STAG Industrial Inc

NYSE:STAG

Earnings Call Analysis

STAG Industrial Reports Steady Growth and Increased Acquisition Activity

In the latest earnings call, STAG Industrial shared a strong quarter characterized by stable absorption and a declining supply pipeline. Market rent growth reached 3.2%, on track for a full-year target of 4%. Notably, the company has leased 38% of its expected 2025 space at impressive cash spreads of 24.1%. Despite American Tire Distributors' bankruptcy filing, all rent remains current. The company raised its core FFO guidance to $2.39 per share, and acquisition activity surged to $113 million. Additionally, cash same-store growth guidance increased to 5.25%-5.5%. With ground broken on several new developments, STAG appears well-positioned for future growth.

Strong Third Quarter Performance

The earnings call for STAG Industrial revealed a solid performance in the third quarter of 2024, with core funds from operations (FFO) per share increasing by 1.7% year-over-year to $0.60. This robust result was accompanied by $88 million in cash available for distribution. The company has strategically retained approximately $75 million of cash flow after dividends through September 30, positioning itself well for future investments and debt repayment.

Leasing Activity and Growth

During the quarter, STAG Industrial initiated 20 leases covering 3.3 million square feet, generating impressive cash leasing spreads of 24.6%. The company is on pace to meet 99.5% of its leasing goals for 2024, equating to approximately 13.2 million square feet, with cash leasing spreads anticipated to average 28.5%. Year-to-date, the same-store cash net operating income (NOI) has experienced growth of 6.1%, reinforcing a positive trend in income generation.

Guidance Adjustments

The management team updated its guidance, now expecting annual same-store cash NOI growth in the range of 5.25% to 5.5%, a marginal improvement of 12.5 basis points at the midpoint. Additionally, the anticipated acquisition volume was increased and narrowed to between $500 million and $700 million. The core FFO guidance was adjusted slightly upward to a range of $2.38 to $2.40 per share, providing investors with a clearer picture of the company's financial outlook for the year.

Strategic Acquisitions and Financing

In Q3, STAG Industrial achieved acquisition volumes of $113 million, consisting of six buildings with cap rates between 6.7% and 7.2%. Notably, the firm acquired a five-property portfolio in Massachusetts, fully leased, at a cash cap rate of 6.9%. Following the quarter's end, it closed additional acquisitions for $66.6 million at a 6.3% cash cap rate, ensuring a strong pipeline for future growth. Liquidity remains healthy at $904 million, enabling further strategic acquisitions.

Market Conditions and Tenant Stability

The industrial supply chain appears to be stabilizing, with STAG Industrial noting that vacancy rates are approaching a trough. However, they anticipate market rent growth for the portfolio around 4%, supported by a steady demand environment. The company is closely monitoring the financial health of key tenants, including American Tire Distributors, which recently filed for Chapter 11 bankruptcy. Although this represents 1% of STAG's annualized base rent, all leases remain current, mitigating immediate credit concerns.

Focus on Development and Future Prospects

With over 2.1 million square feet of development underway across nine U.S. buildings, STAG Industrial remains committed to strategically diversifying its portfolio. The company has closed on key land parcels for future projects, planning developments with strong tenant demand anticipated in markets like Nashville and Reno. The development strategy is designed with an emphasis on managing risk while capitalizing on favorable submarket conditions.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the STAG Industrial, Inc. Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Steve Xiarhos, Senior Associate, Investor Relations and Capital Markets. Thank you. You may begin.

[Steve Xiarhos, executive]

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2020 results. In addition to the press release distributed yesterday, we 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 Matt Pinard, our Chief Financial Officer. Also here with us today is Mike Chase, our Chief Investment Officer; and Steve Kimball, EVP of Real Estate Operations. We're available to answer questions specific to their areas of focus.

I'll now turn the call over to Bill.

[William Crooker, executive]

Thank you, Steve. Good morning, everybody, and welcome to the third quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about the third quarter 2021 results. We are happy to report another strong quarter of operating results. The industrial supply pipeline continues to contract and absorption remains stable in many of our markets. Availability and vacancy appear to be approaching a trough, although our expectation remains that we won't see an inflection point until the back half of next year. Market rent growth for our portfolio stands at 3.2% through September 30, keeping us on track for full year market rent growth of approximately 4%.

The leasing market is active with temps committing space. I'm happy to report that we have already leased 38% of the square feet we currently expect to lease in 2025, achieving cash leasing spreads of 24.1%. This level of leasing is on a similar pace to last year. On October 22, American Tire Distributors voluntarily filed for Chapter 11 bankruptcy. In conjunction with this filing, the tenant entered into a restructuring support agreement with participation from the current holders of its term loans. American Tire Distributors is the nation's largest independent tire distributor with over 80,000 customers. American Tire Distributors operates within 7 of our facilities across 841,000 square feet. They represent 1% of our annualized base rent or approximately $6.1 million. In the aggregate, these 7 leases have rent at market and all 7 buildings are actively utilized. All leases are current with missed rental payments.

We are monitoring the situation closely. This event is reflected in our updated guidance provided in yesterday's earnings release, including core FFO per share for the year. The acquisition market regained momentum in the third quarter, with activity noticeably accelerating post Labor Day. Acquisition volume for the third quarter totaled $113 million. This consisted of 6 buildings with cash and straight-line cap rates of 6.7% and 7.2%, respectively.

During the quarter, we acquired a 5-property portfolio totaling 290,000 square feet. The total acquisition cost was $78.1 million with a cash cap rate of 6.9%. The portfolio is located in the supply-constrained Route 128 Route 3 submarkets of Boston, Massachusetts. All of the buildings are located within close proximity to I-93, I-95 and I-495. -- the portfolio is 100% leased to 5 tenants with a wall to 4.9 years and weighted average lease escalations of 3.75%. Subsequent to quarter end, we acquired 2 buildings for $66.6 million at a 6.3% cash cap rate. On the development front, as of September 30, we have over 2.1 million square feet of activity across 9 buildings in the U.S. In July, we closed on a 5-acre land site. The planned 76,000 square foot building will be developed with an estimated delivery date of Q3 2025.

In August, we closed on our first single asset joint venture with a national developer -- the project will consist of a single 284,000 square feet distribution facility capable of accommodating up to 2 tenants with an estimated delivery date of Q4 2025. Both projects sit in the North Valley submarket of Reno, which has experienced robust tenant demand and rent growth over the past several years and continues to be a premier location in the market for distribution tenants.

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

[Matts Pinard, executive]

Thank you, Bill, and good morning, everyone. Core FFO per share was $0.60 for the quarter an increase of 1.7% as compared to the third quarter of last year. Cash available for distribution for the third quarter totaled $88 million. We have retained approximately $75 million of cash flow after dividends paid through September 30 of this year. These dollars are available for incremental investment opportunities, debt repayment and other general corporate purposes. Net debt to annualized run rate adjusted EBITDA was 5.1x and liquidity stood at $904 million at quarter end, inclusive of available forward ATM proceeds.

During the quarter, we commenced 20 leases totaling 3.3 million square feet, which generated cash and straight-line leasing spreads of 24.6% and and 34.3%, respectively. As of today, we have achieved 99.5% of the leasing we expect to accomplish in 2024 or approximately 13.2 million square feet at cash leasing spreads of 28.5%. There are 6 large leasing spread outliers totaling 1.2 million square feet that featured aggregate positive cash leasing spreads of almost 100%. Excluding these leases, cash leasing spreads would be 22.5% for the year. As mentioned by Bill, we have accomplished 38% of the square feet we currently expect to lease in 2025, achieving 24.1% cash leasing spreads, spreads that are relatively in line with the adjusted 2024 level. We achieved same-store cash NOI growth of 4.4% for the quarter and 6.1% year-to-date. We've increased our annual same-store cash NOI guidance to a range of 5.25% to 5.5% for the year or a 12.5 basis point increase at the midpoint.

Moving to capital market activity. In the third quarter, we issued 2.3 million shares on a forward basis under ATM program at a gross average share price of $39.89 resulting in gross proceeds of $93 million. As of today, we have $164 million of forward equity proceeds available to fund at our discretion at a net share price of $38.86. This equity will be used to pay down the revolver and match fund our acquisition and development pipeline. On September 10, we refinanced our $1 billion senior unsecured credit facility. The refinanced revolving credit facility matures in September 2028, with 2 6-month extension options and no change to pricing or covenants Subsequent to quarter end, we fully repaid our $50 million private placement one, which matured on October 1. Moving to guidance, we made the following updates. As previously mentioned, we have increased the cash same-store growth expectation to a range of 5.25% to 5.5%, an increase of 12.5 basis points at the midpoint.

Additionally, we have increased and narrowed the range of expected acquisition volume to a range of $500 million to $700 million. G&A expectations for the year have been decreased to a range of $49 million to $50 million, a decrease of $500,000 at the midpoint. These guidance changes result in core FFO guidance revision to a range of $2.38 to $2.40 per share, an increase of $0.01 at the midpoint. I want to note that we've also added a new slide to our supplemental information package. Given the increase in development projects, we've added this slide to detail each project in our development pipeline. This can be found on Page 10 of our supplemental information package.

I will now turn it over to Bill.

[William Crooker, executive]

Thank you, Matt, and thank you to the rest of our team for their continued hard work and achievement towards our 2024 goals. We'll now turn it back to the operator for questions.

[Operator]

[Operator Instructions] Our first questions come from the line of Craig Mailman with Citi.

[Craig Mailman, analyst]

Bill, maybe just going back to your commentary about the leasing market getting more active over the last year or so, you guys have become less active than historically partly on cost of capital and then just deal flow. What do you think it is now that's really kind of opening up the deal pipeline to you guys? Is it just the cost of capital? Or are you just seeing better opportunities out there? And kind of what do you think we could get back to sort of the baseline level of acquisitions you guys are doing a couple of years ago?

[William Crooker, executive]

Thanks, Craig. And just to clarify, you're referencing the acquisition market. I thought I heard leasing market.

[Craig Mailman, analyst]

Sorry. So the acquisition market, yes.

[William Crooker, executive]

Yes. Okay. Yes. Yes, I think that's a number of things. I think there's -- it was pent up, call it, seller demand to sell properties -- so we've seen a lot more properties on the market. I think with rates stabilizing for a period of time, it reduced the bid-ask spread. So you saw a lot of transactions occurring. And I think there's just a lot of confidence that where we can buy a building, the cap rates we can pay for it, but that's market. So we're seeing a lot of opportunities. Our pipeline, as you saw, moved a little bit north of $4 billion, which was nice to see about 75% of that pipeline is individual assets across the CBRE Tier 1 markets. About 20% of that pipeline is, you call it, portfolios, anywhere from a little 5 buildings or more. And about 5% of the pipeline is development.

So I think it's regarding your second part of your question and what pace of acquisitions we can achieve, I think it's going to be subject to interest rates and sell our expectations when we look at transactions, we price transactions to be accretive day 1 and typically with some growth embedded in it, whether it be from escalators or mark-to-market and we make sure that those acquisitions at the submarkets that they're in really well.

So certainly happy with the progress we've had on the acquisition front this year. We raised our guidance. We've had a bit of success subsequent to quarter end, and we closed another $67 million of acquisitions subsequent to quarter end. So the pace right now is really strong. Typically, the fourth quarter is the biggest quarter with regards to acquisitions. We'll see if that pans out this year. But overall, we're really happy with what we're seeing in the acquisition market.

[Craig Mailman, analyst]

And just from a competitive standpoint, I know you guys are in markets with other REITs, but largely not as much overlap. I mean is that the competitive advantage here that your local peers may just need to source financing and you guys are all cash, and that's given you surety you've closed. Like is there a differentiator for you guys? Or is it solely just your cost of capital is going better, you could maybe be a little bit more flexible on price and that's what's getting the deal flow back up? .

[William Crooker, executive]

Yes, I think it's a combination. It depends on what markets we're in, who our competition is. And a lot of our competition has been private equity and it's a large institutional private equity I think we still have a cost of capital advantage against some of those folks, but then it comes down to maybe their return metrics, maybe a little bit more aggressive than ours or they have their underwriting differently. But oftentimes, we do compete against small local regional private equity, where not only do we have a cost of capital advantage, but we have that surety of close. And over the years, especially in the fourth quarter, there's been opportunities where sellers need to close a disposition in their case, an acquisition in our case by year-end. And because of the processes and the people we have in place, we're able to close relatively quickly.

So charity to close is a priority for some sellers. So there's often times that we're not the highest bid, but because of our reputation, because of our broker network and I sure you close, we're able to get those transactions. So short answer to your question, it's a combination of cost of capital advantage, reputation and surety of close.

[Craig Mailman, analyst]

And if I could sneak one more quick 1 in. Any comment on what the exiter transaction during the quarter kind of means potentially for the valuation of your portfolio?

[William Crooker, executive]

Yes. I don't want to talk specifically about other transactions in the market, but I think as we view our portfolio, we view the submarkets our portfolio are in where the supply demand dynamics are heading. We feel like there's a lot of upside to our portfolio going forward. And frankly, you're happy with where the portfolio is going.

[Operator]

Our next questions come from the line of Nick Thillman with Baird.

[Nicholas Thillman, analyst]

Maybe touching a little bit on 2025 leasing. I appreciate sort of the update on spreads, how they're tracking thus far. -- you think that's kind of indicative of where as you look at 25 role, is that a good representation of what you guys are rolling and what you kind of expect for the full year without.

[William Crooker, executive]

Yes. Nick, we'll give a range for our leasing spreads that we always do in our February guidance for 2025. But this is indicative of what we expect at this point, but we'll give a range as we move into '25.

[Nicholas Thillman, analyst]

And then maybe a follow-up for Matt. On just bad debt, maybe what was it in 3Q. I appreciate the update on American Tire, but any other tenants on the watch list or things which should be watching out for?

[Matts Pinard, executive]

So in terms of the watch list, it's similar as it was 90 days ago. We've experienced about $1.4 million of credit loss through September 30, which is about 23 basis points. we maintained our guidance. We did raise same-store rate in core FFO. This compares to the guidance of 50 basis points for the year. We expect that to be a real number. We expect to incur that. But the theme across our credit events is really centered on weakness in the highly levered low-margin businesses, and our analysis is fully captured in the guidance that we gave for the year.

[Operator]

Our next questions come from the line of Eric Borden with BMO Capital Markets.

[Eric Borden, analyst]

Maybe just starting with development. I appreciate the new disclosure there and the new slide in the sub. I was just wondering if you could provide an update on potential tenant interest as it relates to your Greenville-Spartanburg assets and your Polerolled assets. Bill, I think you mentioned in your prepared remarks that availability and leasing the environment appears to be troughing and we could see a potential increase through the back half of 2025. So just curious, are more tenants kind of taking the tires today and could we potentially see those leased up in the upcoming quarters?

[William Crooker, executive]

Yes. I mean, I think as we said on our last call, our expectation for the 2 Greenville Spotenberg that assets we expect to lease in Q3 25. The other Greenville Spartanburg asset, the casual drive that tip is a 12-month lease-up period we underwrote. That one, As a reminder, is it was a sister building. When we acquired that project, we also acquired a fully completed building that we end up leasing up shortly after closing for -- I think it was like a 7.5% cap rate.

So on the casual drive, I think we're closer to the 7% cap rate range. With respect to that market, it's a market that has great demand drivers. The buildings are positioned extremely well near the inland port can service light manufacturing users or distribution users. And it's a market that has experienced some excess supply, that supply is getting absorbed. It's going to take a little bit of time. But we've had a fair bit of activity on all 3 of those buildings. Nothing to report yet, but overall, still expect to lease it up in our in our prior -- as we noted in our prior quarter and the Q3 '25 range for the first 2 and then about a year lease-up from for the Hosn.

[Eric Borden, analyst]

That's helpful. And then maybe one for Matt. Sorry if I missed this in your prepared remarks, but could you just provide an update on your same-store average occupancy loss expectations for the remainder of the year?

[Matts Pinard, executive]

Yes, absolutely. So there was no change. So if you recall last quarter, we had adjusted our guidance initially at the beginning of the year, we had guided the market to 50 basis points of average occupancy loss. We've seen some successes. We've seen retention has ended up at the higher end of our range or guidance of 75%. So we adjusted the expectation down. So we're still assuming 25 basis points of average occupancy loss on the year.

[Operator]

Our next questions come from the line of Jason Belcher with Wells Fargo.

[Jason Belcher, analyst]

Just wondering if you could talk about any common themes or characteristics in the property as you sold recently or are targeting for sale this year. To what extent are there specific markets you may be looking to exit or maybe tenant industries or categories you're trying to avoid?

[William Crooker, executive]

Yes. With respect to the markets, we have that CBRE Tier 1 focus. So I would expect most of our dispositions that are noncore to be in the non CBRE Tier 1 markets. They'll we'll have dispositions on an annual basis that are opportunistic, where we feel like we've achieved the most value out of that asset and we'll realize that value and redeploy that capital. with respect to what we sold this quarter, and that was a noncore asset, I think we spoke about on the previous call, that was sold for a 7.1% cap rate. But overall, we're really happy with that execution given our view on the asset.

[Jason Belcher, analyst]

Great. And then just 1 more in terms of kind of the slowdown in construction we've seen this year. To what extent have you seen land prices decline? And how are you thinking about maybe adding or building up your land bank for development opportunities in the future?

[William Crooker, executive]

Yes. We've seen land prices stay relatively flat throughout the year. Right now, with our development initiative, we're not buying raw in. We're really focused on sites that are permitted. And so a little -- not as far out on the risk spectrum. But we still continue to see a lot of opportunities to acquire permanent land for development. So we're -- that will continue to be an initiative for us, and we feel like we can continue to grow that throughout the years.

[Operator]

Our next questions come from the line of Michael Carroll with RBC Capital Markets.

[Michael Carroll, analyst]

Bill, just kind of building off of that last question, how do you think about new development starts? I know it does look like you bought a few land parcels past quarter. I mean, are those sites that you want to break ground and start developments on? Or do you want to lease up some of your projects that are currently under construction and completed before you start pursuing new starts? .

[William Crooker, executive]

Yes. We -- the ones that we did buy those were permanent and we've already broken ground on those, Mike. So we're not sitting on any land parcels that are permitted, ready to go. So everything that we have on that development slide, we've broken ground. As I mentioned earlier, we underwrite a 12-month lease-up period upon building completion, so you can underwrite or model when that revenue should be coming in. And with respect to new opportunities, we'll continue to evaluate it. I like the laddered, call it, development schedule that we have right now. And we'll -- as we add new properties, it's going to take call it, 9 to 12 months to build it and another 12 months to lease it. So we can continue to ladder these developments. And when I look at some of the newer developments, the Tampa developments, will be completed in the fourth quarter. Those are getting some really good interest. It's not a pre-leasing market, but we feel really good about the suite sizes how they fit the market. The Nashville property that was on land be owned in the portfolio. We're able to permit that break ground on that, that's going to be a very successful market and Nashville is 1 of the stronger industrial markets today. The Portland development, that's a a 10-year build-to-suit to a strong credit, and that is in the high 6s from a cap rate perspective. So that's great transaction. In the renal market, we like both those locations. I mentioned that in the prepared remarks. It's 1 of the premier submarkets within Reno. -- and site sizes that I think will fit the market pretty well. So overall, really happy with the way the development initiative is coming along and comfortable adding to it, assuming it's a building that we can put up that will fit the submarket well.

[Jason Belcher, analyst]

Okay. I mean is there -- I guess, off of that, is there a limit to how big you want the pipeline to be that's not yet leased? I mean, are -- like at what point do you want to kind of slow that down? And then just second to that, with what is your capitalization policy? So should we assume that these Greenville-Spartsburg assets will roll off capitalization on the beginning of 2025, if they're not least?

[William Crooker, executive]

Yes, that's right. I think that's -- I think from a capitalization policy, that's just gap. So I think it's 12 months is what the allowable time is to capitalize interest on that wages on that. Sorry, I'm getting a look from Matts. So the -- with respect to TAP and development, it's something that we're evaluating. I mean certainly, if you look at the total invested capital here, it's a very low percentage on our total overall enterprise value. We'll continue to evaluate that. Obviously, the build-to-suits bring a lot less risk than some of the more speculative developments that we have on here. I think anywhere in that right now is a newer initiative somewhere in that circa 5% of enterprise value is probably where we feel comfortable. But it will be well laddered. It will be diversified across geography, across suite sizes.

[Operator]

Our next questions comes from the line of Jessica Zhang with Green Street.

[Unknown Analyst]

I was just wondering if you could provide some color around the drop in retention rate this quarter. Was it driven by any particular leases?

[William Crooker, executive]

There was 1 lease that was a non-retention, but we backfilled it with 0 downtime. And so we didn't include that in the prepared remarks, maybe we should have. But if you factor that 1 in our retention adjusted for immediate backfills is about 73%. So it was really just 1 outlier that didn't -- we didn't retain them, but we backfilled it with no downtime.

[Unknown Analyst]

Okay. Great. And then just maybe 1 more. On the occupancy side, are there any material normal out in 25 that we should be aware of? .

[William Crooker, executive]

No, no material non-move-outs -- at this point in the year, there's leases rolling in the back half that we're unsure that whether they're going to retain or not but nothing material that's known move out at this point.

[Operator]

Our next questions come from the line of Rich Anderson with Wedbush.

[Unknown Analyst]

So if we go to American Tire, what is the bull and bear case there in terms of things that could transpire. Do you sort of -- you said you're monitoring, but you sort of devising some plan Bs. And also, where do the rents sit relative to market? Maybe there's an opportunity here in some cases, just if you can add some more color to the extent you can.

[William Crooker, executive]

Yes. On average, the leases are are pretty close to market Yes. I don't want to dive too much into this. It's -- we're speculating, right? It's their company. They filed, but if you read some of the public information out there, very good support from their lenders. I think it's going to come down. It appears it's going to come down to their evaluation of their distribution network and how they're utilizing the buildings and whether they affirm or reject leases. So as you can probably figure out with our guidance this year, there's not a lot related to ATD credit loss. The buildings are utilized. These are buildings that fit the submarket well. They're highly functional buildings, healthy submarkets and with leases generally at market. So Will the Bulner case, I mean, I think the Bulmer case is they vacate all leases or they stay in all leases, but I think the answer will be we have to figure out and see how things shake out. in the first quarter next year?

[Unknown Analyst]

Is it still too fresh to like sort of already think about optionality should something come at you? Or are you sort of sitting tight and just monitoring at this .

[William Crooker, executive]

We've got some views on this. It's just nothing I want to publicly comment on right at this point.

[Unknown Analyst]

Fair enough. Second question on the acquisition window, the pipeline up relative to last quarter. But you referenced sort of stable interest rate environment, which was yesterday's news at this point. I'm wondering how quickly does that pipeline kind of ebb and flow as the macro changes. We've had quite a change at the longer end of the curve in the more recent past. I'm wondering how much how quickly that 4.2 can go to something below 4 with some suddenness.

[William Crooker, executive]

Yes. I mean the pipeline is dynamic. The assets roll on and off at every week. It's not going to go from 4 to 3 in a matter of a week. But assets -- a lot of times, assets will sit on the pipeline if they don't trade. So I think when you think about just the broader transaction market and what's happened at least in the past couple of years, as you've seen spikes in interest rates and there's a little bit of a pause in the market and sometimes sellers reset expectations and sometimes they don't, and that sometimes results in a pause in the acquisition market.

So for us, as net buyers we adjust our returns immediately with our cost of capital. So the benefit of the team we've built is that we're looking across all the CBRE Tier 1 markets and evaluating opportunities from high net worth individuals to large institutional private equity. And we're adjusting our returns immediately. So we think there's still still some really good opportunities even with some elevated 10-year rates right now?

[Operator]

Our next questions come from the line of Brendan Lynch with Barclays.

[Brendan Lynch, analyst]

Maybe on the development -- excuse me, the acquisition pipeline, can you just talk about the characteristics of the assets that you're looking for in terms of value add or fully leased or market condition considerations?

[William Crooker, executive]

Yes. I mean it's CBRE Tier 1 markets. It's building needs to fit the submarket well. The -- it's made up about 75% individual assets percent portfolio is 5% developments. The individual assets and some of those are value add. I don't have the exact breakout but it's a wide range of opportunities. And similar to past years, similar to this year, we can buy assets that have -- it's a vacant asset to an asset that has a 10-year lease term. and we evaluate all the aspects of the transaction when determining whether to put a bid in for it.

[Brendan Lynch, analyst]

Great. And in the past, you've called out El Paso as being a market of particular strength. Can you give us an update there and maybe any others along the border that are performing particularly well.

[William Crooker, executive]

I mean Pass still performing well. I mean, certainly seeing a little bit of a uptick in vacancy there with some new deliveries, but still a very strong market and we look across other markets the mid -- a lot of Midwest markets continue to be strong, Detroit, Milwaukee, Minneapolis, Chicago, Sacramento is strong. Tampa is strong. I mentioned Nashville early with our development. That's a really strong market. And then the weakness continued weakness in Columbus Indi, you mentioned Philly on the last call, Philly, Southern Jersey is some weakness there. Not too dissimilar improving kind of quarter-over-quarter, at least staying flat and net absorption is staying flat on a lot of our markets. And it feels like we'll see some pretty good recovery in the back half of next year.

[Operator]

Our next question has come from the line of Jon Petersen with Jefferies.

[Jonathan Petersen, analyst]

Great. One more question on American Tower. One of your peers had a similar situation, and they talked about how there's a security deposit in place. They can contribute to top line rents in the case that they don't pay. Do you guys have anything like that with American Tire -- and what would be the duration on it? .

[William Crooker, executive]

Nothing material. I will say, just as I said in the prepared remarks, they're current on all the rent. There's no AR related to them. We've been to all 7 of our facilities -- they're actively utilizing our facilities. They're highly functional facilities in healthy submarkets.

[Jonathan Petersen, analyst]

Got it. Okay. All right. I appreciate that. And then maybe just one other maybe somewhat more broad question, but what impact does election uncertainty having on your business right now, whether it's closing on transactions or the leasing market? .

[William Crooker, executive]

It's an interesting question, Jon. I mean, we've heard from brokers that tenants, larger tenants are waiting on the election to make a decision. I don't know what the what the reason for that is other than maybe buying some time and just getting some certainty. But it feels like it's being used as used for a reason to delay decision-making in the leasing market. With respect to the acquisition market, I don't think it's really played a factor in that, but more on the leasing market and delaying decision-making?

[Jonathan Petersen, analyst]

All right. I'll ask you a follow-up question at NAREIT on what you think once we get results. Thanks, .

[William Crooker, executive]

Thank you for not asking it now.

[Operator]

Thank you. That does conclude our question-and-answer session. I would now like to turn the floor back over to Bill Crooker for closing remarks.

[William Crooker, executive]

Thank you all for attending the call. And -- thank you to the analysts again for their thoughtful questions, and we look forward to seeing you all soon.

[Operator]

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. enjoy the rest of your day.