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Eastgroup Properties Inc
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Good morning everyone and welcome to the EastGroup Properties Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Now, it’s now my pleasure to introduce Marshall Loeb, President and CEO.
Good morning, and thanks for calling in for our third quarter 2019 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
Please also note that some statements during this call are forward-looking statements within the Private Securities Litigation Reform Act. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and we undertake no duty to update them as actual events unfold. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially. We refer to certain of these risks in our SEC filings.
Thanks Keena. We had a strong team performance this quarter maintaining the pace said earlier in the year. Some of the positive trends we saw were funds from operations came in above guidance achieving a 9.4% increase compared to third quarter last year. This marks 26th consecutive quarters of higher FFO per share as compared to the prior year quarter. Based on the quarter and the market strength, we're raising our annual FFO guidance $0.03 per share.
The vitality of the industrial market is further demonstrated through a number of metrics such as record quarter for occupancy and leasing and another solid quarter for same-store NOI and releasing spreads. As the statistics bear out, the operating environment continues to allow us to steadily increase rents and create value through ground up development and value-add acquisitions.
At quarter end we were 97.9% leased and 97.4% occupied. These represented record results for us in terms of quarter end occupancy and leasing. Further, our quarterly occupancy has been 95% or better for what is now 25 consecutive quarters. In short, demand continues growing for our infill location, small bay and last mile parks. Several markets were 98% leased or better, including Houston, our largest market. And while still our largest market Houston has fallen from roughly 21% of NOI in 2016 to 13.5% this quarter. Supply and specifically shallow bay industrial supply remains in check in our markets.
In this cycle, supply is predominantly institutionally controlled and as a result deliveries remain disciplined and as a byproduct of the institutional control, it's largely focused on big box construction. While our sourcing development signs within fast-growing Sunbelt markets is a growing challenge for us, it's keeping supply in balance.
Same property NOI growth was 5.8% cash and 4.7% GAAP. We're also pleased with average quarterly occupancy at 97.2% up 160 basis points from third quarter 2018. Rent spreads continued their positive trend rising 8.7% cash and 19.7% GAAP respectively. Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We effectively manage development risk as a majority of our developments are additional phases within an existing park. The average investment for our shallow bay business distribution buildings is roughly $9 million and while our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging 200 basis points to 300 basis point premiums.
At quarter end, the development pipeline's projected return was 7.4% whereas we estimate the market cap rate in the fours. During third quarter, we began construction on five developments, totally 930,000 square feet. And as of quarter end, our development and value-add pipeline consisted of 26 projects containing 3.8 million square feet with a projected cost of approximately $360 million.
For 2019, we're raising our projected starts to $260 million. As color commentary, our $148 million in starts last year were a record, so we decided to again raise the target and to exceed last year's results. Finally, our activity is spread over 10 different cities. This geographic diversity further reduces risk while enhances our ability to grow the development pipeline on an ongoing basis. And as a reminder, the majority of our starts are based on the performance of the prior phase within the park.
In fact, over three quarters this year starts or the next building on a park, as a result market demand dictates new construction rather than us pushing supply into the market. Two outcomes of this approach are one, it allows us to manage risk as in most cases we're simply restocking the shelves. In many cases, the start is driven by expansion needs of an existing tenant in the park and in most of those cases we're able to backfill the original space at higher rents.
Secondly, our record number of starts demonstrates the strength of the industrial market, our team, and our parks. Year-to-date, we've been pleasantly surprised by demand levels and the resiliency and our occupancy. We've had a busy quarter in terms of transactions closing during the quarter had a few after quarter and others we view as likely transactions prior to year end. We're pleased with the quality of our investments as well as the geographic diversity.
New investments were made or are being made in Las Vegas, San Diego, Dallas, Phoenix, Greenville and Tampa. From a dispositions perspective, we had four R&D buildings in Santa Barbara. One we expect to close within a couple of weeks; two others also have funds at risk where they’re projected fourth quarter close; and finally in Tucson a tenant is acquiring their building and we expect closing there this quarter also.
In some, while the market is strong, we're working to find development and value add opportunities, but we're also using this environment to shed those assets which are less likely to drive our future growth. Brent will now review a variety of financial topics including fourth quarter guidance.
Good morning. We continue to experience positive results due to superior execution by our team in the field and strong overall performance of our portfolio. FFO per share for the third quarter exceeded the upper end of our guidance range at $1.28 per share compared to third quarter 2018 of $1.17 per share, an increase of 9.4%.
Funds from operations, excluding gains on casualties and involuntary conversions, represented an increase of 7.6% for the nine months ended September 30, 2019. Our continued strong performance both operationally and in share price is allowing us to further strengthen our balance sheet. From a capital perspective, during the third quarter, we issued common stock at an average price of $123.56 per share for gross proceeds of $105 million.
During the nine months ended September 30, our gross common stock issuance proceeds total $220 million, which represents a record amount and a physical year for the company. Also during the third quarter, we closed two senior unsecured private placement notes, a 10 year note for $75 million with a fixed interest rate of 3.47% and a 12 year note for $35 million with a fixed interest rate of 3.54%.
Subsequent to quarter end, we closed on a seven year $100 million unsecured term loan at a fixed rate of 2.75%. We remain pleased to have access to capital via debt and equity at attractive pricing. We declared cash dividends of $0.75 per share in the third quarter, which represented a 4.2% increase over the previous quarter’s dividend and an annualized dividend rate of $3 per share. The third quarter dividend was the company's 159 consecutive quarterly cash distribution to shareholders.
Looking forward, FFO guidance for the fourth quarter of 2019 is estimated to be in the range of $1.24 to $1.28 per share and $4.94 to $4.98 for the year. Those midpoints represent an increase of 6.8% and 6.4% compared to the prior year restated respectively and an increase of $0.03 per share to the midpoint of our guidance – of our prior 2019 guidance.
Our FFO ranges were impacted by an estimated increase in fourth quarter G&A of $0.03 per share directly attributable to the anticipated adoption of a retirement policy for equity awards. Since there was no pre-existing policy, the company will incur this one time initial charge to record immediate accounting applications. These are charges we would have anticipated occurring in future periods, but with a written policy in place, we are required to accelerate the expense recognition for eligible employees. To be clear, we have no employees announcing retirement today, but rather as simply a policy adoption.
Our third quarter results combined with the leasing assumptions that comprised updated guidance produce an increase in both average occupancy for the year and an increase in cash and straight-line same-property range. Other notable assumption guidance revisions include increasing development starts by $60 million, increasing operating property acquisitions by $50 million, increasing value-add property acquisitions by $35 million, and increasing termination fee income by $250,000 due to known fees.
With opportunities to invest capital ahead of expectations, we continue to take advantage of an attractive stock price and low interest rates. We increase our estimated issuance of common stock by $20 million and unsecured that by $100 million. In summary, our financial metrics and operating results continue to be some of the best we have experienced and we anticipate that momentum continuing as we close out the year.
Now Marshall will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continuing improving across our markets. Following these fundamentals, we continue investing in, upgrading and geographically diversifying our portfolio. As we pursue opportunities, we're also committed to maintaining a strong, healthy balance sheet with improving metrics, as demonstrated by the equity raised year-to-date.
We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the strong current operating environment. The mix of our team, our operating strategy and our markets has us optimistic about the future.
And we'll be now happy to take any of your questions.
[Operator Instructions] And we'll go first to Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hello, hey, good morning down there. So the first question is on the external side you guys have been quite busy. Marshall, I think you touched on just the competitive nature of the acquisition market. I noticed that you had nothing in LA or Bay area. But can you talk a little bit more about development because that's really the key to you guys? Are you seeing – you continue to see no diminution in your development yields or the way land prices and construction costs, etcetera are trending. Are you starting to see some of that – some of those yields erode? So if you just comment.
Sure. Happy to; and good morning. Good question. And I – as you're right with land prices are –there's no fire sale land left construction prices rising and then simply as we've developed a little bit and Miami has a bigger component where the cap rates are lower, but our yield projections, they're a little bit lower. I've thought our development pipeline yields would trend down, but pleasantly surprised, we've hung in there north of 7, 7.4, kind of in both buckets under construction and lease up this quarter.
So there – thankfully rents are rising with construction prices are in fact some cases outpacing it. So we've been able to maintain those spreads and it's about as large a gap between market cap rates and construction yields as we've ever had where we're developing into the kind of lower 7, 7.25, 7.4 and the last couple of, at least portfolio trades have been in the mid 4s.
So it's – I've – with you, I've thought it would drift down a little bit, but stay certainly well above 150 basis points. But as tight as the market is, so if you’ve get paced and offset that. And really in terms of the amount of development because I mentioned too, I guess I should just touch on that. I'm pleasantly surprised a little bit that we've gotten to 260 million in starts, last year was a busy year, 140 something million. And this year it's really been the – we'll get a call from the field or the guys will call and say, we're about out of space in Phase 2, where we had a call earlier this week and the comment was, we have more prospects than space, so we're going to kick off the next phase.
So it's really driven by leasing demand and we've kind of just said it's restocking the shelves, we're out of this inventory, we need a new – we need funds from Brent to kind of fund that next round of development at the park.
And it looks like we'll go next to James Feldman. Please go ahead with Bank of America.
Great, thank you. I guess just first, hopefully it doesn't count as a question. But just to confirm on the G&A you mentioned, so that $0.03 was not in your prior range, but it is in the new range. So effectively your guidance would have been $0.03 higher, is that correct?
Yes. Good morning Jamie. That's correct. We of course had $0.03 would be third quarter and we would have guided $0.03 higher fourth quarter. But as I mentioned in the prepared remarks, we anticipate adopting a retirement policy just as a consistent means of treating equity awards when someone retires. And that required, we had a few employees that meet some of those early eligibility requirements once it's adopted, so we had to catch up. And so yes, there is a onetime $0.03 charge that we're incurring in fourth quarter. We collab from operating perspective that we basically absorb that charge and was able to at least maintain our fourth quarter anticipated range.
And then how does that work for the run rate into next year? Will that, I mean the G&A, is it now $0.03 lower next year, or is that an annual…
That's not an annual – it would be $0.03 lower, there'll be some costs associated year-to-year, but it'll be much less material and much more year-to-year comparable from a run rate perspective. But that would not be – that would just be a lump four quarter G&A, certainly fourth quarter of 2020, there would not be that amount there. So it's anticipated to be a onetime catch up charge.
Okay. All right, thanks. And then I guess just big picture, you guys constantly talk about how you're shallow bay in-fill product is getting good demand? Can you provide like some anecdotal stories or leases, examples of leases of why your portfolio really is differentiated and why it does seem to be working here and maybe to talk about why you think it does have such lags here?
Sure. I'll take a stab at that and then Brent, chime in. Maybe I got a couple of examples and again, it's hard for us to speak about someone else’s portfolio. But at least, I was reading the other day, we’ve signed up thankfully a couple of few leases with Lowe's and some with Best Buy and Home Depot and was reading where Lowe's just focusing on them, for example, they were saying, they were moving their inventory really more from a store-based model to a market-based model and I’m interpolating too much or assuming too much in that. But I think that's where we pick up. One of the examples was in Miami at a new development there, they signed a lease where it's cheaper and more efficient to keep white goods as they call it though, washer, dryer, refrigerator, stove and an Eastgroup type building, then the back of the store without a higher retail type rent.
So as each of the retailers shifts their model to that supply chain evolution of all, so faster and faster delivery. And in these fast growing markets like Miami or Dallas or Los Angeles, the traffic is so bad, you really need that in-fill location near a growing consumer base. And so it's almost effectively repricing some brick and mortar with industrial space. And that's where –each quarter we seem to pick up a new tent. Peloton is a new prospect, we've talked to Tesla.
People that we hadn't – weren't in our portfolio, and those aren't signed leases, but just some of the names that kind of pop up from time-to-time that are tried in true tenants, thankfully are still out there and doing well. But we'll pick up a tenant or a customer we typically haven't dealt with in the past is they, and I think we're still early, early in, in terms of what we see Amazon and Lowe's and Home Depot, I think there is a whole mixed wave of retailers that are still just starting to figure out their logistics chain and how to get goods delivered faster and store more – at a more cheap basis to deliver quickly.
Jamie, the only thing I would add to that is – and you guys are good at showing the various stats and portfolios, but we have 59% of our revenue comes from leases that are less than 50,000 square feet in size, another 25% in the 50,000 to 100,000 square foot in size. So more simply said 84% of our revenue stream comes from tenants who have leases with us that are less than a 100,000 square feet in size. So when we say multitenant, that's really like we said for many years now that's really our bailiwick, and that kind of shows that there.
And those are the size leases, that like Lowe's is looking for.
Yes, for the most part. And we've even seen maybe I think with some of – with Amazon and Best Buy and some of those, I've been pleasantly surprised by some of the smaller sizes that they're seeking in markets.
Okay. And then I guess just as we think about next year, you've got your – you said your development pipelines is in all time high. I mean, do you think you could be in a position to have a similar sized pipeline or larger next year? And then similarly on same-store, you're trending 4.7% this year. I assume you'll have some occupancy headwinds next year, just given you're at peak occupancy. How do we think about, what leasing spreads and rent bumps could do to cash same-store next year versus this year.
I think at least on the development, I – if you had asked me earlier in the year to give you odds to get to 260, again, I'm confident in our team and I like our parks and locations and where the market's going, I wouldn't have thought we'd get there, I'm not trying to be coy, I'm just not that smart, actually. So I hope we can get back to these type levels, I think the market – what I guess I'm relieved that the market will tell us what we should do, we could make it, you just may not want us to make it in hindsight type thing.
But, hopefully the tenant demand is there and we keep going from park to park to park and running through the land quickly. So it's certainly possible, we'll obviously come out in our next call with our 2020 guidance and we feel certainly good about the market and where things are going. I hope we can maintain the pace or we'll see where the market takes us.
In terms of same-store next year, you're right, it'll be, we're about as full as we've been ever in the mid-97s, so we probably could see that drift down. But when terms of rent growth, if you’re seeing from us and from some of our peers who've reported with a tight market and rising construction cost, we keep predicting or I keep predicting that rents are going to climb even faster. So I don't see demand slowing down, thankfully, and I don't see rent growth moderating just yet until there's an economic event.
Okay. Thanks.
Sure. You're welcome.
And we’ll go next to John Guinee with the Stifel. Please go ahead.
Great. I love your reference, development is restocking the shelves. Question for you, Marshall, you guys have a stunningly low cost of capital. How much of your acquisition and development would you attribute to your current costs of capital? I – what do you think your volume would be if you were trading at $100 instead of $132.71 a share.
Good question; and good morning. I like to think, we actually do talk about decoupling, stock price or debt cost away, I guess we – you’ve kind of narrow and thankfully we’ve been in a spot where Brent's been able to grab some really low interest rates and where we – and our stock price has been there. But, so we could do more, but I've always said I don't want to go buy something and get the volume there, and then in a couple of years when we have this same call.
John, you're asking me what in the world where we thinking when we bought X, Y, or Z properties. So trying to decouple that as best we can, and buy things that we think – some of the assets we've owned for 20, 30 years, so I hope what we're buying today, we want to own for those same time periods.
So try to decouple it, it does help in terms of spread. I mean, we do look certainly in some expensive markets like South Florida and LA, San Diego, San Bay area, okay, where do we think our weighted average cost of capital is versus market cap rates. But we certainly also look at the rent growth we've gotten in those markets, so that we anticipate for the next few years. So try to – short answers, try to decouple it as best we can and just does this make sense for our shareholders that we buy this and own it for the next decade or not.
Great. Thank you.
You’re welcome.
And we'll go next to Bill Crow with Raymond James. Please go ahead.
Hey, good morning guys. Marshall, you talked about some of those well known mostly retail tenants, Lowe's, Home Depot, Amazon, et cetera, Best Buy. Is there any difference in the lease duration that you're signing with those big companies compared to maybe your local or regional tenants?
Good question, and not really. I mean, for the most part they've been about the same. In terms of kind of within that lease and I hope I'm not trying to – sometimes wait there and always think, just their model is evolving so quickly. They’ll lean towards a three year lease, but I've seen them execute leases that are longer than that and our – we track it and keep that statistic and it seems like every quarter we end up at about four and a half years as our average lease term, usually in a new development, it's longer than that, but average lease term.
But by and large are the other tenants that may have a unique lease term that we’ll see the third party logistics, especially if they're awarded a contract, we'll build one to match the lease term out with their contract. So you could end up with a three year term, five year term. But for the most part they've been the same. And we've seen people a little bit and I think they've pulled the requirement back in house.
But Walmart was kind of, as I say, that wave that's coming, they were looking at multiple small kind of, I’ll stick with shallow bay kind of smaller spaces and they were – I think a lot, so many of the retailers are figuring out, do we going – or is it going to be order online, pickup in store or order online and have it delivered from an Eastgroup type warehouse.
So that Walmart was tinkering with that, we heard they pulled the requirement back in house. And I think if people like Walmart and Amazon are figuring this out, then the rest of the world was likely following suit.
Okay. My follow-up question is how much does price per foot in its relationship to replacement cost figure into your decision on acquisitions?
It’s certainly something, we look at yield probably a little more heavily and then it really varies by market too. Like in we’re – one of the acquisitions we announced was in North San Diego, the Rocky Point, North County and that's unexpensive one, and it's just under $200 a square foot. And I had to talk some of our investment committee members, so you know David off the ledge a little bit, but when you look there, there is really no land left.
You've got Camp Pendleton to the North, obviously, Pacific Ocean to the West and really no great freeway system running to the Eastern Mountains. So you get into some of those like in LA and San Francisco and in Miami, where I think it's less of a factor because there is so little industrial land left. If we were in a Jacksonville or some of our other markets, that would be a bigger factor. If you're on the edge of town, I would say cost per square foot should be a really large factor. On an in-fill site, it's a factor, but maybe a little bit less because there is so little competing land around you.
Thank you. Appreciate your time.
Thank you.
And we'll go next to Craig Mailman with KeyBanc Capital Market. Please go ahead.
Hey guys. Couple of questions here. I guess to go back to you commentary, you guys are definitely seeing more national kind of Fortune 100 tenants versus more of a regional kind of tenant that you had seen earlier in the cycle and then past cycle. I guess just as your space as a percent of their cost structure is much lower than maybe traditionally where your tenants were. Your attention is really still pretty high, rent spreads are good. But how are you guys kind of changing the mindset of the people on the ground to push even harder on rents knowing that location kind of trumps a couple percent of higher rent for some of these newer tenants that you were talking to?
Good morning. Good question. I think we certainly do spend a lot of time talking about rents, occupancy, all this kind of maximizing NOI, certainly on any given year, even given quarter. The good news, I think at this point in the cycle, all of our tenants just about, probably 99% plus have a tenant rep broker or at least an in house real estate department. And then we'll have the third-party brokers typically that we're working with. So there's usually, I think, the best ones – and everybody will know both sides where the market rents are. And then came in like it's a new tenant or a renewal tenant, you kind of know what’s your competitive advantages or how your space works for them.
So it's really almost, I guess it helps hopefully that Brent and I have both been in the field and been asset managers at times. I've always thought its best case you knew exactly who your prospect or your tenant, what their other options were and how your property compared to that property and even price to that property. So I think the guys are pushing rends as hard as they can without losing too much. I think you can keep occupancy and push rents at the same time. We – certainly, you save on the downtime and the releasing costs and TI, things like that once you lose someone.
But I think they're pushing the rents, or hopefully we believe they're pushing rents about as hard as they can. Brent any color?
Yes, I would agree with that. And used to wait at all the time in the field and when you put pencil to paper, you want to push as hard as you can, but if you pushed to the edge of saying, okay, we're going to lose the tenant and if they're really close to what you perceive as a market rep, then you only have a few months of downtime to where you could come out positive and much past that from a time frame over say a four to five year lease period, then you lose, even if you get a higher rate in the future.
So it's something just like Marshall said, we look at, we push hard on and we like to think we're pushing and doing both, certainly, with the rental increases we've seen in California, making a push to get more exposure there to try to get more exposure to some of these really high increased markets. But the guys – our guys are pushing every day occupancy and rents.
Okay. I mean, I guess maybe ask another way, when your competitors are just talking about a couple of years ago, rent was never the reason people left. Today it's a little bit higher but not high enough. Kind of when you guys do exit interviews or exit surveys, how often is it rent versus expansion space? Maybe they need more than you guys currently have in a park or just more than what your typical size is?
Yes. Good point. Usually if – you're right, it's not rents, we'll push rents as – a good kind of rents not pushed much as we can and in some cases like that, I was glad we got that in detail, but Tampa acquisition that we got, for example, it's contiguous to an existing park. We'll – we're in the process of tying the two together, but that was we lost a national tenant in Tampa simply because we did – I won't say simply, but we didn't have the land to build the next building for them. And we've got a couple of other tenants that are outgrowing their space.
So you've tried to have that inventory on hand to kind of keep up with demand, but it's usually a riotous, they've outgrown the space or they've been acquired and they are consolidating with another company or consolidating several locations into one on the outskirts of town or doing some kind of bigger strategic shift, is probably by far more the reason we lose them. Unless you're just well over market and then somebody, it's worth the moving costs.
You had mentioned earlier too, now is a good time to be a seller. As you guys look at the portfolio, look at your different market exposures, how much of the portfolio do you think should be cold at this point, where there's just no more growth left or there's better use of that capital?
Thankfully it's not that much, I guess I'll thank the team that's been here, we – almost all of it is industrial. We don't have really anything meaningful other product types in terms of like office or medical office or anything kind of unique, probably where we've looked at our dispositions is really managing the size of Houston really like the market a lot, we've created a lot of value in Houston over the time, but we realized when we were north of 20%, that, that was a lot in the market, certainly agreed with us a few years ago.
And so we'll continue, we're delivering, I'll give the guys credit too, 100% lease buildings that they're finishing construction up there, so probably look to keep selling in Houston. And then what we're kind of picking and choosing their good assets and they're well leased, it's more R&D buildings in Santa Barbara that really aren't true industrial buildings or service center buildings that we've sold. You've seen us sell in Tampa and Orlando, trying to think different things. We sold a couple of 50 plus year old assets that were industrial, but they were a 100% leased, one in Dallas, and then one in Phoenix that worked well, you and I could own them and they would cash flow, it's just the rent growth and the NOI growth is going to be less than the portfolio average.
So that's as we try to really think about a batting order and I think we should always be pruned into portfolio from the bottom, unless it's just an absolutely horrible market. But right now is a good time to be a seller, there's this wall of capital that likes industrial, so we're selling as much as we can, as fast as we can, while maintaining the earnings, maintaining FFO, dividends, all the things like that and trying to raise capital while we have an attractive stock price. So it's a little bit of a 3D equation, which we work at daily I suppose.
Great. Thanks guys.
You're welcome.
And we’ll take our next question from Jason Green with Evercore. Please go ahead.
Good morning. Just a question on the acquisition side. How has the bitter pool changed for call it $15 million to $20 million assets? And are you seeing a lot more competition today than you were call it 12 months ago?
Good question. Certainly more competition than 12 months ago, but it was a lot call it a year ago. And the better pool still the same groups that we've typically had, although you used to – could drop down to smaller assets and it wouldn't be as many institutional buyers. And I'd say that certainly changed that. And there is – it always, there is groups that are industrial – that have an industrial platform or forming an industrial platform that weren't industrial companies that are – have been around, but really weren't an industrial a few years ago.
So every kind of year, every quarter, it's not a very well kept secret than industrial has been an attractive sector the last handful of years. And every quarter it seems like someone else is becoming an industrial REIT or launching an industrial platform. And so that's, I’d say bad definition, what's pushed us more into development and into value add and really even looking at our acquisitions, we thankfully had an active year, but outside though the airways in Denver, everything we've acquired or are acquiring has been off market.
So it's really been just turning over a lot of stones that if you wait and get a sales package, it's highly competitive, even certainly, at a $1 billion plus portfolio pool type thing, but even at a $15 million, $20 million asset size kind of a major city, it'll be highly competitive.
Got it. And then on the development side, yields have continued or at least projected yields on your pipeline have continued to be in the mid-7s, we know the construction costs are rising. So how have you been able to manage to maintain those yields? Is that just passing on the increases in construction to consumers or something else that we should be thinking about?
Yes. I think, again, I've been kind of waiting for some – not horrible downward pressure, but a little bit of downward pressure on them for those reasons you name and thankfully as tight as the markets have been, the rents have maintained that pace. So we've hung in there in north of 7% to kind of 7.4% this quarter, so knock on wood, we can hang in there.
And in the meantime, cap rates I'd say have been compressed in the major markets. And maybe that's one thing we've seen in the last 12 months to 18 months as cap rates getting compressed, not only being low in the major kind of top five, six markets, but in Denver, Phoenix, Las Vegas, Orlando, Charlotte, but I won't call them secondary markets, but maybe markets number six to thirty around the country those cap rates have come down because all the capital can't – simply can't go to Northern New Jersey, Los Angeles, Chicago, Atlanta.
Yes. I would just add to that too, I think it's a testament, there are multi-tenant, there are 80,000 square foot to 100,000 square foot buildings, they tend to be less of a commodity in each of our markets. If we were building bigger box, which is nothing wrong with those assets, but if we were building those, there certainly would be more pressure from a commodity standpoint, from a rental rate pressure standpoint.
So I think if you compare our development deals, maybe the peer group or someone that does a bigger box, you're going to see that spread because of the smaller tenant size pay a little more in rent and little less commodity, little less supply in each of those markets as well.
Got it. Thank you very much.
You're welcome.
We'll go next to Manny Korchman with Citi. Please go ahead.
Hey, good morning everyone. Marshall, you had mentioned in one of the discussions about investing, you had talked David off the ledge on some of these valuations.
Okay.
I guess if we were to say, if you were still CEO, whether you are there or not, what would he be doing differently if anything or do you think that this has just been a move in the market and it's a matter of him adjusting to the times?
Yes, good question. And I guess in David's defense a little bit, a little bit facetious and I'm as much in shock just we've seen prices per square foot, I'd like to think in David's, certainly the Chair of our Board and on our Investment Committee, so I think the difference would be very little, it's still a team. It's not you guys don't want me making the decisions, rather be a team type thing. So David is still in the room for us to say prices at $200 a square foot or I, we chased in last property in the Bay area the other day and I've kidded him, we had two or three options and the first one started in the high $300 per square foot, I said, let me – I don't think either of us thought and see industrial prices where cap rates have – really combination of where cap rates have gone and rents have gone that you'd ever see these type prices per square foot, it's what I would typically think of office prices per square foot.
But even when we bought in North San Diego, we’re about to acquire North San Diego, we have a detailed replacement costs from one of our brokers and so it’s at $190 something a foot, it's actually below replacement cost and Rexford bought a building within the same park fairly recently and it's in an even higher price per square foot. So it's numbers not have us ever really thought we'd see, so you kind of go in and go, people that have done it for a few decades, you're not going to believe where we're used to being $60, $70, $80 a square foot where I'm now saying, Hey here's one that's $200 a foot and I think it's a good deal.
We think it's a good deal type thing, so certainly no major pushback. It's just prices, you say wow to which is a good problem that shows where industrial is going.
Great. Thanks. And Brent, question for you. So in the last couple of quarters you guys have beaten your own internal quarterly guidance for the following quarter. Can you just walk us through sort of how your approach to budgeting is made a little bit off there or if trends are just that much better than you're having trouble keeping up with what's actually happening on the ground?
I think it's more the latter. Manny, each time we do a very thorough lease-by-lease roll up from the field all the way up to the top and then put in corporate expense and just our occupancies have continued to pace higher than we had anticipated. We're 97.4% occupied or whatever it is this quarter and it's just very difficult to budget from that standpoint. I would also say our developments had been rolling in faster than anticipated leasing up quicker.
The guys in the field have been able to find a few one-off operating acquisitions. We've been able to find several value-add acquisitions and from quarter-to-quarter, I don't know, as we sit here today and in another three, three and a half months, we may buy another value-add project or two or an operating project or two. And so the good thing about it, Manny it has made a challenging budgeting, it's not just been one thing it's been bad debts come in a little better, termination fees a little higher, occupancy, a little higher, development's done a little better.
So when you roll all that up and then you wind up being a few cents a share ahead and if you had told me that we would've been able to beat and raise as consistently and at the margins we've been able to do this year, I would have really been skeptical of that at the beginning of the year. But it's just been a testament to our strategy in a very strong industrial market and so Manny, I hope that trend continues into imperpetuity.
Thank you.
Welcome.
We’ll go next Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks for taking the question. I just wanted the rent spreads overall has been very strong, that clearly [indiscernible] verified numbers. Can you just give us some color between the markets where sort of spreads that may come in, like Fort Myers, I think there were negative – maybe some of the other markets where there's something closer to [indiscernible].
Sure. Happy to [indiscernible] coming through a little bit weaker quality, but, I think I would say our strongest rent growth markets, where we certainly see California, when I say California, the major markets, Southern California, LA, Orange County, San Diego, Bay area, and thankfully all of the markets, all the major markets that we're active and we're seeing good rent growth in the major markets in Texas and Florida as well, where I guess good or bad, where we're not seeing rent growth quite as strong. I would say it's usually the secondary markets and we don't have much in those markets at Jackson, Mississippi and New Orleans, Louisiana, some of those markets.
The rents aren't going backwards, certainly by any stretch, but they're not growing as fast and that's why you see us as hovering other product types where Santa Barbara rents are back about where they were at the peak, but they haven't really picked up since then. But again, that's R&D rent's not industrial rents. So we're continuing to see pretty strong rent growth and really where you see us placing our capital, it's something we talk about in when we do that.
I know we talked about earlier price per square foot and yields going in, but also we do look at where have rents grown and where do we think rents will continue to grow. Las Vegas as a market, for example, I'm excited about our Southwest Commerce and that the land prices are in that Southern market above and in many cases where industrial can be developed in terms of where rents are and vacancy rates about 1.5% and there's a lot of new construction in Las Vegas.
So we're in the Southwest submarket, which is near the airport, near the strip, where the new Raiders stadium is being built. It's going to displace a lot of industrial buildings. So that's one where we liked the project going in and I think I like it better 10 years from now, the crystal balls line.
We'll go next to Blaine Heck with Wells Fargo, please go ahead.
Thanks. Good morning. Just on the acquisition side. What's the difference in pricing you guys are finding between core deals and value-add? Maybe if you're looking at them on a stabilized yield basis and has that spread gotten any narrower or wider over the past few quarters as other investors may be chasing one strategy over the other.
I’d say value-add is something I think give Brent credit, first one I can remember, I think it was in 2016 in Fort Worth and there we kind of said we're not taking the construction risk obviously, but we are taking the leasing risks, so kind of using really round numbers if market cap rates are 4.5% where the last few portfolios have traded and if our development deals were 7.5% and I realized I'm rounding up slightly there versus our supplement, then you'd want to be about the middle for value-add. It depends on how much vacancies there and what lead time we can get on leasing and we have seen those spreads come in.
I mean we're still in the 6%, but given the market strength, I would say one thing we've seen is people are less and less afraid, maybe a vacancy than we are in some cases that those spreads have come in, I'm happy with the project we're buying in Fort Worth that we bought with Lincoln Tech in the great Southwest submarket, but there was a portfolio that traded there that was partially occupied, that had some vacancy that was listed.
Ours was off market and the one that was listed went for about 120 basis points, 130 basis points below us this is what I was told. So you're seeing where it gets listed and out there in the market but people are willing to pay out because they're having a hard time placing their industrial allocation. So that's why we've done better just, we've really spent the last couple of years trying to get boots on the ground in more and more markets, and finding things that are off market where we can maintain those spreads. So we're making good profits and they're probably about – the spreads are maybe half or probably averaging more like a half to two-thirds of what we earn on our development yields.
Got it, that's helpful. And Marshall, you touched a little bit on selling Houston assets and one of your peers recently have identified Houston once again as one of the markets with potential oversupply concerns. Clearly there are significant differences from submarket-to-submarket, so can you discuss just what you're seeing in that market in general and whether you guys have any exposure to those sub markets that are seeing the high levels of supply?
Sure. Good question. And I guess I mentioned we like Houston and it's been a good market for us, there's probably three main submarkets where the majority of the new supply is being, Northwest, where we're active there North, where we're active, Houston is, for example, about George Bush Airport and then Southeast where we're not, but a few – if I can bear with me, throw a few stats at you that the market is 5.6% vacant, construction has been up in Houston, but it actually came down this quarter it was at 20 million it's down to 17 million.
And then really where we fit in, that's a big number and probably as much by submarket. It's the tight building that gets delivered that the numbers we read about 55% of the new supplies and buildings over 225,000 square feet and over 70% of the build – some of the supplies and buildings over 150,000 square feet. So most of it is really not aimed as kind of as Brent touched on earlier, those tenants 50,000 and 75,000 feet and below absorption year-to-date again with 17 million under construction that obviously won't all deliver this year, there is 7.3 million square feet got absorbed and per JLL there's 15.5 million square feet of active requirements in the market.
Houston makes people nervous, but a couple of other things that we like about was over 80,000 jobs got created in the last 12 months and then I was surprised in the last decade they've added 1.3 million people. So that's a ton of growth for a metro area and there's probably not many cities in the country that have grown that much population wise, Dallas and maybe a few others. As I talk about our Houston dispositions where, and maybe again I've thrown stats defending the market where we're 98% leased, so happy with those numbers where we've got 8.5% rolling next year.
We're down to 13.6% which is the lowest number we've been as a percentage of our portfolio in a decade, but also now, we're just finishing up two buildings and thankfully before we could finish them, they leased both of those and that's in that North submarket. So kind of add thoughts as we've talked about Houston, we like – certainly don't want to get into high-teens or even kind of mid-teen again, we'll keep developed to this in the seven and then pick some of the other assets in Houston and sell, so if you can develop into the seven and sell it a five rounded or maybe below a five in some cases, I like that value creation model and let the rest of the portfolio keep growing.
So it's more of a portfolio allocation than a Houston specific. I think we'd be doing the same thing if it were Los Angeles or Orlando, for example. So I know Houston always seems to make people nervous and we like it and I think we have a really good team there. So we'll just manage the size of Houston.
That's helpful. Thanks guys.
Sure.
And our next question from Jon Petersen with Jefferies. Please go ahead.
Okay, thanks. So you're – just wanted to ask a quick clarification on guidance. I think your guidance is 96.8% is your average month end occupancy? I think you're 96.9%, if you average the first three quarters and you are 97.4% at the end of the third quarter, so that would imply a modest drop into the fourth quarter, is that just conservatism or are there some expected move outs in the portfolio?
I guess it'll improve if it's conservative or not, Jon. But in third quarter we really took a nice bump up in our occupancy for example, for first quarter we were 96.8%, second quarter 96.6% and then we swung up to 97.1% this quarter. Our fourth quarter, same-store budget is showing 96.5%, which is pretty much in line with the first and second quarter, that obliviously shows a little bit of decline from third quarter, but I think part of that may play into budgeting.
We don't have any large known specific move outs that we're trying, that's dialed into that. So we will see if that third quarter was another bump up and we can hold that or if it will come down slightly, our budget shows that'll come down slightly.
Okay, thanks. And then what are you guys seeing from municipalities in terms of property taxes and what they're pushing for in warehouses these days. Obviously valuations continue to rise, should we expect that to be a pressure on margin at all?
Short answer would be yes, obviously values keep rising and municipalities are noticing that. And we do appeal our taxes or protest where appropriate, but thankfully we're 98% leased and are almost all of those 99% of the 98% are triple net where that gets passed-through. So short-term we're covered in terms of property tax increases, but you're right they continue to drift higher and higher in certain markets though, they're a little more aggressive than others in terms of pushing those.
Okay. And then in terms of incremental investment, what are your thoughts on kind of debt versus equity given where your stock prices and your cost of equity would you I guess lean towards over equitizing acquisitions versus historical investment standards.
That has been our trend lately and we like that, we have the option of both and we feel very good about the low interest debt and very good stock price relative to any internal calculation of NAV. It'll be primarily driven, it reminds – the main reason we've raised much capital is that we've been able to generate, the guys in the field will be able to generate so much opportunity, but as we continue to go, the price stays where it is. I think you'll see us tend to be a little more heavy handed with the ATM and continue to go that route, but we'll still supplement that with some debt.
We don't have any large debt, but touring anytime soon so that won't have something coming at us quickly where it might prompt us to go out and do debt more quickly than we would if not. But so you'll see us play both sides and probably a little heavier on the equity side given the price where it is.
Okay, great. Thank you.
Thank you.
We'll take our next question from Eric Frankel with Green Street Advisors. Please go ahead.
Thank you. I think most of my questions have already been answered, but maybe if you could just comment a little bit further on small box rent growth versus large box rent growth across your market. Is it fair to say that submarkets is a greater determinant of how rents have been trending, obviously where there's been a lot of supply, there tends to be a lot of land, that's where a lot of large boxes are built but small boxes probably wouldn't do as well there. Are you seeing that across your markets as well, generally, it sounds like Houston that's kind of the case?
Yes. I'm, I'm trying to probably look and even in Houston, what we typically see is we'll look at supply, if I'm answering your question correctly, and probably 80%, 85% of that supply isn't really competitive. It's usually larger buildings, even if its large, typically a larger institution, so they've got capital to a place, but even the local regional players will have a Heitman, A.W. Clarion, kind of the list of names as their partner and they're not – they are competitive developments but it's usually larger box and then these infill sites and certainly what we're reading from CBRE’s research and things like that, that it's the smaller infill sites the rents are growing faster than they are the big boxes on the edge of town.
I think I'd also like to believe and time will tell that obsolescence is less of a factor in those times because there's going to be the less new product delivered in infill sites, it certainly worries us long-term, finding the land to keep filling the development pipeline. But right now it also helping keep supply and check, and helping us push rents there. So it is a little bit in a submarket-by-submarket and that's why we like being infill and then even infill kind of firm, I guess what you might say, the right side of town where the population's growing and where the consumers are living. And that's pretty sticky compared to a logistics chain from China to Orange County for example.
Sure. Just a quick – another quick question, just related to Texas. It looks like the leasing spreads has especially accelerated in Dallas and San Antonio, so just wondering if that was just the lease issue or rents growing and faster in those markets?
Normally in any given quarter, I'd say it's just a mix of leases, but we've been happy in both of those markets, Dallas is – what, I'm trying to go back to the numbers, it was 100,000 plus new jobs, 116,000 new jobs in Dallas for the year, ended through August and we're spread out from Fort Worth to Northeast Dallas, so it feels like driving in Southern California that you'll drive 50 miles and still be in the same city more or less. But it is a really healthy, strong economy and a lot of companies relocating there. So I don't think either one of those should slow down.
And really Texas, if you dug in and say, how is your development pipeline going from where you started, I'll admit we were at 140 million and get bumping it up to 260 million a lot of that in the Texas markets.
All right. Thank you.
Sure.
And we will take a follow-up question from Alex Goldfarb with Sandler O'Neil, please go ahead.
Thank you for taking it, I realize it's been a long call. Just Marshall, just big picture, everything you've talked about the call is incredible demand from tenants and it seems like the trade war and the issues that we hear about, certain either manufacturers or producers or whoever, having their business get impacted doesn't show up at all in any of your portfolio. So is it just a matter that the market is just so deep that the tenants that are being or the people who are being hit by the trade war just have zero overlap?
Or is it that yes, they are, – your tenants are being impacted by the trade war, but that hasn't impacted their needs to expand their space and take more, and rent more, pay more in rent to be closer to their tenants. I'm just trying to rationalize the headlines that we read versus the results in the commentary that you guys provide.
Yes. And I've got a good question and a hard one to answer scientifically. I think it's more the latter and then with 1,600 tenants. I mean our top 10% or just 8% of our revenues, so we have the lowest percent of tenant concentration of the industrial REITs. I have to believe somebody or some of them are being affected by the trade wars, but I also hope that within that as things continue to shift to industrial and where low cost provider, if you're delivering goods into these major cities or maybe they're being impacted and we're also offsetting it with 116,000 new jobs in Dallas type thing.
If your business, it's typically local or metro area deliveries that if you're there with a growing pie you could lose some of your customers will replace them just with the growth in Orlando or Dallas or Austin for example. So hopefully it's got to be there, but hopefully it's being muted by the kind of that evolution in the supply chain as well as growth in Sunbelt markets.
Okay. Thank you.
And we'll take our next question follow-up from James Feldman with Bank of America. Please go ahead.
All my questions are answered. Thank you.
Thanks, James.
Thanks James.
So there are no further questions in the queue at this time. I will turn the call back over to you speakers, Marshall for any closing remarks.
Okay. Thank you. Thanks everybody for your time. We know everybody's busy, it's earning season. Appreciate your time. And Brent and I are certainly available for any follow-up questions people may have. Thanks again.
This will conclude today's program. Thank you for your participation. You may now disconnect.