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. You may register to ask a question at any time by pressing the star and 1 on your touch tone phone. I will be standing by if you should need any assistance. Now, it's my pleasure to introduce Marshall Loeb, President and CEO.
Good morning, and thanks for calling in for our third 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 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, 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 9.4% increase compared to third quarter 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 and leasing, and another solid quarter for same-store NOI and re-leasing spreads. As the statistics 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% leased and 97.4% 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, shallow bay, last mile parks. Several markets were 98% leased or better, including Houston, our largest market. While still our largest market, Houston has fallen from roughly 21% of NOI in 2016 to 13.5% this quarter. Supply, and specifically shallow bay 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 Sun Belt 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 at 97.2%, up 160 basis points from third quarter 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 bay business distribution buildings is roughly $9 million. While our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging 2-300 basis point premiums. At quarter end, the development pipeline's projected return was 7.4%, whereas we estimate a market cap rate in the fours. During the third quarter, we began construction on five developments totaling 930,000 square feet.
As of quarter end, our development and value add pipeline consisted of 26 projects containing 3.8 million sq ft with a projected cost of approximately $360 million. For 2019, we're raising our projected starts to $260 million. As color commentary, our $148 million in starts last year were a record, so we decided to again raise the target and to exceed last year's results. 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. As a reminder, the majority of our starts are based on the performance of the prior phase within the park. Over three-quarters of this year's starts are the next building in a park.
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 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, 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 have four R&D buildings in Santa Barbara. One we expect to close within a couple of weeks. Two others also have funds at risk with a projected fourth quarter close. Finally in Tucson, a 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 fourth 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 third quarter exceeded the upper end of our guidance range at $1.28 per share, compared to third quarter 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 nine 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 third quarter, we issued common stock at an average price of $123.56 per share for gross proceeds of $105 million.
During the nine months ended September 30, our gross common stock issuance proceeds totaled $220 million, which represents a record amount in a fiscal year for the company. Also during the third quarter, we closed on two senior unsecured private placement notes, a 10-year note for $75 million with a fixed interest rate of 3.47%, and a 12-year note for $35 million with a fixed interest rate of 3.54%. Subsequent to quarter end, we closed on a seven-year, $100 million unsecured term loan at a fixed rate of 2.75%. We remain pleased to have access to capital via debt and equity at attractive pricing. We declared cash dividends of $0.75 per share in the third quarter, which represented a 4.2% increase over the previous quarter's dividend and an annualized dividend rate of $3 per share. The third quarter dividend was the company's 159th consecutive quarterly cash distribution to shareholders.
Looking forward, FFO guidance for the fourth quarter of 2019 is estimated to be in the range of $1.24-$1.28 per share and $4.94-$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 prior 2019 guidance. Our FFO ranges were impacted by an estimated increase in full quarter G&A of $0.03 per share, directly attributable to the anticipated adoption of a retirement policy for equity awards. Since there was no preexisting policy, the company will incur this one-time initial charge to record the immediate accounting implications. These are charges we would've 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 third quarter results, combined with the leasing assumptions that comprise updated guidance, produce an increase in both average occupancy for the year and an increase in cash and straight line same property rent. Other notable assumption guidance revisions include increasing development starts by $60 million, increasing operating property acquisitions by $50 million, increasing value add property acquisitions by $35 million, 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 million and unsecured debt by $100 million.
In summary, our financial metrics and operating results continue to be some of the best we have experienced. 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 raise year to date. 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 operating strategy, and our markets has us optimistic about the future, and we'll be now happy to take any of your questions.
At this time, if you would like to ask a question, again, please press the star and one on your touch-tone phone. We do ask that you please limit yourself to two questions per person to allow everyone to ask their questions today. Once again, that is star and one. We'll go first to Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey. Good morning down there. 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 L.A. or the Bay Area. Can you talk a little bit more about development? That's really the key to you guys. Are you continue to see no diminution in your development yields or the way land prices and construction costs, et cetera, are trending? Are you starting to see some of those yields erode? Can you just comment?
Sure. Happy to. Good morning. Good question. You're right. With land prices up, there's no fire sale land left, construction prices rising. Simply as we've developed a little bit in Miami as a bigger component, where the cap rates are lower, but our yield projections there are a little bit lower. I thought our development pipeline yields would trend down, but pleasantly surprised we've hung in there north of seven, 7.4, kind of in both buckets, under construction and lease up this quarter. Thankfully, rents are rising, with construction prices, and in fact, some cases outpacing it.
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 that kind of lower 7.25, 7.4, and the last couple of lease portfolio trades has been in the mid-4s. I'm with you. I thought it would drift down a little bit, stay certainly well above 150 basis points. As tight as the market is, rents have kept pace and offset that. Really in terms of the amount of development, I mentioned too, I guess I'll just touch on that. I'm pleasantly surprised a little bit that we've gotten to $260 million in starts last year. It was a busy year at $140 something million.
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." We had a call earlier this week and the comment was, "We have more prospects than space, so we're going to kick off the next phase." It's really driven by leasing demand, and we've kind of just said, "It's restocking the shelves. We're out of this inventory. We need funds from Brent to kind of fund that next round of development at the park.
All right. Now 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 count as a question, but just to confirm on the G&A you mentioned. That $0.03 was not in your prior range, but it is in the new range, so effectively your guidance would've been $0.03 higher. Is that correct?
Yeah. Good morning, James. That's correct. We, of course, had a $0.03 beat third quarter, and we would have guided $0.03 higher fourth 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. We had a few employees that meet some of those early eligibility requirements. Once it's adopted, we had to catch up. Yes, there's a one-time $0.03 charge that we're incurring fourth quarter. We'd be glad from an operating perspective that we basically absorbed that charge and was able to at least maintain our fourth quarter anticipated range.
How does that work for the run rate into next year? Will that, I mean, is G&A now $0.03 lower next year, or is that an annual?
That's not an annual. It'd be $0.03 lower. There'll be some costs associated year-over-year, but it'll be much less material and much more year-over-year comparable from a run rate perspective. That would just be a lump fourth quarter G&A. Certainly fourth quarter of 2020, there would not be that amount there. It's anticipated to be a one-time catch-up charge.
Okay. All right, thanks. I guess just big picture, you guys constantly talk about how your shallow bay infill product is getting good demand. Can you provide 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 just 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 a, thankfully, a couple 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. 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 at a new development there.
They signed a lease where it's cheaper and more efficient to keep white goods, as they call it, the washer, dryer, refrigerator, stove, in an EastGroup type building than the back of a store. With a higher retail-type rent. As each of the retailers shifts their model, that supply chain evolution evolves to faster and faster delivery. In these fast-growing markets like a Miami or a Dallas or a Los Angeles, the traffic is so bad you really need that infill location near a growing consumer base. It's almost effectively replacing some brick and mortar with industrial space. That's where each quarter we seem to pick up a new tenant. Peloton is a new prospect. We've talked to Tesla.
People that weren't in our portfolio, and those aren't signing leases. Just some of the names that pop up from time to time that are tried and true tenants, thankfully, are still out there and doing well. We'll pick up a tenant or a customer we typically haven't dealt with in the past. I think we're still early in terms of what we see 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 and how to get goods delivered faster and stored at a more cheap basis to deliver quickly.
James, 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 sq ft in size, another 25% in the 50,000 to 100,000 sq ft in size. more simply said, 84% of our revenue stream comes from tenants who have leases with us that are less than 100,000 sq ft in size. when we say multi-tenant, that's really, like we've said for many years now, that's really our bailiwick, and that kind of shows that there.
Those are the size leases that Lowe's is looking for?
Yes, for the most part. We've even seen, I think, with some of the Amazon and Best Buy and some of those, I've been pleasantly surprised about some of the smaller sizes that they're seeking in markets.
I guess, just as we think about next year, you said your development pipeline's at an all-time high. Do you think you could be in a position to have a similar-sized pipeline or larger next year? Similarly on same store, you're trending 4.7% this year. I 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, 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 parks and locations and where the market's going. I wouldn't have thought we'd get there. I'm not trying to be coy. I'm just not that smart, actually. I hope we can get back to these type levels. I think what the market, I guess I'm relieved that the market will tell us what we should do. We could make it. You just may not want us to make it in hindsight type thing. Hopefully the tenant demand is there, and we keep going from park to park and running through land quickly. 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. We're about as full as we've been ever in the mid '97s. We probably could see that drift down. In terms of rent growth that you've seen from us and from some of our peers who have reported with a tight market and rising construction cost, we keep predicting or I keep predicting that rents are going to climb even faster. I don't see demand slowing down, thankfully, and I don't see rent growth moderating just yet until there's an economic event.
Okay, thanks.
Sure. You're welcome.
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. 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. Thankfully, we've been in a spot where Brent's been able to grab some really low interest rates. Our stock price has been there, we could do more. I've always said I don't want to go buy something and get the volume there. Then in a couple of years when we have this same call, John, you're asking me what in the world were we thinking when we bought X, Y, or Z property. Try to decouple that as best we can and buy things. Some of the assets we've owned for 20, 30 years. I hope what we're buying today, we want to own for those same time periods.
Try to decouple it. It does help in terms of spread. We do work certainly in some expensive markets like South Florida and in L.A., San Diego, Bay Area. Where do we think our weighted average cost of capital is versus market cap rates. We certainly also look at the rent growth we've gotten in those markets or what we anticipate for the next few years. Short answer is, try to decouple it as best we can and 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.
We'll go next to William Crow with Raymond James. Please go ahead.
Hey, good morning, guys. Marshall, you talked about some of those well-known, mostly retail tenants, Lowe's, Home Depot, Amazon, et cetera, 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. For the most part, they've been about the same. In terms of within that lease, and I hope I'm not saying something confidential, sometimes lease there. I always think, just their model is evolving so quickly, they'll lean towards a three-year lease, but I've seen them execute leases that are longer than that. We track it and keep that statistic, and it seems like every quarter, we end up at about four and a half years as our average lease term. Usually in the new development, it's longer than that, but average lease term.
By and large, or the other tenants that may have a unique lease term that we'll see the third party logistics, especially if they're awarded a contract, where they'll want to match the lease term up with their contract, so you could end up with a three-year term, five-year term. 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 say, that wave that's coming. They were looking at multiple small kind of shelves, fit the shallow bay, kind of smaller spaces. They were, I think a lot, so many of the retailers are figuring out, is it going to be order online, pick up in store, or order online and have it delivered from a streetside warehouse? Walmart was tinkering with that.
We heard they pulled the requirement 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.
Yeah. 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. 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. I had to talk to some of our investment committee members who you know, Leland and David, off the ledge a little bit. When you look there's really no land left. You'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. You get into some of those, like in L.A. and San Francisco, and 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. On the infill side, it's a factor, but maybe a little bit less because there's so little competing land around you.
Thank you. Appreciate your time.
You're welcome. Thank you.
We'll go next to Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey, guys. Couple 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 cycle and in past cycles. I guess, just as your space as a % of their cost structure is much lower than maybe traditionally where your tenants were. Your retention's really still pretty high. Rent spreads are good. How are you guys kind of changing the mindset of the people on the ground to push even harder on rents, knowing that location kind of trumps a couple % 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 or even given quarter. The good news, I think at this point in the cycle, all of our tenants, just about 99%+, have a tenant rep broker, at least an in-house real estate department. Then we'll have the third-party brokers typically that we're working with. There's usually, I think the best ones, and everybody will know both sides of where the market rents are. Then pending if it's a new tenant or a renewal tenant, you kind of know what your competitive advantage is or how your space works for them.
It's really almost a, I guess, and it helps, hopefully, that Brent and I have both been in the field and been asset managers at times. I've always thought if 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 priced to that property. I think the guys 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've certainly saved on the downtime and the releasing cost and TI, things like that, once you lose someone. I think they're pushing rents, or hopefully, we believe they're pushing rents about as hard as they can. Brent and Tyler?
Yeah, I would agree with that. Used to weigh that all the time in the field. 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. Much past that from a timeframe over, say, a four-to-five-year lease period, then you lose even if you get a higher rate in the future. 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 rent 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. Our guys are pushing every day, occupancy and rents.
I guess maybe asked another way. One 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. 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.
Yeah. Good point. Usually, you're right, it's not rents. We'll push rents because rent up as much as we can. In some cases, I was glad we got and we built a Tampa acquisition that we got, for example. It's contiguous to an existing park. Well, we're in the process of tying the two together, but that was, we lost a national tenant in Tampa simply because I won't say simply, but we didn't have the land to build the next building for them. We've got a couple of other tenants that are outgrowing their space. You try to have that inventory on hand to kind of keep up with demand. 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 one on the outskirts of town.
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.
You had mentioned earlier, too, now's 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 culled 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. Almost all of it is industrial. We don't have really anything meaningful, other product types in terms of office or medical office or anything kind of unique. Probably where we've looked at our dispositions is really managing the size of Houston. Really like the market a lot. We've created a lot of value in Houston over the time. We realized when we were north of 20%, that that is a lot, and the market certainly agreed with us a few years ago. We'll continue. We're delivering, I'll give the guys credit too, 100% leased buildings that they're finishing construction up there. Probably look to keep selling in Houston. What we're kind of picking and choosing. They're good assets, and they're well leased.
It's more R&D buildings in Santa Barbara that really aren't true industrial buildings or service center buildings that we've sold. We've seen it 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, one in Dallas and then one in Phoenix, that worked well. You and I could own them, and they would cash flow. It's just the rent growth and the NOI growth is going to be less than the portfolio average. 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. You're 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. It's a little bit of a 3D equation, which we work at daily, I suppose.
Great. Thanks, guys.
You're welcome.
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, $15 million-$20 million 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. The bidder pool, still the same groups that we've typically had. Although you used to could drop down to smaller assets, there wouldn't be as many institutional buyers, I'd say that certainly changed. There's groups that are industrial, that have an industrial platform or forming an industrial platform that weren't industrial companies that have been around, but really weren't in industrial a few years ago. Every kind of year every quarter. It's not a very well-kept secret that industrial has been an attractive sector the last handful of years, every quarter it seems like someone else is becoming an industrial REIT or launching an industrial platform.
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. It's really been just turning over a lot of stones, that if you wait and get a sales package, it's highly competitive. Certainly if the billion-dollar-plus portfolio pools type thing, but even at the $15, $20 million asset size, in a major city, it'll be highly competitive.
Got it. On the development side, yields have continued, or at least projected yields on your pipeline continue to be in the mid 7s. We know that construction costs are rising. 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?
Yeah, I think 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. Thankfully, as tight as the markets have been, the rents have maintained that pace. We've hung in there and north of seven to kind of 7.4 this quarter. Knock on wood, we can hang in there. In the meantime, cap rates, I think have been compressed in the major markets. 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 five, six markets, but in Denver, Phoenix, Las Vegas, Orlando, Charlotte, with the, I won't call them secondary markets, but maybe markets number 6 through 30 around the country.
Those cap rates have come down because all the capital camps simply can't go to northern New Jersey, Los Angeles, Chicago, Atlanta.
Yeah, I would just add to that, too, that I think it's a testament to our multi-tenant, our 80,000 to 100,000 sq ft 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, there certainly would be more pressure from a commodity standpoint, from a rental rate pressure standpoint. I think if you compare our development yields, maybe with a 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'd mentioned in one of the discussions about investing, you had to talk David off the ledge on some of the evaluations.
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? Do you think that this is just a move in the market, and it's a matter of him adjusting to the times?
Yeah, no, good question. I guess David would differ a little bit. I'm a little bit facetious. I'm as much in shock. Just we've seen prices per square foot. I'd like to think. David's certainly Chair of our board and on our investment committee, so I think the difference would be very little, or it's still a team. It's not. You guys don't want me making the decisions. You'd rather it be a team type thing. David's still in the room. For us to see prices at $200 a square foot, or we chased and lost a property in the Bay Area the other day. I'm kidding, we had two or three options. The first one started in the high 300s for square foot.
I don't think either of us thought you'd see industrial prices where cap rates, really a combination of where cap rates have gone and rents have gone, that you'd ever see these type prices per square foot. It's what I would typically think of office prices per square foot. Even what we bought in North San Diego, or we're about to acquire in North San Diego, we have a detailed replacement cost from one of our brokers. At $190 something a foot, it's actually below replacement cost. Rexford bought a building within the same park fairly recently, and it's in an even higher price per square foot. It's numbers none of us ever really thought we'd see.
You kind of go in and go, people that have done it for a few decades, you go, "You're not going to believe where we used to being 60, 70, $80 a sq ft." Where I'm now saying, "Hey, 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. We're certainly no major pushback. It's just prices you say wow to, which is a good problem that shows where industrial is going.
Great. Thanks. Brent, question for you. 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 on the ground?
I think it's more the latter, Manny. 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. Just our occupancies have continued to pace higher than we had anticipated. We're 97.4% 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.
Several value-add acquisitions. From quarter to quarter, I don't know, as we sit here today, in another three and a half months, we may buy another value-add project or two, or an operating project or two. The good thing about it, Manny, that's made it challenging budgeting, is it's not just been one thing, it's been bad debts coming in a little better, termination fees a little higher, occupancy a little higher, development's done a little better. When you roll all that up, and then you wind up being a few cents a share ahead.
If you would've told me that we would've been able to beat and raise as consistently and at the margins we've been able to do this year, I would've really been skeptical of that at the beginning of the year, but it's just been a testament to our strategy in a very strong industrial market. Manny, I hope that trend continues 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 found that the rent spread overall has been really strong. Clearly, San Francisco 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, I think they were negative, maybe some of the other markets where they've come into those sorts of more decelerated versus ones that have been strong for development? Thanks.
Sure. Happy to. Sorry, Vikram. It was coming through a little bit weaker quality. 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. Thankfully, all of the markets, all the major markets that were active, and 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, and we don't have much in those markets. A Jackson, Mississippi, a 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 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. Again, that's R&D rents, not industrial rents. 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 per square foot 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, the land prices are in that submarket above in many cases where industrial can be developed in terms of where rents are, the vacancy rate's about 1.5%, there's a lot of new construction in Las Vegas. 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 displace a lot of industrial buildings. That's one where we liked the project going in, I think I'll like it better 10 years from now if the crystal ball's right.
Great. We'll go next to Blaine Heck with Wells Fargo. Please go ahead.
Thanks. Good morning. 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? Has that spread gotten any narrower or wider over the past few quarters as other investors may be chasing one strategy over the other?
Good thought. We typically, I'd say value add is something I'll give Brent credit, our first one I can remember, I think, was in 2016 in Fort Worth. There we kind of said we're not taking the construction risk, obviously, but we are taking the leasing risk. Kind of using really round numbers, if market cap rates are four and a half where the last few portfolios have traded, if our development yields were seven and a half, I realize I'm rounding up slightly there versus our supplement, you'd want to be about the middle for value add. We have seen those spreads come in, we're still in the sixes.
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, the Arlington Tech Center in the Great Southwest submarket. 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, 130 basis points below us, is what I was told. 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. That's why we've done better.
We've really spent 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. We're making good profits, the spreads are maybe half or probably averaging more like a half to two-thirds of what we earn on our development yields.
Got it. That's helpful. 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 sub-market to sub-market. Can you discuss just what you're seeing in that market in general, and whether you guys have any exposure to those sub-markets that are seeing the high levels of supply?
Sure. Good question, and I guess as I mentioned earlier, we like Houston, and it's been a good market for us. There's probably three main sub-markets where the majority of the new supply has been. Northwest, where we're active there. North, where we're active, where World Houston is, for example, up by George Bush Airport, and then Southeast, where we're not. If I can, bear with me, throw a few stats at you, but the market's 5.6% vacant. Construction has been up in Houston, but it actually came down this quarter. It was at 20 million, it's down to 17 million.
Really where we fit in, that's a big number and probably as much by submarket, it's the type building that gets delivered, but the numbers we read, about 55% of the new supply is in buildings over 225,000 sq ft, and over 70% of the supply is in buildings over 150,000 sq ft. Most of it is really not aimed, as Brent touched on earlier, those tenants, 50,000, 75,000 feet and below. Absorption year-to-date, again, with 17 million under construction, that obviously won't all deliver this year. There's 7.3 million sq ft got absorbed, and per JLL, there's 15.5 million sq ft of active requirements in the market.
I know Houston makes people nervous, but a couple of other things that we like about 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 1.3 million people. 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, maybe a few others. As I talk about our Houston dispositions, and maybe again, I've thrown stats to pin you 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%, which is the lowest number we've been as a percentage of our portfolio in a decade.
I also know we're just finishing up two buildings, and thankfully, before we could finish them, they leased both of those, and that's in that north sub-market. Our thoughts as we've talked about Houston, we certainly don't want to get in the high teens or even mid-teens again. We'll keep develop in the 7s, and then pick some of the other assets in Houston and sell. If you can develop into the 7s 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. It's more of a portfolio allocation than a Houston specific. I think we'd be doing the same thing if it were Los Angeles or Orlando, for example.
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.
Thank you. Our next question from Jonathan Petersen with Jefferies. Please go ahead.
Okay, thanks. I just wanted to ask a quick clarification on guidance. I think your guidance is 96.8 as 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 third quarter. That would imply a modest drop into the fourth quarter. 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, Jonathan, third quarter, we really took a nice bump up in our occupancy. For example, first quarter, we were 96.8, second quarter, 96.6, we swung up to 97.1 this quarter. Our fourth quarter same-store budget is showing 96.5, which is pretty much in line with the first and second quarter. That obviously shows a little bit of decline from third quarter, I think part of that may play into budgeting. We don't have any large known specific move-outs that's dialed into that. We will see if that third quarter was another bump up and we can hold that, or if it'll come down slightly. Our budget shows it'll come down slightly.
Okay, thanks. 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?
The short answer would be yes, a little bit. 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. Short-term, we're covered in terms of property tax increases. You're right, they continue to drift higher and higher in certain markets that they're a little more aggressive than others in terms of pushing those.
Okay. 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. We like that we have the option of both, and we feel very good about low-interest debt and very good stock price relative to any internal calculation of NAV. The main reason we've raised so much capital is that the guys in the field have been able to generate so much opportunity. As we continue to go, if the price stays 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. We'll still supplement that with some debt. We don't have any large debt maturing anytime soon. 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 if not.
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 sub-markets is a greater determinant of how rents have been trending? Obviously, where 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.
Yeah, even in Houston, what we typically see is, we'll look at supply, if I'm answering your question correctly, that probably 80%-85% of that supply isn't really competitive. It's usually larger buildings, it's typically a larger institution, so they've got capital to place. Even the local regional players will have a Heitman, AEW, Clarion, kind of a list of names as their partner. There are competitive developments, but it's usually larger box. In these infill sites, and certainly what we're reading from CBRE's research and things like that it's the smaller infill sites, the 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 because 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. Right now, it's also helping keep supply in check and helping us push rents there. It is a little bit sub-market by sub-market, 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's growing and where the consumers are loading. That's pretty sticky compared to a logistics chain from China to Orange County, for example.
Sure. Just another quick question. It's related to Texas. It looks like leasing spreads especially accelerated in Dallas and San Antonio. Just wondering if that was just a lease issue or are rents growing faster in those markets?
In any given quarter, I'd say it's just a mix of leases. We've been happy in both of those markets. Dallas is. Let me get the numbers. It was 112,000 new jobs, 116,000 new jobs in Dallas for the year ended through August. 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. It is a really healthy, strong economy and a lot of companies relocating there. I don't think either one of those should slow down. Really, Texas, if you dug in and said, "How has your development pipeline gone from where you started?" I'll admit we were at $140 million, and just kept bumping it up to $260 million. A lot of that's been the Texas markets.
All right. Thank you.
Sure.
We will take a follow-up question from Alex Goldfarb with Sandler O'Neill. Please go ahead.
Oh, hey, thank you for taking it. I realize it's been a long call. Marshall, just big picture, everything you've talked about the call is incredible demand from tenants. 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. 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? Is it that, yeah, your tenants are being impacted by the trade war, but that hasn't impacted their needs to expand their space and rent more or pay more in rent to be closer to their tenants?
I'm just trying to rationalize the headlines that we read versus the results and the commentary that you guys provide.
A good question and a hard one to answer scientifically. I think it's more of the latter. With 1,600 tenants, I mean, our top 10 are just 8% of our revenues. 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. 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. Maybe they're being impacted, and we're offsetting it with 116,000 new jobs in Dallas type thing. If your business is typically local or metro area deliveries, that if you're there with a growing pie, you could lose some of your customers, but replace them just with the growth in Orlando or Dallas or Austin, for example.
Hopefully, it's got to be there, but hopefully, it's being muted by kind of that evolution in the supply chain as well as growth in some of that markets.
Okay. Thank you.
We'll take our next question follow-up from James Feldman with Bank of America. Please go ahead.
My question's been answered. Thank you.
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 get as busy. It's earning season. Appreciate your time, and Brent and I are certainly available for any follow-up questions people may have. Thanks again.
This will conclude today's program. Thank you for your participation. You may now disconnect.