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STAG Industrial Inc
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Greetings, and welcome to STAG Industrial Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Matts Pinard, Senior Vice President of Investor Relations. Thank you sir, you may begin.
Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2019 results. In addition to the press release distributed yesterday, we posted an unaudited quarterly supplemental informational presentation on the company's website at stagindustrial.com under the Investor Relations section.
On today's call, the company's prepared remarks and the 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 statements relating to earnings trends, G&A amounts, acquisition and disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends and other matters.
We encourage all of our 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 to 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'll hear from Ben Butcher, our Chief Executive Officer; and Bill Crooker, our Chief Financial Officer.
I will now turn the call over to Ben.
Thank you, Matts. Good morning, everybody and welcome to the third quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our third quarter results. Presenting today in addition to myself will be Bill Crooker, our Chief Financial Officer, who'll discuss the book of the financial and operational data. Also with me today are Steve Mecke, our Chief Operating Officer; and Dave King our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus.
Yesterday, we announced acquisition volumes of just over $300 million for the third quarter. This brings our year-to-date total including acquisitions that have closed subsequent to the quarter end to approximately 875 million. As a result, we have raised the top end of our 2019 acquisition guidance to $1.2 billion, a significant increase from our initial line guidance.
We have already closed well in excess of any previous year's acquisition totals, ensuring this will be the company's most successful year on the external growth front. At the same time, our operating metrics for the first three quarters of 2019 remain strong. We achieve cash releasing spreads of 11.4% retention of 74% and same store cash NOI growth of 1.9%. All of these metrics meet or have surpassed our initial and then any substantively increased 2019 guidance. This has prompted a further upward revision toward 2019 same-store NOI guidance this quarter that Bill will describe in his remarks.
This marks one of the company's most successful years producing internal growth. STAG has demonstrated the rare ability to provide both external and internal growth. Growing GDP and a particular continued strong consumer spending provides strong demand support for the industrial sector.
The continued growth of e-commerce, the associated supply chain reconfiguration and the increased inventory needs are large additive drivers of industrial demand. As we have previously highlighted, STAG’s portfolio is located approximate to centers of population, and is directly benefiting from these secular tailwinds.
Consistent with headlines and various industry reports, STAG’s markets continue to benefit from healthy demographic trends. The trends in population and employment growth, which drive income growth and industrial demand have generally been positive nationwide. And this holds true when looking at our largest market exposures.
Population growth and specifically growth in prime working age population help drive Metro GDP growth. Metro GDP is projected to grow across our top marketing exposures, and broadly across our portfolio wide market exposure. This has driven our robust portfolio operating metrics for this year.
This fall we rolled out our third annual comprehensive tenant survey. This survey has proven to be a valuable tool that allows us to gain additional insights into our tenants view on their business, the world and how their current and future real estate needs are being met.
Consistent with last year, the results from the survey show an increase in business activity, both at the corporate and building level. 52% of respondents indicated business activity is increasing at the corporate level, and 41% indicated an increase at the building level.
The macro environment continues to be uncertain specifically with regard to trade wars. In response to a direct question of letting the impact of tariffs and other restrictions, our tenants indicated on average there was a small negative impact to their business with responses ranging from a large negative impact to a small benefit.
We continue to believe it is too early to tell what these impacts will be. But note, the results from the tenant survey indicate that the tone has become more cautious compared to our survey from one year ago.
STAG's emphasis on geographic and industry diversification should provide a level of protection should negative trade impacts start to be evidenced. e-commerce is clearly an important and growing incremental demand driver at 44% of our portfolios buildings are currently handling e-commerce activity and 47% of respondents indicate that e-commerce activity has increased in their facility over the past year.
These responses have grown compared to last year, and we expect this trend to continue. It is important to note that the traditional demand drivers for industrial real estate such as GDP growth and improved business confidence continue to provide baseline support to industrial fundamentals.
The survey results are consistent with our operating results. The increase in business activity and the increasing importance of e-commerce to our tenants businesses have directly contributed to our strong operating results over the past several quarters.
With that, I will turn over to Bill to discuss our operational results.
Thank you, Ben, and good morning everyone. Core FFO was $0.46 for the quarter, an increase of 2.2% compared to the third quarter 2018. Leverage remains at the low end of our guidance with net debt to run rate adjusted EBITDA of 4.7 times. Acquisition volume for the third quarter totaled $303 million with a stabilized cash cap rate of 6.8%, and a straight line cap rate of 7.2%.
The straight line cap rate incorporates weighted average rental escalators of 2% associated with this quarter's acquisitions. This spring's acquisition volume through Q3 to $748 million with stabilized cash and straight line cap rates of 6.5% and 7.1% respectively.
Subsequent to quarter end, our acquisition volume to date is $126 million. The demand for our buildings continued to be reflected in our portfolio operating results, with new and renewal cash leasing spreads of 19.7% and 8.6% respectively.
Straight line releasing spreads for the quarter were robust as well, with new and renewal straight line releasing spreads of 24.7% and 14.8% respectively. Retention for the quarter was 61%.
Same-store cash NOI grew by 1.3% for the quarter, which was positively impacted by our retention and cash releasing spreads, and partially offset by a decline in occupancy within the same store pool in the third quarter.
Year-to-date same-store cash NOI has grown 1.9% driven by a retention rate of 74% and a cash releasing spreads of 11.4%. This is partially offset with a decline in occupancy in the year-to-date same-store pool. As Ben mentioned, these metrics have exceeded our budgets and have contributed to our increase in same-store cash NOI guidance for 2019.
Moving to our capital market activity, as previously discussed on the second quarter call, we funded term loan E and originated term loan F. Term loan E has a notional of $175 million and is fully swapped with a fixed rate of 3.92%. Term loan F has a delayed draw feature and is currently undrawn with the notion of 200 million and is fully swapped at the fixed rate of 3.11%.
On September 24th, we completed an equity offering at $29 per share, which resulted in aggregate net proceeds of approximately $362 million with a portion of those proceeds to be received on a forward basis. We receive net proceeds of $157 million in September, and expect to settle the forward contract, and receive the remaining $205 million in the next few months.
The $157 million of media proceeds were used to fund our third quarter acquisitions, and the $205 million of proceeds to be forward, settled will help fund upcoming identified acquisitions.
At quarter end, net debt to run rate adjusted EBITDA was 4.7 times. Our fixed charge coverage equals five times and our available liquidity is $623 million. We have updated our public guidance to reflect our activity to date. We now expect acquisition volume to be between $1.1 billion and $1.2 billion. This includes between 50 million and 100 million of value add acquisitions.
The stabilized cash cap rate gains has also been updated to a range of 6.3% to 6.5%, and we expect the straight line stabilized cap rate to be approximately 50 basis points higher. G&A guidance has been decreased to a range of $36 million to $36.5 million. We have reduced our granular disposition guidance range between $50 million and $75 million. And we find retention guides to 75%.
Finally, we have increased our same-store cash NOI guidance to a range of 2% to 2.25% which reflects the impact of our leasing success year-to-date. All 2019 guidance can be found on the supplemental posted to our website in the Investor Relations section.
I will now turn it back over to Ben.
Thanks, Bill. This quarter and for the year-to-date STAG has again demonstrated the strength of our portfolio, of our operating platform and above our investment thesis, this strength was evidenced by a historic quarter for acquisitions and our outstanding third quarter and year-to-date operating metrics. With our successful equity transaction in September, our conservative balance sheet and our healthy pipeline of potential accretive acquisitions, the company is well-positioned to close out a very successful 2019.
We thank you for your time this morning and for your continued support of our company. I'll now turn it over to the floor for questions.
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Sheila McGrath with Evercore. Please proceed with your question.
Yes. Good morning. Ben, acquisition volume in the quarter was a record and [Indiscernible] guidance meaningfully. We keep hearing how competitive it is to acquire industrial buildings. Just wondering, if you could give us some insight how you're able to continue to capture this kind of volume at attractive cap rates?
Good morning, Sheila. Thank you for participating and thank you for the question. As we've talked about in previous quarters, we have built and continue to augment and the experience of the of the team continues to grow. So it's really by covering a broad swap of the fungible industrial market and a lot of it's in areas where we don't have significant institutional competition.
So we look at 60 or so markets, and again and a lot of those markets we're not -- we're not competing with large and potential buyers. So it's a -- it's an iterative process. We're still only buy about 15% of what we underwrite, and we underwrite a very small portion of the things that we identify, only the things that we think we have a reasonable chance of acquiring.
So it's a large interim process that by virtue of the experience and maturing of the organization and the growth of the organization allows us to identify and acquire at those types of lines.
Have you added to the acquisition team this year?
We have, we made a decision a number of years ago to grow our own acquisition people, and so we are, have people that have moved up through the ranks of financials analyst. The senior financial analyst and I have been rotated out into the field, and are picking up coverage in markets. So are the number of people we have outward phasing has gone from effectively 5 or so to 8 or so. They're out there interacting with brokers identifying assets and helping us identify those acquisitions that you see in the acquisition totals.
Okay. Great. And any update on your New Jersey development project?
Yes, Sheila this is Dave King. That project is due to deliver in December. It is both on time and on budget, and we expect to meet and most likely exceed pro forma on that.
Okay. Great. Thank you.
Thank you.
Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.
Yes, thanks. Ben, can you talk a little bit about your near term and I guess investment activity. What's driving the lower acquisition yields? Do you have any other lumpier transactions coming in the fourth quarter?
So the acquisition yields. I think you were referring to cap rates. Cap rates as we've discussed for a point in time measure. We're still adhering to and exceeding our long term return metrics in terms of IRR, FFO or cash per share over time. And so from quarter-to-quarter we see cap rates move up or down depending on the mix of what we're acquiring long term leases with little capital expenditure, and good contracts or rental bonds as it can be bought at lower cap rates and still deliver the same kind of returns. So I don't think we're very comfortable that our acquisition guidance for the year remains solid in terms of in terms of cap rates expected. So I don't think you're -- really should expect to see anything different in the fourth quarter than what we normally acquire. It's just there are mix changes from quarter-to-quarter that result in different reported cap rates.
Okay. Do you have another I guess, larger acquisition come in the fourth quarter with and expand a lease term and that's what's driving a little bit lower?
No again, it's just the same mix that we always buy there. But there could be you know depending on the mix, I don't know particularly, but it could be some sale leaseback, and there is something that is longer term with again, which would have a lower initial cap rate lower again with red bumps etcetera.
You know Mike, for the year we’re at 6.5 on a cash cap rate, and that's within the range of our guidance for the year, so the only quarter that would dip really below that was Q2. So we're not expecting anything like a Q2 cap rate for Q4.
Okay, great. And then can you talk a little bit about your I guess new same-store guidance that you raised this quarter. What's driving this improvement, is it just the strong year-to-date leasing trends that you've been able to record?
That's the biggest, that's one of the biggest drivers, Mike. It’s just the -- you're seeing that the strong leasing trends you're seeing the cash roll over rents that and as I just remind you those are those leases that have commenced. So if they've commenced later in Q3, you're going to see that roll through the rest of in Q4, and drive the year-to-date results.
Okay. Great. Thank you.
Thank you. Our next question comes from Blaine Heck with Wells Fargo. Please proceed with your question.
Thanks. Good morning. Ben, there’s been a lot of discussion in the industrial sector about rent growth differential between smaller buildings and big box with smaller reportedly seeing better growth. You guys have a pretty good mix between the two. So I wanted to get your take on the subject, and whether it's size that's the biggest determinant of rent growth, or if it's more based on you know the submarket or availability of land or some other factor?
Well, I think long, very long term rent growth and industrial markets has cost base, tends to be cost base. So when you're very hot markets and land prices go up, you can see unusual rent growth in those markets for a period of time. The history has been, and of course we can accept that this time may be different, but the history has been that rental growth for industrial properties is pretty much the same across all the top 50 or so markets. It has different variability, depending where you are in the cycle. And that's also true, likely true for smaller versus larger.
I would say smaller spaces are more expensive to build and maintain, and therefore may have an under -- some type of underpinning for higher rent. But I don't think that's the underpinning for higher rent growth as much it is for higher absolute rent. So I think, our -- I think our belief is that the smaller spaces are to the extent that they're outperforming in this market is more of a single goal. I wouldn't even say anomaly, but more of a cyclical feature.
Yes and Blain, when you look at the stats within our portfolio, we're not seeing that our large boxes are producing as good as rent growth as the small boxes.
All right, that's helpful. And you guys bought a building in Memphis over a million square feet, which I think is the only one that size you've bought in a while. Can you just talk about what attracted you to that asset, and whether we should expect you guys to purchase some of these larger buildings going forward?
Sure, it's Steve. This building what attracts to us, it's a -- it's a classy building with a long term tenant in it that just recently expanded into. It was originally a two tower building the tenants are now expanded into the balance of the building. It's in a great logistics location. It's near the BNSF intermodal yard in Memphis and near the airport. So we are very bullish on the property, and to the extent that the tenant ever decides to leave and the tenants been there almost in there 19 or 20 years. We're very comfortable the releasing prospects of that -- of that site as well.
And I think that generally the question of whether or not we're comfortable buying a million square foot buildings like everybody else in the industry, we have there's some degree of consideration of the fact that there have been a lot of million square foot billions of rolled. We have been looking at the statistics on that, and we derive comfort from the statistics on second generation space leasing of those buildings.
But it's certainly something that we pay attention to as we do with all the buildings on the right, and what -- how the reuse of that building would occur for the tenant lease.
All right, thanks guys.
Thank you. Our next question comes from Dave Rodgers with Baird. Please proceed with your question
Yes. Good morning. Ben, maybe on the acquisition front. You guys have done a lot of the acquisitions this year on a one-off basis, which again is a good testament to the strategy you've got. But you know talk about maybe why you haven't been able to find as many value add opportunities as you increased guidance that was not an increase and then can you also talk about the portfolio premium for your type of assets in your market, that are keeping you back to the single asset rate.
So I'll address the second one first. The portfolio of premium in markets that are deemed more risky, whether they are or not as a subject that we would be happy to discuss at length. But there markets that are deemed more risky on an individual asset basis. The premium is higher if you bought. I mean it goes to the ridiculous extreme. If you buy 50 treasury bills, the risk is the same as if you buy one. I think some people view assets in for instance Inland Empire West as being relatively low risk. The portfolio of premium you would see on a collection of assets in an Exit 8A in New Jersey or in Ontario, California or in Long Beach, those types of things have very little in the way of portfolio premium.
If you have a collection of assets in fungible markets, like say Cincinnati in Indianapolis, which are deemed a little bit more risky generally, you'll see a bigger portfolio of premium. And so, we believe that as we work across a 60 or so markets that we operate in, we see different levels of portfolio of premium accruing to the -- accruing to those assets we acquire in those various markets. So the first part of the question, I've forgotten.
Value add.
Value add. So we have a level of inquiry that we have with regard to value-add. We’re out looking for value add transactions, and we acquire them as they come through our filter, and we can buy them for the returns that we're looking for. So we may identify a great value add asset, but somebody else is willing to pay more and then will allow us to achieve the returns we're looking for. So we are throughout the year continuing to look. We don't have a cap on the amount of value add per say. It's our expectation that the value add will be on the range of maybe 5% to 10% of our assets acquisitions for the year. And the timing of those acquisitions you could see a quarter where all you know all 5% to 10% occurred in one quarter, or you could see it spread throughout the year. But the -- we are open to acquiring them. We're looking for them, and we'll acquire them again we can get the returns that we're looking for in those acquisitions.
And Dave, just regarding the portfolios I mean, we still underwrite portfolios, but 20% of our pipeline is our portfolios. It's just -- we're very disciplined on price, and have not been able to not been able to acquire those portfolios due to price.
Got you. That’s helpful. And then maybe on the disposition side, you actually took guidance down and I realized there's a high level of scale in your business then, but as you kind of think about increasing the guidance for acquisitions to $1.2 billion at the top end, nothing really kind of bubbles up that you kind of dare to say, hey we need to do a little bit more of the recycling.
Well, I think, it's a little bit of the same thing. We have filters that we've set up in terms of disposition, and we've talked about those filters in the past. From quarter-to-quarter we'll have you know different levels of disposition, but we're always looking at and evaluating the kinds of dispositions. This is -- this is separate aside from sort of capital raising dispositions which we've done a couple of times in the past. But as we look at our portfolio, as we've talked about the past, there are assets that we are interested in and only in long term, that would be the vast preponderance of our portfolio. But there are some assets, the Flex office assets, that we've discussed. We will get rid of overtime I shouldn't say or dispose of overtime. And we continue to look to do that on an opportunistic basis.
As we look at our portfolio, there may be times where we decide that there's another sub segment that we would look to dispose of. But mostly, we're looking at on the same way as we do on acquisitions on a granular basis on an opportunistic basis.
And then last question for me, just on the retention year-to-date, your retention is in line in the quarter with a little bit lower. Kind of remind us what's going on there, and then the backfill of any opportunities? And then as you look out into the early part of 2020 any tenants that we should be kind of paying attention to? Thanks.
Dave. Thanks for the question. I mean we're very comfortable with our guidance for the year. Our long term attention has been in that range, and so we don't expect anything unusual from as we've discussed from quarter-to-quarter, you're going to see lower and higher numbers but we're comfortable with our guidance for the year.
Thank you. Our next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Hey, thanks and good morning. Can you talk more about the study you mentioned? It sounded like you're seeing an increase in an e-commerce type tenants in the portfolio or at least e-commerce activities? Maybe if you could just provide more color on exactly what people are saying, and are there certain sectors that are using your assets more than they were in the past? Anything you can provide would be really helpful.
Yes. So Jamie, that's – there we’re referring to our tenant survey. This is our second year of doing the comprehensive -- third year of doing the comprehensive survey, time does fly. And so the survey is an indicator -- we get we ask our tenants specifically what they're doing in the building with regard to e-commerce.
Now, I am not going to tell you that it's know gray or household goods or anything like that. It's just general e-commerce activity that we're inquiring about. And as you might expect since our portfolio was representative of the industrial assets in the United States, our portfolio as in e-commerce activity is increasing generally across the United States, our portfolio is experiencing that same increase.
Okay. Are there certain regions, there's certain property sizes or certain locations within markets that tend to be getting more traction.
You know the e-commerce activity tends to occur near populations. Our assets are located approximate to populations. I think, it's important to note that sort of you know whether you're talking about last mile or last touch that doesn't mean you know one mile five mile radius is, you know the last touch assets are in most population centers are out or out in and around the Beltway is around those population centers, which may be 10 or 15 miles away from sort of the most dense population. And I know in particular, you know as an example in Boston the last such [ph] stuff's all occurring out around 128 and beyond.
And so, our assets are approximate enough to those population centers, and to how the people that are delivering to those last touch consumers, they're proximate enough for the -- for the purposes of those that activity.
And then what about other characteristics like dock doors on both sides of the building or truck courts, certain sizes of that. I mean are there any trends you're seeing that even help you as you think about your next round of acquisitions, you know certain characteristics that matter more than others?
So as you know and we underwrite an acquisition, we're looking at the features of the building that will that will affect obviously the tenant retention. So we want to know the building is fungible. I feel [Indiscernible] has the features that are our tenant current tenant uses. But I also want to know if and when that tenants leaves does this building have features that are that are attractive to the tenants in that specific market and submarket.
And as we underwrite those buildings, if the building is short on dock doors or if the market is a market where they want to cross dock instead of single loaded, we're putting in our underwriting the capital costs of converting that building to that, to have those features. And if the building is not you know – if the building with no side yards or something like that, so actually can add cross docks in its market. We're either going to assume that we can lease it for a long period -- a longer period of time or assume we’ll have to lease it for less rent, because of the less fully featured building.
All that's part of the underwriting. And as we look at assets individually, which is again is the predominately how we buy assets, we're able to again identify it, and acquire assets have good long term viability in those markets.
But are there certain characteristics of building today that would -- you wouldn't even consider them or maybe three or four years ago you would have. Like has the market changed that much or not really?
No the market hasn't changed that much.
Okay. And then following up on the same-store question, you guys have had pretty healthy leasing spread accelerating leasing spreads for many quarters now. What do – how you think about your same-store potential in 2020 versus 2019? I mean, can you see accelerating growth, based on how we were?
Obviously we're not in a position yet to talk about our guidance on 2020. I think one of the things as we think about same store NOI, one of the things that I like to think about is, we have a different acronyms saying, which is stabilize asset NOI growth. We have a – our same-store pool is at the end of the year is probably to be about 70% of all of our assets, and another 20%, 25% of our assets, 25% of assets are actually stabilized. So we have a significant portion of our owned assets that are not in our same store pool, but are producing 2.5% or so growth, through contractual rent bumps, they're stabilized assets. And so, we think that the SS NOI stat is a little misleading with regard to our portfolio in particular, but we're very comfortable with our projection, whether it recently revised projection for the year, and we're very comfortable that our portfolio will continue to operate it well and we will visit guidance as we move into 2020.
Yes. But Jamie as you pointed out, the leasing spreads has been a big driver and the acceleration of our same-store NOI over the past several years.
All right thank you. Do you have a sense of what your mark-to-market looks like for 20?
I think that still gets into guidance for 2020. We've told you, we've mentioned from time to time that the -- we believe our portfolio is in aggregate slightly under market. We can continue to have that belief.
Okay. All right. Thank you.
Thanks, Jamie.
Thank you. Our next question comes from John Massocca with Ladenburg Thalmann. Pleas proceed with your question.
Good morning. So just like a look on the balance sheet side of things. You've been a little bit lighter in terms of the issuance on the ATM obviously having the two offerings in place recently probably drove that. Was that more of a structural shift, where that'll be more of a capital raising focus going forward. And maybe less emphasis on the ATM or is it just a matter of the deal flow for acquisitions being what it was that the bigger chunks of equity made more sense than if it becomes more granular say the start of next year ATM is still kind of the primary equity raising vehicle?
Yes. Just taking a step back, John I think ideally we'd like to match fund our acquisitions with both debt and equity. Historically, the ATM has been a great tool to do that, given the increased deal volume we elected to do some larger bought deals. And this recent bought deal had a forward component, which allowed us to match fund identified acquisitions both under contract and NOI. And we'll continue to be flexible with how we raise equity and try to match fund as best we can to our acquisitions.
And I would say to sort of confirm and reiterate, what Bill is saying is, we're happy with the ways that we have to raise equity and we're happy with the fact that we have multiple ways to access the equity markets.
Okay. And I know it's probably a little bit early days, but did you see any impact potentially on your automotive supplier tenants from the GM labor stoppage at all. Was there anything notable?
No we checked in with them obviously on the news of the strike, and there seemed to be a degree of concern, but no real impact.
Okay. And then one quick detailed one, how much of the expected value add volume this year has been completed already, and how much is kind of remaining, let's say at the midpoint of guidance, that 75 million.
We've completed. I mean, right now if we don't complete any other value add deals for the year, we'll be within our guidance range.
Okay. Perfect. That's it for me. Thank you very much.
Thanks, John.
Thank you. [Operator Instructions] Our next question comes from John Petersen with Jefferies. Please proceed with your question.
Great, thanks. I wanted to ask about your G&A in the context of you guys lowered it this quarter and now you're a company that's acquiring a billion dollars of properties a year. You guys have been able to keep that line pretty well under control the past few years, but is it kind of curious given the you know the increased momentum in activity in the business over the last year, whether you think you can continue to scale that number over the next couple of years?
Yes I think, we'll be able to continue this to scale that number. If you look back several years, G&A as a percentage of NOI was mid-to-low teens. We continue to drive that number down and there was a variety of items that drove the reduction in G&A guidance this year. We're very comfortable with the revised guidance for the rest of the year.
And then I wanted to ask about property taxes. It things like across most real estate types municipalities are getting more aggressive with trying to increase people's property taxes, and they got to pass those through to customers. But, I'm kind of curious just in the negotiations with customers on rents, whether they look at things in terms of total cost of occupancy and whether that increased property taxes have any impact on their willingness and ability to pay rents or whether those sort of things are thought about separately?
I think by and large our tenants do look at total operating costs. We are -- we aggressively appeal our property taxes and are successful in many many cases. But you're right, they are passed through to the tenants, so we don't necessarily feel the immediate impact of those. We do perhaps see an abatement rolling off situation or something like that. Our net rents might change, but incremental increases in property taxes haven't been that significant to change our net rents.
Okay. And then just one more. Apologize if I missed this, but did you guys give any update on the development in New Jersey?
We did.
Could you repeat it for me?
On time, on budget, on pro forma or better.
Okay. All right thanks guys.
Thanks John.
Thank you. The next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Hi, sorry. Just a quick follow up. I just wanted to get your thoughts given you know we've been in this recovery for a while now we're starting to see construction rise, just how are you guys thinking about this supply risk in your markets or supply growing in your markets versus maybe this time last year? And what's the implications for the ability to push rent and other certainly in…
Yes, I think there's no question that as you look at the national aggregated scale, that supply is more of an issue than it was a year ago. Most of our portfolio and a lot of our activity is in markets that are less impacted by excess supply. There continues to be preponderance of supply continues to be in a few of the top 10 markets that the oversupply if you will.
So there's no question that it impacts rents, and I think you know and in places like South Dallas your -- the expectations are from a continued negative rent growth. We are as our portfolio as we think is remains pretty balanced with regard to supply and demand. So we're not expecting any material impacts on rent growth because of that.
Could you see rents accelerating still in your market?
I think rents will continue to move up at a measured pace. We've always had a long run of very high rent rental growth. We expect to see continued rental growth. But what's important I think in the exercise of our investment thesis is we underwrite every market every submarket and indeed the building itself. The characteristics, the building itself to understand and/or project that rent growth for that building and that submarket. So again, we're not really a top down. Dallas is going to grow at 3% it's you know what's going on in this particular industrial park in Dallas or in Cincinnati or wherever so.
So we're very -- and how we look at rent growth, and I think that has provided us a question of safety and conservatism in our underwriting.
Okay. All right, thank you.
Thank you, Jamie.
Thank you. We have reached the end of our question and answer session. So I'd like to pass the floor back over to Mr. Butcher for any additional or concluding comments.
Thank you very much operator. And thank you all for joining us this morning. I think our results both on the acquisition operating side are as we've mentioned in our comments, initial comments, are reflective of an investment thesis that is -- has worked and it continues to work and we're very excited about the prospects of continuing to execute it as we move forward. Again, thank you for your time this morning.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.