Good morning, everyone, and welcome to the EastGroup Properties Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you'll have an opportunity to ask questions during the question and answer session. Now, it's my pleasure to introduce Marshall Loeb, President and CEO.
Good morning, and thanks for calling in for our Q3 2019 conference call. As always, we appreciate your interest. Brentwood, 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 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 all 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 actual results to differ materially.
We refer to certain of these risk factors in our SEC filings.
Thanks, Kima. 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 9.4% increase compared to Q3 last year. This marks 26 consecutive quarters of higher FFO per share as compared to the prior year quarter. Based on the quarter and the market strength, we're raising our annual FFO guidance $0.03 per share.
The vitality of the industrial market is further demonstrated through a number of metrics such as record quarter for occupancy bear out, the operating environment continues to allow us to steadily increase rents and create value through ground up development and value add acquisitions. At quarter end, we were 97.9 percent leased and 97.4 percent occupied. These represent record results for us in terms of quarter end occupancy and leasing. Further, our quarterly occupancy has been 95% or better for what is now 25 consecutive quarters. In short, demand continues growing for our infill location, small bay last mile parks.
Several markets were 98% leased or better, including Houston, our largest market. And while still our largest market, Houston is falling from roughly 21% of NOI in 2016 to 13.5% this quarter. Supply and specifically shallow day industrial supply remains in check-in our markets. In this cycle, 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 fast growing Sunbelt markets is a growing challenge for us, it's keeping supply in balance.
Same property NOI growth was 5.8% cash and 4.7% GAAP. We're also pleased with average quarterly occupancy of 97.2%, up 160 basis points from Q3 2018. Rent spreads continued their positive trend rising 8.7% cash and 19.7% GAAP, respectively. 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 a majority of our developments are additional phases within an existing park.
The average investment for our shallow day business distribution buildings is roughly $9,000,000 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 quarter end, the development pipeline's projected return was 7.4%, whereas we estimate a market cap rate in the 4s. During the Q3, we began construction on 5 developments totaling 930,000 square feet. And as of quarter end, our development and value add pipeline consisted of 26 projects containing 3,800,000 square feet with a projected cost of approximately $360,000,000 For 2019, we're raising our projected starts to 260,000,000 As color commentary, our $148,000,000 in starts last year were a record, so we decided to again raise the target and to exceed last year's results. Finally, our activity is spread over 10 different cities.
This geographic diversity further reduces risk, while enhances our ability to grow the development pipeline on an ongoing basis. And as a reminder, the majority of our starts are based on the performance of the prior phase within the park. In fact, over 3 quarters of this year starts are the next building in the park. As a result, market demand dictates new construction rather than us pushing supply into the market. Two 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 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. Secondly, our record number of starts demonstrates the strength of the industrial market, our team and our products. Year to date, we've been pleasantly surprised by demand levels and the resiliency in our occupancy. We've had a busy quarter in terms of transactions closing during the quarter, had a few after quarter end and others we view as likely transactions prior to year end.
We're pleased with the quality of our investments as well as the geographic diversity. New investments were made or are being made in Las Vegas, San Diego, Dallas, Phoenix, Greenville and Tampa. From a dispositions perspective, we had 4 R and D buildings in Santa Barbara. One we expect to close within a couple of weeks. 2 others also have funds at risk with a projected 4th quarter close.
And finally, in Tucson, the tenant is acquiring their building and we expect closing there this quarter also. In sum, while the market is strong, we're working to find development and value add opportunities, but we're 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 4th quarter guidance. Good morning. We continue to experience positive results due to superior execution by our team in the field and strong overall performance of our portfolio.
FFO per share for the Q3 exceeded the upper end of our guidance range at $1.28 per share compared to Q3 2018 of $1.17 per share, an increase of 9.4%. Funds from operations, excluding gains on casualties and involuntary conversions, represented an increase of 7.6% for the 9 months ended September 30, 2019. Our continued strong performance, both operationally and in share price, is allowing us to further strengthen our balance sheet. From a capital perspective, during the Q3, we issued common stock at an average price of $123.56 per share for gross proceeds of $105,000,000 During the 9 months ended September 30, our gross common stock issuance proceeds totaled $220,000,000 which represents a record amount in a fiscal year for the company. Also during the Q3, we closed on 2 senior unsecured private placement notes, a 10 year note for $75,000,000 with a fixed interest rate of 3.47 percent and a 12 year note for $35,000,000 with a fixed interest rate of 3.54%.
Subsequent to quarter end, we closed on a 7 year $100,000,000 unsecured term loan at a fixed rate of 2.75%. We remain pleased to have access via debt and equity at attractive pricing. We declared cash dividends of $0.75 per share in the 3rd quarter, which represented a 4.2% increase over the previous quarter's dividend and an annualized dividend rate of $3 per share. The 3rd quarter dividend was the company's 159th consecutive quarterly cash distribution to shareholders. Looking forward, FFO guidance for the Q4 of 2019 is estimated to be in the range of $1.24 to 1.2 $8 per share $4.94 to $4.98 for the year.
Those midpoints represent an increase of 6.8% and 6.4% compared to the prior year restated, respectively, and an increase of $0.03 per share to the midpoint of our guidance of our prior 2019 guidance. Our FFO ranges were impacted by an estimated increase in 4th quarter G and A of $0.03 per share directly attributable to the anticipated adoption of a retirement policy for equity awards. Since there was no pre existing policy, the company will incur this one time initial charge to record immediate accounting implications. These are charges we would have anticipated occurring in future periods, but with a written policy in place, we are required to accelerate the expense recognition for eligible employees. To be clear, we have no employees announcing retirement today, but rather it's simply a policy adoption.
Our 3rd quarter results, combined with the leasing assumptions that comprised updated guidance, produced an increase in both average occupancy for the year and an increase in cash and straight line same property range. Other notable assumption guidance revisions include increasing development starts by $60,000,000 increasing operating property acquisitions by $50,000,000 increasing value add property acquisitions by $35,000,000 and increasing termination fee income by $250,000 due to known fees. With opportunities to invest capital ahead of expectations, we continue to take advantage of an attractive stock price and low interest rates. We increased our estimated issuance of common stock by $20,000,000 and unsecured debt by $100,000,000 In summary, our financial metrics and operating results continue to be some of the best we have experienced, and we anticipate that momentum continuing as we close out the year. Now Marshall will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continue improving across our markets. Following these fundamentals, we continue investing in, upgrading and geographically diversifying our portfolio. As we pursue opportunities, we're also committed to maintaining a strong healthy balance sheet with improving metrics as demonstrated by the equity 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 operating strategy and our markets has us optimistic about the future and we'll be now happy to take any of your questions.
And we'll go first to Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, good morning down there. So the first question is, on the external side, you guys have been quite busy. Marshall, I think you touched on just the competitive nature of the acquisition market. I noticed that you had nothing in LA or the Bay Area.
But can you talk
a little bit more about development because that's really the key to you guys? Are you seeing you continue to see no diminution in your development yields or the way land prices and construction costs, etcetera, are trending, are you starting to see some of that some of those yields erode? So can you just comment?
Sure. Happy to and good morning. Good question. And I you're right, with land prices up, there's no fire sale land left,
construction prices rising.
And then simply as we've those the cap rates are lower, but our yield projections are a little bit lower. I thought our development pipeline yields would trend down, but pleasantly surprised we've hung in there north of 7, 7.4 kind of in both buckets under construction and lease up this quarter. So there thankfully rents are rising with construction prices and in fact some cases outpacing it. So we've been able to maintain those spreads and it's about as large a gap between market cap rates and construction yields as we've ever had where we're developing into the kind of lower 7%, 7.25%, 7.4% and the last couple of portfolio trades has been in the mid-4s. So it's with you, I thought it would drift down a little bit, but stay certainly well above 150 basis points.
But as tight as the market is, we have to have kept pace and offset that. And really in terms of the amount of development, as I mentioned too, I guess, let's touch on that. I'm pleasantly surprised a little bit that we've gotten to $260,000,000 in starts last year, with a busy year at $140 something million. And this year, it's really been we'll get a call from the field or the guys will call and say, we're about out of space in Phase 2 where we had a call earlier this week and the comment was we have more prospects in space. So we're going to kick off the next phase.
So it's really driven by leasing demand and we've kind of just sort of it's restocking the shelves. We're out of this inventory. We need the new we need funds from Brent to kind of fund that next round of development at the park.
All right. And it looks like we'll go next to James Feldman. Please go ahead with Bank of America.
Great. Thank you. I guess just first, hopefully it doesn't come to the question, but just to confirm on the G and A you mentioned, so that $0.03 was not in your prior range, but it is in the new range. So effectively, your guidance would have been $0.03 higher. Is that correct?
Yes. Good morning, Jamie. That's correct. We, of course, had a $0.03 beat Q3, and we would have guided $0.03 higher 4th quarter. But as I mentioned in the prepared remarks, we anticipate adopting a retirement policy just as a consistent means of treating equity awards when someone retires.
And that required we had a few employees that meet some of those early eligibility requirements once it's adopted so we had to catch up. And so yes, there's a one time $0.03 charge that we're incurring in the 4th quarter. We glad from operating perspective that we basically absorbed that charge and was able to at least maintain our 4th quarter anticipated range.
And then how does that work for the run rate into next year? Will that I mean, it's G and A now $0.03 lower next year? Or is that an annual?
That's not an annual. It would be $0.03 lower. There will be some costs associated year to year, but it will be much less material and much more year to year comparable from a run rate perspective. But that would not be that would just be a lump 4th quarter G and A. Certainly Q4 of 2020, there would not be that amount there.
So it's anticipated a one time catch up charge.
Okay. All right. Thanks. And then I guess just big picture, you guys constantly talk about how your shallow bay insole product is getting good demand. Can you provide like some anecdotal stories or leases, examples of leases of why your portfolio really is differentiated and why it does seem to be working here and maybe to talk about why you think it does have such legs here?
Sure. I'll take a stab at that and then Brent chime in. Maybe a couple of examples, and again, it's hard for us to speak about someone else's portfolio. But at least, I was reading the other day, we signed up, thankfully a couple of few leases with Lowe's and some with Best Buy and Home Depot and was reading where Lowe's just focusing on them, for example. They were saying they were moving their inventory really more from a store based model to a market based model.
And I'm interpolating too much or assuming too much in that. But I think that's where we pick up. One of the examples is in Miami and development there, they signed a lease where it's cheaper and more efficient to keep white beds as they call it the washer, dryer, refrigerator, stove and an EastGroup type building than the back of a store with a higher retail type rent. So, as each of the retailers shift their model to supply chain evolution evolves to faster and faster delivery And in these fast growing markets like Miami or Dallas or Los Angeles, the traffic is so bad, You really need that infill location near a growing consumer base. And so, it's almost effectively replacing some brick and mortar with space.
And that's where each quarter we seem to pick up a new tent. Peloton is a new prospect. We've talked to Tesla. People that we hadn't weren't in our portfolio and those aren't signed leases, but just some of the names that kind of pop up from time to time that are tried and true tenants thankfully are still out there and doing well, but we'll pick up a tenant or a customer we typically haven't dealt with in the past as they and I think we're still early, early in, in terms of what we see in Amazon and Lowe's and Home Depot. I think there's a whole next wave of retailers that are still just starting to figure out their logistics chain on how to get goods delivered faster and stored more at a more cheap basis to deliver quickly.
Jamie, the only thing I would add to that is and you guys are good at showing the various stats and portfolios, but we have 59% of our revenue comes from leases that are less than 50,000 square feet in size, another 25% in the 50,000 to 100,000 square foot in size. So more simply said, 84% of our revenue stream comes from tenants who have leases with us that are less than 100,000 square feet in size. So
when
we say multi tenant, that's really, like we said for many years now, that's really our, Bailiwick and that kind of shows that there.
And those are the size leases that like Lowe's is looking for?
Yes, for the most part. And we've even seen, I mean, I think with some of the Amazon and Best Buy and some of those, I've been pleasantly surprised by some of the smaller sizes that they're seeking in markets.
Okay. And then I guess just as we think about next year, you said your development pipeline is at an all time high. I mean, do you think you could be in a position to have a similar size pipeline or larger next year? And then similarly on same store, you're trending 4.7% this year. Assume you'll have some occupancy headwinds next year, just given you're at peak occupancy.
How do we think about what leasing spreads and rent bumps could do to cash same store next year versus this year?
I think at least on the development, I if you had asked me earlier in the year to give you odds to get to 260, again, I'm confident in our team and I like our parts and locations and where the market is going. I wouldn't have thought we'd get there. I'm not trying to be coy. I'm just not that smart, actually. So I hope we can get back to these type levels.
I think with the market, I guess I'm relieved that the market will tell us what we should do. We can make it. You just may not want us to make it in hindsight type thing. But hopefully the tenant demand is there and we keep going from park to park to park and running through land quickly. So it's certainly possible.
We'll obviously come out in our next call with our 2020 guidance and we feel certainly good about the market and where things are going. I hope we can maintain the pace or we'll see where the market takes us. In terms of same store next year, you're right, it'll be we're about as full as we've been ever in the mid-97s. So we probably could see that drift down. But in terms of rent growth, if you're seeing from us and from some of our peers that we've reported, with a tight market and rising construction costs, we keep predicting or I keep predicting that rents are going to decline even faster.
So, I don't see demand slowing down thankfully and I don't see rent growth moderating just yet until there's an economic event.
We'll go next to John Guinee with Stifel. Please go ahead.
Great. I love your reference. Development is restocking the shelves. Question for you, Marshall. You guys have a stunningly low cost of capital.
How much of your acquisition and development would you attribute to your current cost of capital, I. E, what do you think your volume would be if you were trading at $100 instead of $132.71 a share?
Good question and good morning. I'd like to think we actually do talk about decoupling stock price or debt cost away. I guess we kind of know and thankfully we've been in a spot where Brent's been able to grab some really low interest rates and what we and our stock price has been there. So, we could do more. But I've always said, I don't want to go buy something and get the volume there.
And then in a couple of years when we have the same call, John, you're asking me what in the world were we thinking about X, Y or Z properties. So try to decouple that as best we can and buy things that we think we're some of the assets we've owned for 20, 30 years. So I hope what we're buying today, we want to own for those same time periods. So try to decouple it. It does help in terms of spread.
I mean, we do work certainly in some expensive markets like South Florida and then LA, San Diego, South Bay area. Okay, where do we think our weighted average cost of capital is versus market cap rates. But we certainly also look at the rent growth we've gotten in those markets and that we anticipate for the next few years. So try to short answer is try to decouple it as best we can and just does this make sense for our shareholders that we buy this and own it for the next decade or not.
Great. Thank you. You're welcome.
And we'll go next to Bill Crow with Raymond James. Please go ahead.
Hey, good morning guys. Commercial, you talked about some of those well known, mostly retail tenants, Lowe's, Home Depot, Amazon, etcetera, Best Buy. Is there any difference in the lease duration that you're signing with those big companies compared to maybe your local or regional tenants?
Good question and not really. I mean for the most part, they've been about the same in terms of kind of within that lease and I hope I'm not saying some companies, sometimes wayfare and I always think just their model is evolving so quickly. They'll lean towards a 3 year lease, but I've seen them execute leases that are longer than that. And we track it and keep that statistic and it seems like every quarter we end up at about 4.5 years is that average lease term. Usually in the new development, it's longer than that, but average lease term.
But by and large or the other tenants that may have a unique lease term that we'll see the 3rd party logistics, especially if they're awarded a contract, will they'll want to match the lease term their contract. So you can end up with a 3 year term, 5 year term. But for the most part, they've been the same and we've seen people a little bit and I think they pulled the requirement back in house, but Walmart was kind of, I'd say, that wave is coming. They were looking at multiple small kind of, I'll say, the shallow day kind of smaller spaces. And they were I think a lot so many of the retailers are figuring out do we going or is it going to be order online, pick up in store or order online and have it delivered from an escrow type warehouse?
So, the Walmart was tinkering with that. We heard they pulled the required back in house. And I think if people like Walmart and Amazon are figuring this out, then the rest of the world is likely following suit.
Yes. Okay. My follow-up question is, how much does price per foot and its relationship to replacement cost figure into your decision on acquisitions?
It's certainly something we look at. We look at yield probably a little more heavily and then it really varies by market too. Like in, we're one of the acquisitions we announced was in North San Diego, the Rocky Point North County. And that's an expensive one. It's just under $200 a square foot.
And I had to talk some of our investment committee members, so you know, Leland. David off the ledge a little bit. But when you look there, there's really no land left. We've got Camp Pendleton to the north, obviously, Pacific Ocean to the west and really no great freeway system running to the east and mountains. So, you get into some of those like in LA and San Francisco and in Miami where I think it's less of a factor because there's so little industrial land left.
If we were in a Jacksonville or some of our other markets, it would be a bigger factor. If you're on the edge of town, I would say cost per square foot should be a really large factor. And on the infill side, it's a factor, but maybe a little bit less because there's so little competing land around you.
And we'll go next to Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey, guys. Couple of questions here. I guess to go back to commentary, you guys are definitely seeing more national kind of Fortune 100 tenants versus more of a regional kind of tenant that you had seen earlier in the cycle and in past cycles. I guess just as your space as a percent of their cost structure is much lower than maybe traditionally where your tenants were. Your attention is really still pretty high.
Rent spreads are good, but how are you guys kind of changing the mindset of the people on the ground to push even harder on rents, knowing that locations kind of trumps a couple percent of higher rent for some of these newer tenants that you're talking to?
Good morning. Good question. I think we certainly do spend a lot of time talking about rents, occupancy, all the kind of maximizing NOI certainly on any given year, even given quarter. The good news, I think, at this point in the cycle, all of our tenants, just about 99 plus percent have a tenant rep broker, at least an in house real estate department. And then we'll have the 3rd party brokers typically that we're working with.
So, usually I think the best ones and everybody will know both sides where the market rents are and when pending if it's a new tenant or a renewal tenant and kind of know what your competitive advantage is or how your space works. And then so it's really almost, I guess, it helps hopefully that Brent and I have both been in the field and then asset managers at times. I've always had it. Best case, you knew exactly who your prospect or your tenant, what their other options were and how your property compared to that property and even price to that property. So, I think the guys are pushing rents as hard as they can without losing too much.
I think you can keep occupancy and push rents at the same time. We certainly save on the downtime and the re leasing costs and TI, things like that once you lose someone. But I think they're pushing rents or hopefully, we believe they're pushing rents about as hard as they can. Brent, any color? Yes.
I would agree with that and used to weigh that all the time in the field. And when you put pencil to paper, you want to push as hard as you can. But if you push to the edge of saying, okay, we're going to lose the tenant and if they're really close to what you perceive as a market rent, then you only have a few months of downtime to where you can come out positive and much past that from a timeframe over, say, a 4 to 5 year lease period than you believe even if you get a higher rate in the future. So it's something just like Marshall said, we look at, we push hard on and we like to think we're pushing and doing both. Certainly, with the rental increases we've seen in California, we're making a push to get more exposure there, just trying to get more exposure to some of these really high increased markets.
But the guys our guys are pushing every day occupancy and rents.
Okay. I mean, I guess maybe ask another way. 1 of your competitors was talking about a couple of years ago rent was never the reason people left. Today it's a little bit higher, but not high enough. Kind of when you guys do exit interviews or exit surveys, how often is it rent versus expansion space?
Maybe they need more than you guys currently have at a park or just more than what your typical size is?
Yes. Good point. Usually, it's you're right, it's not rents. We'll push rents as much as we can. And then in some cases, like I was glad we got in detail the Tampa acquisition that we got, for example.
It's contiguous to an existing park. We're in the process of tying it, the 2 together, but that was we lost a national tenant in Tampa simply because we didn't I don't say simply, but we didn't have the land to build the next building for them and we've got a couple of other tenants that are outgrowing their space. So you've tried to have that inventory on hand to kind of keep up with demand. But it's usually you're right, it's they've outgrown the space or they've been acquired and they're consolidating with another company or consolidating several locations into 1 on the outskirts of town or doing some kind of bigger strategic shift is probably by far more the reason we lose them unless you're just well over market and then somebody it's worth the moving cost.
Just you had mentioned earlier too, now is a good time to be a seller. As you guys look at the portfolio, look at your different market exposures, how much of the portfolio do you think should be called at this point where there's just no more growth left or there's better use of that capital?
Thankfully, it's not that much. I guess, I'll thank the team that's been here. We almost all of it is industrial. We don't have really anything meaningful, other product types in terms of like office or medical office or anything kind of unique. Probably where we've looked at our dispositions is really managing the dispositions is really managing the size of Houston, really like the market a lot.
They've created a lot of value in Houston over the time, but we realized when we were north of 20%, that that is a lot and the market certainly agreed with us a few years ago. And so we'll continue, we're delivering, give the guys credit to 100% leased buildings, but they're finishing construction up there. So probably look to keep selling in Houston. And then what we're kind of picking and choosing, they're good assets and they're well leased. It's more R and D buildings in Santa Barbara that really aren't true industrial buildings or service center buildings that we sold.
You've seen us sell in Tampa and Orlando or kind of different things. We sold a couple of 50 plus year old assets that were industrial, but they were 100% leased, 1 in Dallas and then 1 in Phoenix that worked well. You and I could own them and they were cash flow. It's just the rent growth and the NOI growth is going to be less than the portfolio average. So that's as we try to really think about a batting order.
And I think we should always be trimming the portfolio from the bottom unless it's just an absolutely horrible market. But right now is a good time to be a seller. There's this wall of capital that likes industrial. So, we're selling as much as we can as fast as we can while maintaining the earnings, maintaining FFO, dividends, all the things like that and trying to raise capital while we have an attractive stock price. So it's a little bit of a 3 d equation, which we work at daily as
Great. Thanks, guys.
You're welcome.
And we'll take our next question from Jason Green with Evercore. Please go ahead.
Good morning. Just a question on the acquisition side. How has the bidder pool changed for, call it, dollars 15,000,000 to $20,000,000 assets? Are you seeing a lot more competition today than you were, call it, 12 months ago?
Good question. Certainly more competition than 12 months ago, but it was a lot, call it a year ago. And the better pool, still the same groups that we typically had, although you used to drop down to smaller assets and there wouldn't be as many institutional buyers. And I'd say that certainly changed that. And there's it always there's groups that are industrial that have an industrial platform or forming an industrial platform that weren't industrial companies that are have been around, but really weren't in industrial a few years ago.
So every kind of year, every quarter, it's not a very well kept secret and industrial has been an attractive sector the last handful of years. And every quarter, it seems like someone else is becoming an industrial read or launching an industrial platform. And so that's, I'd say by definition, what's pushed us more into development and into value add and really even looking at our acquisitions. We've thankfully had an active year. But outside of the Airways in Denver, everything we've acquired or are acquiring has been off market.
So, it's really been just turning over a lot of stones that if you wait and get a sales package, it's highly competitive even that certainly at the $1,000,000,000 plus portfolio pool type thing, but even at the $15,000,000 $20,000,000 asset size in a major city, it will be highly competitive.
Got it. And then on the development side, yields have continued or at least projected yields on your pipeline continue to be in the mid-7s, but we know that construction costs are rising. So how have you been able to manage to maintain those yields? Is that just passing on the increases in construction to consumers or something else that we should be thinking about?
Again, I've been kind of waiting for some not horrible downward pressure, but a little bit of downward pressure on them for those reasons you name. And thankfully, as tight as the markets have been, the rents have maintained that pace. So we've hung in there and up north of 7% to kind of 7.4% this quarter. So knock on wood, we can hang in there. And in the meantime, cap rates, I think, have been compressed in the major markets and maybe that's one thing we've seen in the last 12 to 18 months is cap rates getting compressed, not only being low in the major kind of top 5, 6 markets, but in Denver, Phoenix, Las Vegas, Orlando, Charlotte with one call in secondary markets, but maybe markets number 6 through 30 around the country, those cap rates have come down because all the capital can't simply can't go to more than New Jersey, Los Angeles, Chicago, Atlanta.
I would just add to that too. I think it's a testament to our multi tenant, our 80,000 to 100,000 square foot buildings, they tend to be less of a commodity in each of our markets. If we were building bigger box, which nothing wrong with those assets, if we were building those, Big Sur would be more pressure from a commodity standpoint, from a rental rate pressure standpoint. So I think if you compare our development yield maybe with peer group or someone that does a bigger box, you're going to see that spread, the cost of the smaller tenant size, pay a little more in rent and a little less commodity, a little less supply in each of those markets as well.
Got it. Thank you very much.
You're
welcome. We'll go next to Manny Korchman with Citi. Please go ahead.
Hey, good morning, everyone. Marshall, you had mentioned in one of the discussions about investing, you had to talk David off the ledge on some of these valuations.
Okay. I guess
if we were to say, if he were still CEO, whether you were there or not, what would you be doing differently, if anything? Or do you think that this is just going to move in the market and it's a matter of him adjusting for the times?
Yes. No, it's a good question. And I guess, and David, just to converse a little bit, I'm a little bit facetious and I'm as much in shock. Just we've seen prices per square foot. I'd like to think and David is certainly the Chair of our Board and on our Investment Committee.
So I think the difference would be very little or little. It's still a team. It's not you guys got a lot of needs making the decisions. You'd rather be a team type thing. So David is still in the room for us to see prices at $200 a square foot or I we chased and lost a property in the Bay Area the other day and I kid it only had 2 or 3 options and the first one started in the high 300s per store foot.
I said, let me look, I don't think either of us thought you'd see industrial prices where cap rates have gone and rents have gone that you've ever seen these type prices per square foot. It's what I would typically think of office prices per square foot. But even what we thought in North San Diego, whereabouts require North San Diego, we have a detailed replacement cost from one of our brokers. And so, with 190 something dollars a foot, it's actually below replacement cost and Rexford bought a building within the same park fairly recently and it's in an even higher price per square foot. So, that's numbers none of us ever really thought we'd see.
So you kind of go in and go, you're people that have done it for a few decades, you go, you're not going to believe where it used to being $60, dollars 70, dollars 80 a square foot around now. So, here's one that's $200 a foot and I think it's a good deal. We think it's a good deal type thing. So, we've certainly no major pushback. It's just prices you say well to, which is a good problem that shows where industrial is going.
Thanks. And Brent, a question for you. So in the last couple of quarters, you guys have beat your own internal quarterly guidance from following quarter. Can you just walk us through sort of how your approach to budgeting has maybe been a little bit off there or if trends are just that much better that you're having trouble keeping up with what's actually happening in the ground?
I think it's more the latter, Manny, that each time we do a very thorough lease by lease roll up from the field all the way up to the top and then put in corporate expense. And just our occupancies have continued to pace higher than we had anticipated. We're 97 point 4% occupied or whatever it is this quarter and it's just very difficult to budget from that standpoint. I would also say our developments have been rolling in faster than anticipated, leasing up quicker. The guys in the field have been able to find a few one off operating acquisitions.
We've been able to find several value add acquisitions. And from quarter to quarter, I don't know if we sit here today in another 3, 3.5 months, we may buy another value add project or 2 or an operating project or 2. And so the good thing about it, Manny, it's made it challenging budgeting is it's not just been one thing, it's been bad debt's come in a little better, termination fees a little higher, occupancy a little higher, development's done a little better. So when you roll all that up and then you wind up being a few cents a share ahead and if you had told me that we would have been able to beat and raise as consistently and that the margins we've been able to do this year, I would have testament to our strategy in a very strong industrial market. And so, mainly, I hope that trend continues into in perpetuity.
Thank you.
Welcome.
We'll go next to Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks for taking the question. I just wondered
the rent spreads overall has been
really strong, clearly, that's the typical submarket, very, very high numbers. Can you just give us some color between markets where sort of spreads that may come in, like in Fort Myers that you see they were negative, maybe some of the other markets where they're coming closer to more federated versus the ones where they're
Happy to try to Deepgram out at this coming through a little bit weaker quality. But I think I would say our strongest rent growth markets, we certainly see California, when I say California, the major markets, Southern California, L. A, Orange County, San Diego, Bay Area. And thankfully, all of the markets, all the major markets that we're active in, we're seeing good rent growth in the major markets in Texas and Florida as well. Where we're I guess good or bad where we're not seeing rent growth quite as strong, I would say it's usually the secondary markets where and we don't have much in those markets.
The Jackson, Mississippi and New Orleans, Louisiana. Some of those markets, the rents aren't going backwards certainly by any stretch, but they're not growing as fast. And that's why you see us or in other product types where Santa Barbara rents are back about where they were at the peak, but they haven't really picked up since then. But again, that's R and D rents, not industrial rents. So, we're continuing to see pretty strong rent growth and really where you see us placing our capital, it's something we talk about when we do that.
I know we talked about earlier price for sure FUD and yields going in, but also we do look at where have rents grown and where do we think rents will continue to grow. Las Vegas is a market, for example. I'm excited about our Southwest Commerce and that the land prices are in that submarket above and many cases where industrial can be developed in terms of where rents are and the vacancy rates about 1.5%. And there's a lot of new construction in Las Vegas. So we're in the Southwest submarket, which is near the airport, near the Strip, where the new Raiders stadium is being built.
It's going to industrial buildings. So, that's one where we like the project going in and I think I like it better 10 years from now if the crystal ball is running.
And we'll go next to Blaine Heck with Wells Fargo.
Just on the acquisition side, what's the difference in pricing you guys are finding between core deals and value add, maybe if you're looking at them on a stabilized yield basis? And has that spread gotten any narrower or wider over the past few quarters as other investors may be chasing one strategy over the other?
We typically and it was kind of value add is something I'll get brand credit out First one, I can remember, I think it was in 2016 in Fort Worth. And there we kind of said, we're not taking the construction risk, obviously, but we are taking beliefs in the rest. So kind of using really round numbers, if market cap rates are 4.5% over the last few portfolios have traded and if our development yields were 7.5 and I realize I'm rounding up slightly there versus our supplement, then you'd want to And we have seen those spreads come in. I mean, we're still in the 6s, but given the market strength, I would say one thing we've seen is people are less and less afraid maybe of vacancy than we are in some cases that those spreads have come in. I'm happy with the project we're buying in Fort Worth that we bought at the we're not full with the Arlington Tech Center in the Great Southwest submarket, but there was a portfolio that traded there that was partially occupied that had some vacancy that was listed.
Ours was off market and the one that was listed went for about 120 basis points, 130 basis points below us is what I was told. So, you're seeing where it gets listed and out there in the market that people are willing to pay up because they're having a hard time placing their industrial allocation. So that's why we've done better just we've wasted the last couple of years trying to get boots on the ground in more and more markets and finding things that are off market where we can maintain those spreads. So it's a we're making good profits and they're probably about the spreads are maybe half or probably averaging more like a half to 2 thirds of what we're doing on our development U. S.
Got it. That's helpful. And Marshall, you touched a little bit on selling Houston assets, and one of your peers recently identified Houston once again as one of the markets with potential oversupply concerns. Clearly, there are significant differences from submarket to submarket. So can you discuss just what you're seeing in that market in general and whether you guys have any exposure to those submarkets that are seeing the high levels of supply?
Sure. Good question. And I guess as I mentioned, we like Houston and it's been a big market for us. There's probably 3 main submarkets where the majority of the new supply has been Northwest where we're active there, North where we're active. The world Houston is, for example, up by George Bush Airport and then Southeast where we're not.
But a few if I can bear with me, throw a few stats at you, the markets 5.6% vacant. Construction has been up in Houston, but that's a came down this quarter. It was at $20,000,000 It's down to $17,000,000 dollars And then really where we fit in, that's a big number and probably as much by submarket, it's the tight building that gets delivered that the numbers we read about 55% of the new supply is in buildings over 225,000 square feet and over 70% of the supplies in buildings over 150,000 square feet. So most of it is really not aimed as kind of as Brent touched on earlier, those tenants, 50000, 75000 feet and below absorption year to date, again, a 17,000,000 under construction that obviously won't all deliver this year. There's 7,300,000 square feet got absorbed.
And per JLL, there's 15,500,000 square feet of active requirements in the market. I know Houston makes people nervous, but a couple of other things that we like about it, it was over 80,000 jobs got created in the last 12 months. And then I was surprised in the last decade, they've added 1,300,000 people. So, that's a ton of growth for a metro area and there's probably not many cities in the country that have grown that much population wise, Dallas and maybe a few others. As I talk about our think in the market, we're 98% leased.
So happy with those numbers. We've got 8.5% rolling next year. We're down to 13.6 percent, which is the lowest number we've been as a percentage of our portfolio in a decade. But I also know we're just finishing up 2 buildings and thankfully, the whole we could finish them. They leased both of those and that's in the whole way to finish them.
They leased both of those and that's in the North submarket. So kind of our thoughts as we've talked about Houston, we like certainly don't want to get in the high teens or even kind of mid teens again. We'll keep developed to this in the 7s and then pick some of our other assets in Houston and sell. So if you can develop into 7th and sell at a 5 rounded or maybe below a 5 in some cases, I like that value creation model and let the rest of the portfolio keep growing. So, it's more of a portfolio allocation than on Houston specific.
I think we'd be doing the same thing if it were Los Angeles or Orlando, for example. So, I know Houston always seems to make people nervous and we like it and I think we have a really good team there. So, we'll just manage the size of Houston.
That's helpful. Thanks guys.
Sure.
We'll take our next question from Jon Petersen with Jefferies. Please go ahead.
Okay. Thanks. So your I just wanted to ask a quick clarification on guidance. I think your guidance is 96.8% is your average month end occupancy. I think you're 96.9% if you average the first three quarters and you were 97.4% at the end of the Q3.
So that would imply a modest drop into the Q4. Is that just conservatism? Or are there some expected move outs in the portfolio?
I guess it'll prove if it's conservative or not, John. But Q3, we really took a nice bump up in our occupancy. For example, Q1, we were 96.8%, 2nd quarter 96.6%, and then we swung up to 97.1% this quarter. Our 4th quarter same store budget is showing 96. 5%, which is pretty much in line with the 1st and second quarter.
That obviously shows a little bit of decline from 3rd quarter. But I think part of that may play into budgeting. We don't have any large non specific new house that we're trying that's dialed into that. So we will see if that Q3 was another bump up and we can hold that or if it will come down slightly. Our budget shows it will come down slightly.
Okay. Thanks. And then what are you guys seeing from municipalities in terms of property taxes and what they're pushing for in warehouses these days? Obviously, valuations continue to rise. Should we expect that to be a pressure on margins at all?
Short answer would be yes. Obviously, values keep rising and the municipalities are noticing that and we do appeal our taxes or protest where appropriate. Thankfully, we're 98% leased and almost all of those 99% of the 98% are triple net where it gets passed through. So short term, we're covered in terms of property tax increases. But you're right, they continue to drift higher and higher and in certain markets, they're a little more aggressive than others in terms of pushing those.
Okay. And then in terms of incremental investment, what are your thoughts on kind of debt versus equity given where your stock price is and your cost of equity? Would you, I guess, lean towards over equitizing acquisitions versus historical investment standards?
That has been our trend lately, and we like that we have the option of It will be primarily driven the main reason we've raised so much capital It will be primarily driven the main reason we've raised so much capital is that we've been able to generate the guys in the field are going to generate so much opportunity. But as we continue to go with the price base where it is, I think you'll see us tend to be a little more heavy handed with the ATM and continue to go that route, but we'll still supplement that with some debt. We don't have any large debt maturing anytime soon, so that won't have something coming at us quickly where it might prompt us to go out and do debt more quickly than we would have not. But so you'll see us play both sides and probably a little heavier on the equity side given the price where it is.
Okay. Great. Thank you.
Thank
you. We'll take our next question from Eric Frankel with Green Street Advisors. Please go ahead.
Thank you. I think most of my questions have already been answered. But maybe you could just comment a little bit further on small box rent growth versus large box rent growth across your markets. Is it fair to say that submarkets is a greater determinant of how rents have been trending? Obviously,
when there's been a lot of supply, there tends to be
a lot of land, that's where
a lot of large boxes are built, but small boxes probably wouldn't do
as well there. Are you seeing that across your markets as well generally? It sounds like Houston, that's kind of the case.
Yes. I'm trying to follow-up. And even in Houston, what we typically see is we'll look at supply, if I'm answering your question correctly, but and probably 80%, 85% of that supply isn't really competitive. It's usually the larger buildings, if it's a lot typically a larger institution. So they've got capital placed, but even the local regional players will have a Heitman, Aidan, Eucalyrium, kind of the list of names as their partner.
And though they're not there are competitive developments, but it's usually larger box. And then these infill sites and certainly what we're reading from CBRE's research and things like that, that it's the smaller infill sites that rents are growing faster than they are the big boxes on the edge of town. I think I'd also like to believe and time will tell that obsolescence is less of a factor in those types of coke. There's going to be less new product delivered in infill sites. What certainly worries us long term is finding the land to keep feeding the development pipeline, but right now it's also helping keep supply in check and helping us push rents there.
So it is a little bit submarket by submarket and that's why we like being infill and then even infill kind of on, I guess what you might say, the right side of town where the population is growing and where the consumers are living. And that's pretty sticky compared to the logistics chain from China to Orange County, for example.
Sure. Just another quick question that's related to Texas. It looks like releasing spreads are especially accelerated in Dallas and San Antonio. So just wondering if Dallas is a weak issue or rents going faster in those markets?
I mean, in any given quarter, I'd say it's just a mix of leases, but we've been happy in both of those markets. Dallas is it let me back the numbers. It was 112,000 new jobs, 116,000 new jobs in Dallas for the year ended through August. It is and we're spread out from Fort Worth to Northeast Dallas. So it feels like driving in Southern California that you'll drive 50 miles and still be in the same city more or less.
But it is a really healthy strong economy and a lot of companies relocating there. So I don't think either one of those should slow down. And really Texas, if you dug in and said, how is your development pipeline gone from where you started? I'll admit we were at 140,000,000 and then you kept knocking it up to 260,000,000 dollars A lot of that's been in the Texas markets.
And we will take a follow-up question from Alex Goldfarb with Sandler O'Neill. Please go ahead.
Hey, and thank you for taking it. It's been a long call. Marshall, just big picture, everything you've talked about the call is incredible demand from tenants. And it seems like the trade war and the issues that we hear about certain either manufacturers or producers or whoever having their business get impacted doesn't show up at all in any of your portfolio. So is it just a matter that the market is just so deep that the tenants that are being or the people who are being hit by the trade war just have zero overlap?
Or is it that, yes, they are your tenants are being impacted by the trade war, but that hasn't impacted their needs to expand their space and take more and rent more, pay more in rent to be closer to their tenants. So just trying to rationalize the headlines that we read versus the results and the commentary that you guys provide.
That's a good question and a hard one to answer scientifically. I think it's more of the latter and with 1600 tenants, I mean our top 10 are just 8% of our revenues. So we have the lowest percent of kind of tenant concentration of the industrial REITs. I have to believe somebody or some of them are being affected by the trade wars. But I also hope that within that as things continue to shift to industrial and we're a low cost provider if you're delivering goods into these major cities or maybe they're being impacted and we're also offsetting it with 116,000 new jobs in Dallas type thing.
But if your business, it's typically local or metro area deliveries that if you're there with a growing pie, you could lose some of your customers that will place them just with the growth in Orlando or Dallas or Austin, for example. So hopefully, it's got to be there, but hopefully it's been muted by the kind of that evolution in the supply chain as well as growth in some of that markets.
Okay. Thank you.
And we'll take our next question follow-up from James Feldman with Bank of America. Please go ahead.
My question has been answered. Thank you.
Thanks, James.
So there are no further questions in the queue at this time. I will turn this call back over to you speakers, Marshall, for any closing remarks.
Okay. Thank you. Thanks everybody for your time. We all do that busy. It's earnings season.
I appreciate your time and Brent and I are certainly available for any follow-up questions people may have. Thanks again.