Good day, everyone, and welcome to the EastGroup Properties 4th Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you'll have the opportunity to ask questions during the question and answer session. Please note this call may be recorded. Now it is my pleasure to turn today's conference over to Marshall Loeb, President and CEO.
Good morning and thanks for calling in for our Q4 2019 conference calls. As always, we appreciate your interest. Brent Wood, our CFO is also participating on the call. And since we'll make forward looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward looking statements within the Private Securities Litigation Reform Act. Forward looking statements in the earnings press release, along with our remarks, are made as of today, and we undertake no duty to update them as actual events unfold. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially.
We refer to certain of these risk factors in our SEC filings.
Thanks, Keena. We had a strong team performance this quarter maintaining the pace set earlier in the year. Some of the positive trends we saw were funds from operations came in above guidance, achieving a 7.6% increase compared to Q4 last year. And for the year, FFO also came in above guidance with an increase of 6.9% over prior year. This marks 27 consecutive quarters of higher FFO per share as compared to the prior year quarter and we're especially pleased with our 4th quarter and 2019 FFO growth given that the equity raise far exceeded our original budget.
The vitality of the industrial market is further demonstrated through a number of metrics such as occupancy, same store NOI and re leasing spreads. As these statistics bear out, the operating environment continues to allow us to steadily increase rent and create value through our ground up development and value add acquisitions. At year end, we were 97.6% leased and 97.1% occupied. Further, our quarterly occupancy has been 95% or better for it is now 26 consecutive quarters. In short, demand continues growing for our infill location, small bay last mile parks.
We're seeing this growth in terms of tenant expansions as well as a broadening range of tenants. Several markets were 98% leased or better, including Houston, our largest market. And while still our largest market, Houston has fallen from roughly 21% NOI to a projected 13.4% for 2020 and even below 13% in Q4 of the year. Supply and specifically shallow bay industrial supply remains in check-in our markets. In this cycle, the supply is predominantly institutionally controlled and as a result, deliveries remain disciplined and as a byproduct of the institutional control, it's largely focused on big box construction.
While sourcing development sites within the fast growing Sunbelt markets is a growing challenge, it's keeping supply in balance. Our quarterly same property NOI growth was 0.5% cash and 3.7 percent GAAP and our annual same property NOI growth was 4.7% cash and 3.7% GAAP. We're also pleased with our average quarterly occupancy at 97.1%, up a full 60 basis points from Q4 2018. Rent spreads continued their positive trend rising 9.3% cash and 18.3% GAAP last quarter. And for the year, GAAP rents grew 17.3% marking our 5th consecutive year of double digit GAAP increases.
Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our shallow Bay business distribution buildings is roughly 10,000,000 dollars And while our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging 200 to 300 basis point premiums. At year end, the development pipeline's projected return was 7.4%, whereas we estimate a market cap rate to be in the 4s. During the Q4, we began construction on 4 developments totaling 593,000 square feet.
And as of year end, our development and value add pipeline consisted of 28 projects containing 4,100,000 square feet with a projected cost of approximately $420,000,000 Meanwhile, during the quarter, we transferred 5 buildings into our portfolio totaling 775,000 square feet, each 100% leased. Looking back from 2017 to 2019, we've transferred 34 starts into our portfolio with 33 of those being 100 percent leased. For 2020, we're projecting starts of $150,000,000 spread over 9 cities. This geographic diversity further reduces risk while enhancing our ability to grow the development pipeline on an ongoing basis. As a reminder, the majority of our starts are based on the performance of the prior phase within the park.
In fact, over 2 thirds of our 2020 starts are projected to be that next building. As a result, market demand dictates new construction rather than us pushing supply into the market. 2 outcomes of this approach are 1, it allows us to manage risk as in most cases we're simply restocking the shelves. In many cases, the start is driven by the expansion needs of an existing tenant at the park and in most of those cases we're able to backfill the original space at higher rents. We had a busy quarter in terms of new investments and dispositions.
We're pleased with the quality of our investments as well as the geographic diversity. New investments were made in Las Vegas, San Diego, Dallas and Phoenix. And from a dispositions perspective, we sold 3 of our 4 R and D buildings in Santa Barbara and in Tucson, a long term tenant acquired their building. In sum, while the market is strong, we're working to find development and value add opportunities while also using this environment to shed those assets which are less likely to drive our future growth. Brent will now review a variety of financial topics, including our 2020 annual guidance.
Good morning. We continue to see positive results due to the strong overall performance of our portfolio. FFO per share for the 4th quarter exceeded the midpoint of our guidance at $1.27 per share and compared to Q4 2018 of $1.18 represented an increase of 7.6%. We continue to experience terrific leasing results in both operating and development programs. Average occupancy for 20 19 was 96.9 percent and we transferred 13 development and value add projects totaling 1,800,000 square feet into the operating portfolio that are currently 96% leased.
FFO per share for 2019 was $4.98 per share compared to $4.66 per share last year, an increase of 6.9%. Our continued strong performance, both operationally and in share price, is allowing us to further strengthen our balance sheet. From a capital perspective, we issued $68,000,000 of common stock at an average price of $132.52 per share during the quarter. That increased our 2019 gross equity raise to a record high 2 $88,000,000 Also during the quarter, we closed on a 7 year senior unsecured term loan for $100,000,000 With the addition of an interest rate swap agreement, the total effective fixed interest rate is 2.75%. We remain pleased to have access to capital via equity and debt at attractive pricing.
The company had one milestone that may have been overlooked, so we wanted to mention it on today's call. In December, we declared our 160th consecutive quarterly cash distribution to EastGroup shareholders or 40 consecutive years. EastGroup has increased or maintained its dividend for 27 consecutive years, including increases in 24 years over that period. The strength, stability and growth of the dividend is a testament to the successful implementation of our strategy over an extended period. Looking forward, FFO guidance for the Q1 of 2020 is estimated to be in the range of $1.27 to $1.31 per share and $5.25 to $5.35 per share for the year.
The FFO per share midpoint for 2020 represents a 6 0.4% increase over 2019. The leasing assumptions that comprise 2020 guidance produce an average occupancy of 96.3 percent for the year and a cash same property increase range of 2.5% to 3.5%. Other notable assumptions for 2020 guidance include $95,000,000 in acquisitions $40,000,000 in dispositions, $170,000,000 in common stock issuances, dollars 100,000,000 of unsecured debt, which will be offset by $105,000,000 in debt repayment and $300,000 of bad debt net of termination fees. In summary, our financial metrics and operating results continue to be some of the best we have experienced and we anticipate that momentum continuing into 2020. Now Marshall will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continue improving across our markets. Following the fundamentals, we continue investing in upgrading and geographically diversifying our portfolio. As we pursue the opportunities, we're also committed to maintaining a strong healthy balance sheet with improving metrics as demonstrated by the equity raise last year. We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the strong current operating environment.
The mix of our team, our strategy and our markets has us optimistic about our future and we'll now open it up for questions.
And we'll take our first question from Jamie Feldman with Bank of America. Please go ahead. Your line is open.
Great. Thank you. I guess just to start, you had mentioned you're seeing tenant expansion and a broadening range of tenants. Can you talk more about the broadening range of tenants and just to give a picture of what we might see going forward?
Sure. Good morning, Jamie. It's Marshall. I'll add some of what we've talked about a little bit in the past and then it continues to broaden. What's been interesting maybe and I'll go back 2 or 3 years, our traditional tenants are still doing well and the economy is kind of chugging along.
So the granite tile guy, the flooring, the HVAC contractors, all are doing well and expanding. And really what's been a new trend for us is more, I'd say, retail related or along those lines where they rework their supply chain, logistics chain, some of it e commerce, some of it not necessarily, but maybe the handful that come to mind would be the Home Depots and Lowe's. And then we'll, I guess, attention, we'll see them in a market and then they'll spread and we'll see them in Florida, Texas, California, Arizona throughout our markets. I'd say Wayfair, Best Buy. Of late, probably maybe in the last couple of quarters, we've seen Peloton, if you're familiar within the exercise equipment.
We've gone from no leases to maybe 3 with them and a couple of more conversations going on. And probably 2 years ago, we were having we had more leases with Amazon 3PL Groups that were doing deliveries in the last, call it, couple of quarters as well. We've seen more activity of signed leases with Amazon and have conversations. We may or may not get them, but they're in the market. So they're certainly coming across our radar much more frequently.
And that's been what's really been interesting maybe the last 18 months is once someone shows up and it's good, we build that relationship and have a conforming lease, we think it gives us a hopefully, if we're fair to negotiate with and have a conforming lease, if we do a lease in Tampa, like with Tesla, for example, is another new name, then we have an opportunity to work with them in Dallas or in Las Vegas.
Okay. That's helpful. And then I guess as you think about your guidance, I mean last year you ended up well above what you initially provided. Can you just help us think through kind of the upside and potentially downside movements to your range, what you need to see to move it higher, both I guess on the development starts and the same store?
Yes, Jamie. Hey, it's Brent. Good morning. Yes, the 5:30, part of the challenges in budgeting this year is you're on the heels of 2 consecutive literally record years. And so the template that we put in the press release with all the assumptions basically that shows directly the factors that we put in place that result in the 5.30 midpoint.
And so we do show occupancy down a little bit, same store down a little bit from the prior year, but the record levels we're very optimistic about the year. Certainly last year, we were fortunate enough to be able to raise that throughout the year. So certainly, if occupancy were to be slightly better, that would be obviously a help to the bottom line and to same store. If we can lease the developments at the same very brisk clip that we enjoyed last year, certainly there would be upside to start there. So we if things go positive like they did last year and we've got no reason to think now that that wouldn't happen, but there could be some room.
But when you start getting around those 97% type numbers and record highs, it's I guess you've learned us over the years, we're a little hesitant to come in and say, hey, we're going to budget to a 3rd consecutive record year. So I think our occupancy that we budgeted to this year, even if it happened exactly as budgeted, it would be our 2nd highest occupancy for the year in the history of the company. So I guess it's a high class conundrum to be in, but we're very bullish on the year looking as it looks today.
We'll take our next question from Alexander Goldfarb with Piper Sandler. Please go ahead. Your line is open.
Thank you and good morning down there. So two questions. First, Marshall, you guys are clearly an FFO company. So same store is not as much of a focus given your development. But that said, looking at your same store guidance for this coming year, obviously it's lower.
You guys speak about wanting to push rent more and given and maybe trade off some occupancy. But I would think on those two levers, the bottom line is that you're driving more overall NOI. So can you just talk about how the reduction of occupancy, how you wouldn't more than offset that as you push rents?
Yes. Good point. And probably, I guess mathematically, if you pushed again, this is just speaking theoretically, mathematically because of that downtime, if you lose a tenant over rents, even though we may get 5%, 10% higher rent from the next tenant, you probably won't have enough time pending when it happens during the year to really catch up and catch it. You may do better over a 5 year period, but if it ends up snapshot of 2020, you probably won't catch up. I'd like to think our guys, as we said, 5 years of double digit GAAP rent increases and last year was actually a record GAAP increase for us at a little over 17 percent.
So hopefully, we'll see similar numbers and we're going to with 97.5% leased at year end. We think it's a good time with rising construction prices to keep pushing and hammering on rents where we have those opportunities. But that said, if we think the right thing is it's a great time to also improve credit quality. So you could lose some tenants and we may lose some occupancy that way where we if someone had trouble paying rents and things like that and then pushing rents. So hopefully we can make the trade off and maintain and improve our NOI and do it all in 1 year.
But as Brent said, last year was such a great year for us. We budgeted a little bit of loss. And then if you mathematically work through it, we were saying that, call it the 60 basis points, that's about 200,000 square feet for us. So it's not, that's about 6 on average, about 6 or 7 tenants.
So it's not
a it's almost like point tosses on that many leases rolling and 2 100,000 feet, 6, 7 tenants, if I hope we're guessing wrong and we get those renewals done and we push rents that there could be some upside to the numbers.
Okay. So it sounds like it's just the downtime between the tenants is really the delta. That's helpful. The second question is on development, sort of a 2 parter. 1, some recent articles about increased supply, but you mentioned in your comments about sort of less supply and maybe it's a geographic marketing, maybe all the new supply is still out in the cornfields, whereas you guys are closing in.
So I'll comment on that. And 2, you bought a bunch of land again, just thinking about how costs have accelerated. Are you still seeing rent growth in excess of costs and therefore your 7% plus, the 300 to 400 spread, basis point spread still is applicable today as it has been over the past few years?
Sure. I guess a couple of different thoughts within that. We are seeing we're certainly cognizant of supply and the fact that the industrial market has been hot now for a few years has certainly attracted the world really in terms of investments and acquisitions and even development. Everybody has an industrial platform now, it feels like, whether they're a developer or an acquirer. So we see that, but we also know we struggle for infill sites and fast growing Sunbelt markets.
So that's helped along with the institutional, but we are watching supply. What makes us feel a little better as we think about it is, as you said, not all supply is equal. An awful lot of it is in the cornfields and it's bigger box. Our average tenant size is 30,000 feet. About roughly 60% of our tenants are under 50,000 feet.
So a lot of the supply isn't simply isn't designed for our power tenants. And then with fast growing markets, we're in 13 of the 15 fastest growing cities. So with the growth in our markets, there should be more supply. And then really with e commerce and supply chain logistics, that's the other thing. Even if Dallas hadn't added 120,000 jobs last year, there'd be more demand.
But those 120,000 jobs and the secular shift away from brick and mortar retail towards our end is really helping us there. So we feel optimistic about it. And really, I guess I'd also say what I love about our model is it almost doesn't matter what Brent and I feel. It's really how well did the last building lease and if it did well, we'll restock the shelves and if it's languishing a little bit or we're behind on pro form a, we'll hold off. We've said kind of the rents are rising, but that our yields would come down, maybe that are low to mid-7s.
That said, everything we transferred in last year was at a 7.5 and our pipeline for development is penciling out at 7.4 and value adds at a 6.4 and cap rates are staying compressed in the 4s. So even if we I've kept thinking we'll come down to the lower 7s just with construction prices, but we've been able to hang in there so far. And some of that they've leased up like for their starts last year faster than we anticipated or pro
form a. Okay. Thank you, Marshall.
You're welcome.
From Manny Korchman with Citi. Please go ahead. Your line is open.
Hey, everyone. Good morning. Marshall, you talked about the tenant relationships taking up some of the space and you mentioned some names like the home improvement retailers, Tesla, etcetera. How many of those conversations are happening because they have a relationship with you and you're utilizing that relationship for new deals versus them wanting to be in the markets you're in? And then on the flip side of that, how often are they asking you to go or find them opportunities in markets that you're not in, but they want to be in?
Good morning and good question. I mean, I'd love to evolve to the former and it's probably more of the latter today. What will happen is it makes sense, everybody has a tenant rep broker and with kind of smaller company, we have pretty good grapevine within the company. We'll hear that Best Buy is looking for space. We signed a lease with them recently in Miami.
Is looking in Miami and we signed a lease with them in Charlotte or LA. Ryan had worked with them and so that word-of-mouth and that it usually follows the initial contact from the tenant that they're out looking for space and then we'll connect those dots and try to get in front of them and get a leg up. That helped us, for example, in Las Vegas and our acquisition, we bought 3 buildings there and one of the full building users we got, it was a tenant rep broker that we knew and he learned we were acquiring the building and I think that I won't speak for him, but I think that was helpful for us landing that tenant. He was out of Dallas and was doing national rep work for that tenant. And once he had done a handful of deals with us already and he was comfortable with us.
So That helps, but we're more reactive at this point still.
Got it. Thanks. And Brett, maybe one for you. If we think about your guidance going into 2019 versus your guidance going into 2020, If we think about the levels of both acquisitions, dispositions and equity, those moved up quite significantly in 2019 versus where you first came out. What's the setup for 2020?
What needs to change for you to sort of increase those targets for both acquisitions and dispositions? And then also what would make you raise more equity than the $170,000,000 that you have in guidance?
Yes. Good morning, Manny. I think it would be just what you're saying. Our equity issuance really is just a byproduct of what we budget from acquisition standpoint. So we certainly like the pricing of our stock price and or debt if we needed to issue it.
So we certainly don't view ourselves as capital constrained. So our guys in the field and all the markets are on the ground daily trying to drum up. Acquisitions are very difficult. Value add, we've had some success. And then of course, the majority of our success in the development program.
So as we have success and have those opportunities, we will certainly ratchet those up. But given where our balance sheet is, we won't do that just in a vacuum without given where we are today, we're not looking to drive our debt to market cap even lower that type thing just arbitrarily. So we're in a good position. I think just in terms of that volume, it will be a matter of what the guys can come up with. I know Marshall and team got a couple of value adds early in the year, which is a good start.
That guide that we have in that category is are basically what we hope are known at this point. So we'll go from there. But we there's certainly upside on the capital side that that will not be limiting us in any way.
Thank you, guys.
Welcome.
Question from Bill Crow with Raymond James. Please go ahead. Your line is open.
Appreciate it. Good morning, guys. I want to follow that last question with another question on the balance sheet. It just it feels like you're over equitizing a little bit given your goals for expansion for 2020 versus the capital that you're raising. At what point when you start to look at the cost of debt, does it get to the point where you need to add some more debt?
Bill, that's it's a conversation we have quite frequently and become hoarders. I guess you remember Keith, our longtime CFO predecessor, kind of an old statement of you get equity when you can. And this window has certainly been open longer than historical or historically typical. And so like I said to San Diego, I don't view that we're in a position now that we would issue equity just for the sake of further strengthening. But given those situations, Bill, as bright as the sun is today, there will be a time where it's maybe not quite so bright and we would like to it served us very well in the last great recession to have what was viewed as a very conservative balance sheet and it turned out to be in hindsight probably where we should have been And we were positioned then to pick up on some other people's weakness.
And certainly, if that were to happen again, we would want to be in that same boat. So it's a trick one way or the other, but we do keep an eye on debt. Last year, when we did the 2.75, it was more of a reaction to where
the markets were until we were able to move on that pretty quickly. And that
wasn't something score until we were able to move on that pretty quickly. And that wasn't something that we had said, let's just go do this. It was the market looked attractive at the moment. So we pulled that lever versus the equity lever. So we'll keep an eye both ways.
And Bill, I think I agree with Brent and I'd jump in and add, it's been interesting over the last year and a lot of ways to do it, but as we look at our cost of equity versus where the 10 year and the safety for our shareholders of it. But we'll and so I agree with that. Okay. And then, I think, I think, we'll be able to safety for our shareholders of it. And so I agree, we like where we are balance sheet wise, but it's been interesting to see how close that gap has come at different times.
I appreciate that. Marshall, is Houston kind of on the highest up on the watch list from a supply demand perspective? Is it closest to the precipice? And if not, which market is?
We watch all of them. Houston, Dallas, Atlanta are always big, the last few years, supply markets. Typically, Dallas, Atlanta have been south of town and literally far enough away, especially Atlanta. We're north of town and so much of the supply is south. The port area of Houston is pretty far away, but we've watched supply creep up in Houston to the point that we're definitely keeping an eye on it.
I'd like at least if we look kind of within our own portfolio and you've I'm thankful or grateful that we're a little over 98 percent leased in Houston as we ended the year with a little under 7% set to roll this year. Kind of another context is we like and this isn't so much Houston as any market, but last year it was within our pro form a budget, it was 13.8 percent of our NOI. This year, it's projected to be 13.4%. So we dropped 40 basis points in Houston. And then even at the end of the year, it falls below 13% and that's without any disposition.
So we may pull the trigger on an asset or so in Houston, we've said and the 2 buildings, I guess I say that at a high level on Houston and we finished 2 buildings at World Houston in the 4th quarter and by the time we delivered them, the guys had on the 100% leased and occupied. So you hate to stop that when you're getting that kind of performance, but we'll probably build to the 7s and sell in the fives to somewhere in the 4s, wherever the market allows and kind of watch it. But you're right, it has crept up 17,000,000 as a square feet in Houston is a pretty decent sized number when they've been absorbing about 11,000,000 square feet. So not all of that's competitive, but it's definitely on our radar.
First of all,
I'm going to violate the rules and just add one more ask one more quick question. Are you hearing I assume you're not seeing anything, but are you hearing anything from tenants or other owners of any impact from coronavirus, from ships coming over empty, from anything related to that?
No. And I will let you violate the rules. I'll violate it with 3 answers. And short, I'll be brief then is no. We really have not.
We kind of watch for it and maybe just with the nature of our tenants and portfolio have not no one's used that as an excuse to not sign to back out of yet. There's always a first, but I haven't heard that one.
I appreciate the time. Thank you.
You're welcome.
Question from John Guinee with Stifel. Please go ahead. Your line is open.
Great. Thank you. Another stunningly good quarter and guidance. Congratulations.
Just out
of curiosity, and I don't know if John Coleman is on the call or not, but I noticed that your 43 Acres site in Miami, 465,000 square feet, you end up for about $35,000,000 $34,000,000 That's about $75 per square foot. Is that because you've got a lot of infrastructure you've built out? Or is that just the cost or value of dirt down in Miami these days?
Yes. I'm trying to I don't have the can pull numbers and maybe we can circle back if we need to John, it's Marshall. But we have added the infrastructure for the it for we bought it for about $10 a foot. And so it's really and land prices have really risen in Miami in the last couple with the success of industrial, a fair amount as well. So we like our basis in the land.
I see what you're looking at now. So it probably does is we put the roads in and the retention. So everything is in and I'll brag on John since he's not on the call to give him a compliment. He'll have everything set and his goal is to have the permit in hand. So as our 3rd building as you saw with our 2nd building leased up with Best Buy, he quickly moved to the 3rd building this quarter and we started it.
And then when as that building leases up, it gets full, we'll pull the trigger fairly quickly on our 4th building there.
And I'm embarrassed, I should already know the answer to this. But if you look at your pretty sizable lease up portfolio, 2,300,000 square feet, You're obviously capitalizing all your costs during the lease up period. But a lot of these are generating income. Are you capitalizing the income also? Or are you reporting the income in your top line revenue?
On which on the development? On the development of assets.
On your lease up assets.
Yes. On the lease up, basically the way that works, we capitalize on the unoccupied portion. And then of course, on the occupied portion, as it becomes occupied, you collect the rents. And so as you see the lease percentages based on a little bit of timing, but it basically works in that manner. And obviously, when you see a property 100% leased, but it's still a lease up, it means we've signed the lease, but the tenant hasn't yet occupied because as soon as they occupy at that level, it would transition in.
So as long as you're still in that lease up category window, the unoccupied portion expense related to that is capitalized.
Okay. Income is always put into the top line revenue though?
It is. Rent, even if you have a 25 leased property and that tenant is occupying paying rent, you are booking that 25% rental income to the bottom line as soon as they start paying rent, yes.
Perfect. All right. Thank you. Great.
We'll take our next question from Jon Petersen with Jefferies. Please go ahead. Your line is open.
Great. Thanks. I know you talked about pushing harder on rents this year. I was curious if you could talk about lease term and if you guys are pushing harder on that with renewals and with new leases and also where you guys are at on annual escalators on new leases you're signing versus the ones that are rolling off?
We will push terms usually is construction, good morning Marshall, I should say, is TI costs, construction costs have risen. Usually again, everybody will have a tenant rep broker and you'll get an for a 5 year or 7 year lease. We'll typically start, you'll want to match that with our initial response. And as we work through the deal and a lot more recently as the TI costs have escalated, you can end up adding a little more term and or a little bit higher rent. So that's typically how that conversation goes as they settle on our building and we get the construction bids back, we'll say you can either fund dollars over, call it $12 a foot or whatever if it's new space, however it works out or we'll amortize it, but we need another year of terms.
So terms have probably crept up a little bit, but they've always kind of stayed within that 4% to 5% portfolio wise, dialing in renewals 4 to 5 years. And bumps typically 2.5%, 3% the longer the term of the lease and maybe the higher the rent starts. We've seen a little bit of push back on that, but it's typically 2.5%, 3% and almost every lease we have has some type of escalator in it.
I guess what's the difference though between when you sign a renewal on the escalators on the lease that's rolling off and the new one that you're signing? Are you still pushing those higher? Are you kind of holding the line on the same escalator as the old lease?
They may be a little they're pretty close, but they may be a little bit higher on 3 year as is renewal, you probably can get more of the 3% type ops. If it's someone signing a brand new 10 year lease and the rents climbed up there pretty high, they'll push back and get you may get 2% the longer the lease term and maybe the higher the rent starts out, those bumps, you may get as high as absolute increases, but that percentage gets pretty high.
Okay, thanks. And then on acquisitions, I'm curious, is 2020 going to be a year that we see EastGroup enter any new markets? And if so, which markets look appealing to you?
Sure. Good question. We feel like we just got to Greenville, South Carolina last year, which is a market we like and we're continue to kind of kick tires and turn over stones there. And there's some we've considered like a Nashville and some markets like that. But if I were going to guess, and it is that, I'd probably say no.
I'd rather if we had our preference, I'd rather us fill in on the markets where we're under allocated. Today, you've seen us do a lot out in the Western region, which is thin. We like South Florida. We feel like we're still fairly new to Atlanta and have some runway there and we're active in Dallas. So I'd rather see us grow in our existing markets.
But if the right opportunity came along and it probably fit our footprint, you won't see us jump overseas or do anything hopefully surprising. We don't think that would be well received by the market. So we'll stick with kind of the markets we know and kind of manage our portfolio allocation within those most likely.
Okay. Thank you so much.
Sure. You're welcome.
We'll take our next question from Eric Frankel with Green Street Advisors. Please go ahead. Your line is open.
Thank you. I just want to know if there's any known tenant move outs in which markets we should kind of be focused on just given that a lot of your lease roll seems to be concentrated in Florida, I guess to a lesser extent Charlotte next year?
Yes. I'll start, Marshall, filling with maybe individual transactions. But on the known vacancies or there's nothing specific that we're overly focused on. I would even add on our tenant watch list, our bad debt that we've got budgeted is a generic bad debt number. We don't have that assigned to specific tenants.
I know Tampa is a little higher rollover this year. There's a couple of large leases. I think, Marsh, you have a detailed couple of those are even in the positive category early potentially.
Yes. The Tampa, we had about a 200 since year end, about a 225,000 foot lease renewal that's been signed. So that one's done within Vanity Fair. And then in Charlotte, we had Home Depot is about 200,000 feet has renewed there as well. So a good eye to pick up, we'll kind of look and see where we have large lease role.
And thankfully, we've knocked out a couple of big leases in each of those markets. And then talking to those teams, the balance, it's a pretty mixed bag that's remaining and we typically end up renewing. If you and I were building a model, Eric, I'd say, let's assume 70 percent retention rate and we may miss that in a quarter or 2, but over 4 quarters or a little bit longer, we always seem to hover around that ratio. So I think that we'll probably do that in Tampa and Charlotte, plus or minus.
Okay. 70% it is. Final question. Obviously, you tend to lean, I guess, a bit on the conservative side in terms of your guidance and your investment budget for this year. But maybe you could touch upon whether I think last year you bought a fair amount of newly developed assets that were in lease up and maybe you can talk about that opportunity set this year?
Yes. Thanks. And I hope you're right. I hope we're conservative again. We've been accused of worse things.
So that's a good thing. I hope again, this is our budget, not our goal is kind of one of our internal sayings. And you're right, we like that value add category because core acquisitions are so competitive. I think last year we bought one property was all of our either acquisitions or value add that was actually a listed property. We came in 2nd and third a lot and we'll pursue those, but everybody's got a checkbook.
So we really have no differentiating factor there. And we are turning over a lot of stones. Our value add kind of within our development pipeline, those are averaging about 6.4% yield and with cap rates where they are, we're getting a good 150 to maybe 200 basis points spread over core assets. So we like that risk return given that someone else has held the land, gotten the zoning done, taken the construction risk and it's usually either all or some portion of leasing risk that we have to take. So they're hard to come by.
As Brent mentioned, the 30,000,000 in our budget as of today is identified and project specific projects and we'll try to grow that number. It's a little bit of a shadow development pipeline, we said, as another way to create some NAV. The spreads aren't quite as high as development, but we'd like the risk return of those and there's it's usually a developer with a financial institution as their partner and they can make some money with their IRR promote, maybe not as much as they would have made if they had finished the project, but they're happy to take the promote and kind of build the next building before the cycle ends is more their mentality. So we keep chasing it. And I guess the risk of that, as people have pointed out, is you don't want to create false demand.
But so far, when you look at our yields and when we were looking back at the end of the year that 33 of 34 buildings over the last 3 years have rolled in at 100% lease, you could be feels like we're busy and I know the teams would say that doing a lot more, but you could be critical that we should have done even more that 33 of 34 is too high of a batting average.
Okay. Thank you. Sure.
We'll take our next question from Rich Anderson with SMBC. Please go ahead. Your line is open.
Thanks. Good morning. So I'd like to if you could, do you have a sense of what percentage of your portfolio is truly infill last mile? I know the vast majority is on the smaller side, but like in Atlanta, for example, you're a bit far afield from a population center, if memory serves correctly. And so I was just wondering if you could kind of give some parameters about what is really inside the population center and truly fits into this last mile concept?
Sure. Good question and a trickier one to answer, but maybe here's a couple of stats. As I mentioned, I'd say our average tenant size is 30,000 feet. So that's not really logistics chain getting goods from China to New York, for example, type thing. I'm not doing this from memory.
60% of our tenants roughly are under 50,000 feet and 85% of our 1500 tenants are under 100,000 feet. So we have a lot of smaller tenants that do distribute within their regional area and we've said probably a better or really our strategy better indicator of our growth is people moving to Orlando, people moving to Phoenix, people moving to Austin, Texas. And last mile in Atlanta, it's interesting as we studied it, it almost maybe having spent some time in retail, it reminded me where you're right. If you look at the map of Atlanta where we are, isn't the bull's eye of the Atlanta map, but that north quadrant of the city, call it 10 to 12 o'clock or what locals refer to as the Golden Triangle. If you're with Wayfair, for example, that's a pretty good highly educated above average per capita income.
That's a good last mile delivery spot or if you're just an HVAC contractor and your restaurant, your service is out and it's July and you need to get your guys to the location quickly, that's where the higher end retail is. So a little bit similar, it really struck me Jacksonville, where we've been for 20 years, we're on the south side of Jacksonville, away from the city center of the city, but in the path of population growth and the type of population growth that's attractive to tenants as well. So it's a little bit like it reminds me a little bit like retail in times of where do you want to be, where is your customer going to be and that fits well for our tenants.
So back of the envelope, 85%, you would say is definitionally last mile?
If I stretch, yes, just because they're that small, I know and probably even more than that 85%. They really are not in that they may be selling off of a website and shipping around the country, but they're not in any type of supply chain for Home Depot or Lowe's.
Understood. And second question for me, how would you describe the price total pole for them hence gives you the ability to be a bit more aggressive or is it a little bit more important to them and are they more focused on rent particularly now over the past couple of years of the strength and fundamentals?
No, I think it certainly matters to them, but in their equation, it's pretty low. So thankfully, we've got a low component within their overall cost. And that's what I thought too in a rising market, it rep broker. So by the time we sit down, they know where our market is and we'll push as hard as we can. So there's always competition.
They always seem to have an option and you're trying to figure out if they like your what your advantages are over the competition. But thankfully, it's a low component. So it's that's why you've seen us and our peers be able to probably push rents the way we have. It's becoming more this is the location, certainly location specific and labor pool driven. But the bigger the tenant, the more the labor pool factors in.
Do you
have a rent coverage number of any kind that you can share, like property loans? No.
Not really because you get into things like side yards and is it HVAC and I guess I'm equating it. I'm going to go back to retail again where you could say 14% of occupancy costs you could pay as gross rents, kind of plus or minus depending on your sales per square foot. There's really not that kind of same factor or it's not as formulaic as I've seen in office or retail.
Yes, fair enough. Okay, thank you. Sure.
We'll take our next question from Craig Mailman with KeyBanc. Please go ahead. Your line is open.
Hey, guys. Marshall, you had mentioned 2 thirds of your 2020 starts are going to be existing parks. What markets are the other 1 third in? And can you just describe kind of how that differ? Or just give some color.
Yes, sure. Happy to. Good morning. And usually that other third for the most part, I'm kind of looking down our list. It means we ran out of land at a park and the guys have done a good job of and we've compared it to a residential subdivision, finding land for the next subdivision.
So in Orlando where John and Chris and the team have done a great job with Horizon, we have land tied up, haven't closed yet, but for our next park in Orlando. So this would be our 3rd kind of 1,000,000 square foot park if everything tracks and goes well in Fort Worth. You saw us close on some land in Q4. We finished the buildings that were a value add as well as the land we acquired in Fort Worth. So that's the next new start there.
I'm kind of looking down doing this from memory from the list. We have Ridgeview in San Antonio. I'm trying to think we finished Eisenhower Point and that's our next new park there. So it's really where we've run out of for the most part, that other third is where we ran out of land and we need to go start the next 3, 4, 5 building parks. I would say as an aside, as hard as lands come and you've seen like World Houston and some of our parks that that one's crazy and that Brent had land for 40 buildings.
Typically, if we can get to 10 or 12 buildings, it's a good sized park. As someone described to me now, land is so hard, if we can do it 3, 4, 5 building park, that's about as big as you can find the land parcels anymore. So it probably leads to more churn with the next park just because they're not we can't find the land we could 10 years ago.
That's helpful. And then the operating land you guys bought in San Diego during or subsequent to quarter end, I think it was, when does that be put into production?
We're working through, we've made good headway on zoning and all the compliance to break ground. There's still a little more work to be done. It's really at least 2, I think it's 28 tenants. It's a junkyard storage yard today. I hate to say junkyard, but if you were there, you'd call it a junkyard.
To be honest, there's nothing about that. Nice junkyard. But as we get the zoning done and we're ready to break ground, it's a nice way to earn. I think we're about a 5.5% yield while cars are stored there and RVs and things like that. And as soon as we can get through all the zoning and ordinance hurdles in California, which takes a little bit longer than our other markets.
They're month to month tenants and we'll terminate their leases and put it into production. And we've actually already had a meeting or 2 with possible pre lease there with some tenants that we're excited about. So hopefully, maybe a year and hopefully it's a 20 21 start.
And then just one last one. I know people haven't seen really any impact from supply in a big way yet. But on the margin, are you seeing kind of tenant decisions taking a little bit longer as maybe some people have some other options with new supply or anything that's kind of an early indicator of any potential weakness from supply?
Not really. Haven't heard it honestly on supply as much, although there's certainly a little more out there given everybody's success. What we're hearing is it takes a little longer as one of our guys described it, deals get in the red zone and take a little bit longer to close. But their thoughts or what we've heard from a couple of people, tenant sizes continue to grow a little bit even within our building, maybe from 40,000 feet to 60,000, 70,000 feet and with rents as a higher per square foot number, that commitment is taking a little bit takes maybe another layer of approval and things like that. So we get deals close and then they hover for a while and they don't most of them, knock on wood, don't die.
They do get over the finish line, but it takes a little bit longer to get leases done than it used to. And the best explanation I've heard of that is it's more layers of approval given more square footage and a higher rent per square foot.
I think Craig, one thing I would add to that as well, we talk about multi tenant supply versus big box supply. And I would just point out that we're still building fortunately in that mid to low 7 yield. And if you look really at some of the big box developers, they're building more in an upper 5, around 6 yield. And I think that's a direct example of supply demand. I mean, obviously, you would build at the highest yield you can if you could.
And I think that just goes to show there's a little more competition in the mix there that depresses those yields a little bit. So I think if you look at our yield being a true multi tenant developers versus some of the big box, you'll maybe get a kind of a picture there of how the playing field we have competition too, but maybe not quite as rigorous as the others.
Great. Thank you.
We'll take our next question from Ki Bin Kim with SunTrust. Please go ahead. Your line is open.
Hi, out there. So going back to development, maybe I can just ask it in a different way. If I look at your dollars at risk from development, so after taking into account the percentage leased, it's about 3% a little more than 3% of your gross asset value. And I just want to understand a little better your internal motivations. Do you look at it that way?
Or do you look at it from a more practical way of what can we get done and not necessarily base it off the company size and what moves the needle and those things? And then Glenn, the last second part to that is, if you want to grow it, where should we expect that? Is that the 2 thirds within parks? So maybe you start doing 2 buildings instead of 1 or is it really trying to expand that 1 third of the portfolio where you're looking for a new business parks?
Okay. Good question. Good morning. We don't look at development. I guess, I'd say it's direct quite like that, like the 3%.
But we do put that in what we view as our low earning bucket. And so we'll look at land development and value add what percentage of our assets is that. And then hopefully that pipeline is moving pretty rapidly. It's been a great value creator, NAV creator and FFO creator for us the last few years. But we don't want to get, as you said, too far out over our skis and things like that.
So we'll lump the value adds in as well as just the land we're carrying waiting for the next development. So we do definitely do watch that and don't want to get too far out there. And again, in each component, hopefully the value adds, if we can get the leasing done, can move pretty quickly in and out of that pipeline, certainly as compared to where the land sits today. It's just a shorter gestation period.
Okay. And just second question, what are your market rent growth forecast for your portfolio? And how does it compare to 2019? So I don't mean lease spreads, I'm talking about the spot rates increasing?
Yes. As far as spot rates, I guess I would first say, Ki Bin, that our expectation for the overall portfolio, we've really 3 consecutive years now and no reason to think this would be a lot different where we've had high single digit cash, mid to upper teen in the case of this past year GAAP. We feel like that's probably still a good run rate just based on our vibe. In terms of just spot rates market to market, that would vary. Probably in the Marshalls, you and I are looking at each other maybe in the 4% to 5% range.
And again, that could be higher in submarkets and maybe a little tighter in some other markets. But it feels like rental trends are still kind of on pace where they've been the last 3 years or so.
Okay. Thank you. You're welcome.
We'll take our next question today from Blaine Heck with Wells Fargo. Please go ahead. Your line is open.
Thanks. Good morning. Just a couple of quick ones. Can you remind me, do you guys have any additional properties in the Houston market that you'd identify as non core and earmarked for sale? Or have you guys kind of worked through all that non core product at this point?
Nothing in the held for sale category. That said, we'll keep pruning away at Houston and we maybe an indirect way. We probably have 2 or 3 assets that we've said and really we try to do that in every market. If you could sell 2 or 3 assets or if you got a call about a tenant bankruptcy, which building would you want to get that in the least or where are we in terms of leasing on that, we maxed out the value. So we've got a couple of 3 buildings we might sell in Houston.
That's probably dialed into our disposition guidance a little bit this year. And I like, although I like Houston and our team does a great job there, I like that Houston continues to drift lower as a percentage from over 21% to projected to be under 13% this year absent any sales.
Got it. That's helpful. And then just on retention, obviously 70% is great and a solid target, but I wanted to talk about the 30% or so that aren't expected to renew. Can you just talk about the most common reason for the move outs that you've seen so far? Is it usually just the tenant that needs to expand and you can't accommodate their needs?
Or is there any pushback on rental rates that you're seeing out there?
It's a good question. Not as much reps. It's more expansion. I know we lost it. I was glad we got the land in Tampa that we did the back half of last year that we lost Ferguson Plumbing and we had a couple of other tenants that want to expand and we were really full and couldn't accommodate them.
So a lot of times, we could do it almost feels
like a Rubik's cube
where you're trying to figure out how we can accommodate our tenants. And that's what's great about building these larger parks. What drove Horizon so rapidly was an existing tenant expansion and we can move you from Building 3 to Building 8. So it's expansion. In some cases, it's consolidating 2 or 3 locations to under one roof and maybe we're one of those 2 or 3 and they're moving around town.
It seems to be more of a logistics type chain or they're just shuttering their business in some cases or relocating to a different state and things like that. That probably accounts for the majority of them.
Great. Thank you.
Sure. Thank you.
And there are no further questions on the line at this time. I'll turn the call back to Marshall Lo for any closing remarks.
Thank you everyone for your time. Again, we appreciate your interest in EastGroup. We're certainly available this afternoon for any questions and thanks for your time. Thank you.
This does conclude today's program. Thank you for your participation and you may now disconnect.