the industrial space or new competitors arriving remarks depending on which market we’re talking about.

Elvis Rodriguez

Thank you.

Marshall Loeb

Sure.

Operator

The next question comes from Craig Mailman from KeyBanc Capital Markets. Please go ahead.

Craig Mailman

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 curious. This is a tenant debt that’s come in to your market more recently and the CFO was recently saying they’re going to moderate their appetite for industrial. I’m just curious what your thoughts are on that, whether you’ve seen anything on that?

Marshall Loeb

Yeah, I guess I’m not — think I’m not as — 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 will be more and more shifts away from — you want closure traditional brick-and-mortar but you will have Omni -channel retail or it can be here’s our class, our prototype retail store, and a retail property in town, or maybe two in town and you will 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, Dal-Tile, Enser Tile, some of those home improvements.

So I think is 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 the 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 to keep up with Amazon’s growth.

Brent Wood

So it — your feeling is, even if Amazon pulls back, there’s plenty of demand behind them from competitors that you shouldn’t see a big falloff, okay. I’m an optimistic. But I think so. Or tell me, I guess I’m sorry with 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 — Our House. You named the retailer or online mattresses and things like that. Will we see Pharmaceuticals getting push more and more online as a way to manage costs within our buildings? I think all those folks would have to adjust. If you’re from just a business strategy, 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 pie.

Craig Mailman

Okay. That’s helpful, then just on development, you guys what you started subsequent to year-end, you’re 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 you can close the gap relative to what you did in ’21 and then just also on the yields. And I know you guys get asked all time. Yields are sticky in that high 6% range despite inflation higher land costs. Do you feel like the market rent growth aspect of things could continue to keep yields up at that area?

Brent Wood

Maybe, yeah I guess it’s 2001 — I hope so. We’ll go, as usually kind of our amount has always internally, we’ll go as fast as the market leases our buildings. And then last year went quickly, I think is one of your peers pointed out we started the year. It just shows how bad I am at forecasting. At $205 million in starts and finished at $340 million. And we did have that $90 million Speed pre-leased moved and then they’d obviously, a lot. I hope — look, I hope the markets are strong, as we are thinking it will be. And that leasing activity picks up on our developments and that we can beat the $250 million.

So I would like to think, as you said, we started a lot this quarter. We’re seeing good activity within our leasing in a good movement from last quarter to this quarter as you compare the percent lease. So hopefully there’s upside there. And then on the development yields, our underwriting will 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 and returns, but then by the time — six, eight months when we deliver the building and the team starts leasing them off, we have been able to catch up. 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 at 7.2% yield, and I think it’s unreasonable, you could say at 3, 6 market cap rate and just because that 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 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’s there after we find the land sites as much competition is out there. And the growth we’re seeing, demand from industrial tenants. Record absorption’s and about all of our markets. How can we find land that we can pencil and makes 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. And hopefully we can hang in there with those yields even with prices going up, we will do our best. Hopefully rent can help keep offsetting those increases.

Craig Mailman

Great. Thanks.

Brent Wood

You’re welcome.

Operator

The next question comes from Manny Korchman from Citi. Please go ahead.

Christopher McCurry

Hey, it’s Chris McCurry with Manny. I was wondering if you could comment on — on-shoring trends and specifically the impact of labor cost, inflation, and just hiring shortages on any of these conversations?

Marshall Loeb

Yes. I think a good question. We see a — it’s hard to even call it on-shoring probably where we’ve been more effective is, we do see a number of tenant relocations from California to Arizona, Nevada, Texas. We’ve seen more of that, relocations into the state of Florida. So we definitely see the population growth. On-shoring, I actually — is we’ve talked about it, given the labor shortage and the cost of labor, we feel better about near-shoring maybe that people will — it’ll take a while, we’ll move plants to Juarez where we have a presence in El Paso, we’re 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 near-shoring. I think that would take a while to close the plant somewhere else and move it into Mexico. And I think that would seem to me to be and what the preface of what do I know. But we’ve seen more attractive than opening — you’ll see some manufacturing and when we certainly see that in Atlanta or 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 Home Depot, your supplier to Mexico from China.

Christopher McCurry

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

Marshall Loeb

A little bit of strategy. I mean, and maybe give me a month and it just probably speaks more to one of our prospects we’re working with and things, where they are touring and focused a little bit on near shoring and their logistics. So we’ve 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 — we did lease a building to a German automotive company in Atlanta within — it’s probably eight, nine months ago. So we’re seeing some movement like that within home building.

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, and place — we are seeing those tight tenants definitely pick up. We just — one of the buildings in Fort Myers was just leads to a Canadian company that serves the home building industry and we’ve got 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 building, they’ll take the entire building and that’s really the other factor that help — obviously, helps speed up our development pipeline is we’ll move to the next building in the park as quickly as we can.

Christopher McCurry

Got it. Thank you.

Marshall Loeb

Sure. You’re welcome, Chris.

Operator

[Operator Instructions] Our next question comes from Samir Khanal from Evercore ISI. Please go ahead

Samir Khanal

Hey, Marshall. Good morning here. I guess my question is around the guidance sort of 55 at the midpoint for NOI, which is similar to what you did in ’21. But considering how strong demand is and all the rent growth you hear about, I would’ve thought that would’ve been a little bit higher. Just trying to figure out, are there any headwinds we need to think about or contemplate to get you the midpoint or even the low end here, which is the 51? And I guess I’m trying to see how much conservatism you’re baking in here. Thanks.

Brent Wood

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, 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 rental rate increase that which again, it’s been a very good for us. The low 30% GAAP and very high tins cash. And so we’re projecting similar — I guess, what I would say, we are projecting similar record type results, but we hope that we can build off those in terms of higher increases.

But we will see if the year plays out. We’re — February of the year. And so that’s where we’re 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, or guys in the field go space by space on a 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, it’s a midpoint, it’s what factors into our FFO mid-point of guidance. And so we’ll see, I would say we’ve probably leaned a little more conservative into our development or spec leasing into the overall budget, maybe more so than the operating side.

Samir Khanal

That’s it from me, guys. Thanks.

Brent Wood

Thanks.

Marshall Loeb

Thank you.

Operator

The next question comes from Vince Tibone from Green Street Advisors. Please go ahead.

Vince Tibone

Hi. Good morning. Could you discuss the supplier landscape for shallow bay products in your markets? Are there any regions or metros where supply is potentially becoming a concern?

Marshall Loeb

Hey, Vince, good morning. It’s Marshall. We — I’m really not. I mean, there is some supplies. For the most part, if you ask me if we were building a model or something, a rule of thumb is we’ll typically say where there’s — I’ll pick over market with a lot. I’m just looking at my Dallas numbers, where Dallas has 55 million under construction, which has probably got to be close to a record, but last year absorptions was 40 million square feet, and over 60% of that’s 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, for me as I use a rule of thumb, it’s usually about that amount or, again, as I’m looking at my market numbers and that’s when I’ll credit it, hesitate to repeat, but if CVR is 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, 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 the highest, maybe if the grass is greener, it would be easier for you and 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 promoters are better. Building an 800,000 foot building than a 120,000-foot multi-tenant buildings. So that’s where we see so much of the competition. And I’m — I can’t fall to my — I say that because those buildings are getting leased and it’s working for them, it’s just not 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 base 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.

Vince Tibone

That’s really helpful and [Indiscernible] what you said in the past, I just find it interesting that especially given the profit margins, East Group’s develop that in recent years that maybe more people aren’t pursuing a similar strategy, but it makes sense on the — it’s a different point you laid out. So that’s really helpful.

Marshall Loeb

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 almost Rubik’s cube a handful of buildings to build on 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 remodel, we can spend a few years, like the Charlotte land that we closed, I think we had it under contract for about a year-and-a-half 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 it can have the luxury of patients and work on a lot of these sides for — feels to me like an iceberg that we’re working on it, working on it, and then you all see it when we finally close on it.

Vince Tibone

Got it. That’s all helpful. Commentary. Thank you.

Marshall Loeb

Thank you. You’re welcome.

Brent Wood

Thanks Vince.

Operator

The next question comes from Jason Idoine from RBC. Please go ahead.

Jason Idoine

Hey, good morning guys. Quick question on the disposition of funds. So you guys had your first normally disposition of the year in the fourth quarter and then started the year with another dispositions. 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 maybe where you’ve maximized value?

Marshall Loeb

Jason, good question. The one in Tampa we had acquired it in the ’90s, is well located, but a lot of small tenants. Some of the projects, smaller building, smaller tenants, non-sprinkler. So we had it — as we worked in my mind it’s almost like a batting order, and there we were at knock on wood that the team did a good job, we were able to get a little under of 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’re going to have it closed last year. We had to switch buyers, 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 four-cap too.

And as I’ve — to give you an idea, as I’ve mentioned, the demand out there for industrial product. I would’ve put both of those in the six — I’m looking at Brent as I say it, 6% to 7% cap rates, maybe 18, 24 months and we were able to get four 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 be pruning our portfolio and typically we’ll ask the team if — Jason, if you came in in the morning and you got an email or 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 settle things and content — and if we can sell at a four in Tampa and develop into the sixes to maybe even a seven and drill into that really liked that model lot and that’s really what we’ve been doing in Houston in the last couple of years as we think there’s some development opportunities, we closed on some land there, but also sell in the threes to fours if we can keep that model.

Jason Idoine

Okay. 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?

Marshall Loeb

A little of both. I mean, [Indiscernible] — predominantly, it’s been growth and rising rents and other markets. We still like Houston. We have a good team there, fifth largest city in the country in the value creation, but we’re under contract, knock on wood where the Houston asset presently looking at something else. So we’ll tread water in Houston a little bit while the other markets where we’re under allocated continue to grow. And thankfully this year was — as we were looking at our projected NOI s, it’s fallen below 11%. So it continues to drift lower and lower and we won’t — certainly want to 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.

Jason Idoine

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?

Marshall Loeb

Houston, yes, if it has — I guess they had a lot of markets, record absorption last year 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% lease. So the market definitely has improved over the last two years. Houston is probably better today than it has been at any point in the last couple of three years, and 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 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 — once 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 in oddly enough or maybe is not they are in markets like Phoenix and Greenville, South Carolina, and Atlanta. They are not in Houston.

Jason Idoine

Okay. Thank you.

Marshall Loeb

Sure.

Operator

The next question comes from Amit Nihalani, from Mizuho. Please go ahead.

Amit Nihalani

Good morning. Are you guys able to comment on your bad debt reserve — bad debt reserve in for your ’22 — for your 2022 guidance? I know back in 2019, you had mentioned you’re signing a number of leases with Peloton?

Brent Wood

Yeah. Good morning. This is Brent. I guess two parts to that: 1. As far as our bad debt guidance of $1.5 million. Obviously, in 2021 we had this really an anomaly year, I would call it. We had an 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 were still shy of a vaccine. So this year, our allowance as the years played out has 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 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 or historical average. Do I hope we beat that, yes, but when you start talking about 1600, 1700 tenants, depending what size of what tenant may have then maybe what their straight-line balance is, that type 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, I know in South Florida we leased space to them and maybe another market or two. But there current — we’ve had no issues there and obviously, they’ve been in new some lately, but they’re not a top ten tenant. And it sounds like at the end of the day, that credit could, if anything, maybe get enhanced if something will potentially happen there, but they are trusting that you see in the news but nothing thankfully that’s been anything we’ve had to deal with specifically.

Amit Nihalani

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

Brent Wood

Yeah, certainly under 11, it’ll probably — just the reality, I will probably continue to drift down. We’ve said, let’s — 10% — our low launder 10%. My goal is — would always be to have runway in any market in case you do find that kind of [Indiscernible] opportunity. And I think we do it under 11%. Unless, we bought something huge there. But, it will probably continue to — I think over the next year or two, continue to drift down and you’ll probably see it below 10% here in another 12 to 18 months.

Amit Nihalani

Great. Thank you.

Brent Wood

You’re welcome.

Operator

The next question comes from Ronald Camden, from Morgan Stanley. Please go ahead.

Ronald Camden

Yeah, it’s me [Indiscernible] for Ron Camden. Keena talked a little 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 the 2021 levels. I’m just thinking about 2021 and how the same-store guidance was roughly in line but FFO ultimately came in ahead.

Brent Wood

Yeah. You are referencing a comment I made earlier, and it’s just a general assumption where we have a fair amount of our development income is down into the budget already covered the existing and prior leasing leases. There are a lot of leases that aren’t in same-store. You would have 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 incomes covered, but from an operating standpoint where you’ve got 97% or 98% occupancy as you’re analyzing the rent roll in the rollovers, obviously it’s — if we can run at 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 being spec, we don’t have tenants in hand. 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 in place, get the lease started, so that side of things can be just by its nature trickier to project, and so like that we tend not to get I guess what I would say aggressive with those riding with those assumptions, and what that difference might be, it’d be hard to tell just because of, again, delivery times and those type things. But again, we have both sides built on upside on both operating and in development. And if 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 said 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.

Ronald Camden

Yeah, that makes sense.

Operator

The next question is a follow-up from Elvis Rodriguez, from Bank of America. Please go ahead.

Elvis Rodriguez

Hey guys, just a quick follow-up on mark-to-market for the entire portfolio, are you able to share on a GAAP and cash basis? Thank you.

Brent Wood

Not very well and not accurately. We don’t know what 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 than in retail than it is industrial because where there’s an endcap space or it’s air-conditioned, things like that. That said, mark to market, we’ve seen our GAAP numbers in — our annual numbers were low 20s and 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 big — 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’re certainly are seeing what’s also helping those GAAP numbers and more and more around markets where the annual increase used to be 2.5% to 3%. Now, we’re moving to threes to fours, and a number of our markets. So that will help this GAAP. That’s obviously helping those GAAP rent increases too. So I think there are 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-end upper teens on a cash basis and 20’a to maybe a 30 if we get if we push things and I hope I’m conservative on that. This year in terms of rent increases.

Marshall

It’s Marshall and just one more where 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 what are you seeing, your ability to sort of get to that 4% across markets?

Brent Wood

I think the ability we’re really — I guess the good news is we’re — we could push for 4% if 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 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 been able to — 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 long on increasing rents. And I think given where we think the supply chain issues are, we’ve internally said where we struggled 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 lot — we still teach some of it some free rent in there, but there’s downward pressure on free rent in the market as well.

Marshall

Great. Thank you.

Brent Wood

You’re welcome.

Operator

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

Marshall Loeb

Thank you. Again, we appreciate everybody’s time. Thanks for your interest at EastGroup. Hopefully we’re — it feels like we’re getting near the point in the year where 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.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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