Good day everyone, and welcome to the EastGroup Properties' Fourth 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. You may register to ask a question at any time by pressing the star and one on your telephone keypad. 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. Thanks for calling in for our fourth quarter 2019 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement into 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 filing.
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 fourth quarter last year. 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 fourth 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 releasing 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. While still our largest market, Houston has fallen from roughly 21% NOI to a projected 13.4% for 2020 and even below 13% in fourth quarter of the year. Supply, 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 Sunb elt markets is a growing challenge, it's keeping supply in balance. Our quarterly same-property NOI growth was 4.5% cash and 3.7% 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 fourth quarter 2018. Rent spreads continued their positive trend, rising 9.3% cash and 18.3% GAAP last quarter. For the year, GAAP rents grew 17.3%, marking our fifth 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 million.
While our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging 2 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 fours. During fourth quarter, we began construction on four developments totaling 593,000 square feet, and as of year-end, our development and value add pipeline consisted of 28 projects containing 4.1 million square feet with a projected cost of approximately $420 million. Meanwhile, during the quarter, we transferred five 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% leased. For 2020, we're projecting starts of $150 million spread over nine 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 two-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. Two outcomes of this approach are, one, it allows us to manage risk, as in most cases, we're simply restocking the shelves. In many cases, the start is driven by the expansion needs of an existing tenant in the park, and in most of those cases, we're able to backfill the original space at higher rents. 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. From a dispositions perspective, we sold three of our four R&D buildings in Santa Barbara, and in Tucson, a long-term tenant acquired their building. In sum, while the market's 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. The high historical transaction levels we achieved in each of the categories during 2019 are examples of the market's strength. 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 fourth quarter exceeded the midpoint of our guidance at $1.27 per share, and compared to fourth quarter 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 2019 was 96.9%, and we transferred 13 development and value add projects totaling 1.8 million sq ft 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 million 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 $288 million. Also during the quarter, we closed on a seven-year senior unsecured term loan for $100 million. 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. 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 first quarter 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 6.4% increase over 2019. The leasing assumptions that comprise 2020 guidance produce an average occupancy of 96.3% for the year and a cash same-property increase range of 2.5%-3.5%. Other notable assumptions for 2020 guidance include $95 million in acquisitions and $40 million in dispositions, $170 million in common stock issuances, $100 million of unsecured debt, which will be offset by $105 million 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.
At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing the pound key. Once again, to ask a question today, please press the star and one keys on your touchtone telephone keypad. 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 two or three 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. 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. Maybe the handful that come to mind would be The Home Depot and Lowe's. Then, I guess what's interesting, 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 with them, the exercise equipment. We've gone from no leases to maybe three with them and a couple more conversations going on. Probably two years ago, we had more leases with Amazon 3PL groups that were doing deliveries. 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. 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.
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.
Sure.
I guess as you think about your guidance, 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'd need to see to move it higher? I guess, on the development starts and the same store.
Yeah, Jamie. Hey, it's Brent. Good morning. Yeah, the 530, part of the challenges in budgeting this year is you're on the heels of two consecutive, clearly, record years. 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 530 midpoint. We do show occupancy down a little bit, same store, down a little bit from the prior year, but their record levels were very optimistic about the year. Certainly last year, we were fortunate enough to be able to raise that throughout the year. 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 in the stores there. 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. When you start getting around those 97%-type numbers and record highs, 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 third consecutive record year." I think our occupancy that we budgeted to this year, even if it happened exactly as budgeted, it would be our second highest occupancy for the year in the history of the company. I guess it's a high-class conundrum to be in, but we're very bullish on the year, looking as it looks today.
To ask a question today, please press the star and one keys on your telephone keypad. In the interest of time, we do ask that you limit yourself to two questions. We'll take our next question from Alexander Goldfarb with Piper Sandler. Please go ahead. Your line is open.
Oh, thank you. Good morning down there. Two questions. First, Marshall, you guys are clearly an FFO company, so same store is not as much of a focus given your development. 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 maybe trade off some occupancy. I would think on those two levers, the bottom line is that you're driving more overall NOI. Can you just talk about how the reduction of occupancy, how you wouldn't more than offset that as you push rents?
Good point. 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 five-year period, but if it ends up snapshot of 2020, you probably won't catch up. I'd like to think our guys have. As we said, five years of double-digit GAAP rent increases, and last year was actually a record GAAP increase for us at a little over 17%. Hopefully we'll see similar numbers and we've made 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.
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 if someone's had trouble paying rents and things like that, and then pushing rents. Hopefully we can make the trade-off and maintain or improve our NOI and do it all in one year. 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 call it the 60 basis points. That's about 200,000 sq ft for us. That's on average about six or seven tenants. It's almost like coin tosses on that many leases rolling and 200,000 sq ft, six, seven tenants.
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. 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 two-parter. One, some recent articles about increased supply, but you mentioned in your comments about sort of less supply, and maybe it's a geographic market thing. Maybe all the new supply is still out in the cornfields, whereas you guys are closing in. Comment on that. Two, you bought a bunch of land. Again, just thinking about how costs have accelerated. Are you still seeing rent growth in excess of cost and therefore your 7%+, the 300-400 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'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. We see that, but we also know we struggle for infill sites in fast-growing Sunb elt markets. That's helped along with the institutional. 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.
A lot of the supply simply isn't designed for our tenants. With fast-growing markets, we're in 13 of the 15 fastest growing cities. With the growth in our markets, there should be more supply. 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. Those 120,000 jobs and the secular shift away from brick and mortar retail towards our end is really helping us there. 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 forma, we'll hold off.
We've said kind of the rents are rising, but that our yields would come down maybe to the low to mid sevens. That said, everything we transferred in last year was at a seven and a half, 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 fours. Even if I've kept thinking we'll come down to the lower sevens just with construction prices, but we've been able to hang in there so far. Some of that they've leased up, like for their starts last year, faster than we anticipated or pro formated.
Thank you.
Sure.
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. You mentioned some names like the home improvement retailers, Tesla, et cetera. 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? 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'd love to evolve to the former, and it's probably more of the latter today. What'll happen is, it makes sense. Everybody has a tenant rep broker, and with kind of smaller company, with 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'd signed a lease with them in Charlotte or L.A. Ryan had worked with them, and so that word of mouth. 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 in our acquisition.
We bought three buildings there. One of the full building users we got, it was a tenant rep broker that we knew. He learned we were acquiring the building. I think that, I won't speak for him, I think that was helpful for us landing that tenant. He was out of Dallas, was doing national rep work for that tenant. Once he had done a handful of deals with us already, he was comfortable with us. That helped. That helps. We're more reactive at this point still.
Got it. Thanks. Brent, 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? Then also, what would make you raise more equity than the $170 million that you have in guidance?
Yeah. 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. We certainly like the pricing of our stock price and/or debt if we needed to issue it. We certainly don't view ourselves as capital constrained. 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. As we have success and have those opportunities, we will certainly ratchet those up. Given where our balance sheet is, we won't do that just in a vacuum without, you know, given where we are today, we're not looking to drive our debt to market cap even lower, that type thing, just arbitrarily.
We're in a good position. I think just in terms of that volume, it'll 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 are basically what we hope are known at this point. We'll go from there, but there's certainly upside on the capital side. 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 feels like you're over-equitizing a little bit, given your goals for expansion for 2020 versus the capital that you raised. 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, it's a conversation we have quite frequently, and I think Marshall joked with me one time, we didn't realize we were hoarders until we saw the stock price, and all of a sudden we've 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 historically typical. Like I said, I don't view that we're in a position now that we would issue equity just for the sake of further strengthening. 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. 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. 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. 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. We'll keep an eye both ways.
Yeah. Bill, I agree with Brent, and I'd jump in and add, it's been interesting over the last years in a lot of ways to do it. As we look at our cost of equity versus where the 10-year and the spreads are, there have been moments in time where that difference really wasn't very great. Given how close they were, we'll lean towards equity just for the safety for our shareholders of it. 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? 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 I'm thankful or grateful that we're a little over 98% 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 forma, our budget, it was 13.8% of our NOI.
This year, it's projected to be 13.4. 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 dispositions. We may pull the trigger on an asset or so in Houston, we've said. The two buildings, I guess I say that at a high level on Houston, and we finished two buildings at World Houston in the fourth quarter, and by the time we delivered them, the guys had them 100% leased and occupied. You hate to stop that when you're getting that kind of performance. We'll probably build to the sevens and sell in the fives to somewhere in the fours, wherever the market allows, and kind of watch it. You're right, it has crept up.
17 million square feet in Houston is a pretty decent-sized number when they've been absorbing about 11 million square feet. Not all of that's competitive, but it's definitely on our radar.
Marshall, I'm going to violate the rules and just 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, I will let you violate the rules. I'll violate it with three answers. Short, I'll be brief, is no, we really have not. We've kind of watched for it, maybe just with the nature of our tenants and portfolio. No one's used that as an excuse to not sign or to back out of a lease yet. There's always a first. I haven't heard that one.
I appreciate the time. Thank you.
Sure. 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, I don't know if John Coleman's on the call or not, I noticed that your 43-acre site in Miami, 465,000 square feet, you're in it for about $35 million, $34 million. 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?
I'm trying. I don't have the complete numbers, and we can circle back if we need to, John. It's Marshall. We have added the infrastructure for the park, have built and delivered two of the five buildings there, and are building the third building. That land, we bought it for about $10 a foot, and land prices have really risen in Miami with the success of industrial, a fair amount as well. We like our basis in the land. I see what you're looking at now. It probably does, as we put the roads in and the retention. Everything is in. 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.
As our third building, as you saw with our second building leased out with Best Buy, he quickly moved to the third building this quarter, and we started it. As that building leases up or gets full, we'll pull the trigger fairly quickly on our fourth building there.
I'm embarrassed. I should already know the answer to this. If you look at your pretty sizable lease-up portfolio, 2.3 million sq ft, you're obviously capitalizing all your costs during the lease-up period. 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 itself?
Well, on your lease-up assets.
Yeah. On the lease-up, basically the way it works, we capitalize on the unoccupied portion, and then of course on the occupied portion, as it becomes occupied, you collect the rents. As you see the lease percentages, based on a little bit of timing, but it basically works in that manner. 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. 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.
You know, rent, even if you have a 25% leased property and that tenant's 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, it's construction. Good morning. Marshall, I should say. As TI costs, construction costs have risen. Usually, again, everybody will have a tenant rep broker, and you'll get an RFP for a five-year, seven-year lease. We'll typically start, you'll want to match that with our initial response. 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. That's typically how that conversation goes, is they settle on our building, and we get the construction bids back. We'll say, "You can either fund dollars, 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.
Terms have probably crept up a little bit, but they've always kind of stayed within that 4%-5% portfolio-wise, dialing in renewals four to five years. 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 pushback 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, or are you kind of holding the line on the same escalator as the old lease?
They're pretty close, they may be a little bit higher. In a three-year as is renewal, you probably can get more of a 3% type bumps. If it's someone signing a brand new 10-year lease and the rent's climbed up there pretty high, they'll push back and you may get 2.5%-2.75%. It's not night and day difference, 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. Then, on acquisitions, I'm curious, is 2020 going to be a year that we see EastGroup enter any new markets? 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 continue to kind of kick tires and turn over stones there. There's some we've considered, like a Nashville and some markets like that. If I were going to guess, and it is that, I'd probably say no. 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. We're active in Dallas. I'd rather see us grow in our existing markets. 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. 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 wanted 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.
Yeah. I'll start. Marc can fill in with maybe individual transactions. On the known vacancies, 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 as a generic bad debt number. We don't have that assigned to specific tenants. I know Tampa is a little higher roll over this year. There's a couple of large leases. I think, Marshall, you have the detail. A couple of those are even in the positive category early, potentially.
Yeah. Tampa, since year-end, about a 225,000-foot lease renewal that's been signed. That one's done within Vanity Fair. In Charlotte, we had The Home Depot. It was about 200,000 feet, has renewed there as well. A good eye to pick up. We'll kind of look and see where we have large lease roll. Thankfully, we've knocked out a couple of big leases in each of those markets. 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% retention rate, and we may miss that in a quarter or two, but over four quarters or a little bit longer, we always seem to hover around that ratio.
I think that we'll probably do that in Tampa and Charlotte, plus or minus.
Okay. 70% it is.
Thank you.
A 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. 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.
Yeah, thanks. I hope you're right. I hope we're conservative again. We've been accused of worse things, that's a good thing. This is our budget, not our goal, is kind of one of our internal sayings. 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 second and third a lot, we'll pursue those, everybody's got a checkbook, we really have no differentiating factor there. We are turning over a lot of stones. Our value add kind of within our development pipeline, those are averaging about a 6.4% yield. With cap rates where they are, we're getting a good 150 to maybe 200 basis points spread over core assets.
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. It's hard to come by. As Brent mentioned, the $30 million in our budget, as of today, is identified in 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 like the risk-return of those. 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, they're happy to take the promote and build the next building before the cycle ends, is more their mentality. 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. 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 three years have rolled in at 100% leased. 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.
As a reminder, in the interest of time, we ask that you limit yourself to two questions. We'll take our next question from Rich Anderson with SMBC. Please go ahead. Your line is open.
Thanks. Good morning. 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. I was just wondering if you could give some parameters about what is really inside the population center and truly fits into this last mile concept.
Sure. Good question, a trickier one to answer, maybe here's a couple of stats. As I mentioned, I'd say our average tenant size is 30,000 feet. That's not really logistics chain, getting goods from China to New York, for example, type thing.
Right.
I've been doing this from memory. 60% of our tenants, roughly, are under 50,000 feet, and 85% of our 1,500 tenants are under 100,000 feet. 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. Last mile in Atlanta, it's interesting as we studied 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 bullseye of the Atlanta map. 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. 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. 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 center of the city, but in the path of population growth and the type of population growth that's attractive to tenants as well. 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.
Back of the envelope, 85%, you would say is definitionally last mile.
If that's stretched, yeah. Just because they're that small, I know, and probably even more than that 85%, they may be selling off of a website and shipping around the country, but they're not in any type of supply chain for-
Got you.
Home Depot or Lowe's. Yeah.
Understood. Second question from me, how would you describe the price sensitivity of your tenants? In other words, is the rent that you charge low on the totem pole for them, and 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 in fundamentals?
No, I think it certainly matters to them, but in their equation, it's pretty low. Thankfully, we've got a low component within their overall cost. That's what I've felt too, in a rising market, it often helps when they have a tenant rep broker. By the time we sit down, they know where a market is, and we'll push as hard as we can. There's always competition. They always seem to have an option, and you're trying to figure out what your advantages are over the competition. Thankfully, it's a low component, so 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. 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 level?
No. Yeah, not really. You get into things like side yards and is it HVAC? 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.
Yep, 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 two-thirds of your 2020 starts are going to be existing parks. What markets are the other one-third in? Can you just describe how that differ, or just give some color?
Yeah. Sure. No, happy to. Good morning. 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, we've compared it to a residential subdivision, finding land for the next subdivision. 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. This would be our third million square foot park if everything tracks and goes well. In Fort Worth, you saw us close on some land in fourth quarter. We finished the buildings that were a value add, as well as the land we acquired in Fort Worth. 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. 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 three, four, five 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 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 size park. As someone described to me, now land is so hard, if we can do a three, four, five building park, that's about as big as you can find the land parcels anymore.
It probably leads to more churn with the next park just because we can't find the land we could 10 years ago.
That's helpful. Then the operating land that 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 leased to about, 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.
A nice junkyard.
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. 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. We've actually already had a meeting or two with possible pre-lease there with some tenants that we're excited about. Hopefully, maybe a year, and hopefully it's a 2021 start.
Then just one last one. I know people haven't seen really any impact from supply in a big way yet. On the margin, are you seeing 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. Their thoughts, or what we've heard from a couple 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 takes maybe another layer of approval and things like that. We get deals closed, and then they hover for a while, and 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.
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. I would just point out that we're still building, fortunately, in that mid to low seven yield. If you look really at some of the big box developers, they're building more in an upper five, around six yield. I think that's a direct example of supply-demand. Obviously, you would build at the highest yield you can if you could. I think that just goes to show there's a little more competition in the mix there that depresses those yields a little bit.
I think if you look at our yield being a true multi-tenant developer versus some of the big box, you'll maybe get a picture there of how the playing field. We have competition too, but maybe not quite as rigorous as the others.
Great. Thank you.
Take our next question from Ki Bin Kim with SunTrust. Please go ahead. Your line is open.
Hi out there. Going back to development, maybe I can just ask it in a different way. If I look at your dollars at risk from development, after taking into account the percentage leased, it's a little more than 3% of your gross asset value. 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 on those things? The last second part to that is, if you want to grow it, where should we expect that?
Is that the two-thirds within the park, so maybe you start doing two buildings instead of one, or is it really trying to expand that one-third of the portfolio where you're looking for new business parks?
No. Okay. Good question. Good morning. We don't look at development, I guess I'd say, as direct quite like that, like the 3%, but we do put that in what we view as our low earning bucket. We'll look at land development and value add and what percentage of our assets is that. 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. We don't want to get, as you said, too far out over our skis and things like that. We'll lump the value adds in, as well as just the land we're carrying, waiting for the next development. We definitely do watch that and don't want to get too far out there.
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. Just second question, what are your market rent growth forecasts for your portfolio, and how does it compare to 2019? I don't mean lease spreads, I'm talking about just spot rates increasing.
Yeah. As far as spot rates, I guess I would first say, Ki Bin, that our expectation for the overall portfolio, we've really, three 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, Marshall, as you and I are looking at each other, maybe in the 4%-5% range, and again, that could be higher in some markets and maybe a little tighter in some other markets. It feels like rental trends are still on pace where they've been the last three years or so.
Okay. Thank you.
You're welcome.
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 maybe in an indirect way. We probably have two or three assets that we've said. Really, we try to do that in every market. If you could sell two or three assets, or if you got a call about a tenant bankruptcy, which building would you want to get that in the least? Where are we in terms of leasing on that? Have we maxed out the value? We've got a couple or three buildings we might sell in Houston. That's probably dialed into our disposition guidance a little bit this year. 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. Then, just on retention, obviously 70% is great and a solid target, but I wanted to talk about that 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 a 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 rent, it's more expansion. I know we lost. That's why 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 wanted to expand, and we were really full and couldn't accommodate them. A lot of times, 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 three to building eight. It's expansion. In some cases, it's consolidating two or three locations to under one roof, and maybe we're one of those two or three, 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.
There are no further questions on the line at this time. I'll turn the call back to Marshall Loeb for any closing remarks.
Thank you everyone for your time. 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.