EastGroup Properties - Q4 2023
February 8, 2024
Transcript
Marshall Loeb (President and CEO)
Good morning. I'll start by thanking our team for a strong quarter and year, in which we delivered record FFO per share and record releasing spreads. Our team continues performing at a high level and finding opportunities in an evolving market. Our Q4 and full year results demonstrate the quality of the portfolio we've built and the continued resiliency of the industrial market. Some of the results produced include funds from operations coming in above guidance, up 11.5% for the quarter and 11.3% for the year. For over a decade, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year. Truly a long-term trend. Quarter-end occupancy rose 50 basis points from the prior quarter to 98.2%.
Occupancy would have been 30 basis points higher, but for a lease-but-unoccupied late December acquisition. Our percent leased rose 20 basis points from prior quarter to 98.7%. Average occupancy was 98.1%, which although historically strong, was down 30 basis points from 2022. Quarterly releasing spreads reached a record at 62% GAAP and 43% cash. These results broke the previous record set last quarter and pushed year-to-date spreads to 55% GAAP and 38% cash. Cash same store rental NOI was strong, up 7.5% for the quarter and 8% year to date. And finally, I'm happy to finish the quarter with FFO rising to $2.03 per share.
Helping us achieve these results is thankfully having the most diversified rent roll in our sector, with our top ten tenants falling to 7.9% of rents, down 70 basis points from Q4 2022 and in more locations. We view our geographic and tenant diversity as ways to stabilize future earnings, regardless of the economic environment. In summary, I'm proud of the performance last year, especially given the larger economic backdrop. We continue responding to strength in the market and user demand for industrial product by focusing on value creation via raising rents, development, and more recently, acquisitions. This strength allowed us to end the quarter 98.7% leased and push rents throughout the portfolio. Due to current capital markets, we're seeing broader strategic acquisition opportunities.
It's hard to accurately gauge how large the opportunity may be or when the window may close, but we're pleased with our ability to acquire newer, fully leased properties with below-market rents at accretive yields. As stated before, our development starts are pulled by market demand within our parks. Based on our read-through, we're forecasting 2024 starts of $300 million. And though our developments continue leasing with solid prospect interest, we're seeing longer, deliberate decision making. While we forecast $300 million in starts, we'll ultimately follow demand on the ground to dictate the pace. Based on the decision-making time frames we're seeing, I expect starts to be more heavily weighted to the H2 of 2024. Further, in this environment, we're seeing two promising trends. The first thing, the decline in industrial starts.
Starts have fallen five consecutive quarters, with Q4 2023 being roughly 60% lower than Q3 2022, when the decline began. Assuming reasonably steady demand, the markets will tighten in 2024, allowing us to continue pushing rents and create development opportunities. The second trend is the rise in investment opportunities with developers who've completed significant site prep work prior to closing and need capital to move forward. This allows us to take years off our traditional development timeline and materially reduce the site development legal risk. Brent will now speak to several topics, including assumptions within our initial 2024 guidance. As always, we'll update our forecast as the year unfolds. My belief is that when or if interest rates begin to fall, confidence and stability within the business community will rise.
Brent W. Wood (EVP and CFO)
Good morning. Our Q4 results reflect the terrific execution of our team, the resilient performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the Q4 was $2.03 per share, compared to $1.82 for the same quarter last year, an increase of 11.5%. The outperformance continues to be driven by stellar operating portfolio results and the success of our development and acquisition programs. From a capital perspective, the strength in our stock price continued to provide the opportunity to access the equity markets. During the quarter, we sold shares for gross proceeds of $235 million at an average price of $171.55 per share.
Additionally, we executed on our Forward Equity Program for the first time, securing gross proceeds of $75 million at an average initial price of $183.92 per share. Subsequent to year-end, we settled $50 million, with $25 million in commitments still outstanding. Although capital markets are fluid, our balance sheet remains flexible and strong with solid financial metrics. Our debt to total market capitalization was 16%, and for the quarter, our unadjusted debt to EBITDA ratio is down to 3.9x, and our interest and fixed charge coverage ratio was 9.6x. Looking forward to 2024, FFO guidance for the Q1 is estimated to be in the range of $1.93-$2.01 per share, and $8.17-$8.37 for the year.
Those midpoints represent increases of 8.2% and 7.4% compared to the prior year, excluding involuntary conversion gain as a result of insurance claims, respectively. Notable operating assumptions that comprise our 2024 guidance include: an average occupancy midpoint of 97.0%, cash paying property midpoint of 6.0%, bad debt of $2 million, $300 million in new development starts, and $130 million in strategic acquisitions, $55 million of which has already been executed. During this period of elevated interest rates, we continue to view equity proceeds as our most attractive capital source. In our guidance for the year, we are projecting $465 million in common stock issuances, $75 million of which has already been secured via the Forward Equity Program, as mentioned earlier.
2024 has minimal debt maturing, with $50 million in August and the remaining $120 million not until December. In summary, we are pleased with our solid 2023 results. Thank you, EastGroup team members that are listening to the call. As we turn the page to 2024, 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 final comments.
Marshall Loeb (President and CEO)
Thanks, Brent. In closing, I'm proud of the results and the value our team is generating. Internally, operations remain strong, and we continue to strengthen the balance sheet. Externally, the capital markets and overall environment remain clouded. This is leading to the continued decline in starts. So in the meantime, we're working to maintain high occupancies while pushing rents. And in spite of the uncertainty, I like our positioning, as our portfolio is benefiting from several long-term positive secular trends, such as population migration, nearshoring and onshoring trends, and evolving logistics chains, for example. We also have a proven management team with a long-term public track record. Our portfolio quality, in terms of buildings and markets, is continually improving each quarter. Our balance sheet is stronger than ever, and we're expanding our diversity in both our tenant base as well as our geography.
With that, we'd like to open up the call for your questions.
Operator (participant)
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speakerphone, please lift the handset before pressing any keys. Please be advised that each participant can have one question and one follow-up. If you have any other question, you can come back on the queue. One moment, please, for your first question. Your first question comes from Craig Mailman from Citibank. Your line is already open.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
Hey, good morning, everybody. Marshall, just wanted to touch on the acquisition environment getting a little bit better for you guys. You know, you've been more of a developer over the last couple of years. What are you seeing from a pricing perspective that on a risk-adjusted basis is, you know, compelling relative to where you're developing? And, you know, how much of the remaining, kind of, what is it? About $80 million, $75 million dollars embedded in guidance. What's the visibility of that, and kind of where are the markets that you guys are targeting?
Marshall Loeb (President and CEO)
Thanks, Craig. Good morning. If you'll allow me, maybe before we dive in, I'll let people on the call a little bit of bait and switch. We prerecorded the call. Brent Wood has the flu or is under the weather today, so you've got Staci Tyler. We're in Staci's capable hands and mine, so if you don't hear Brent, he'll be back tomorrow, but he's under the weather today. On the acquisition environment, we've been encouraged in the sense that and it's almost two different buckets. On a portfolio of properties, cap rates have remained low, and they feel more competitive. And by portfolio, I'm thinking three or four buildings where our team's been successful in finding opportunities.
And if I go back to about the midpoint last year till today, we've acquired six buildings and kind of a little bit of color, if it helps. A little over $225 million. The average age is a year and a half old, so they've been new buildings with rents, typically slightly below market, where they, where they got leased up, and it's added about $0.08 a year on our run rate in terms of FFO. If you match it with the equity that we issued in the quarter we closed, is kind of how we were looking at it. They've all been different in that they've been one-off, but in some cases it's been a, you know, a seller who needed to close by a certain date.
One, it was a group that had a property tied up, had gotten it leased and needed funds to close, so we assumed the contract. A marketing process that didn't work out the way the brokers, we weren't originally in it, we came in later, and our, our pitch has been: We may not be your highest offer, but because of our line, and we've been issuing equity, we're your certain path to closing. And two years ago, a year ago, that really wasn't a point of differentiation, and all of a sudden, it's become an ability, and we've kind of viewed it as we wanna own, you know, well-located infill industrial buildings in our markets, whether we build them or acquire them, we'll adjust to kind of where the risk returns are.
And of that batch, our average, I call it GAAP cap rate, they're leased, and it's been about a 6.5 type GAAP return. So that's what's when you compared it to an equity cost in the fours, and a GAAP return at 6.5 on a, on a blended average on brand-new buildings that are like usually, we underwrite a year to lease up a development, and these were 1.5 years old. So that's that was really been a new development in the market, and I, I'll tie it to interest rates. All of a sudden, the people that were underwriting and using low-cost debt, we, we had a more competitive cost of equity or cost of capital using our equity than we normally do.
I think that window will slam shut on us, unfortunately, when interest rates start coming the other way. But in the meantime, we've kind of turned over a lot of stones and found some really what I'd call unique situations, but it doesn't take that many to, you know, to add $0.08 a year to our FFO. So we're excited. Longer answer than maybe you were seeking, but that's really kind of how they've played out. And we've got, I'd say, visibility. We're always in the market bidding on a handful of properties in our markets, and that's probably where we are today. Nothing big coming. And the last comment I'll make, I've been a little bit on that bottleneck. We could have done more.
I'll take the blame for not wanting to use our line, run up our line, and then issue equity. That's really what led us to add the forward component to our ATM in Q4. So now it allows us to match fund the acquisitions a whole lot better than we did, because before I was probably a light switch to the teams in the field, saying, "We've got capital, we don't have capital." And it usually, you know, takes six weeks to a month to run through, or more, the bidding process on a property.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
Okay. And no, that's really helpful. So that 6.5 is probably what? Low six, high fives going in. So when you compare that to cash on cash, kind of development returns and adjust for cost to carry and risk, you guys kind of view it as very favorable.
Marshall Loeb (President and CEO)
Yeah, if you look maybe two parts in our supplement, I may be off slightly, but about pages 11 and 12, we're developing to about a 6.9% GAAP. So if we can buy a 6.5 and take leasing and construction risk away. I will say, and it's been a function of the teams mainly, and the market rents. Last year, what we developed, what we delivered, all leased, and it was in the higher sevens. So we've been coming out ahead of where we thought we would be, thankfully, on our developments. But, you know, a new building and that delta between a development and an acquisition, all of a sudden looked more attractive for this moment in time.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
Okay. And you led me to my next question, which was gonna be the introduction of the forward. So really, you'll kind of use the ATM to fund near-term spend that you need, and the forward is more for when you think you're gonna be kind of closing on an acquisition. You may employ that, if it makes sense.
Marshall Loeb (President and CEO)
Yes, and I think the other thing, I think that's true, and I know we'll see you here in a month, so more input's welcome when we sit down. We've viewed the forward, if it's an attractive price, and attractive meaning, you know, at or above our internal NAV, at or above the street, and we feel pretty good about ideally, the uses, being it's our own development pipeline or acquisitions. If we have a year to take down the forward, if we can get out ahead of it and really pre-fund some, so we know we've got that capital, but we don't have to pull it down today, it's really, it's another kind of tool in the toolkit and a nice one.
So because acquisitions are so clunky coming and going, you know, I didn't want to—I was nervous. I didn't want to run the line up, and then you have to issue equity to kind of get back to where you want to be. Because if we're using debt, we're, it's kind of where you went. You're buying at a low six cap, and you're funding at a low six cap today, so we don't like that. But if we can use our equity and maybe get a little bit ahead, we'll either use it on developments, which we know we'll have, or a leap of faith, that out of the five properties we're always bidding on, someone's going to say yes to us eventually.
Staci Tyler (EVP and Chief Accounting Officer)
Yes, and one thing I would add to that, Craig, is just the timing. So much of the year, we're in blackout due to earnings, you know, as a public company, so it just gives us flexibility on the timing of, of when we can receive the cash. We don't have to be in an open trading window in order to actually receive the funds. So that gives us some additional flexibility.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
If I could slip one more in, and maybe.
Marshall Loeb (President and CEO)
Okay.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
By the way, congrats on your promotion.
Staci Tyler (EVP and Chief Accounting Officer)
I appreciate that. Thank you.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
The G&A ramp this year looks a little bit more than what you typically have. Is there something one-time in that number?
Staci Tyler (EVP and Chief Accounting Officer)
The main driver there, about two-thirds of the additional G&A in our 2024 guide, is due to a slowdown in development starts. So we have our internal development team that spends their time on development and construction activities. We capitalize a portion of the costs related to that team, based on the development projects that they're working on. So in our guide, in 2023 we had $360 million of development starts, and our guide for 2024 is $300 million. So that slowdown in development starts means that we have, you know, less in development fees that we'll be recording. When we record those fees, it's a reduction to G&A, and it adds to the basis of the properties. So hopefully, there's some upside, and that hopefully G&A ends up being less because we're able to start more development projects.
But to be conservative with, you know, making prudent business decisions, we felt like it was best to lower the guide for development starts, and in turn, that added about $0.05 of G&A compared to 2023. That's the main driver. And then we—you know, our team's growing as the company grows, so we, you know, adding a few people to the team and then typical additional investments in other aspects of G&A, ESG, and, and some other matters. But the main driver there is the development fees.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
Is that partially offset, though, by lower cap interest drag from starting those projects? So is it a full $0.05, or is it something a little bit smaller?
Staci Tyler (EVP and Chief Accounting Officer)
Well, it's really, it's really two separate things. So we have capitalized interest, but then these internal development costs are really more personnel costs.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
Okay.
Staci Tyler (EVP and Chief Accounting Officer)
The impact to G&A is for our team's time that they spend on the development projects.
Craig Mailman (Director and Equity Research Analyst, Real Estate and Lodging)
Got it. Thank you.
Staci Tyler (EVP and Chief Accounting Officer)
So it's offsetting salaries and other compensation costs. You're welcome.
Operator (participant)
Your next question comes from Jeff Spector of Bank of America. Your line is already open.
Jeff Spector (Managing Director and Head of U.S. REITs)
Great. Thank you. Good morning. First question, I know we constantly talk about onshoring, nearshoring. Marshall, I know you mentioned it quickly. I guess, could we just touch on that? Anything new there in light of, you know, what we're seeing in terms of, you know, potential impact on ports, et cetera? I guess, you know, if we could touch on that first. Thank you.
Marshall Loeb (President and CEO)
Sure. Hey, good morning, Jeff. You know, I guess we view it, or my view, in case it's wrong, it's really a long-term trend. You know, when people make the decision on their kind of China plus one manufacturing, which port it comes through... And I think that I was kind of reading through some of the pieces on the Suez Canal, that's why there's. Look, you can make money being an owner and a developer around ports, but it really reinforced to me, that's a very fluid, dynamic environment. We want to be near the consumer and a growing base of consumers, 'cause I don't think that flips from Houston's gaining market share from L.A., and then last year, L.A. is gaining it back, and things like that.
Although we like both of those markets, we do feel when I look at El Paso, we're 100% leased, Phoenix, 99%, San Diego is strong, and some of our best rent growth markets in our company are in those, in our portfolio, are in those markets. So we still feel long-term strong, and it really is, you know, a function of we're looking for opportunities in all of those markets to kind of, you know, take, you know, take steps one at a time to grow our portfolio. We're really. We've looked for that next opportunity in San Diego and El Paso. We're active there. Phoenix, we've got some development land. It's really a timing issue of when we kick that off, but we like that segment of our portfolio.
What I like, and I was reading, you know, when you look at where so many of the EV manufacturers are, you know, besides the nearshoring, which I know was your question, but on the onshoring, it really, they run through the Carolinas, Georgia, and into Florida, and then certainly Texas is seeing a lot of kind of technology manufacturing. I like the tailwinds we have, whether it's green energy, we seem to get an awful lot of it within our footprint in the Carolinas and Georgia, and then what we're seeing in Dallas and Austin, especially in terms of more tech. And we, again, we won't have the manufacturer, but we'll have the supplier, and if we don't have the supplier, there'll still be that ripple effect of just growth in the local economy.
Jeff Spector (Managing Director and Head of U.S. REITs)
Great. Thank you. And then, again, a follow-up on the acquisition guidance. I believe you talked about the $130 million. Is that? That's strictly for operating properties. Can you talk about, I guess, land purchases in 2024?
Marshall Loeb (President and CEO)
Sure. We've got a little bit of land, yeah, and on acquisitions, I'll preface it, that's always a hard... Look, we've usually missed that number. Obviously, we spent a fair amount of that. We had the Spanish Ridge in Las Vegas, which we closed. I hope we beat that number. If we find the right opportunities and we have affordable capital, we'd like to beat that number. On land, we have land that we have tied up as EastGroup. Maybe it's kind of come in the last year, two different ways. Land that we tie up, and we'll try to get as far through the zoning and permitting and wetlands issue and everything else that may come up before closing, to kind of minimize that time between closing and and we've got a few parcels tied up currently.
You saw us close, and then some, like in Atlanta this year, where it's another kind of newer path to finding land, has been someone's approached us, and they've done all of that work, but now you're not selling forward lands, you know, on a forward sale that you used to, and that's expensive. So they've come to us, and we've seen it in Denver and Tampa, Atlanta, and in Austin a couple of times, where it's another local regional developer has done all the legal work and things are ready, and they could use our help in closing. Either we buy it completely for them or, you know, work out some kind of venture where they have upside. And that's been an interesting new path, kind of given the constrained capital markets, where the legal risk, because sometimes we don't get through the zoning.
Everyone, we say, wants their package delivered quickly. You just don't want it to originate from your neighborhood. So kind of that NIMBY effect, where we've tied up land and sometimes we don't close it, and it's a kind of a dry well of you've put some time and money into it, and you have to walk away. But we like where people have come to us at the eleventh hour to kind of help them get it closed, and that's the other part. So it's the land we have on our balance sheet, we feel good about, and there's always another kind of, to me, it's like an iceberg, the part you don't see. If we've got another, you know, 100-200 acres tied up here and there, where we're kicking tires, and if everything checks out, we'll go ahead and close.
But we have, you know, we have it under control, but we haven't closed yet. So we feel, you know, it's market by market, but overall, I'd say we feel pretty good about the land we have. And I think things are going to turn, given the drop in supply, when the business environment stabilizes a little bit. I could be optimistic about our starts this year. I think it'll be a fairly quick or reasonably quick turn, where buildings are going to fill up, and there's not a lot of inventory in the stores, especially in our size range right now. The vacancy's higher in the big box, and it's still fairly tight in the 200,000- and below-size buildings.
Jeff Spector (Managing Director and Head of U.S. REITs)
Great. Thank you.
Marshall Loeb (President and CEO)
You're welcome.
Operator (participant)
Your next question comes from Alexander Goldfarb of Piper Sandler. Your line is already open.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Hey. Oh, great! Hey, good morning, and Staci, echoing Jeff's comments, congrats [Uncertain] on the promotion. So that's awesome.
Staci Tyler (EVP and Chief Accounting Officer)
Thank you, Alex.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Hopefully, the comp committee takes notice. Two questions here. First, just going back to the ATM, Marshall. EastGroup has long used, you know, the ATM to fund its, its investments. Going to a forward is, you know, that's sort of a playbook out of what the apartment guys have done more over the past few years. So do you see you shifting in terms of how you use the ATM? Or what was it about the forward issuance now, where traditionally, you know, you guys have been, you know, quite comfortable using, you know, sort of a traditional ATM mindset? And then, Staci, does this affect timing of the settlement of the shares?
You guys have issuance in the guidance, but I'm not sure now if, you know, we should think about this settling later in the year or, you know, sort of modeling ratable as we normally would.
Marshall Loeb (President and CEO)
Okay. Hey, Alex, good morning. On the ATM, look, we still like the ATM a lot, and we'll, we intend to use both. And really, as we've, you know, again, we're, we've thought, given where, you know, you're always historically tempted to use your line, short-term debt with long-term assets is how you get in trouble as a REIT. But our line cost is higher than our equity cost for this past year, so we'll use the traditional ATM probably until we really get the line to a fairly low or flat balance. And at that point, if we still like the price, given the blackout periods and things like that, that Staci mentioned earlier, that's probably where, you know, if I generalize, that's where we'll toggle over to the forward.
It's money that we know we will have a good use for, and we're at attractive pricing, and we can kind of put that on the shelf for... It's really when you need it. You give the banks a couple, you know, 48 or 72 hours notice and bring it down later. So that's how we're thinking. We'll still use both, and we'll probably have a limit, where we will have a limit on how much we have of each. We're not gonna get out too far over our skis in terms of uses, but it gives us an ability to kind of have equity on the shelf, like when we closed Las Vegas earlier in the year, even though we're in a blackout, we were able to fund that through the forward. And Staci, I'll let you...
I'll echo the congrats, definitely well-deserved, but I'll let you talk about the timing.
Staci Tyler (EVP and Chief Accounting Officer)
Yes, sounds good. Yes, and I agree with what Marshall was saying, that the forward will continue to issue under the regular ATM as well. It's all part of one program, so we can easily toggle back and forth, and some of it will just depend on the market, pricing, timing, whether we're in blackout. But what we have built into our guidance is funding laid more heavily weighted to the back half of the year, and that really is in line with the timing of potential development starts and acquisitions. But, you know, all of that will obviously change based on market conditions and actual.
But in terms of the actual funding, when we execute a forward, like Marshall said, we can have that forward outstanding, and then whenever we need the funding, we, you know, just give 24-48 hours notice, and then we issue the shares and actually receive the cash. So it gives us a lot of flexibility in terms of our cash needs. And we know that we have the forwards that we have outstanding on the shelf. We'll hope to add to that, and then in the meantime, we can issue under the regular ATM as long as we're not in a blackout.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay, second question is, and Brent's not on the call, so you guys will have to fill in for his conservative assumptions. But, you know, the past, this year and then the past two years, you guys have come out with, you know, expectations of occupancy drop and sort of a, hey, things could get worse. And in fact, you know, the market's held up well, your performance holds up well, and the occupancy outperforms, everything does well. Yes, we hear your comments about just normal caution, hey, it's the third year in a row. But still, what, you know, is it just normal EastGroup caution that's causing you to think occupancy could drop 100 basis points?
Or are you actually seeing, you know, pushback of client, of tenants or, potential for credit issues or trouble backfilling space, longer downtime, et cetera, that's leading you, to the occupancy drop?
Marshall Loeb (President and CEO)
Good question, and I'll—Staci, jump in. I'll say it, it's really more return to the norm. The last two years, you know, given our 40-year history, we've had our record occupancy and tied it at 98% the last two years. So there's no major known move-outs, there's no major identified bad debt or anything that's, any specific space that's keeping us up at night. It's more things have been really good for a few years. I think at the beginning of the year, especially, are they gonna keep on this path? And especially now with higher interest rates, global unease, that it feels like things could rotate back to the normal a little more. And then I think the other thing that affects us on our same store, because people are...
This is unique to EastGroup, a little more deliberate right now, understandably, in growing their businesses. About a third, at one point, of our development leasing was to our existing tenants, and so we still have that, especially Florida and Texas, where our developments are leasing up to customers. And what we were seeing in the budget, where before we may have 60 days of downtime, now it's four months of, you know, look, we'll try to minimize it. That's our goal as best we can, but we underwrote a little more vacant, downtime before. When that tenant goes to phase or building 6 in a park for us to re-lease building two, will probably take us a couple more months. So that hits our occupancy, and it especially hits our same store, but we view it, someone's going to counter...
If one of our tenants needs to grow, someone's going to accommodate that growth, and that's why we like the parks, and that's part of our initial sales pitch when they come in, is we can always tailor your space for you up or down, moving you within a park. And so that's still happening, and as one broker described it, I thought it was a good way, with rents being higher and the lease commitments being higher in dollars, it's moved from a real estate manager decision to a CFO decision at so many of these companies. And so people are being slower and maybe deliberate because of the environment. And again, kind of like acquisitions, except on the flip side, and I may be tying too much to interest rate moves.
I think when interest rates do come down, there'll be a little bit of a lag effect, but that's when I'm hoping that tenant demand will take off, that our retention rates are higher, and a lot of tenants have renewed, really across the country, if you look at some of the stats. But I think people will move back to growth, and what I get excited about is there's been no starts, and if we can keep our balance sheet safe and we have the right land, we'll be able to pick up our development pipeline faster than our private peers will.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay, thank you.
Marshall Loeb (President and CEO)
You're welcome.
Operator (participant)
Your next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is already open.
Todd Thomas (Managing Director and Equity Research Analyst)
Hi, thanks. First, can you talk about the leasing activity that's embedded in guidance within the lease-up portfolio? You have a few conversions scheduled for Q1 and Q2, about 1.4 million sq ft in total that's scheduled to transition to the operating portfolio during the year. What's budgeted in guidance in terms of leasing, and can you just talk about your confidence around getting those buttoned up ahead of the conversion date?
Marshall Loeb (President and CEO)
Yeah, Todd, good morning. If I'm following you, I think what we would say of our, you know, kind of looking at our 2024 transfers, we're today, as we sit, we're about 60% leased on those. Feel good about the activity. I'd say leasing activity was a little bit slow, you know, and the brokers would probably tell me it's because of holidays. It felt slow to, in terms of people out kicking tires late last year. It feels like things have picked up or they have in the last 30-45 days. So we're. We have activity. We need to convert that into signed leases. Of the transfers this year, the majority of it is the back half of the year, so we still have some... Look, we've got. That's really our task this year.
We've got that budgeted, leasing up kind of, you know, in pieces here. And then if we're fortunate, like you saw, there's a, one of the Orlando projects, we were able to get that lease this quarter, and all of a sudden it jumps from a 2025 stabilization to a 2024. So that one will move up the ladder. The other, maybe upside to our budget, if I daydream about it, is we get some leasing done on some of the ones that are projected to stabilize next year or just stabilize early. And that's the other thing that will lead to more starts, because we like having that available inventory within our parks, especially to kind of keep moving through. And so we've got a, you know, a pro rata amount. I think the back half of the year is our portfolio.
We think occupancy will probably, it usually does, dips a little bit through, call it June, and then it builds towards the back half of the year, and that's probably where the economy will go, too, I think, is supply dwindles and hopefully confidence picks up. That's where I think the back half of our year will be better than the H1 of the year. Not that the H1 will be bad. I think it'll just be better.
Todd Thomas (Managing Director and Equity Research Analyst)
Okay, and then you mentioned that activity picked up, I guess, in the last 30-45 days. We've heard similar commentary on other calls this quarter. Just curious if you can characterize demand and touring activity today, you know, relative to pre-pandemic levels, you know, 2019, for example, how would you sort of, you know, compare and contrast?
Marshall Loeb (President and CEO)
Probably very similar to pre-pandemic, other than the lease, as I mentioned earlier, the lease commitment's greater, and so it, well, the description I've heard from one of our tenants, I have more approvals to get, you know, their brokers. Like, it takes more approvals to get this done, which adds time. There's activity, I'll say, but you know, maybe post-pandemic, and I think that's maybe what happened in Southern California. People had a fear of losing out on space, and so there was, there was a tenant rep broker told me, "My job's not fun anymore because as soon as I leave, there's two or three other people looking at this space".
I would say tenants don't have a sense of urgency right now that they had maybe in late 2021 and into early 2022, but they're out there, and they're looking at it. And I think people at one of the charts we were looking at in terms of renewals, the last several years, about one in every 4 sq ft has been a renewal, and then over the last year, it's moved to one, well, I'd safely say there's pent-up demand about 1 in every 3 sq ft. So renewals have jumped up from, call it, 25% to 1/3 of the leasing activity.
And I think my amateur analysis of that is that people are probably being patient and waiting to see what happens, whether it's interest rates or global unease or an election year. But once they feel like it's safe to come back in the water, I think the gate will be open, and that's where I hope we have a head start, either in maybe two ways: pushing rents within our portfolio, or we've got the land, and we'll try to have the-
Our goal is to have the permit in hand and the balance sheet, too, whether it's through the forward or the ATM, to really move several quarters ahead of our private peers, which is really who we compete an awful lot with on our size buildings, rather than the bigger groups have more capital they've got to put out, so they lean towards the big box development rather than our $15 million buildings.
Todd Thomas (Managing Director and Equity Research Analyst)
All right, great. Thank you.
Marshall Loeb (President and CEO)
Sure. You're welcome.
Operator (participant)
Your next question comes from Bill Crow of Raymond James. Your line is already open.
Bill Crow (Managing Director of Real Estate Research)
Thanks. Good morning, Marshall and Stacy, and I'll say good morning to Brent as well. He should be asleep, but I'm sure he's listening at home. Marshall, just a follow-up question on the guidance on occupancy. I'm just wondering if Q4 occupancy was boosted at all by any seasonal demand that you saw?
Marshall Loeb (President and CEO)
Kind of, no, not really. Not really. Hey, Bill, good morning. I mean, we kind of... It was within our budget, and then actually we came out ahead of our budget.
Bill Crow (Managing Director of Real Estate Research)
Right.
Marshall Loeb (President and CEO)
You know, usually at the end of the year, probably what we've probably talked about before is the post office or someone like that will take space, you know, on a 90-day basis. But I can't really find. I don't think we had any of that this year. It was really just a pickup in demand and, and, and thankfully, our occupancy picked back up, and we've kind of said that's, if it helps, kind of our goal is if we can hang on to our occupancy until all this supply gets absorbed, because there's nothing coming in the pipeline behind it, that'll be a really good time to play offense. So it wasn't. Thankfully, it wasn't seasonal. I mean, I do think our occupancy may drift down like it typically does in the Q1.
It may not be 98 plus, but at least through February, we're pretty much in the same zip code as where we ended the year. It's still... It's not like there's been any big movements. I'm sure it's 20 or 30 basis points one way or the other, but it's not much movement.
Bill Crow (Managing Director of Real Estate Research)
All right. And the second area of guidance I want to challenge you on a little bit is on the equity issuance assumption. I guess I'm more ambivalent than others about where it's coming from or which bucket it's coming from. But if maybe, Staci, it would be helpful if you gave us a sources and uses. It just feels like you're leaning so heavily and maybe unnecessarily so on the equity portion of funding this year.
Staci Tyler (EVP and Chief Accounting Officer)
We'll certainly monitor the debt markets as well. We just as we were putting the building blocks together for 2024 guidance, you know, at the time, it just seems more prudent and to make more sense at a lower cost of capital for us to issue equity. We can certainly easily shift that to debt if rates come down or if, for whatever reason, the equity markets were to get away from us. We have $170 million in debt maturing later in the year, so that's, you know, a use, and we'll need to fund for those repayments and then for our development starts and acquisitions that we have included in guidance.
We, you know, just felt, given the, the cost of capital when we evaluate the options, equity is the lower cost of capital and, and seems to make the most sense today. But we could easily see where that shifts, and if the total stayed $465 million, you know, maybe $150 million could shift to debt, but that's just not an assumption that we wanted to build in, given the current cost of that, you know, of equity versus debt.
Bill Crow (Managing Director of Real Estate Research)
At this point, you're assuming that the overall debt outstanding goes down by $100 million or $170 million this year. Is that, is that fair?
Staci Tyler (EVP and Chief Accounting Officer)
Yes, that's fair. With the maturities that we have, in August and December. That's correct.
Marshall Loeb (President and CEO)
It's not that we're trying to. We're very. We like our balance sheet today, Bill, if it helps. It's not that we're trying to strengthen it so much as Staci said. It's just... I don't remember many, if any, times in my career where our cost of equity has been materially lower than our cost of short-term debt.
Bill Crow (Managing Director of Real Estate Research)
Yeah.
Marshall Loeb (President and CEO)
But I think as that does evolve, it will and it will shift back to kind of assume the historic norm, that we'll have a balance sheet in a position where we'll have a fair amount of debt capacity and still have a very safe balance sheet.
Bill Crow (Managing Director of Real Estate Research)
All right. That's it for me. Thank you.
Marshall Loeb (President and CEO)
Okay. Thanks, Bill.
Staci Tyler (EVP and Chief Accounting Officer)
Thanks.
Operator (participant)
Your next question comes from Samir Khanal of Evercore. Your line is already open.
Samir Khanal (Fundamental Research Analyst)
Thank you. Hey, Marshall, can you provide a bit more color on California? You know, when I looked at the page where you provided the market breakdown, you know, looking at San Francisco, NOI growth slowed considerably. And then, I guess, just expand on kind of what you're seeing in Southern California as well, you know, in L.A. and San Diego. Thanks.
Marshall Loeb (President and CEO)
Sure. Hey, good morning, Sameer. I'd say San Francisco, we've had, and we've got—we had some vacancy there. We had a value-add we bought that's now 100% leased, but it took us a little bit longer than we had hoped to get that—it's a 60,000 sq ft vacancy, to get that foot to bed. And then in the Tulloch portfolio, there was a 3PL that left. We've got about half of that space leased now and activity on the balance, but that's—it was really vacant. That's what impacted our same-store, or pulled our growth down and occupancy down in San Francisco.
It has both of those markets, maybe a little bit more San Francisco and LA. They've been great historically, and those are markets where you watch, and it certainly had a lot of layoffs in technology in the Bay Area. It feels like it's stabilized. We're not really in the city. What we read is this, kind of, reading through it, the city stats are not great. We're in East Bay and in the North Bay market. Those have been a little more stable. And then in LA, it feels there, especially as you get into the Inland Empire, and we're not in the Inland Empire East.
We have some in the Inland Empire West and some in South Bay, which is the ports and Mid-Counties markets, that it was so red hot, it really got out, almost like you get out over your skis, and then a lot of the 3PLs have given space back, and rents have come backwards in those. They ran up, they more than doubled, and now they're retreating a little bit and kind of finding stability, we think, in those markets. Thankfully, we've been full, and we've really, it's been more hearing and reading about L.A. than really impacting our portfolio. We have a couple of spaces turning this year in L.A., not a lot, but, you know, for us, it's about 6% of our NOI that we'll address.
But that market, if you said which ones that we're in feel like they've had the most instability, it's that one, but it's probably because, you know, we've... I kid it as we look at our own thing, you know, something that takes off like a rocket, usually lands about as gracefully as a rocket. So it was one of the hottest markets, and that's why we like diversity and geography, and we like diversity in our tenant base, too. Look, we enjoyed the run-up, but it, it makes you a little nervous when things turn. There's no, we can go to Florida, right, and build buildings or lease and do things like that. San Diego's been stable throughout it. We like San Diego a lot. That's been the most stable of the three markets. We'd love to find the next value creation opportunity there.
The Bay Area, we just need to get the space leased, but I'll admit it's taken a little bit longer than I historically would have thought that those markets maybe have gone. I know I've talked to one of our peers who were saying they've gone from good to great, maybe, or great to good in those markets.
Samir Khanal (Fundamental Research Analyst)
Got it. And then I guess, just a second question on maybe development starts. I mean, you did talk about supply coming down right in the H2, which is similar to what your peers have stated. So, I mean, could we see you ramp up your development starts? I mean, how are you thinking about that?
Marshall Loeb (President and CEO)
Yeah, I hope so. If it, if it's helpful, maybe two slides I'll mention. Here's what's the danger. I wish it was a Zoom call rather than a call. On page 10 of our investor relations, our slide deck, it starts. So people can look, and that's all sizes, but that'll show you kind of how fast they've come down the last year plus now, and I expect fourth-Q1 to look similar to Q4 last year. It, it won't be much of a pickup, so when people do come back, the shelves of the store are going to be pretty empty. And then on page 12 is really the vacancy by size range. And to me, that—these are both CBRE slides, by the way.
That's pretty impactful, where you can see the supply that has not gotten absorbed over the past year. It's really in the Big Box space, that the Shallow Bay is still pretty full, and our starts have come down as much, if maybe not more, because it's less institutional. So, where we've modeled our starts, and I think we're being prudent, when we see people moving deliberately, we'll, we'll go as fast or as slow as kind of the field dictates on our starts. We've modeled $300 million. We've modeled it more towards the back end of the year. That's really heavier for starts, and as Staci mentioned, that, that cost us about $0.05 in earnings, which isn't fun. I mean, at least it hit our G&A, but we think it's the right... It's a long-term business. That's the prudent business decision.
And I think if, or certainly if people feel better about the economy and want space, we'll try to get inventory on the shelves as quickly as we can. That's why we like, you know, having our long-standing relationships with the general contractors, having the permits in hand, having the GCs, everything ready to go. And I, and I like about industrial compared to some other product types, that we can deliver it pretty quickly, and, and certainly in this environment, because I think there'll be a lag effect for supply to catch up for demand by, you know, several quarters. And that's where I, I hope it should be a good, well, we need to capitalize on it, but that should be a really good opportunity for our company.
Samir Khanal (Fundamental Research Analyst)
Thank you.
Marshall Loeb (President and CEO)
Sure. You're welcome.
Operator (participant)
Your next question comes from Vincent Tibone of Green Street. Your line is already open.
Vince Tibone (Managing Director of Retail & Industrial)
Hi, good morning. I'd like to keep the dialogue going on just the broader supply landscape. So just within your markets, what percentage of new supply do you estimate to be light industrial and competitive with your portfolio? And then also, are there any markets where you're concerned about, you know, overbuilding and potentially, you know, market rent declines for your type of, you know, your type of building in the near term?
Marshall Loeb (President and CEO)
Yeah, hey, Vince. Good morning. We typically, we'll say, and I don't think that was any aberration, 10%-15% of supply is competitive supply, because although we get questions of can they break up a Big Box for more Shallow Bay, really the dimensions, and it almost helps if we had a, you know, an architect plan in front of us. Those spaces get awfully long, awfully narrow, and awfully expensive for those landlords. So the loading, you know, the runs for the forklifts get awfully long. The loading, you get two doors rather than 10 doors, dock loading doors and things like that. So 10%-15%, and at the markets where we're watching, besides L.A., that I mentioned earlier, that we're watching supply the most, it would be Austin and Phoenix, that there's a little bit of supply.
We've got good sites there, and that's maybe where we've pulled back on starts, and input's welcome. I've kind of said, in case I'm wrong, it's me, that I'd rather be a quarter or two late than a quarter or two early. So we're going to try to let some of the supply that's out there clear the market, and then I think there'll be a calm, and then, and again, it will take us 10 months to a year to deliver. So it's not. We're not putting the space on the shelves today, but when do we pull the trigger? We've got sites that I really like long term in both markets, but we've said, let's be a little bit. I never want the team in the field to feel pressure from corporate to have a start.
So let's be patient and watch it, and we're watching it closely. As the inventory gets absorbed, how fast do we go? I've not seen rents come backwards in any market, other than L.A. right now. That's the only one I'm aware of that I'd say, where I've seen rents actually turn, and especially turn in our product type, because the vacancy is a little, thankfully, a lot less, a lower rate than in the Big Box.
Vince Tibone (Managing Director of Retail & Industrial)
No, that's all really helpful color. Appreciate that. I just have, you know, one quick follow-up on the same-store guidance. Are you able to provide cash releasing spreads that are assumed within 2024 guidance?
Marshall Loeb (President and CEO)
We really have not. One, because we haven't been all that accurate on it. I have not disclosed that. I think, you know, last year, maybe two parts to same store are. Thankfully, our same store occupancy, and it, this is in our supplement, was 98.4%. So I think it'll be a good number. We've budgeted 97%, so a good number. It's just coming off what I think is a record, and I would expect releasing spreads. I think the rent growth will moderate this year. I think it'll still be positive, but will moderate. But I think with our embedded growth, I would expect our releasing spreads to be similar. They actually, on a GAAP basis, got better. You know, each quarter was better last year for us.
I don't see that trend changing materially this year, and so the cash releasing should follow that or will follow that as well. And that's, without saying a number, that's probably pretty much what we've modeled, maybe a hair below it, just in case it does moderate some.
Vince Tibone (Managing Director of Retail & Industrial)
No, that's perfect. Thank you so much.
Marshall Loeb (President and CEO)
You're welcome.
Operator (participant)
Your next question comes from Ki Bin Kim of Truist. Your line is already open.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
Thank you, and congratulations, Staci.
Staci Tyler (EVP and Chief Accounting Officer)
Thank you, Ki Bin.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
So Marshall, just want to go back to some of the comments you made. I mean, you guys have an excellent balance sheet and significant financial flexibility, and like you mentioned, that your cost of equity is lower than your cost of debt. You know, going back historically, EastGroup has, you know, I don't think it's ever been known to do very large-scale M&A or portfolio deals, but given that this situation is a little bit different for you guys, does that change your thinking at all on larger scale portfolio deals? Or is it more of a philosophical thing where when you buy portfolios, you end up having to sell a decent chunk, so maybe that's not as attractive?
Marshall Loeb (President and CEO)
Yeah. Now, hey, good morning, Ki Bin. That's right. And, you know, one, we don't wanna make reckless moves, but I'd like to think, look, we did buy the San Francisco portfolio, and that was a unique situation where just about everything, 90%+ of the NOI was what we wanted. It's usually twofold. We-- Either we don't like enough of the portfolio to make kind of the net cost when you think of the cost of selling those assets that you don't want and things like that, or probably I'm being modest, and the real reason we don't is we usually just get clobbered by somebody bigger that's willing to underwrite higher rent growth and a lower, you know, levered IRR and things like that. So usually we ask the homecoming queen out a lot, and we don't get a yes.
So we—you know, look, I'd love to find—if we can find opportunities to grow the portfolio smartly, you know, we're all about it. Usually, portfolios draw more attention, and you get more people bidding on them, you know, to a certain scale, where it becomes maybe only Prologis and Blackstone or Link. But outside of that, you usually end up with a lot of competition, and we don't win those bids. But if we found one that lined up, you know, like we did in the Bay Area, we're willing to roll up our sleeves and try to make it work at a number that works for what we think for our shareholders.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
Do you think portfolio deals have a discount today? And you know, approximately, what does that look like?
Marshall Loeb (President and CEO)
You know, I don't. They probably have a discount to where they were, where I remember the broker saying, if you put things together in a portfolio, they're actually worth more. You know, it's hard 'cause we've done better finding one-off, kind of unique situations buying. When I look at, not every one of the six we've bought and call it the last six months, but the majority of them, there was something unusual about it, and it was a timing situation or something where we've - I think we've gotten better value than the market, really, at that moment in time, and, and most all of those. So I still think, and where we bid on portfolios, there was one in, I'll say, Georgia, it was Atlanta. There was one in Texas fairly recently.
It were, you know, a handful of buildings where we did not make it to the second round. And so I still—I don't think the premium is maybe what it was, but there's still a premium, or I just. There's one on the market now, and it's a large portfolio. But even then, and I'm sure they'd take an offer on all of it, they've broken it into about five different buckets that you can bid on. So usually people say "We'll take an offer on all of it or any parts of it", but kind of human nature, their preference is probably still to bundle it and get as much of it out the door to one buyer. So we'll certainly-Look, I like your thoughts, and we've got the balance sheet.
Today, thankfully, we wanna be mindful of that, but if we can find a portfolio acquisition, you know, I'd love to say, well, you know, you'll be the first to know about it. We'll have it. It's just historically, we like 2/3 of it or 3/4, and we don't like the other part, and then we got to sell it, and you have the transaction cost, and your effective yield goes down with all of that. Or we like it, but there's 10 people in line that, you know, are willing to take on more risk than we feel it's worth at that moment in time.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
Okay, thank you.
Marshall Loeb (President and CEO)
Sure. You're welcome.
Operator (participant)
Your next question comes from Michael Carroll of RBC Capital Markets. Your line is already open.
Michael Carroll, CFA (Managing Director and Senior Analyst)
Yep, thanks. Marshall, I just wanted to circle back on your comments regarding developments. So for EastGroup to kind of be more aggressive pursuing new development starts, do you need to lease up your projects and lease up right now or in process, or do you need to see the broader competitive set see some leasing?
Marshall Loeb (President and CEO)
Yeah. Hey, good morning, Michael. Yes, I guess I'm kind of—I don't mean to give a short answer, but a little bit of both. I mean, I think in Austin and Phoenix, as I mentioned, we're watching the competition on the ground, and there, especially in Phoenix, we're full, and we don't have a development underway, but we said, Let's let the, you know, field clear a little bit before we jump into all of it. Typically, it is. It's, but it's also our existing product, and the way it would work would be we're in phase three of a park. If roles reverse, Staci and I will call you and say, "Hey, Michael, we're 50% leased. I've got another lease out, and I've got three proposals out.
I'm going to run out of inventory," and the tenant rep brokers want to see that visibility, that when they promise their customers, it's going to be delivered. So that's why we build stack, and so we'll get out ahead of that and starting putting more inventory out there. And that's really, to me, I like our model. It's reactive to the market, and it makes it really easier for me. It's... Look, we know if phase three isn't leasing up, kind of in your question. Building phase four doesn't solve our vacancy issue.
If phase three is going really rapidly, we'll try to get to phase four as quickly as we can, and then try to buy the land adjacent to or around that park as close as we can, because we know we've got a proven product, and it really becomes a manufacturing process of just putting similar buildings up, and hopefully, then you get a critical mass of tenants, more than you want to know. Then we're really helping our customers grow and moving them within the park.
So that's really reactive to calls, but every once in a while, like right now, we'll say, even though we're full in Austin and we're full in Phoenix, there's a lot of people that are out there with space on the ground that we'd like to see that clear a little bit before we jump into those markets. And look, if I pick two of our fastest-growing markets in our portfolio, if those aren't the two, they're right there at a, you know, historically, top five growth cities in the country. So I think that inventory will get absorbed pretty quickly in those markets, and then, you know, we don't need to be the third developer. We may not be the first developer to follow too early, but I don't wanna be the third one either.
Michael Carroll, CFA (Managing Director and Senior Analyst)
Okay. And those projects that you're kind of mentioning that you want to get leased up in the broader market, are those, I guess, shallow bay properties that are directly competitive yours, or are they more outside the market, kind of the larger buildings that might not directly compete with you?
Marshall Loeb (President and CEO)
Yeah. No, good, good thought. It's you know, if it's big box that's vacant, that really doesn't... You know, it may as well be a hotel. That really doesn't affect our thinking. And those markets, there's a decent amount of shallow bay that's out there that's either delivered or being delivered, enough to kind of tell us, like, "Look, maybe the right long-term decision, let's wait a quarter or two, and there's really not much downside to, you know, being patient." Actually, hopefully, there's a reward for being patient and seeing how things play out, than, "Hey, we've got to go just because we put it on a sheet of paper, that we said we're going to break ground this quarter." So that's kind of how we're looking at it.
We'll monitor it, and hopefully, it picks up during the year. As soon as that starts to clear, we'll get moving fairly quickly on those.
Michael Carroll, CFA (Managing Director and Senior Analyst)
Okay, and then just last one for me. Like, with you doing all the pre-development work on your projects, I mean, how quickly once you decide to go vertical, can you have it completed and delivered?
Marshall Loeb (President and CEO)
It used to be 6 months, was kind of our answer. During COVID, it got as long as a year. It's probably back to 9-10 months. Electrical equipment, construction costs have come down from the peak, maybe 10%-15%, thankfully. And right now, I guess maybe it's the push towards green energy, getting the electrical equipment, transformers, switchgear, all the things like that. We'll order it, but that's still about a year lead time. So the supply chain's better, but it's not perfect.
Michael Carroll, CFA (Managing Director and Senior Analyst)
Okay, great. Thank you.
Marshall Loeb (President and CEO)
You're welcome.
Operator (participant)
Your next question comes from Jason Belcher of Wells Fargo. Your line is already open.
Jason Belcher (VP and Equity Research Associate Analyst of Real Estate)
Good morning out there. Just wondering if you could talk a little bit about any pockets of strength or weakness you're seeing across your different tenant industries, whether or not there are any groups that might be more aggressive than others in taking space, or if others have maybe decreased requirements more abruptly than others.
Marshall Loeb (President and CEO)
Sure. Good morning. Food and beverage is kind of one that's picked up of late. Construction, a little bit, which is odd, but maybe it's the government projects and things like that. Home building, maybe some of that. So we've seen some construction, some food and beverage. And as I mentioned earlier, when I think things hopefully turn later, the first type tenancy that they're usually the first in either direction, are the third-party logistics firms. So we're still seeing activity from them, and I think when things turn, I think they'll be the first ones out there picking up contracts and gobbling up space. But those that, you know, we've seen kind of a lot more green energy within our portfolio.
Maybe because it was we had so little, but someone, you know, store, you know, storing batteries, distributing batteries, working some kind of conversion or energy-related, has been a new pocket of demand. And then, and I think food and beverage also within kind of medical. We've seen a pickup in medical. And as an aside, one, we have a number of tenants that basically it's a, an industrial building, but a pharmacy where you order prescriptions or medical products online. And so we've seen a pickup of that. A couple have been relocations from California to the Dallas market, for example, that we've picked up.
Jason Belcher (VP and Equity Research Associate Analyst of Real Estate)
Thank you. That's helpful. And then, secondly, can you just talk a little bit about your contractual rent increases or rent bumps and what you all are incorporating into newly signed leases there, and whether you're getting any pushback on that aspect of the lease agreement? And then if you can also just remind us where your average escalator is across the portfolio.
Staci Tyler (EVP and Chief Accounting Officer)
We've definitely seen that increase. So where a couple of years ago, we would have been working up toward an average of 3%, now our portfolio average would be, you know, in the 3s. And on new leases that we're signing, we're seeing those 3.5%-4%. You know, in some cases, it's been above that, but I would say the norm has been in the 3.5%-4% range. So definitely still seeing strength there. We have not seen any pullback from that recently, so continue and, you know, our expectations would be for that to continue in the 3.5%-4% range for new leases that we're signing.
Jason Belcher (VP and Equity Research Associate Analyst of Real Estate)
Got it. Thanks again.
Staci Tyler (EVP and Chief Accounting Officer)
Sure.
Operator (participant)
Your next question comes from, Ronald Kamden of Morgan Stanley. Your line is already open.
Ronald Kamdem (Head of Commercial Real Estate Research and the U.S. Real Estate Investment Trust team)
Great. Hey, two quick ones for me. Just, going back sort of the rent growth commentary, for the portfolio, I think you said, positive, but was curious if you can give a little bit more color around there and maybe also by market. I think L.A. may be, may be slow, but curious, sort of when you go through the markets, what, what are the ones that are sort of on the higher end, on the lower end, would be helpful. Thanks.
Marshall Loeb (President and CEO)
Okay. Hey, Ron, good morning. You know, I think our expectations, you know, market rent growth, not, not our re-leasing spreads, but market rent growth, probably inflationary, maybe a hair above for the market. I think for our product type, I would add 100-200 basis points just because the vacancy rate traditionally is lower. So maybe you get to... That might get you to mid-single digits. And I think it will pick up, I think it'll be better in 25 and into 26 with supply demand, mainly because demand's fallen off so much. Our better markets or the Florida markets have been strong. I'd say that's Central Florida, Miami, those markets. Las Vegas has been a strong market as well.
I know I mentioned Phoenix with oversupply, but that was at one of those two were our best embedded growth rent markets last year. Atlanta is still a good market. So thankfully, you know, a few years ago, we would have told you our California is really driving our, our rent growth, and now it's really spread out, you know, throughout the portfolio. And with the, the falloff in supply, I think that's only going to get better, over the next - you know, it may be, it may take 6-8 months, but I think it's going to be better over the next 24 months following that.
Ronald Kamdem (Head of Commercial Real Estate Research and the U.S. Real Estate Investment Trust team)
Got it. And then just to close the thought, I think we've all sort of touched on that the balance sheet can be pretty unlevered based on, based on how much equity you're going to be issuing. And I guess trying to figure out opportunistically, are you seeing anything in the acquisition markets today that suggests that there may be sort of either distressed or opportunities for EastGroup to come in? Or is it still at the, you know, we're sort of in the wait-and-see mode? Just curious where, where you are on that phase.
Marshall Loeb (President and CEO)
Maybe not broad-brush distress. I mean, we're not seeing, you know, banks or things, although you read about banks still needing to reduce commercial real estate exposure and that industrial will get pulled into that bucket. And they're not distressed, but we have seen instances. One of the properties we bought, the seller had not owned it all that very long at all, and they, supposedly, they sold it at a loss, but they needed liquidity within their portfolio and what they were able to sell, what we were told by the brokers, was the industrial, versus it's hard to sell office or maybe some other product types.
So, you know, I don't know that I'd call it distress, or, or people in a capital bind, where a group had tied up a vacant building, gotten it leased, and then they were having difficulty sourcing their capital, and we were able to let them make a little bit of money, but we stepped into their position and assumed the contract and still got what we thought was a very attractive yield on the property. So yeah, I guess it's a little bit distressed, but I don't know that it's...
You know, I guess I'm trying to, without violating our confidentiality agreements on some of those, describe them a little bit, where it's a capital squeeze, and whether it may not be an entity-level distress, it's a developer who's having trouble meeting the closing date or someone needs to sell something, and our pitch is, we're a very... You know, we may not be your highest bid, but we're your surest path to the closing table.
Ronald Kamdem (Head of Commercial Real Estate Research and the U.S. Real Estate Investment Trust team)
Right. Okay. So maybe not distressed, maybe just motivated or something.
Marshall Loeb (President and CEO)
Yeah, I like your adjective. Thank you.
Ronald Kamdem (Head of Commercial Real Estate Research and the U.S. Real Estate Investment Trust team)
That, that's it for me. Thanks so much.
Marshall Loeb (President and CEO)
All right. Thanks, Ron.
Operator (participant)
Your next question comes from, Vikram Malhotra of Mizuho. Your line is already open.
Speaker 15
Hey, this is Georgie on for Vikram. Just have two quick ones from me. When you model credit risk, is it a placeholder or is it a segment where you anticipate a sector issue? And my second question would be, if you can provide any color on broadening of demand from reshoring. Thank you.
Staci Tyler (EVP and Chief Accounting Officer)
Sure. On the credit, tenant credit and the bad debt that we have included in our guidance, our actual bad debt in 2023 was $1.5 million, which represented about 27 basis points in terms of percentage of revenue, and for 2024, we have $2 million baked into the guidance, which is about 32 basis points of revenue. And that's really just, you know, what an anticipated, I guess, level.
If we look back at our 10-year average, our bad debt has run about 20 basis points of revenue. So, last year was a bit higher, but we don't really have any reason to believe that there would be a major change from last year. Just with the growth of the company, the number grows just a bit, and given some uncertainty in the economy, even though we haven't really felt negative impacts, it just seemed reasonable for us to include $2 million in our bad debt guidance. But we don't have any bad debts identified and really have not seen, you know, any particular tenant industry or any particular market where we can detect a trend in any credit deterioration. It's just been, you know, each one has a story, but nothing too significant.
If we look at our watch list of tenants that we have a reserve for, out of about 1,600 leases, you know, we're in the 15-20 range on number of tenants that we have on our watch list, where we might have a reserve. So, still a very small percentage of total overall, and no trends that we've been able to detect and no overall deterioration.
Marshall Loeb (President and CEO)
Then on nearshoring, you know, what we like about it, it feels like a slow, steady, long-term build rather than a rush, which may be more temporary. But, you know, we've seen El Paso's been a strong market now for three years, and we've been there 20, but the best three years have probably been the last three. Phoenix is a strong market on its own and Tucson, but they've both been solid markets for us and a little bit, you know, El Paso is a border market, more so where Phoenix and San Diego are their own markets that also benefit from onshoring, nearshoring. So we're seeing more, certainly manufacturing in the southern half of the U.S., whether it's green energy, or that type related, and then we're seeing more nearshoring.
I think those are certainly long-term decisions that companies make, but it's, you know, whether it's a labor strike in L.A. or the Suez Canal, I have to think all that just volatility will push people. Look, the border's open every day. The ports have their own challenges and benefits in any given quarter, it seems to fluctuate. At least just we're not a port-related portfolio, but you see the issues those have, and I would have to think it pushes manufacturers to, if they can make the numbers work, go to Juarez, go to Tijuana, go to Nogales, Mexico, and just cross the border, and that's where we... I like that we're not totally dependent on the border in Phoenix and San Diego, but that's one more benefit besides growth that those cities offer.
Operator (participant)
There are no further questions at this time. I would hand over the call to Marshall Loeb for closing comments. Please proceed.
Marshall Loeb (President and CEO)
Okay. Thank you, everyone, for your time today. I know if we didn't get to your question, Staci and I, and Brent, too, as soon as he's back in the office, are certainly available. Feel free to email us, call us if there's anything we didn't get to. We'll hopefully see you all here in a few weeks at the upcoming conference. But I appreciate your time, and hope to speak to you all soon. Take care.
Operator (participant)
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.