EastGroup Properties - Q2 2023
July 26, 2023
Transcript
Operator (participant)
Good day, welcome to the EastGroup Properties Second Quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on your touchtone phone. To withdraw your question, please press Star, then two. 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 (President and CEO)
Good morning. Thanks for calling in for our second quarter 2023 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call, and since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Speaker 16
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 reflect our current views about the company's plans, intentions, expectations, strategies, and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events, or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings, including our most recent annual report on Form 10-K for more detail about these risks.
Marshall Loeb (President and CEO)
Thanks, Keena. Good morning. I'll start by thanking our team for a strong first half of the year. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our second quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance, up 11% for the quarter and 10% year-to-date. For over 10 years now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year. Truly a long-term growth trend. Quarterly occupancy averaged 98.1%, which was consistent with second quarter of 2022, and quarter end occupancy of 98.2% is up 30 basis points from March 31st.
Quarterly releasing spreads reached a record at approximately 53% GAAP and 38% cash, with these results pushing year-to-date spreads to 51% GAAP and 35% cash. Cash same store NOI came in up 6.4% for the quarter and 8.7% year-to-date. Finally, I'm happy to finish the quarter with FFO rising to $1.91 per share. Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top 10 tenants falling to 8.3% of rents, down 50 basis points from second quarter of 2022, and in more locations. In summary, I'm proud of our start of the year. Statistically, it was one of the best quarters on record, all with continued recession concerns.
We're responding to strength in the market and user demand for industrial product by focusing on value creation, via raising rents and new development. This market strength is what allowed us to end the quarter 98.5% lease, average over 98% occupied, and continue pushing rents through a wider and wider geography. As we've stated before, our development starts are pulled by market demands within our park. Based on our read-through, we're forecasting 2023 starts of $360 million. While our developments continue leasing up, we're closely watching demand with the goal of a balanced, fluid response, pending what the economy allows. What's promising to see is the decrease in industrial starts, primarily due to capital market volatility and credit tightening.
Starts have fallen three consecutive quarters, with second quarter 2023 being almost 50% lower than third quarter 2022. Assuming reasonably steady demand, turning into 2024, the markets will tighten, allowing us to continue pushing rents and create earlier development opportunities. Given the capital market volatility, we've taken a measured approach towards transactions since mid-2022. That said, when we find the right strategic opportunities, we pursue them. We're seeing these windows mainly on the development side and being strategically opportunistic on core investment opportunities. Brent will now speak to several topics, including assumptions within our updated 2023 guidance.
Brent Wood (CFO)
Good morning. Our second quarter results reflect the terrific execution of our team, strong overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the upper end of our guidance range at $1.91 per share, compared to $1.72 for the same quarter last year. $0.02 of second quarter FFO was attributable to an involuntary conversion gain, recognized as the result of roof replacements that were damaged in a hurricane. Excluding the gain, FFO per share was at the upper end of our guidance range at $1.89 per share, an increase of 10% over the same quarter last year. The outperformance continues to be driven by stellar operating portfolio results and the success of our development program. From a capital perspective, the strengthening in our stock price continued to provide the opportunity to access the equity markets.
During the quarter, we sold shares for gross proceeds of $165 million at an average price of $169.72 per share. During this period of elevated interest rates, equity proceeds remain our most attractive capital source. In our updated guidance for the year, we increased our stock issuances assumption from $180 million to $475 million, $300 million of which is complete, and removed any unsecured debt assumption. As a reminder, the company does not have any variable rate debt other than the revolver facilities, and our near-term maturity schedule is light, with only $50 million scheduled to mature through July 2024. Although capital markets are fluid, our balance sheet remains flexible and strong with healthy financial metrics. Our debt to total market capitalization was 18%.
Unadjusted debt to EBITDA ratio is down to 4.4x, and our interest and fixed charge coverage ratio increased to 7.8x. Looking forward, FFO guidance for the third quarter of 2023 is estimated to be in the range of $1.87-$1.93 per share, and $7.58-$7.68 for the year, a $0.08 per share increase over our prior guidance. Those midpoints represent increases of 7.3% and 9% compared to the prior year, respectively. Revised guidance produces a same-store growth midpoint of 7.3% for the year, an increase of 30 basis points from last quarter's guidance. We also increased the midpoint of our average occupancy by 10 basis points to 97.8%.
This is the result of outperforming our budget expectations in the second quarter, along with continued optimism for the remainder of the year. In closing, we were pleased with our second quarter results and are well positioned entering the latter half of the year. As we have in both good and uncertain times in the past, we were relying on our financial strength, the experience of our team, and the quality and location of our portfolio to lead us into the future. Now, Marshall will make final comments.
Marshall Loeb (President and CEO)
Thanks, Brent. In closing, I'm proud of the results our team created. We're carrying that momentum forward. Internally, operations remain historically strong, and we're constantly working to strengthen the balance sheet. Externally, the capital markets and the overall environment remain clouded. While never fun to experience, this is leading to a marked decline in development starts. In the meantime, we're working to maintain high occupancies while pushing rents. Longer term, I'll remain excited for EastGroup's future. There are several long-term, positive secular trends occurring within last mile, shallow bay distribution space in Sunbelt markets that will play out over years, such as population migration, evolving logistics change, on-shoring, near-shoring, et cetera, which we're well positioned for. We'll now open up the call for your questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Also, please limit yourself to two questions. The first question comes from Craig Mailman with Citi. Please go ahead.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Yeah. Nick Joseph here with Craig. Marshall, you touched on what's happening in the overall industrial construction market, in terms of new starts coming down, obviously from recent peaks pretty materially. How are you thinking about your own new development starts and underwriting them, just given current construction costs and also what you're seeing on the demand side today?
Marshall Loeb (President and CEO)
Good morning. Thanks, Nick. You know, we're a couple of different ways. One, we've pushed up our development yields. I guess maybe internally our goal, although the numbers were there, so we're kind of high sixes to sevens, usually on new starts. I've always liked our model and that the way it works is, as we build out a park, it's usually the team in the field, and it's rather than corporate pushing out a starts goal for the year or updating that goal, it's really.
They will call, and the conversations are typically: "We're hey, we're 99% leased in Dallas, and the last phase leased up, and we need to build a couple more buildings." Oftentimes, even the benefit is we're talking to two or three of our own tenants in that submarket who need more space. We'll taper that new supply into the demand, and then really, if one of our projects has not leased out, we won't start that next phase. We'll wait until the market kind of.
Fills, you know, fills the inventory and then restocks. That's how we're looking at it. I think a little bit, and maybe where you were going with your question, what we like about this environment or what makes it a little atypical is some of the pieces that talk about, and we would agree that demand is maybe, you know, the world's kind of normalizing after COVID in terms of demand. We still think it's pretty strong. It's just not frenetic like it was at one point, maybe in 2021 or early 2022, which felt was fun, but felt unsustainable.
What's also a really unique environment is how hard it is for merchant developers, local, regional, the people that often were building our shallow bay-type products, are to get capital or know what yields to build to then turn around and flip it, where we have the advantage, where we can hold it in a growing market. We're really seeing supply taper off, that's got us more encouraged about development as we really start looking into 2024, assuming there's not some type of, you know, black swan economic turn. I hope that helps.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Yes.
Marshall Loeb (President and CEO)
Sure.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Very helpful. Thank you. Then just maybe on the increased cash same-store NOI guidance for the year, you know, it implies a deceleration, obviously, in the back half of the year, but you touched on occupancy and the demand you're still seeing. Can you just walk through how we get to the midpoint there, you know, in terms of the updated guidance?
Brent Wood (CFO)
Yeah. I'll jump in there, Nick. Good morning, this is Brent. Yeah, it really comes down to. We've been a little bit ahead. Even we had anticipated the, you know, the slower growth in same-store NOI in the second quarter. As you saw, we were down over first quarter, raised the guide because it came in, second quarter came in ahead of what we were projecting. It really comes down to the slowness. It isn't really to do with rent increases, which continue to be strong, but it's more on the occupancy side. We've had the benefit for many quarters of comparing favorably to the prior year's quarter by 50 to, say, 130 basis points.
First quarter, for example, where we had the 11% increase, we were comparing a 98.7% average occupancy to a 97.4. We had, you know, all the rental growth rate, rental rate growth, rent bumps, plus the occupancy gain. You move to second quarter, and our same store compared a 98.4 to a 98.4. You know, the occupancy side of that becomes flatter. Even looking at our, you know, our budget calls for, you know, a few basis points here and there, pullback in occupancy. You know, the comparison metrics for third quarter, for example, of 2022, is 98.5% same-store occupancy and 98.8 for fourth quarter. Those will be the two benchmarks to which we'll be comparing to.
You know, hope we do better than what we're projecting at the moment. I mean, it's not out of the realm that our occupancy could come in ahead of what we're projecting for the end of the year, but you still got a stiff comparison. Again, we're still very pleased with the other components. Rental rate growth, we've been able to accomplish higher annual rent bumps in our leases over the last few years. The guys have done a good job of leveraging the market there. Clearly, the occupancy side comparison is a, you know, is a bit of headwind in the overall statistic there. As Marshall often says, you know, same store is an important component, but it's just one component of many that come and formulate to our bottom line.
We've been very pleased with our bottom line, FFO growth, as evidenced to getting close to 9%, almost double-digit per share again. You know, we have a way of putting all our pieces together and making them work to be very competitive at, on the bottom line.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Thank you very much.
Marshall Loeb (President and CEO)
Thank you.
Operator (participant)
The next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra (Managing Director, Senior Equity Research Analyst and Co-Head of US REITs)
Thanks so much for taking the question. Maybe just first, you touched a little bit about not being concerned about the rent spread side or just, I guess, being more conservative on the occupancy. You know, as we look into the second half, you know, you've definitely seen a broadening out in terms of the rental rate, rental growth strengthening and the rent spreads pretty solid in parts of Texas and Florida. Can you just give us your updated view of how you see rent growth in the second half across some of your key markets? Does that essentially imply rent spreads will continue to widen out into the second half? Good morning, and good question.
Marshall Loeb (President and CEO)
You know, we're, broadly speaking, kind of viewing rent growth this year and maybe that high single digits to lower double digits, you know, call it 8%, 13%, 14%, and it feels like it's tracking there. Tenants are taking longer to make decisions, but we're staying full. You're right, one of the things when, you know, when we've gotten questions about our Southern California markets, we've still said they're strong. The difference is, when you look at our re-leasing spreads, really over the last couple of years, Southern California is still a good market for us, but so are the other markets. The delta isn't nearly what it was three years ago, type thing.
I don't see that changing, given the supply formula and the growth, just population and business growth in markets like Texas, Florida, Georgia, the Carolinas. I think that embedded rent growth is there, and rents continue to grow. We feel pretty good about our rent spreads. Look, we had the best quarter and best first half of the year we've had historically, so that, you know, in a period where we've been the most anticipated recession in history, feels pretty good right now, and it feels like we'll stay there. It's going to be interesting to see. We've not seen supply come down like this since, you know, probably the GFC or something like that. Really, it'll be interesting to see how supply continues to come down, if demand can stay where it is.
If I'm really an optimist, I could say there's, you know, more upward pressure on rents in 2024 than there was in 2023.
Vikram Malhotra (Managing Director, Senior Equity Research Analyst and Co-Head of US REITs)
Just to clarify, that last comment is more specific to your submarkets, you know, in Texas, et cetera, or you're just talking more broadly?
Marshall Loeb (President and CEO)
Well, like, you know, maybe I was laughing just saying my answer is maybe yes. I think, you know, supply is coming down nationally, I certainly like having maybe the combination of ours and the markets we're in on purpose. I like that supply is coming down nationally, I especially like it if we can double in what I thought in some of our markets. We don't need a great economy, given, you know, the growth of e-commerce, population growth, job growth, onshoring, all the things like that. We just need an okay economy, we'll gain more than our fair market share based on what we're, you know, evolving logistics chains, things like that. If you can mix in falling supply and growing demand, it was kind of where I got to my short answer of laughing with a yes.
Thank you. I like the markets we're in. I think they'll benefit a little more than the national average.
Vikram Malhotra (Managing Director, Senior Equity Research Analyst and Co-Head of US REITs)
Makes sense. Then just to clarify, you referenced sort of nearshoring, onshoring a couple of times, and, you know, El Paso's rent spreads were very solid. I'm just wondering, can you give us any more, like, specific anecdotal evidence that this trend is finally building? You know, we've been talking about it for three, four years since the start of COVID. You know, other data points suggest there's probably more activity, but I'm just wondering, are you seeing it translate into warehouse demand?
Marshall Loeb (President and CEO)
You know what? Mostly what we're. You know, you're right. We're seeing it within our releasing spreads and occupancy. Our main two markets are maybe 2.5-3. We're seeing, you know, rental rate growth in El Paso that's historically strong, where it's really kind of, you know, California-like markets, where it's triple digits. We won't go to the other side of the border, but in reading about Juárez and Tijuana, both have incredibly low vacancy rates, and that will continue to drive those markets. El Paso feels strong. It feels like there's, you know, every quarter there's a new company, there's new demand.
What we like about San Diego and a good portion of our San Diego portfolio is really in a, excuse me, a submarket, Otay Mesa, that's right there on the border. That continues to have strong demand. Every Fortune 1000 company, transport, 3PL, is in that Otay Mesa area. The other market, we're 100% leased in Arizona. Nogales, Mexico is not quite as big a market and a little bit further away. We still see strong demand in Arizona. It feels like it's, you know, it's not a light switch. It incrementally builds in those markets, which feels more sustainable as well.
Vikram Malhotra (Managing Director, Senior Equity Research Analyst and Co-Head of US REITs)
Makes sense. Just last, if I can sneak one more in. Just, you know, your cost of capital, you referenced the equity you're raising, taking advantage of where you are, but also, I guess, relative cost of capital to public and private peers, you know, it's pretty wide today. I'm wondering, you know, apart from sort of deleveraging like you outlined or maybe better development spreads, is there anything else you're monitoring or looking to take advantage of as you have this relative cost of capital?
Marshall Loeb (President and CEO)
Maybe a little bit. Brent, jump in, too. I think one interesting trend we're seeing on really, part of it is cost of capital, but more importantly, access to capital, and that where we've seen opportunities in the market, that's pushed us to the equity. I mean, maybe a lot of different reasons. When you're not sure where the economy is going, I'd rather have a safer balance sheet than an unsafe balance sheet. A lot of our peers that build what we build are local, regional developers, and we've had a number of them come to us in several markets, and hopefully, we've closed on a couple of these, and hopefully, we'll have a few more down the road that we're evaluating.
The conversation is generally that I've had this site tied up for two to three years. It's hard to raise equity. Debt is more expensive. Would you step in? Maybe we give, you know, we give them some promote feature, or they participate on the development or some fee, and really, it's shovel-ready sites that we're finding. That's where, whereas a year or two years ago, they would've had a line of bidders. When you have a site ready, you really didn't have to break ground, and you could have made probably a few million dollars depending the market. Now, those developers are in a tight financial spot.
I think it's going to get, this might be guessing, I think it's going to get worse before it gets better, given some of the ripple effects through commercial banks and things like that, is their exposure to real estate. That's where we're seeing the opportunities, is development sites where someone else has gotten through the zoning, the permitting, all the things that usually are measured in a year or two of headwind before we actually close on the site, where we're having a chance to maybe, you know, jump, cut in line, basically closer to the start of the race than have to do that legwork on the front end.
Vikram Malhotra (Managing Director, Senior Equity Research Analyst and Co-Head of US REITs)
Makes sense. Thank you.
Marshall Loeb (President and CEO)
Sure.
Operator (participant)
Again, please limit yourself to two questions. The next question comes from Nick Thillman with Baird. Please go ahead.
Daniel Hogan (Equity Research Analyst)
Hi, this is Daniel Hogan on with Nick. Looking at your development pipeline, it looks like you pushed back some conversion dates for two projects for Springwood and Stonefield. I know those are larger buildings, but only pushed back a quarter. Is that a function of longer development times or slower lease-up assumptions?
Marshall Loeb (President and CEO)
It's really development. Yeah, the lease-up, the projects are going fine. I would say it's two parts. One, weather can definitely play a factor of, you know, depending where you are, and those are early enough in construction, that it's, you know, probably a little bit of weather delay. Overall, on construction, in talking to our construction team, it feels like delivery times have normalized for the most part. I'll overuse the word normalized on this call, but for electrical equipment. The transformers, the panels, all the things that people have pushed to green energy, that if you said, "Where are we having issues within our construction?" I think it's everyone, it's the lead time on electrical is about one year. It could be on those two, a little bit weather related and probably a little, you know.
I know where our construction guys, their stress level is getting any kind of electrical equipment and delivered. I don't think it's a pricing issue so much as just availability.
Daniel Hogan (Equity Research Analyst)
Got it. Given that you talked about seeing less shallow bay competition in the past on the supply front, have you seen any instances of mid or large box developers putting in the capital to try to break up their spaces and compete with your space? Or is it, you know, still a similar trend of.
Marshall Loeb (President and CEO)
I think it would, you know, look, They'll have financial pressure, you know, on where the market is to do that. I think the challenge, and I guess they could maybe get on the margins, depending the size box you build. Our average tenant size is in the 30,000 sq ft. 75% of our revenue comes from tenants under 100,000 ft. But if you and I have built, you know, say, an 800,000 foot building, much less the 1 million plus, the dimensions of those buildings, it is such a deep building that if you try to, you know, cut it up for a 50,000 or 70,000 foot tenant, you end up with such a long but narrow space, you can't compete on dock doors and things like that. So our.
You know, it becomes very inefficient space for the tenants because you don't have enough loading doors at the back of the space if you kind of picture cutting out the rectangle. The other thing that would happen to you on the landlord side is you have to build up fire-rated demising walls, you know, kind of from ceiling to deck, that gets awfully expensive. I think the tenant improvements wouldn't work. That's why, you know, the big boxes. It doesn't have to go to one or two tenants.
You can maybe cut it up a little bit, but probably not in small enough pieces still that it would really compete with a 120,000 foot building, because the tenancy, when you're having those kind of deliveries and loading and unloading, it just physically wouldn't work for you.
Daniel Hogan (Equity Research Analyst)
Great, thanks for the clarity.
Marshall Loeb (President and CEO)
Oh, sure. You're welcome.
Operator (participant)
The next question comes from Connor Mitchell with Piper Sandler. Please go ahead.
Connor Mitchell (Equity Research Analyst)
Hey, good morning. Thanks for taking my questions. You guys have talked a little bit about the merchant builders and regional developers having trouble accessing capital and reaching out to you guys. I guess I'd just like to ask about maybe, what do you see in the near term and maybe a little bit longer term with whether these kind of competitors maintain and stay on the sidelines for a bit longer, or is it possible they find capital soon to be able to jump back in the mix?
Marshall Loeb (President and CEO)
Good morning, Connor. Good question. I think, you know. Good question, another one, another way to say it's a hard one to answer. I think the pro for industrial, there's a lot of capital that still would like to be in real estate, I think industrial is attractive compared to some, you know, it's. Offices sounds like it's incredibly hard right now. Retail, you know, where do you go? Multifamily is still strong, industrial is attractive as an alternative, you can get capital there.
I still think it's hard to know, and I guess we'll learn a little more today when the Fed finishes raising interest rates, much less lowers them to know where cap rates are, because so many of these developers are merchant developers, and they've been willing to build on a pretty thin margin. Until you really know where capital settles out, it's hard, you know, if it were you, me, and Brent to build it and know where we can flip the building in 12 to 18 months. I think, you know, as we've talked to the banks that we work with, it still sounds like that what regulation may come out or what pressures they're gonna have to reduce their commercial real estate exposure, which isn't industrial so much, but we get thrown into that bucket with every other product type.
I think loans are going to be harder to come by in the near term than they've been the last couple of months, and the interest rate sure feels like it's going to be a little bit harder. I think those developers are going to be on the sidelines for a while. We're not seeing the forward sales or the land sales that we had, and, you know, the demand was great in 2020 and 2021, kind of early 2022, and maybe that's moderated, but supply has adjusted, you know, as dramatically or more, at least in our portfolio, much more dramatically than demand has to date. You've still got a lot of things in the pipeline, but as that empties out, there's not much coming back into that pipeline.
I don't see that changing for the next few quarters until the capital markets kind of settle down a little bit more.
Connor Mitchell (Equity Research Analyst)
Thanks, appreciate that. Just a second question. Regarding the rise in the home builders and demand for new houses, which we haven't seen in a while, maybe even the past 15 years or so, before 2008. Just, I was wondering, how has the rise in the new housing demand and the home builders impacting the warehousing demand? Like, is it showing up materially overall in the industrial market, or could it be more attributed towards the growth in the Sunbelt and maybe some fewer markets?
Marshall Loeb (President and CEO)
Yeah, it's a little, that good question. A little hard to differentiate exactly, but I think, I think we're definitely seeing it. It's not driving our business so much as it's a positive contributor. You know, certainly we're reading where Florida, you know, the population growth Florida has had, you know, the Carolinas, Maricopa County, Phoenix, Arizona, huge population growth, Austin, Texas. We definitely have our share of whether it's Trane air conditioning or Home Depot, Best Buy, Lowe's, all the tenants like that, and then some of the, you know, tile companies, things like that, where we're benefiting from their growth. They've taken a couple of our developments. I can think of a couple in Fort Myers, where it was people home building-related, appliances, things like that. You know, it's a nice benefit, but I like that our tenancy is so diversified.
You know, to me, I wouldn't wanna get too reliant on home building because it is so cyclical. Right now, it seems to be picking up. There's a shortage of homes, it sounds like, as we read about it, and It's, you know, kind of one more tailwind that we're thankful to have.
Connor Mitchell (Equity Research Analyst)
Great color. Thank you very much.
Marshall Loeb (President and CEO)
Sure. You're welcome.
Brent Wood (CFO)
Thanks, Connor.
Operator (participant)
The next question comes from Jeffrey Spector with Bank of America. Please go ahead.
Jeffrey Spector (Managing Director and Head of US REITs)
Great. Thank you. Just big picture, Marshall, just appreciate all the comments on the different drivers of demand. There is a lot of debate or angst over some of those drivers. I guess where we are, let's say, in the cycle or, what inning we're in, per driver of demand. I guess just big picture, what are your thoughts here on the various drivers? I mean, you know, is there still a nice balance between all of them that, you know, you would still characterize the demand for some of these drivers as still early, mid, late innings? Like, how are you thinking about it?
Marshall Loeb (President and CEO)
Hey, Jeff, good morning. I like that we've got any number of drivers. I think we're still early innings and kind of picking them apart on. You know, it's hard to call e-commerce early innings, but I do think last mile delivery and kind of how retailers, as they continue to rationalize store count and things like that, I do think we're earlier innings in terms of how they, you know, door, you know, curbside delivery, things like that. I think there's more to go there. I think we're early innings on onshoring and nearshoring, because that would strike me as a, you know, a multiyear process to move a plant out of China or China Plus One manufacturing. I think it's happening, but we're early on there.
I think some may ebb and flow, like our last question on home building and things like that. I like that there's that many, and I think e-commerce is just a penetration, a continual drip, drip versus brick-and-mortar. I don't think brick-and-mortar is going away, but I do think e-commerce every year seems to gain a little more market share, just as they get better and faster and faster with their delivery. I like that there's.. You know, to us, we're very flexible, low-cost real estate in infill locations. Our top 10 tenants are just over 8% of our revenues, 8.3%, which is actually down 50 basis points from a year ago. I like that there's 1 million ways to use our buildings, and I know you all have.
I would encourage any of the investors, if you're out and you wanna take a tour or join an analyst tour, you really get a sense for just the variety of ways people use good industrial buildings. Every few years, it seems like green energy is a new one, where we've leased to a number of tenants that are doing something with green energy that we wouldn't have had any three years ago, and now we've got 10 or 12 tenants, and there's one or two new prospects every quarter, it feels like. I like that our pie continues to widen. You know, as one of these tailwinds may die down or if it reaches a late inning, it feels like there's a new tailwind that we pick up of a type of tenancy we hadn't seen before.
You know, online pharmacies were something we didn't have several years ago, and now we've got several of those, as your insurance companies push you to order recurring prescriptions online, rather than, say, through a Duane Reade or CVS, where it's brick-and-mortar. That's a new type tenancy. I won't take up this whole hour of the list of tenancies, but I like that our tenant base or prospect pool continues to grow. In the meantime, the pool supply guys and Budweiser distributor and this and that, all those tenants are still there, that we've had, you know, for 20 years.
Jeffrey Spector (Managing Director and Head of US REITs)
Thank you. Very helpful. Then my second question, more detailed, and I'm sorry if I missed this. Did you explain the bump in the stabilized development yields? If you didn't, if you can, please.
Marshall Loeb (President and CEO)
No, I guess it's a little bit there. I'm glad we had it. It's really where rents, we're able to get rents higher than what we had pro forma. When we do the underwriting, we'll underwrite to current market rents and the construction costs we have in hand. A lot of times, as we lease those buildings, the couple of things that can help us get better yields will be, one, mainly getting rents that were a little bit higher than the market was at the time when we kind of said, "Okay, let's break ground and go." The other thing we can usually pick up on, too, would be getting the building leased up faster, so our carry is a little bit less.
A combination of those, the bigger driver would just be, hey, the market continues to rise. I'm glad that the buildings that we had under lease up ticked up, and I'm hopeful by the time they move out, that what we've got under construction can maybe pick up a few basis points between now and then. If it gets leased up quickly or a single tenant takes it, and we can get better rents, it will keep trending higher. Look, if we can, you know, raise capital at the rate we are, again, as Brent mentioned earlier, we think things like same store NOI and all those are very important, our successful development program has been a huge driver to our FFO growth and our NAV creation, it's great to see those yields coming up.
Jeffrey Spector (Managing Director and Head of US REITs)
Great. Thank you.
Marshall Loeb (President and CEO)
Sure. Thanks, Jeff.
Operator (participant)
The next question comes from Samir Khanal with Evercore. Please go ahead.
Samir Khanal (Equity Research Analyst)
Hey, good morning, Marshall. You know, on the one hand, you talk about market strength, you know, operations being strong, and then you talk about demand drivers still intact. When I look at your development starts, it's up, you know, it's up modestly, right? I'm just trying to understand, like, what's holding you back from pushing that number higher. I guess, what are the guideposts that you're looking at to be a little bit aggressive on that?
Marshall Loeb (President and CEO)
You know, ours is really. We feel like for us, you know, over the years, $360 million is a pretty good start rate for us, and we're happy with that. You know, really holding us up, two things we'll look as if this is helpful. We have our starts that we've dialed out for the year, which is that $360 million. You know, when we look at the pages internally, we'll call it a shadow pipeline, of if we get lucky, here's the next batch of build, you know, the next phase and apart, typically. Here's what could happen.
Really, the $360 million, we feel pretty good and solid about that going to happen this year, and we've raised it a couple of times this year. I hope the market demand's there, and we'll go. I've always tried to take an approach to it, you know, for our investors. We'll go as high or as low as the market tells us to. I'm glad that, I'm glad we're 98.5% leased and the demand's there. If phase three in a part doesn't lease up, I would, look, I think it's the right decision. I'd be comfortable going from $360 million to $300 million, or much below that, if we're not leasing up what we built.
Hopefully, if that 360 number rises, it's really the team in the field finding tenants for our current development, and we'll, you know, our task at corporate is really to help them get the capital to, you know, to capitalize on those opportunities. We'll go as fast or as slow as the market demands, and really through, you know, call it late July, we're forecasting 360. Look, if it becomes $400 million, then great! That means we're leasing up our buildings and the market's pulling the next phase of the park faster and faster. That's really what's happened the last couple of years, and we'll see how this year plays out.
Samir Khanal (Equity Research Analyst)
Got it. I guess my second question is around, you know, your guidance. I know this was asked earlier about sort of NOI growth, you know, implying that there's gonna be a bit of a slowdown in the second half. Look, you're coming off a very high level, so I understand that. Maybe talk about some of the markets that are driving that, right? I mean, L.A., we certainly know that's been. We've talked about that a lot, but maybe talk about your other markets, which is sort of driving that slower growth in the second half.
Marshall Loeb (President and CEO)
Good question. I'm just kind of looking at where we are for the year. It's typically, you know, I'll get it, the market that pulls you down this year is the good market next year, it's mainly more a function of, you know, Fort Worth, we had a move-out. It's not big, it's 1 million sq ft. There's nothing wrong with the Fort Worth market, the same store NOI will be less. It's more some of those markets, you're coming off 99%, 100% leased, then we get a vacancy. San Francisco is a market where we've got a little bit of vacancy there. That, as I think about that, one's not in our same store NOI, it's one of the properties we acquired last year.
We're backfilling a space where a tenant moved out, so it should be a nice pickup next year. It's probably more a function, not in terms of market weakness that we're seeing, that are, you know, above and below the average, so much as where is your vacancy rolling in and out of any market? I think maybe if it's more helpful when I look at our core market stats, I've always thought kind of the year-to-date, kind of rent, gap rent growth and cash same store NOI are where I look. When I see, you know, Phoenix, Las Vegas, El Paso, Dallas, gap rent growth, all much closer to what we used to achieve only in California for our portfolio. It's great to see those widening.
The same store NOI, in any given year, maybe we're just not quite as big as some of our peers or one of our peers in particular, that a move out here or there can make our same store look, you know, negative in one year and very positive the next.
Samir Khanal (Equity Research Analyst)
Got it. Thanks so much.
Marshall Loeb (President and CEO)
Sure, you're welcome.
Operator (participant)
The next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll (Real Estate Analyst)
Yeah, thanks. I wanted to touch on the development questions that you kind of commented earlier. I mean, when you underwrite new development projects, I mean, how have those initial targeted yields changed over time? I mean, has the higher construction costs and financing costs, has that pulled yields down, or have market rents really kept those yields really unchanged over the past year or so?
Marshall Loeb (President and CEO)
Good, good morning. It's really more what we were probably way with capital market changes. When interest rates were probably at their low and cap rates were, you know, we're seeing things in the 3s, we would have looked at a development, you know, if it were in one of our major markets, and it's probably as low as we would have gone at any given point in time, let's call it maybe a five and call it a 5.75, something like that, because we would have said, "Hey, it's still 200 basis points or more above a market cap rate." Not that we would exit, but just where cap rates. As cap rates and interest rates have come up, really, our floor has moved into the higher 6s in terms of kicking off a new development.
The good news is we're still achieving those. We achieved those even though we would have looked at something. It was as we competed for land, what were you willing to underwrite to? We probably, two years ago, would have dipped below a six, where now that's probably moved up a good 100 basis points. You're right, construction costs have risen. Thankfully, rents have kept pace. So it's been an offset to those two. It really hasn't sped up or slowed our development pipeline so much as some things we would have said yes to, we'll probably think we need to get a little bit better yield on, or let's kind of keep working on that.
If it was a lower yield, it would probably be like, if somebody pre-leased the project or a good bit of the project, we'd probably accept a little bit lower yield just because the risk is less.
Michael Carroll (Real Estate Analyst)
Okay. To see if I heard you correctly, is like the floor, your target is probably about 100 basis points higher than what it was. What about the exact projects? I mean, has those yields actually increased by that amount, over the past year, or has market rents really kept them in the high 6s, so you're still achieving similar yields as you were last year?
Marshall Loeb (President and CEO)
Yeah, you're correct. More of the latter. Yeah, our target's probably risen, you know, our threshold's risen by, I call it, a good 100 basis points, but rents have matched construction so that the yields have stayed pretty consistent in that, you know, high 6s, seven type range.
Michael Carroll (Real Estate Analyst)
Okay, great. Thank you.
Marshall Loeb (President and CEO)
Sure, you're welcome.
Operator (participant)
The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Todd Thomas (Managing Director and Equity Research Analyst)
Hi, thanks. I wanted to switch gears and ask about the capital raising in the quarter and the updated forecast for the year regarding common stock issuance. You know, Brent, maybe, you know, within the guidance revision, I guess first, can you just provide some additional detail around the impact that the increase in stock issuance had on the guidance? From a timing perspective, you know, how should we think about the remaining $175 million of issuance embedded in the guidance? Is that more heavily weighted toward the third quarter, just given where the stock is today, or do you assume that it's more ratable throughout the balance of the year?
Brent Wood (CFO)
Yeah, I'll start with the latter there. The $175 million, we pretty much have that, you know, equal weighted throughout the remainder of the year as our capital source. You know, just to back up for a moment, as we always do when we're looking at our funding sources, you know, from outside our, you know, funding that's required. You know, if you look back going to 2022, we had about $600 million of what I would say, outside or external source funding, and that was about $525 million of debt. We did that, if you remember, we got, you know, kind of what we felt like, in hindsight, we did get ahead of rate hikes.
We did that $525 million, an average rate of 3.8%, which in hindsight, is very good. We only did $75 million of equity last year. You look at this year, and as rates did go up the latter half of last year and even this year, you know, long-term debt for us today, given our Baa2, you know, you're probably looking at somewhere around a 6%. I mean, the 10 years crept back up to 3.9%-ish. If you add 2.10, somewhere in there is probably where we would be on top. Even the revolver, which obviously has traditionally been, in short term, has been the cheapest debt by far. At one point, 18 months ago, we were sub 1%, now the revolver is like 6% itself.
Any dollar that you have sitting on the revolver now is suddenly costing you a pretty meaningful percentage. That's why you've seen us this year pivot to the equity side. Out of a projected, call it, $575 million of external sourcing, you know, we've kind of pivoted the opposite of last year. We're projecting $475 million of equity, of which $300 million is already done, and $100 million of debt, which we did back in January. We'll continue to toggle back and forth in a, in a short measurement period.
It might look, wow, they're really leaning heavily into equity, which we are. When you back up for a moment, kind of average everything out, you know, we think it's important to look at, you know, every avenue and to tap into each. You can't lever yourself too much. You don't want to, you know, get too delevered either. We like where it is, where the price has actually rebounded some since quarter end. If it could hang in there, it would be even incrementally more attractive.
The good news is, as we continue to have good reason to raise capital, we're not raising capital for retiring certain debts or this, that, and the other. We're raising capital because our team continues to put this money to work at very primarily via development, but other avenues that make it still very accretive to do so. Right now, it's equity. That could change. Yeah, that $175 that's left... Again, that's a flexible number. If the guys could, as Marshall said, if development starts to climb because of good markets or if we continue to find some opportunistic buys, kind of like we did with the Vegas property, you get a couple of those, then, you know, you may even ratchet that number higher. That's kind of how we're looking at it at the moment.
Todd Thomas (Managing Director and Equity Research Analyst)
Okay. Yeah, that's helpful. Yeah, I mean, I guess in terms of the use of funding there, you have a little under $200 million of remaining spend for, you know, the development, you know, and lease-up pipelines. So that makes sense. You know, in terms of investments, you know, it was a relatively quiet quarter. I guess maybe Marshall, can you just talk about, you know, the pipeline today and maybe provide some color around what you're seeing, whether you're starting to see some better opportunities, you know, surface?
Marshall Loeb (President and CEO)
Sure. Good morning, Todd. You know, we're happy with the acquisition we found in Las Vegas, which is, again, a strategic market that we wanna grow in, and it's been another kind of strong rental rate growth market. We've tried to take the approach, and we haven't been as successful as I'd hoped of, given the capital market turn, you know, kind of. We've seen development opportunities to step into, but we haven't seen the acquisition opportunities, that there's still a pool of whether it's private buyers or this or that. We thought with, you know, debt higher, private equity is gonna be stretched, the funds were having redemption challenges and things like that there'd be better core buying opportunities than have turned out on the market to date.
That said, we, you know, we continue to kind of make our offer here and there. We'll be strategic about it. The way we've kind of tried to take the mindset on it, too, if this is helpful, if we, if we don't make any acquisitions, we're okay. We'll keep funding the development pipeline and grow at the pace we can.
If we can find some owners that are maybe having a little bit of distress or if it's some off-market opportunities, or, you know, in a couple of cases we've looked where it's a owner-user selling a good multi-tenant building, and it's a way for them to raise capital, that if we can get, you know, yields that where the spreads are, you know, not that far away from development or at least are attractive enough on a risk-return basis, that's where we'll step in. I hope we can make a few more acquisitions, but we'll try to be patient and disciplined about it. The market definitely has firmed up a good bit, you know, dramatically from where it was a year ago, which was meaning more of how bad the market was a year ago.
We're certainly seeing trades, not portfolios, which was really never where we were that active. There still is a number of bidders in second and third rounds, and we've come close, but really only bought the one property year to date. We'll... You know, hopefully we can find another one or two before year-end, but we'll be okay either way.
Todd Thomas (Managing Director and Equity Research Analyst)
Okay. All right. Thank you.
Marshall Loeb (President and CEO)
Sure.
Operator (participant)
Again, please limit yourself to two questions. The next question comes from Jason Belcher with Wells Fargo. Please go ahead.
Jason Belcher (VP and Equity Research Associate Analyst)
Hello out there. I noticed your occupancy was up sequentially in the quarter, while lease rate was down. You know, both were flat just about a month and a half ago when you provided your interim update on June 1, that were, you know, flat the prior quarter at that time. Can you just give us some color on what drove that divergence over the past month or so?
Marshall Loeb (President and CEO)
I'm trying to... No, I don't have I apologize, June in front of me, I think, in terms of just watching it, that maybe that, you know, a month ago, we're happy where the quarter came out. you know, and again, I know I'm grateful our occupancy was up you know, for the the average quarter year-over-year was flat for the overall portfolio and actually for the same store pool, too. I'm glad we're a little bit higher, 30 basis points than we were at the end of first quarter. That's, you know, I don't know if that's indicative of the market just so much as a little bit of move here and there. The numbers I was the happiest with this quarter are a little better.
One of them was our re-leasing spreads, getting to 38% cash and a 53% GAAP. Again, I'd say at least kind of looking at where things stand, you know, maybe by the time we wrap up second quarter and get our release out, we're virtually at the end of July, so at least seven months of the year, it's been a pretty consistent year. We've kind of stayed, ebbed and flowed around 98% leased, 98% occupied. The last five months are the trickiest, and we'll see how those shake out. I'm grateful that seven months of the year have been pretty stable in what's felt like a pretty unstable environment at times, given, you know, mainly the capital market fluctuation.
I know that's not a very specific answer, but at least that kind of helps where, you know, at the end of the day, our second quarter was pretty consistent with last year, which was, as Brent said, we're coming up against 40-year highs for our company in terms of where occupancy is, percent leased. Historically, 95% leased is fully leased, and we've been at 98%, 99% a couple of quarters, which is, you know, there's not much, not much margin to improve on that. We're happy that we're hanging in there versus those comps.
Jason Belcher (VP and Equity Research Associate Analyst)
Understood. Thank you. Then, secondly, you mentioned that the tenant decision timelines remain elongated. Can you just give us a little more color there, maybe comment on what that timeline looks like today versus a year or so ago? If that elongated timeline, as it is today, is continuing to widen out or lengthen, or does it appear to have stabilized somewhat in recent weeks or months?
Marshall Loeb (President and CEO)
It feels a little more stable. Maybe a couple of years ago, when things were so hot, it felt like people were afraid of losing space. I remember talking to a couple of tenant rep brokers saying their job's not much fun. They would go on a tour and be told two or three other people are looking at the same space, and people felt in a rush to take space. That's maybe how you saw maybe a couple of large users commit to more space than they wanted and things like that it turned out later, they said, 'You know, we may have overdone it,' and things like that. It probably.
There's almost, if I oversimplify it, two buckets. It's the national, the larger the company, and maybe the more legal back and forth happens on those leases and things like that it just takes longer. I've kind of told myself it's natural human psychology when you know, read the news or watch the news, there's so much concern about the economy and waiting for a recession, that it feels like large companies have... I think it's probably more normalized. I don't think it's getting longer, but are being patient and thoughtful about their space needs. The smaller companies, maybe where it's an owner or more regionally based, they're still moving pretty quickly, and maybe their process for all their approvals and things like that isn't quite as cumbersome.
The other explanation, if this is helpful, was one of the brokers explained it to me, is rents have risen so much over the last few years, and as their space requirements, that what the tenants are committing to in terms of lease liability, the absolute dollars, has risen so much that in a number of cases, it takes, depending on the company, another layer or two of approvals before they can get there. That makes, at least made sense to me, of why once you've gotten to LOI, it took so long to get a lease signed, just by, you know, the bigger the company, the more approvals and the lease liability was triggering other layers of approval than it had maybe a year or two earlier.
Jason Belcher (VP and Equity Research Associate Analyst)
Makes sense. Thanks very much.
Marshall Loeb (President and CEO)
Sure. You're welcome.
Operator (participant)
Next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Hey, two quick ones for me. The first is just on the same store and why, I think we're all trying to build a function for what that could look like next year. If I'm taking your cash reds of 38% in the quarter, with, you know, I see 13% coming due, 13% rolling next year, you easily get to a 6%-7% number. The question really is occupancy and bad debt, sort of the biggest delta that we should be thinking about next year and so forth?
Brent Wood (CFO)
Yeah. Ronald, this is Brent. I would say you're right on. We still feel good about that rental rate growth component, and we have annual escalators in the vast majority of our leases, and that's grown now to be, used to be like mid-twos on average, and now I'd say that's grown just north of three as we've been able to lever that, you know, overall as well. I would say more of that, you know, component to look for next year would be occupancy side versus bad debt. Bad debt continues to be low, collection's good. Not to say that couldn't increase, but it feels, you know, at a manageable, you know, pace.
You know, the occupancy side, again, as I just mentioned earlier, for example, the same store bucket, the comparable occupancy for third quarter is gonna be 98.5%, and the same store comparable for the bucket for last year and fourth quarter is gonna be 98.8%. I mean, that we know. I mean, that was the occupancy last year for our current same store bucket. You know, those are gonna be, you know, pretty hefty comparisons. I think that part of it would be, I agree with what you're saying about the rental rate increases and that component of it being 6%-7%, and then it's a matter of where do you think occupancy is gonna be.
We continue to budget it slightly, you know, on basis point measurement, slightly coming down. As Marshall said, it continues to be pretty stubborn to hang around 98. If that happens through the last two quarters of the year, we'll do better than what we've got dialed up right now, because we are showing just a, you know, slight bit of pullback. We'll see. That is, you know, I agree with you, that's probably the biggest component going into next year is, you know, how might that impact one way or the other on the same store.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Great. My second one, just on maybe a little bit more commentary on onshoring or friendshoring, and so forth. What sort of data are you hearing from tenants or are you seeing in the markets? We hear about it a lot in the news, curious where that's flowing through in the portfolio. Thanks.
Marshall Loeb (President and CEO)
Maybe a little, I guess, what we're seeing is maybe twofold. Texas, we're seeing companies, it's more tech, maybe that's not onshoring or nearshoring so much as just, I guess, I put in population shifts. I mean, Tesla has had a large impact, not, you know, directly and indirectly within Austin, even in San Antonio, we've picked up Tesla suppliers. Their relocation has been a pretty dramatic impact, where Texas seems to pick up is more technology and medical-related manufacturers, Dallas and Austin, where we've seen that pickup and prospect activity. Where we've seen it on, when we're looking for that next opportunity in San Diego, we're full there, we did buy four buildings that were 50% leased and quickly leased those up.
It was, you know, electronics manufacturing and medical products and things like that are manufactured in Tijuana and then coming over the border. As those markets stay tight, and then in San Diego, you actually have the city pushing further and further south. Amazon, who was one of our big pre-lease opportunities, they wanted to be closer to the city of San Diego but couldn't find the land, so it all gets pushed there together at the border. The other thing that I think will really help San Diego is they're building a second border crossing that'll be more technologically advanced. It's supposedly a faster border crossing, and a lot of our product is in between those two border crossings. We're bullish on South San Diego.
I shouldn't say that because we're trying to find the next opportunity there, but it's, you know, it seems to be slow builds here and there. When you look, I think the vacancy rate, I'm doing this from memory, which is dangerous, but was under 2% in Juárez, Mexico, and things like that. I think Tijuana is about the same. Those markets are tight and continue to grow, and that spillover continues to help us. Look, we hope California stays a strong market, but if people do leave California, we like that we're balanced and that we're picking up that tenancy in markets like Las Vegas and in Texas and in Arizona as well.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Thanks so much.
Marshall Loeb (President and CEO)
Sure. You're welcome, Ron.
Operator (participant)
The next question comes from Ki Bin Kim with Truist. Please go ahead.
Ki Bin Kim (Managing Director and Senior Equity Analyst of US REIT)
Thanks. Good morning. Just to follow up on that equity raise question. You know, I'm just curious, what were some of the decision inputs to get to that additional $175 million of equity in the second half? Once you execute that, your leverage, all I think, will be closer to four times. I'm just curious, in your press release, it sounded like a little bit more defensive posturing, but I know you haven't been known to do large-scale acquisitions, but are there some deals or opportunities that you see in the horizon for larger scale deals?
Brent Wood (CFO)
Yeah, I'll address the first part. Again, really, it's a matter of us evaluating in the moment what we feel like is our best avenue. As I alluded to earlier, you know, 2022, that wound up being heavy debt early in the year, about, you know, $525 million out of $600 million, and then this year, we've kind of gone almost the other. If you put the two together, we're basically 50/50 debt to equity between 2022 and 2023.
We're careful to try to be balanced on the long run, but certainly in the short run, it does continue to drive our, you know, debt, EBITDA, and debt metrics down, you know, lower than you would say they, quote, "need to be." The one thing that's been just interesting in this environment, Ki Bin, is like I say, even where you could short-term park, you know, capital per se on the revolver and let that glide over time, and then decide over a period of time if you might wanna do debt or equity,
I would say that the high end rate of the revolver has kept us more immediately interested in issuing equity to basically fund as we go, just because right now, it's such a big spread between, you know, say, a low 4%, 4.25% versus a 6%, you know, just day one on an equity dollar versus a revolver dollar.
That'll come down, and as it comes down, we may, you know, then begin to float our revolver a little bit more within reason. It's, you know, we take it as it comes. You know, certainly there's a point you'd reach to where, you know, do you want to continue to go lower? We look at other avenues. We've looked at even other avenues besides, you know, our traditional private placement. You're looking at convertible bonds and some of that, you're seeing more out in the market amongst other companies today. You know, our role is to always be looking at those sources and then just tapping into it as best as it looks at the moment. You know, hopefully, that's helpful. Ki Bin, this is Marshall.
Marshall Loeb (President and CEO)
I agree with Brent. I would jump in, you did use the phrase, I remember in your piece, the dry powder, we're seeing those opportunities on good development sites. You wanna have the ability, if you find an opportunity, to execute on it. I keep waiting for good or better acquisition opportunities than the market has allowed now. I don't know if regulators at some point step in and the banks have some issues to get some loans off their books or things like that. I've, you know, I've been hopeful we'd find those. It's been me being more hopeful than reality. I'm not sure that's all played out yet as well.
If we don't, we'll continue funding development, and maybe worst case, we're a couple months ahead of what we needed, and in the best case, we can find some good strategic acquisition opportunities, kinda long-term strategy, whether it's a market we wanted to grow in or a building around the corner, ideally, both. We'll have that ability to step in when other people may be capital constrained, has been the goal.
Ki Bin Kim (Managing Director and Senior Equity Analyst of US REIT)
Second question on what you just mentioned, convertible bonds. You know, how does the pricing and the effective yield compare to, like, a straight bond? Is that something that's more realistic to address your 2024 maturities?
Brent Wood (CFO)
The yield's lower than, say, a public bond, you've got the other components that go along with that, though, right? The conversion ability and what is that spread to convert. And so you've got costs associated with it that you have to dial in that adds to that initial coupon rate. You know, there's some moving components there. Again, it's something that we're just keep ourselves apprised to, and again, just look at it as, you know, up at the. You know, you sort of look at it arrows in your quiver, and you wanna be, you know, completely cognizant and aware of all of them, so that you can tap into the one that's needed.
I will say we don't, you know, we only have, like, $50 million coming this August, and then a very low. The maturity is next year. When you look at the schedule, about, I think about $120 million of next year's $170 million comes due, like, late December. We don't have a lot coming due over the next 18 months, so we don't need big slugs. The ATM continues to be, you know, again, a good drip capital source for us. Yeah, we evaluate it all and just kind of make the decisions as we go.
Ki Bin Kim (Managing Director and Senior Equity Analyst of US REIT)
Okay. Thank you, guys.
Brent Wood (CFO)
Yes.
Marshall Loeb (President and CEO)
You're welcome.
Operator (participant)
The next question comes from Vince Tibone with Green Street Advisors. Please go ahead.
Vince Tibone (Managing Director and Head of US Industrial & Mall Research)
Hi, thanks for taking my question. Can you discuss the health of Bay Area fundamentals and specifically touch on some of the challenges leasing the Hayward value-add acquisition that transferred to the operating portfolio this quarter? Also, if you can touch on just how the Tulloch acquisition has performed, you know, over your year or so of ownership versus your original expectations?
Marshall Loeb (President and CEO)
Okay. Hey, Vince. Good morning, and thanks. Sorry, it took us a minute to get to you. I appreciate the question. You know, the Bay Area, it's been interesting just as we've watched the number of that's done better stock-wise, tech layoffs and things like that. I would say maybe two parts. The Hayward acquisition has leased up slower than we'd hope. It was a value add. Kind of what we're learning on some of the value adds, the building was not institutionally owned. Great location, older building. There was a few months of cleanup, really, kind of we painted the building, parking lot work, getting the existing office. It's one vacancy. We're, knock on wood, close to a lease that could start here in the next two or three weeks.
You'll hear me yell, or I'll drop you an email if we can get that. That's taken a little bit longer, and it's really 47,000 ft, one tenant, so we'll get that. The vacancy rate in Hayward is, I wanna say 2.4%, was the last number I read from CBRE, so it's a tight market. It just took a little bit longer and a change of brokers there to get that leased. Tulloch, all in all, I'd say the leasing we've done to date has been ahead of our pro forma. We've been happy with that. We do have one vacancy within it on that North Shore, Benicia submarket, that we're working on backfilling that with a tenant move-out. All in all, that's the only vacancy within Tulloch.
To date, thankfully, the leasing we have done has been ahead of what we had underwritten as market rents at the time we made the acquisition. The seller's been a gentleman and easy to work with. He's a big EastGroup shareholder, thankfully now, and we've been happy with that portfolio and still like the Bay Area. It is a market, kind of like, I guess, all of California, you watch a little bit more closely than you do some of the other markets these days.
Vince Tibone (Managing Director and Head of US Industrial & Mall Research)
Yeah. Thank you. That's all, very helpful color. Just switching gears to my second question. I just wanted to, you know, get your thoughts on just this, kind of the state of the private transactions market. Simply, are you starting to see any more deal activity in your markets, or is it still pretty quiet, you know, with wide bid-ask spreads between buyers and sellers? You know, more for core products.
Marshall Loeb (President and CEO)
Yeah. It feels like it's picked up, you know, or picking up, that there is more, more smaller, you know, kind of one-off, or it feels like people will break up portfolios. One of the comments I heard from one of the national brokers, that a large portfolio is a discount now, and that was more a function of a inability to finance and things like that. They'll have market-specific portfolios, but we are seeing more activity on core acquisitions and bidding on those, and not very successfully, but we bid on a number of those. It does feel like a year ago, where things were just at a standstill on bid-ask, that there is a little more transaction activity.
Not nearly where it was at the peak, but better than it was a year ago, and then kind of hopefully improving quarter by quarter.
Vince Tibone (Managing Director and Head of US Industrial & Mall Research)
Great. Thank you.
Marshall Loeb (President and CEO)
Sure. Thanks, Vince.
Operator (participant)
The next question comes from Bill Crow with Raymond James. Please go ahead.
Bill Crow (Managing Director of Real Estate Research)
Hey, good morning. I guess good afternoon, where I am. Quick question.
Brent Wood (CFO)
Hey, Bill.
Bill Crow (Managing Director of Real Estate Research)
Hey, thinking about the development side, the supply side of things, have we ever seen such a dramatic decline in starts when fundamentals have been so strong? It makes me wonder whether we're not just at a timeout, and that, you know, we look ahead 12 months or 18 months, and all of a sudden, we've got that 40% that we're giving back now on the development side, all of a sudden starting again. I mean, isn't that, you know, quite possible?
Marshall Loeb (President and CEO)
It's certainly possible. I've not seen it, I guess maybe I don't wanna sound that old as old as I actually am. I would say that usually, when development starts to drop, the fundamentals are bad, and we've gone really over years. I know we kidded about the most anticipated recession ever, where the economy feels shaky, but fundamentals are good. The capital markets have been bad, but the fundamentals are good. I've never seen it. That's what probably early in the year, had us pretty stressed about the demands there. Where are we going to find the capital to execute on the demands there? It feels a little bit better today, certainly stock price-wise, and maybe that you can get debt. It's just expensive, as Brent said. I'm hopeful.
Look, I look back at COVID, and everybody would've thought I was crazy. I won't put it as we. We should have kept developing right through COVID when it started, and we would have delivered products when the demand was there and gotten some really good construction pricing. I don't know that I'd compare this timeframe to that, but I hope if demand can just hang in there, we'll be... it will pick back up, but we may go a few quarters before private and those private developers can get their capital in order to jump back in the market to get supply back to a more normalized level. Demand, as we sit today, at 98% leased and occupied, I've never seen supply falling as fast as it is.
I think third quarter will be lower, a bigger drop than second quarter was. You know, when we say it was half of what third quarter last year was, I think third quarter will, you know, I'm estimating 60% drop, something like that, in terms of starts.
Bill Crow (Managing Director of Real Estate Research)
The starts you're seeing today, and the ones that you think may happen over the next year or so, do you think you're seeing more like you? In other words, more multi-tenant, you know, last mile, shallow bay sort of product, or has there been an uptick? Because clearly, it feels like you're winning here.
Marshall Loeb (President and CEO)
Maybe a little bit higher percentage. I mean, what we hear is the big boxes, we're not in that, but there are a lot of those in the pipeline, and that's usually the Fortune 1000, and that's where there may be a, you know, I was listening to a call, you know, maybe a temporary glut of those. Because of lack of supply, following it, eventually those will get taken. It'll just be longer hold periods than probably those developers underwrote. We may have a little bit slightly higher percentage, but I think so many of the developers we competed with, they are really the ones, or aspiring developers that weren't developers until industrial really kind of took off in 2018 and 2019, are completely on the sidelines. The starts are.
There's a few out there, but not nearly what we had grown accustomed to seeing the last few years. I think, you know, it's still a pretty mixed bag of probably what's getting started, but not much, and a lot of that is probably pretty tenant-specific. And we usually say within our markets of what's in the pipeline, 10%-15% is comparable in terms of what we deliver, and that number's probably holding true, maybe slightly up, just because big box is probably dropping faster than shallow bay, but it hasn't moved materially.
Bill Crow (Managing Director of Real Estate Research)
Gotcha. Thanks for the color. I appreciate it.
Marshall Loeb (President and CEO)
Sure. Welcome.
Thanks, Bill.
Brent Wood (CFO)
Thanks, Bill.
Operator (participant)
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 (President and CEO)
Thank you for everyone's time and interest in EastGroup this morning. We appreciate that. If we didn't get to your question or if anything comes up later, feel free to reach out or email Brent and me, and look forward to seeing you soon. Thank you.
Brent Wood (CFO)
Thank you.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.