STAG Industrial Inc

NYSE:STAG

Earnings Call Transcript 2023-Q2

[Operator]

Greetings and welcome to the STAG Industrial Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos, Associate Investor Relations. Thank you, sir. You may begin.

[Steve Xiarhos, Investor Relations]

Thank you. Welcome to STAG Industrial’s conference call covering the second quarter 2023 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company’s website at www.stagindustrial.com under the Investor Relations section.

On today’s call, the company’s prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include forecast of core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters. We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company’s website. As a reminder forward-looking statements represent management’s estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements.

On today’s call, you will hear from Bill Crooker, our Chief Executive Officer; and Matts Pinard, our Chief Financial Officer. Also with us here today is Mike Chase, our Chief Investment Officer and Steve Kimball, EVP of Real Estate Operations are available to answer questions specific to the area of focus.

I will now turn the call over to Bill.

[Bill Crooker, Chief Executive Officer]

Thank you, Steve. Good morning, everybody and welcome to the second quarter earnings call for STAG Industrial. We are happy to have you with us today as we discuss our results for the quarter. Our portfolio continues to produce exceptional results as seen by our record leasing spreads this quarter. The industrial sector is benefiting from the secular tailwinds unique to our industry, including the near and onshoring and the continued penetration of e-commerce as a method of consumption.

Vacancy rates have crept up to approximately 3.7% nationally. While demand for industrial real estate remains historically strong, it has come off pandemic highs as we enter the new normal. Tenants are taking more time to evaluate their space needs. There are more examples of tenants weighing their supply chain footprint against the associated corporate finance cost of outfitting space. These are large cash outlays, which include items such as material handling equipment and automation systems. 9 to 12 months ago, there was strong demand for recently constructed buildings with large footprints, generally buildings north of 500,000 square feet.

In today’s environment, the $50 million to $100 million investment by tenants to outfit large new spaces is being avoided by contracting with third-party logistics firms to manage supply chains. On the supply side, deliveries are expected to be approximately 3% of the overall industrial stock this year, with nearly half of those deliveries classified as big box buildings, with sizes at or above 500,000 square feet. These deliveries are expected to result in a national vacancy rate of 4.2% by year end. This level of vacancy is still indicative of strong conditions. We continue to expect market rent growth in our portfolio to be in the mid- to high single digits this year. Development starts, however, are down approximately 30% since the end of 2022. This lower level of development starts coupled with continued strong demand, should push vacancy rates lower in the back half of 2024.

Moving to our portfolio, we are proud to report cash and GAAP leasing spreads at high watermarks for STAG. As of July 25, we have achieved 94.2% of the leasing we expect to accomplish in 2023 at cash spreads of 30.6%. After the slow start to the year, we recently have seen an uptick in development and acquisition opportunities as the capital markets slowly normalize.

One area where this has been evident is on the development side. There has been a growing number of opportunities as developers look to derisk their positions. Financing, supply and leasing risks are pushing some developers to lock in profits today thereby foregoing a portion of potential upside in exchange for certainty. We see opportunities ranging from the purchase of full entitled land sites, with approval and negotiated construction contracts to completed vacant spec buildings. These projects present very limited construction risk with favorable upside in exchange for capital funding and leasing exposure. Also, STAG can be selective focusing on developments that demise to smaller spaces that align with leasing demand.

On the acquisition side, deal activity has restarted. The bid-ask spread between sellers and buyers has begun to narrow towards levels where transactions can begin to clear. Buyers have greater clarity into their cost of capital. Sellers now understand that prices previously achievable in 2021 are not available to them in the current interest rate and macro environment. The ongoing attractiveness of industrial real estate, given the strength in the underlying fundamentals, further supports the case for capital to be placed in our sector. This has resulted in an uptick in deal flow during Q2 and an expectation of increased transaction activity in the back half of 2023, although unlikely to reach level seen pre-pandemic this calendar year. This sparring in the acquisition market can be seen by recent marketing and closing of several large portfolios of industrial real estate, something that was absent during the recent period of volatile capital markets.

Our acquisition volume for the second quarter totaled $40.7 million. This consisted of 2 buildings with stabilized cash and straight line cap rates of 6.2% and 6.3% respectively. In April, STAG acquired a 100,000 square foot warehouse distribution facility located in the I-287 Exit 10 submarket of Central New Jersey for $26.7 million. This acquisition represented an opportunity to acquire low coverage, functional asset in one of the nation’s top markets.

In May, STAG acquired a fully occupied 134,000 square foot facility in the airport submarket of Greensville in North Carolina, $14 million. As of closing, this building is leased for 1.8 years to a tenant who is moving to a larger facility at the end of their term. STAG will have the opportunity to realize a 50% or greater roll-up upon the release of the building. With the recent openings in the market of the Toyota EV battery plant and an aerospace manufacturing plant, the building’s modern specs and airport adjacent location leave it well suited to capture the growing tenant base supporting these plants.

Subsequent to quarter end, we acquired 6 buildings for $70.7 million. On the disposition side, we sold 5 buildings in the quarter for aggregate proceeds of $33.8 million. 3 of these buildings were non-core assets. The other 2 buildings were located in Louisville, Kentucky, as a portfolio, resulting in proceeds of $26.8 million and reflecting a 6.2% cash cap rate. Year-to-date, the aggregate cash cap rate on the company’s opportunistic dispositions was 5.5%.

Finally, I am excited to announce that STAG Industrial was added to the S&P MidCap 400 in May of this year. This is a testament to how the markets have begun to recognize the growth of the company and the evolution of the platform.

With that, I will turn it over to Matts, who will cover our remaining results and updates to guidance.

[Matts Pinard, Chief Financial Officer]

Thank you, Bill and good morning everyone. Core FFO per share was $0.56 for the quarter, equal to the second quarter of last year. Cash available for distribution for the second quarter totaled $87.2 million. We have retained $42.5 million of cash flow after dividends paid this year through June 30. Leverage is near the low end of our guidance range with net debt to annualized run-rate adjusted EBITDA equal to 4.9x. Liquidity stands at $794 million.

During the quarter, we commenced 29 leases totaling 3.6 million square feet, which generated record cash and straight-line leasing spreads of 28% and 42.6% respectively. We expect cash leasing spreads of approximately 30% for the year. Retention was 79.6% for the quarter and 97.4% when adjusted for immediate backfills. We achieved same-store cash NOI growth of 4.5% for the quarter and 5.3% year-to-date. Year-to-date, we have experienced 2 basis points of credit loss with non-incurred during the second quarter.

Moving to capital market activity, we issued approximately 2 million shares under our ATM program at a gross average share price of $35.86 resulting in gross proceeds of $70.5 million. As of today, we have $61.1 million of forward equity proceeds available to fund at our discretion. The equity will be used to match fund our acquisitions and development pipeline.

In terms of guidance, we made the following updates. We increased our cash same-store guidance to a range of 5% and 5.25% for the year or 12.5 basis points at the midpoint. This change was driven by improved retention and a modest reduction in expected credit loss from 40 basis points to 20 basis points. We increased our disposition guidance to a range of $100 million and $200 million, driven by our progress through today, an increase of the midpoint of $25 million. We updated our retention to range of 70% to 75% based on leases signed to-date. We still expect net debt to annualized run-rate adjusted EBITDA to be between 5x and 5.5x.

I will now turn it back over to Bill.

[Bill Crooker, Chief Executive Officer]

Thank you, Matts. I am excited about where the company sits today and the road ahead. I must express my gratitude to our team for their effort and dedication in achieving our goals this quarter. We continue to have extremely strong operational results and forecast for 2023. We are also benefiting from a conservative balance sheet, with ample liquidity. These factors will allow us to take advantage of the opportunities that present themselves through the remainder of 2023 and beyond.

We will now turn it back over to the operator for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Craig Mailman. Please proceed with your question.

[Craig Mailman, Citigroup]

Good morning, guys. Just kind of curious, you guys have a kind of a broader portfolio than maybe some of your peers and more recently, rent growth and sequential rent growth have been sort of top of mind for investors, especially in LA and some of the other coastal markets. But I am just kind of curious, as you guys look at your portfolio, your footprint, what are you seeing on that front from a sequential market rent growth, fundamental kind of stable kind of conditions that kind of maybe differentiate your portfolio, your growth rate from people that are a little bit more exposed to some of the markets that maybe really benefit during COVID and are now kind of coming back a little bit to reality?

[Bill Crooker, Chief Executive Officer]

Yes. Hey, Craig. Thanks for the question. Our market rent growth forecast at the beginning of this year, were mid to high single-digits for the portfolio. We affirmed that last quarter and affirmed it again this quarter. So market rent growth has been pretty stable in our portfolio. Last quarter, we mentioned benefiting from some of the near-shoring in El Paso markets. We’re seeing those mega site investments start to go up in pockets in the U.S., the Southeast Texas, some Midwest markets. So we think that will be a demand driver for some of our markets as well. We’re seeing also some demand coming from logistics tenants continuing to build up the supply chain in our market. So for all those reasons, we’ve seen pretty stable and strong market rent growth in our markets.

[Craig Mailman, Citigroup]

Do you feel like you kind of mentioned the hesitancy of tenants to make big cap outlays and so maybe they are using 3PLs in the near-term. I mean do you feel like there is a substantial amount of pent-up demand in your markets that if maybe the Fed pivots or something else gives people more assurances on the economy that you could see almost a reacceleration in the absorption in potentially kind of an upward pressure on rents in your market? Or is it just it would be incremental on the margin?

[Bill Crooker, Chief Executive Officer]

Yes. I mean, certainly, that’s a scenario that could play out. I mean there is a lot of factors that would contribute to that, and we need to figure that out, but certainly could be an outcome. Right now, as I mentioned in the prepared remarks, big box demand is still very slow. We’re seeing a lot of demand from 3PLs as – which is consistent with last quarter. So overall, I mean, we’re really happy where the supply-demand dynamic is for our portfolio in our markets and our box size. As a reminder, our average lease size is 140,000 square feet and the demand – the supply that’s coming online today about half of that supply is big box supply, 500,000 square feet or above.

[Craig Mailman, Citigroup]

And then if I could slip one more in. You guys talked about your – the acquisitions that you made in the quarter, kind of the $70 million due to post quarter end versus the dispose and kind of your equity availability. I mean if you guys hit your guidance, what does the accretion on a net basis looked like from all the capital recycling activity within earnings maybe for ‘23 and what that kind of translates to on an annualized basis for a run rate?

[Bill Crooker, Chief Executive Officer]

Yes. I mean for earnings this year, our acquisition guidance is back-end weighted. So we’re not factoring in a large contribution to core FFO from acquisitions. Dispositions are happening a little quicker in the year. We increased our disposition guidance. But for this year, not a major contributor to core FFO. The acquisition this year should benefit significantly 2024 core FFO, and we will obviously speak about that on a later call.

[Operator]

Our next question comes from Eric Borden with BMO Capital Markets. Please proceed with your question.

[Eric Borden, BMO Capital Markets]

Hey, guys. Good morning. I appreciate the color on the potential development acquisition opportunities and just hoping that you could kind of expand on that, maybe quantify what you’re seeing today in the pipeline and what you expect to close in the back half of the year? And then just a clarifier is, are those opportunities included in acquisition guidance? Or are they separate too?

[Bill Crooker, Chief Executive Officer]

Yes. Good question, Eric. Thank you. The development opportunities we’re seeing, we’re really excited about. We’ve had really great success on our past developments, the developments are not in our acquisition guidance, any incremental developments would be incremental to that. But they do take time anywhere from 12 to 15, sometimes 18 months to develop. So the deployment of capital for those will be over a period of time. We’re seeing opportunities, as I said, from newly constructed buildings that are vacant to entitled land sites that will run the development to partnering with developer and providing capital to that developer in return for taking the risk for upside and downside in the transaction. So we’re seeing a lot of opportunities now as we close on those opportunities, we will be sure to let everyone know. At this point, there is not enough certainty in the pipeline for us to give guidance on that. But as that happens, we will be sure to give guidance and lay out a schedule, not in the deployment of capital when those developments will be completed, the yields, profit margins, etcetera.

[Eric Borden, BMO Capital Markets]

Okay. That’s helpful. And then maybe on the funding side, just how are you thinking about the funding for the remainder of the year, just given your share price today, you have $60 million of forward left versus cost of debt and mix of dispositions. What’s the most attractive source of capital today? And how should we think about the mix kind of through the remainder of the year?

[Matts Pinard, Chief Financial Officer]

Hey, good morning, Eric, this is Matt. You’re right. So we have unfunded proceeds on the forward roughly $61 million. We’re going to use those to fund acquisitions in the future ongoing developments that Bill just mentioned. The capital market has materially improved since April. And as we’ve talked about, our initial guidance ranges were set at the beginning of the year to allow us to operate our target leverage an, great if we hit the midpoint of our net acquisition volume issued no equity would likely be at the high end of that leverage range. With this modest amount of equity funding, it’s more likely we’re going to operate closer to the middle part of our range. But the concept of being able to operate without any additional equity is still in place. As Bill mentioned, we slightly increased the bottom end range of our disposition guidance. So we expect from a funding source, you’re going to see, I’d say, incremental more disposition proceeds.

[Operator]

Our next question comes from Vince Tibone with Green Street. Please proceed with your question.

[Vince Tibone, Green Street]

Hi, good morning. I just wanted to clarify the cash cap rates on the acquisitions in the quarter. Just given the shorter WAULT deals, does that 6.2% cap rate reflect run rate current NOI? Or does this incorporate this kind of big mark-to-market you highlighted, especially in the Carolina property?

[Bill Crooker, Chief Executive Officer]

Yes. It depends on if it’s a known vacate, Vince. One of the deals is a known vacate, so that would be stabilized. And the other one is not a known vacate, so that would be the in place.

[Vince Tibone, Green Street]

Got it. So basically, the year 1 yield on these is going to be a little lower than the $62 million, just to clarify.

[Bill Crooker, Chief Executive Officer]

Yes, slightly lower.

[Vince Tibone, Green Street]

Yes. Got it. And then just a kind of question on the development opportunities and kind of just really how leasing risk is being priced today. So if you were going to buy the completed development that vacant, how much additional yield do you think you could achieve by leasing that building versus just buying a stabilized core property today?

[Bill Crooker, Chief Executive Officer]

It depends on the market. It depends on suite size demand, the supply, but anywhere, call it, circa 75 basis points depending – again, depending on the suite sizes. But we’re – the opportunities we’re looking at on the development side is, call it, smaller boxes generally, medium-sized boxes. And a lot of times, we’re building those. We’re planning to build those to demise them into two to three suites, so really meets the teeth of the demand.

[Operator]

Our next question comes from Samir Khanal with Evercore ISI. Please proceed with your question.

[Samir Khanal, Evercore ISI]

Hey, good morning, everyone. Matt, I mean there is a lot of positivity around the comments here, but you kept the guidance unchanged. So I’m just trying to figure out as you kind of still a pretty wide gap considering you’re in August here. So wondering what’s sort of holding you back here? Maybe talk about the factors, maybe to get you to the low end of guidance here. Thanks.

[Matts Pinard, Chief Financial Officer]

Yes. So just to talk about the no change in core FFO. To your point, we did have a modest increase in our same-store guidance, look there is still macro uncertainty as we sit here in July, that definitely influences our view on guidance. We did increase our disposition volume expectation for the year. Look, there can be a timing mismatch between selling an asset and redeploying those proceeds. As Bill mentioned, external growth is really not a material driver to earnings this year. The acquisitions are expected to be back-end weighted. In terms of the low end of guidance, to the extent something on the macro front, really kind of tipped the capital market picture and that flowed into the share price. But we’re very confident with the midpoint. And to the extent credit loss comes in lower, etcetera, we would dip towards the higher end.

[Bill Crooker, Chief Executive Officer]

Yes. Just to add on to that, I mean I think you’d have to have some a real material macro event to push us to the low end of guidance, some significant credit issues in the portfolio, which we’re not anticipating, but we certainly don’t want to put a guidance range out there that doesn’t factor some of that uncertainty into it.

[Operator]

Our next question comes from Blaine Heck with Wells Fargo. Please proceed with your question.

[Blaine Heck, Wells Fargo]

Great. Thanks. Just following up on some of the earlier questions. Can you just talk about how you’re thinking about your overall cost of capital today and the spread between your cost of debt and equity and the required return on investment. I guess, what’s that spread on the deals you’ve executed year-to-date? And is there a spread that you guys target that we should be thinking about over the longer-term?

[Matts Pinard, Chief Financial Officer]

Hey, Blaine, this is Matt. I can start with the cost of our capital. So let’s start with that. So if we were to go out and originate long-term debt, would be in the private placement market, we’ve been very successful there. We would likely issue something between a 7 and 10-year tenure, probably mix both of those. If we were to go to market today, we’re in the 5.75% area, notably below the cap rates that we just discussed in a couple of questions ago. In terms of the equity, we’re comfortable with where we should equity because we had accretive uses for those proceeds. As we sit here today, we would need appropriate uses for additional equity, right? There has been modest increases in the acquisition activity, but I really want to emphasize modest, particularly compared to what we look like in 2019. So we sit here today we like where the balance sheet is. We’re looking at the opportunities. We’re hoping the opportunities increase, but we’re very cognizant of the stabilized yield versus the cost of debt, and I think that’s flowing through.

[Bill Crooker, Chief Executive Officer]

Yes. And then just on the opportunity side, Blaine, I mean this quarter, we are really excited about the two acquisitions we executed on the low 6% cash cap range. We can add a lot of value to those assets as well. When you look at what we both subsequent to six buildings, 3-ish, call it, WAULT, 3-year WAULT on those opportunities we can add value to as well. And then when you think about some of these development opportunities that we’re close to closing on a few of these those are going to generate even higher returns. And we feel like in markets that are some of our stronger markets. So great opportunities and certainly accretive uses for where we can raise incremental capital today.

[Blaine Heck, Wells Fargo]

Alright. That’s really helpful. Second question, just – are there any common themes or traits in the properties you guys have sold or those that you guys are targeting for sale in the rest of the year? Any specific markets you might be looking to exit or kind of industries that you’re trying to avoid or is it just more opportunistic?

[Bill Crooker, Chief Executive Officer]

Yes. On the industries, not really, right. We are really focused on the real estate. So, it’s a good piece of real estate, we will deal with the tenants. With respect to the dispositions, there was a couple of opportunistic dispositions. I think year-to-date, we are in the mid-5s for a disposition cap rate, which in this environment was pretty good. And a lot of those properties, Blaine, are either on the cusp of our CBRE Tier 1 markets or just locations that we feel like long-term are not maybe the best for us. One example of a sale was to the tenant itself, who just wanted to own the building. So, it was a great opportunity for us to realize a pretty good yield while improving the overall quality of the portfolio.

[Blaine Heck, Wells Fargo]

Thanks guys.

[Bill Crooker, Chief Executive Officer]

Thanks.

[Operator]

Our next question comes from Camille Bonnel with Bank of America. Please proceed with your question.

[Camille Bonnel, Bank of America]

Hello. Can you talk up to the downtime trends in your portfolio? Clearly, you have made significant progress on leasing this year, and even factoring in lower retention, your occupancy looks to improve. So, just trying to get a sense if anything can detract from this trajectory in the second half of the year?

[Bill Crooker, Chief Executive Officer]

Yes. From a downtime perspective, you are not seeing material changes. I mean it’s basically flat or up just a little bit, but not – we are not seeing any material changes there. What we are seeing change in is just tenants taking a little bit longer to make decisions. So, leasing space well in advance, a year in advance, like they were last year versus now they are taking a little bit more time making those decisions, part of that is just due to their outlook on the economy, part of that’s due to putting capital in the building and making a long-term commitment to the space, and weighing the decision to either go in the space themselves or utilize the 3PL network. So, from a downtime perspective, from a concessions perspective, nothing material from a TIs, those are pretty flat on a free rent, and we are hearing rumblings in the market that free rents up a little bit. We are not seeing that in our portfolio. We are not seeing that in our lease proposals, so overall, it’s pretty consistent with what it has been.

[Camille Bonnel, Bank of America]

That’s very helpful. And just a bigger picture question on the transaction market, given it looks like you are starting to get more active, what’s your view on what’s driving deals across the line now despite no real changes around interest rate and questions around the economy. And have you seen any changes in appetite from sellers and buyers in the recent weeks?

[Bill Crooker, Chief Executive Officer]

What, I think time has been helpful in that respect. I think the volatility of interest rates coming down has helped. So, the stable – let’s say another way, the stabilization of interest rates. And now sellers really understand where their cost of capital is. And when they know that, that generates where they are willing to trade their assets. So, you are seeing that bid-ask spread between sellers and buyers come down. And that’s really what’s starting to fuel the transaction market. A couple of big portfolio deals got done. There is one or two on the market today as well. And those just give a little more confidence to both sides of the equation of what’s the right market. When you have a rapid rise in the interest rates like we had over the past couple of years, sellers don’t know what their properties are valued at. And now that we have had stabilization, I think people are more comfortable with the value of the properties, and that’s why you are seeing deals get done.

[Operator]

Our next question comes from Nick Thillman with Baird. Please proceed with your question.

[Nick Thillman, Baird]

Hey. Good morning guys. Maybe touching a little on leasing now with 94% of ‘23 kind of in the books here. I mean as we are looking out into ‘24, do you have any like early indication of kind of where those spreads are coming in? Just trying to get a sense of we have a sustainable like same-store performance here going forward?

[Bill Crooker, Chief Executive Officer]

Nick, you know I am not going to answer the ‘24 leasing spreads. But I will say the supply-demand dynamic in our markets continues to be pretty balanced. We really like how our portfolio sits and how it fits our submarkets. We said this on the last call. We had some El Paso assets roll. This year, we had a couple of buildings roll in Southern New Jersey. We don’t have those same markets rolling next year. But with that being said, supply starts – development supply starts are down pretty significantly year-over-year. That’s going to impact like through the back half of ‘24. How much of an impact that’s going to have. It’s hard to measure that today. But overall, we are really comfortable where the portfolio sits. I think if you look at same-store, last year we had some occupancy gains in same-store and you had half the leasing spreads, we had no credit loss. This year, we are still budgeting some credit loss, and we were 5% same-store last year. This year, we are still budgeting credit loss. We had doubled the leasing spreads. We had 50 basis points of average occupancy loss, and we are still in that 5% plus range in the same-store. So, I think you back of the envelope, this it’s hard to think we are not kind of in a sustainable same-store range for a period of time.

[Nick Thillman, Baird]

That’s helpful. And then maybe looking at the third quarter acquisitions thus far, it seems as though a little bit more smaller builds, maybe around like 80,000 square feet. So, is this more of a shift into just kind of meet that demand, or this is kind of what you are seeing transact on the market today?

[Bill Crooker, Chief Executive Officer]

Part of what we are seeing transact in the market, I mean we are certainly willing to buy bigger buildings. But if it has a shorter vault on that bigger book building, it’s going to result in us paying less for it because of the way the market is today. So, I think you are seeing sellers not put those large buildings with shorter vaults on the market because they know they won’t transact at the appropriate yield they are looking for. So, I think part of it is a mix change in terms of what’s on the market and part of it is just pricing given market dynamics.

[Operator]

Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.

[Michael Carroll, RBC Capital Markets]

Yes. Thanks. I wanted to follow-up on the 2024 lease expirations. I know, Bill, in your earlier comments, you are talking about I don’t know, some slowdown in the larger blocks of space. I mean if you are looking out at 2024, I mean is there a number of large blocks expiring next year, or how is that mix compared to this year or the past few years?

[Bill Crooker, Chief Executive Officer]

What we are seeing is the slowdown in demand, and you can put a pin in what number you want to use as large, 500,000 square feet and above is what we use. In terms of next year, we have nothing 500,000 square feet or above this rolling. We don’t have anything even 400,000 square feet or above that’s rolling next year. So, for us, what’s rolling meets the demand in our submarkets, so there is nothing abnormal that’s happening next year. And just to remind you, our average lease size is 140,000 square feet. So, it meets a lot of the demand that’s in the market.

[Michael Carroll, RBC Capital Markets]

Okay. Great. Thanks.

[Bill Crooker, Chief Executive Officer]

Thanks Michael.

[Operator]

Our next question comes from Mike Mueller with JPMorgan. Please proceed with your question.

[Mike Mueller, JPMorgan]

Yes. Hi. I am curious on the development pipeline, can you give us a sense as to how large you want that program to be either, say, relative to annual dollars deployed versus acquisitions or relative to your total market cap, just some guidelines there.

[Bill Crooker, Chief Executive Officer]

Yes. It’s still early days, Mike. As we get more of these under contract or we start to close on more of these, we will lay out a schedule and give some threshold there, but we have got a ways to go before we are putting out thresholds. I know some of the others in the sector have a 10% of enterprise value cap or a little bit north of that. For us, it will be lower than that, just given it’s a newer endeavor for us. But as we close more of these, we will certainly provide some of that guidance.

[Mike Mueller, JPMorgan]

Okay. Thank you.

[Bill Crooker, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from Bill Crow with Raymond James. Please proceed with your question.

[Bill Crow, Raymond James]

Hi. Good morning guys. Hey Bill. You quoted development starts down 30%. I think others have talked about down 40%. I am just curious whether you are seeing evidence that the development reduction might be longer duration in nature, or is this just really a pause? I mean you see convergent builders cutting headcount or selling entitled land at a faster pace. It’s unique and that fundamentals are really, really strong, and we are seeing development slowing dramatically. So, everybody just on the sidelines, they are going to jump in as soon as the financial markets, the lending markets recover, or what’s your take on that?

[Bill Crooker, Chief Executive Officer]

Yes. It’s a really good question. We are seeing a lot of different things in the market today. I mean we are certainly partnering with some developers. As I have mentioned, we are seeing some entitled land sites come on the market. The merchant developers that can sit on land are sitting on land, what starts the wave of supply again, I think you are going to need a pretty significant decrease in interest rates for that to happen. I think that’s really been a big issue for the merchant developers. The markets are great. The fundamentals are great, but it’s really the interest rates and the debt capital markets that’s putting them on the sidelines. So, I haven’t seen, I guess I am not close to it to see how much – if they are cutting headcount or whatnot there. I think what they are trying to do is de-risk their portfolio as much as they can, and that’s where we are looking to partner with some of these folks.

[Bill Crow, Raymond James]

Okay. I think it’s really interesting time from a development perspective. Thanks Bill.

[Bill Crooker, Chief Executive Officer]

Yes. Thanks Bill.

[Operator]

There are no further questions at this time. I would now like to turn the floor back over to Bill Crooker for closing comments.

[Bill Crooker, Chief Executive Officer]

Thank you all for attending the call this morning. We appreciate the questions and appreciate your support, and we look forward to talking to you all soon. Thank you.

[Operator]

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.