Ladies and gentlemen, thank you for standing by, and welcome to the First Industrial fourth quarter and full year 2019 results call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question -and -answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Art Harmon, Vice President of Investor Relations and Marketing. Thank you. Please go ahead, sir.
Thanks, Jamiria. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2019 results and initial 2020 guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, Thursday, February 13th, 2020. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release, and our SEC filings are available at firstindustrial.com under the Investors tab.
Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer, and Scott Musil, our Chief Financial Officer. After which, we'll open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter.
Thank you, Art, and thanks to everyone joining us for the call today. We finished 2019 with an excellent fourth quarter to cap off another successful year. For 2020, we expect more of the same, leveraging our platform to generate more cash flow growth and value creation. Occupancy at year-end was a very strong 97.6%, and full-year cash rental rate growth was 13.9%, a company record. Both of these metrics reflect continued strong tenant demand for logistics space and the great work of our leasing and operations professionals. We developed a number of high-quality facilities at strong margins and replenished our pipeline with the acquisition of several exciting new sites in target markets, particularly Miami. In addition, we continued to shape our portfolio to drive long-term growth as we further increase our capital allocation to higher barrier markets.
Before we get into the specifics of the quarter, let me provide you with a quick overview of the national industrial market. According to CBRE Econometric Advisors, new supply for 2019 was 224 million square feet compared to net absorption of 183 million square feet. This marks the first time since 2009 that new supply exceeded net absorption. Despite this, our outlook for 2020 is similar to that of 2019. Vacancies remain low, and excess new construction continues to be concentrated primarily in larger format buildings in certain submarkets, most notably Atlanta, Dallas, and Houston. We continue to see new tenant requirements from a range of industries across all of our markets, so the overall environment remains very favorable for strong demand and rent growth. That's also the case for our portfolio. We've signed leases for approximately 60% of our 2020 rollovers at a cash rental rate increase of more than 9%.
Included in these results is the long-term renewal of our largest rollover, a 675,000 sq ft single-tenant building in central Pennsylvania. Our explorations for the balance of 2020 are fairly granular. For the full year, we expect cash rental rate growth of approximately 10%-14% on our new and renewal leasing. Turning now to a few highlights from our development program. In the fourth quarter, we placed in service seven developments totaling 2.1 million square feet with a total investment of $165 million. Included in this total is our 556,000 sq ft at First Aurora Commerce Center in Denver. As evidence of the strength of this market, we signed a long-term lease for 100% of the space, which commenced shortly after completion of construction. In total for 2019, we placed in service 13 buildings totaling 4.4 million square feet with an estimated investment of $325 million.
These assets are 91% leased with an estimated cash yield of 6.7%. This represents an expected margin of 42%-52%. At the midpoint, that would translate to a little over $1 per share in NAV accretion. At year-end, our pipeline of completed developments in lease-up and under construction totaled 3 million square feet with a total estimated investment of $277 million and a projected cash yield of 6.9%. They are 36% leased and have an expected margin of approximately 40%-50%. This pipeline includes a few new starts in the fourth quarter on both coasts and in Dallas. Starting on the West Coast, First Redwood Logistics Center II is a 72,000 sq ft building in the Inland Empire West, with an estimated total investment of $12.6 million. Completion is set for the third quarter, with a cash yield of 5.2%.
In Los Angeles, one mile north of the Port of Long Beach, we acquired a 1.8-acre site for $6 million. It's leased as a surface lot with an in-place yield of 5.4%. In northwest Dallas, we broke ground on our 435,000 sq ft multi-tenant building at phase two of our First Park 121. With an estimated investment of $31.2 million and a targeted cash yield of 6.7%, this building is 77% pre-leased. We expect to complete this development in Q3. Moving across the country to South Florida, we've been very active in expanding our development pipeline there. We broke ground on our First Cypress Creek Commerce Center, a three-building park totaling 374,000 sq ft, on land for which we have a 50-year ground lease. Our estimated total investment for the buildings is $35.6 million, with a targeted cash yield of 7.1%, and completion is slated for Q4.
We also acquired 7 acres of land and broke ground on First Sawgrass Commerce Center, a 104,000 sq ft in Broward County. Estimated investment is $15.3 million, with a targeted yield of 5.8%. Completion is expected in Q3. On our last call, we discussed our 19.6-acre covered land investment in South Florida for $19.8 million. Recall, this site has three below-market ground leases that are currently yielding 3.5%. We also added another 9-acre site in the Miami market for $8.6 million, on which we can develop 131,000 sq ft. Thus far in the first quarter of 2020, we're very pleased to announce the acquisition of a new land site we call First Park Miami. We acquired 63 developable acres in Medley, a great infill location where land is difficult to come by.
Our acquisition price was $48.9 million, and we can build 1.2 million square feet in total on the site. We will begin the first phase of development this summer with three multi-tenant buildings totaling approximately 600,000 sq ft. Total estimated investment for these three buildings is approximately $90 million, reflecting land, pre-development, and construction costs. Our target stabilized yield is in the mid-5s. For the year, building acquisitions totaled 542,000 sq ft for $67 million, with an expected stabilized cap rate of 5.4%. In the first quarter of 2020, we've acquired our first building in the East Bay market of Northern California. The property is a 23,000 sq ft in the I-880 Hayward submarket. Purchase price was $4.9 million, and our expected yield is 5.3%. Moving to dispositions, we completed $155 million of sales in the fourth quarter, comprising 3.6 million square feet and one land parcel.
These sales were consistent with our ongoing portfolio management efforts that support better long-term cash flow growth. With these sales, our market footprint has significantly changed. The largest portion of these dispositions came from the sale of substantially all of our Indianapolis portfolio, which totaled $98 million and 2.7 million square feet. Other notable sales included two buildings in St. Louis totaling $13 million and 245,000 sq ft. With just one building remaining in each of these markets, we've moved those properties to the other category in the portfolio reporting section of our supplemental. Thus far in the first quarter, we sold 226,000 sq ft in Tampa for $26.5 million. With this sale, we've now effectively exited the Tampa market, with just leased land remaining there. Our efforts in Florida are now focused in the South Florida and Orlando markets.
Given the leasing progress and rollover status of our portfolios in each of these three markets, we felt the time was right to further simplify our market exposure and redeploy these proceeds into higher rental growth opportunities. For 2019, dispositions totaled $261 million and comprised 5.2 million square feet and four land parcels. These figures exclude the sale in Phoenix recognized for accounting purposes in the third quarter of 2019 that is scheduled to close in the third quarter. For 2020, our guidance for sales is $125 million-$175 million. As is typical, we expect the majority of 2020 sales to be back-end loaded. Note this guidance does not include the sale of the Phoenix asset I just mentioned. Based on our strong 2019 performance and outlook, which Scott will discuss shortly, our board of directors has declared a dividend of $0.25 per share for the first quarter of 2020.
This is $1 per share annualized, which equates to an 8.7% increase from 2019. This dividend level represents a payout ratio of approximately 64% of our anticipated AFFO for 2020, as defined in our supplemental. Another note on AFFO. At our last Investor Day in November of 2017, we discussed our opportunity to achieve adjusted funds from operations of $200 million in 2020. If we achieve the midpoint of our overall guidance for the year, we will deliver on that opportunity. This would represent compound annual growth of 9% over the period. With that, let me turn it over to Scott to walk you through some additional details on the quarter and our 2020 guidance.
Thanks, Peter. In the fourth quarter, diluted EPS was $0.76 versus $0.40 one year ago. For the full year, diluted EPS was $1.88 versus $1.31 the prior year. NAREIT funds from operations were $0.45 per fully diluted share, compared to $0.42 per share in 4Q 2018. Excluding $0.01 of income related to insurance settlements for damaged properties, 4Q 2018 FFO was $0.41 per share. For the full year, NAREIT FFO per share was $1.74 versus $1.60 in 2018. As Peter noted, occupancy was 97.6%, down 10 basis points from the prior quarter. In the fourth quarter, we commenced approximately 4.1 million square feet of leases. 757,000 sq ft were new, 1.3 million square feet were renewals, 2.1 million square feet were for developments and acquisitions with lease-up. Tenant retention by square footage was 81.4%.
Same-store NOI growth on a cash basis, excluding termination fees, was 2.1%. For the full year 2019, cash same-store growth before lease termination fees was 3.1%. Cash rental rates were up 9.7% overall, with renewals up 8.2% and new leasing 12.4%. On a straight line basis, overall rental rates were up 20.4%, with renewals increasing 18.5% and new leasing up 23.8%. For the year, cash rental rates were up 13.9% overall, which is a company record. On a straight line basis, they were up 26%. Moving on to a few balance sheet metrics. At the end of 4Q, our net debt plus preferred stock to adjusted EBITDA is 4.6 x. At December 31st, the weighted average maturity of our unsecured notes, term loans and secured financings was 5.8 years, with a weighted average interest rate of 3.9%. These figures exclude our credit facility.
Moving on to our initial 2020 guidance per our press release last evening. Our NAREIT FFO guidance is $1.77-$1.87 per share, with a midpoint of $1.82. Excluding the $0.01 per share of costs related to severance from the closure of our Indianapolis office and costs related to projected vestings of equity awards for retirement-eligible employees, FFO guidance is $1.78-$1.88 per share, with a midpoint of $1.83. The key assumptions for guidance are as follows. Quarter-end average in-service occupancy for the year of 97%-98%. We anticipate first quarter occupancy will have a typical seasonal dip, which could be as much as 75-100 basis points. Our bad debt expense assumption for 2020 is $2 million, consistent with last year's assumption. One of our largest tenants, Pier 1 Imports, has been in the news lately.
Our guidance assumes that Pier 1 will continue to occupy our 644,000 sq ft facility in Baltimore for the entire year, as this facility is a critical part of their supply chain, and I note that they are current on their rent. For your information, the expected FFO from the lease to Pier 1 for the period of March through year-end is approximately $2.5 million.
Same-store NOI growth on a cash basis before termination fees is expected to be 4%-5.5%, and our cash same-store metric for the first two quarters is expected to be higher than the remainder of the year due to the benefit of burn-off of free rent related to developments. Our G&A guidance range is $31 million-$32 million, which excludes $0.01 per share of severance costs from the closure of our Indianapolis office and costs related to projected vesting of equity awards for retirement-eligible employees. Please also note that besides the normal annual increase in expenses, G&A also includes incremental costs related to a new compensation plan the compensation committee put in place in 2020, which is more tilted to our total stock return than the prior plan.
Guidance also includes the anticipated 2020 costs related to our completed and under-construction developments at December 31st, plus the planned start of First Park Miami. In total, for the full year of 2020, we expect to capitalize about $0.03 per share of interest related to our developments. Our guidance does not reflect the impact of any other future sales, acquisitions, or new development starts after this call, other than the Phoenix sale and the expected start of First Park Miami we just discussed, the impact of any future debt issuances, debt repurchases, or repayments, except the payoff of $15 million of secured debt in the second quarter at an interest rate of 6.5%, the impact of any future gains related to the final settlement of two insurance claims from damaged properties, and guidance also excludes the potential issuance of equity. Let me turn it back over to Peter.
Thanks, Scott. Before we open it up to questions, let me thank the entire First Industrial team for their tremendous efforts in 2019, delivering outstanding results and positioning us for growth in 2020 and beyond. We're excited about our new developments through which we can serve the logistics needs of our customers while expanding our portfolio in key markets and creating value for shareholders. With that, operator, would you please open it up for questions?
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Hey, guys. Scott, I think I heard you say $2.5 million of FFO for Pier 1 from March to December.
Yeah
Is there any reason why you excluded 1 Q?
We already collected January and February's payments, Craig. We basically still need to collect March through December.
Got you. Okay, it's pro rata, though, right? If we just wanted to gross up for the other two months.
Yeah. You can take $2.5 million divided by 10, and that's your monthly amount. You can extrapolate it any way you want for the year.
Okay, perfect. Have they given you any indications? I think in the past you told us that they've now fulfilled the Canada out of that warehouse. Are they using all the space? What's your conversations been with them?
Craig, good morning. It's Peter Schultz. They continue to fully occupy the building, and it's apparent to us that they've consolidated more operations in there. They're quite busy. They also have been hiring additional people.
Your next question will come from Rob Stevenson with Janney. Please proceed with your question.
Good morning, guys. Cash rent growth on the 275 leases you did in 2019 was close to 14% versus 7%-8% over the prior three years. Anything abnormal at the end of the day about the 2019 leases, or does that just reflect the strength of the market today? Are you expecting 2020 to be more in the 7%-8% range of the previous three years, or is this 2019 level something that can be replicated again in 2020?
This is Chris. If you look at 2019, yeah, it was very strong. We're looking at rental rate increases of 10%-14%. We're down a tick from 2019, but we're expecting some very strong rental increases still continuing in 2020.
Yeah, that 10%-14% is for 2020. That's what we just mentioned in the script. As Chris mentioned, down two percentage points from 2019 levels. Still very strong in double digit.
Okay, there's nothing abnormal about 2019, though, in that number that sort of pulls you down, or that's just where the market is today?
That's where the market is today. Markets are strong and t he mix of assets-
Okay
.. in a year.
Okay. You guys have done a good job of backfilling your land bank again in 2019, another $200 million or so after closer to $300 million in 2018. Can you talk about how you see the land market today versus the last few years in terms of pricing and availability in your target markets, and how willing are you today to buy land that may take significant time to get through the entitlement process?
I'll start with that and then kick it over to Jojo. Right now, we have about $200 million at book of land. There's no question land pricing is going up. Certainly, in the higher barrier markets, it's going up significantly. So far, rent growth is mitigating some of the pain from the higher land costs. We are, especially in California, really focused on unentitled land. Jojo, you want to talk about that?
Sure. Peter answered the land price appreciation question. In terms of our willingness, yes, we have a local team. We have boots on the ground. We're always looking for additional land opportunities for future growth. Of course, when we look at these deals, we got to have to maintain our spreads, and that's the financial criteria that we will stick to. That basically we compare where the rents are going plus our land pricing. In terms of it taking time, we have done that for the last 10 years. In some markets, it takes 18 months to 24 months to entitle. Our hit ratio in entitlement has been 100%. Of course, before we take on any site for those areas where an entitlement process is pretty significant, we do pre-app process. We meet with the municipalities. We meet with our consultants to increase the certainty of those entitlements.
Okay. Thanks, guys.
Your next question will come from John Guinee with Stifel. Please proceed with your question.
Good quarter. Good guidance. Looks to me like you're trading at a four four implied cap and over $110 a square. Why on earth wouldn't you raise equity?
Yeah. Hey, John, it's Scott. When you look at our sources and uses in our leverage levels, we're in very good shape. Let me walk through where we stand today. We're projecting in 2020 about $170 million of development spend. That's just for developments in process at December 31st and the First Park Miami start that we mentioned in the script. Our sales proceeds that we're expecting this year, our midpoint guidance is about $150 million. Then John, also remember, we expect to close the Phoenix sale in the third quarter, which is another $55 million. Our sales proceeds are in excess of what we need for development. We're going to retain about $70 million of excess cash flow after dividends and CapEx this year. Our leverage is at 4.6 times. We're in very good shape from leverage liquidity point of view.
John, what we've been saying, we've been consistent with this for the last several years, we would consider raising equity if we had an excess of investments that weren't going to be able to cover by those sources I just mentioned. We raised equity back in 2018, 2017, and 2016. They were used to fund investment, primarily spec development. We've walked a lot of folks on this call through our pitch books. We thought it was a very good use of capital because of the yields we were getting and the development margin. Long story short, in good shape now as we stand today, John. If something happens where a pipeline bloats to a level where we need equity, we'll consider it at that point in time.
Well done. Okay. Just curiosity.
Thank you, John.
You're welcome. Bravo. Looks like you sold Indianapolis at about $36 a foot and St. Louis at $53 a foot, if I'm doing my math correctly. What do those assets look like at $36 and $53 a square foot?
John, it's Peter Schultz. In Indy, all but two of those assets were in two parks, the price per pound is largely a function of the rents in that market, which you know is a tax-abated market. The growth rate there is somewhat minimal. These were older, lower cash flow growth, multi-tenant mix of ceiling heights and functionality. Our team did a great job getting the occupancy to as high as it's ever been and securing leases for term. As Peter said in his remarks, we thought it was a good time to sell.
Yeah, those assets in particular had been occupancy-challenged for a long time. The team got them up over 99%, that was a big help.
Were those rents below $2 net?
In one of the buildings, yes.
Wow. Okay, thanks a lot.
Once again, as a reminder to ask a question, you will need to press star one on your telephone. Our next question will come from Eric Frankel with Green Street Advisors. Please proceed with your question.
Thank you. I just want to circle back on your investment decisions this quarter. Maybe you can just walk me through just your thought process on exiting St. Louis and Indianapolis in more detail and how you're thinking about other potential market exits over the next year or two. Then obviously South Florida, I know you want to have a little bit more coastal market exposure, but you're kind of making a pretty big bet on South Florida. Maybe you could walk us through what you're thinking.
Okay. The first question, Eric, our program is always to manage the portfolio and to divest of lower-growing assets and redeploy that capital into higher growth opportunities. Naturally, in some markets over time, that means our footprint's going to shrink and in some cases go to zero like it just did in Indianapolis, St. Louis, and Tampa. I wouldn't say that's a commentary on the markets as much as it is those were the assets that we felt were time to dispose of because of certain leasing status that we achieved and then the future outlook for rent growth. With respect to Miami, that is a fantastic site. Very infill. Rents are growing very rapidly in Miami and in the Medley market. Land is very, very difficult to come by. We're excited about that opportunity. I don't know, Jojo, if you've got anything else you want to add.
Sure. I would just like to add, our view on Miami market, long-term above average population growth, which we think will drive higher than average employment growth and would drive a little bit higher consumption growth, which is all great for distribution. We think where we're at the mid-five yields, that's a good margin over what product would sell for. All in all, for a financial basis from a sub-market long-term view basis. We like to invest in the lot.
Yeah, that's a four cap-ish market. That's a 35 %+ margin in that market. It's very strong.
Okay. Maybe just also circling back to what John Guinee said is about in terms of how you think about raising equity, which I think you've explained before. It's good to hear it again. You talked about your dispositions. Obviously, that also funds your investment activity, but that seems to be more opportunistic in terms of disposition. Is that correct? If you have a really good leasing year and again, in some markets where maybe some of the assets are lower growth, it could be likely that your disposition target could be high again if leasing is really successful.
Well, we're 97.6% leased overall. Generally speaking, the assets that we're looking to dispose of this year are well leased.
Yeah, I would say, Eric, I think you're right. If we do see other opportunities and we're able to get great pricing on other sales, we might sell more than our $150 million midpoint. We just have to figure that out.
We'll get proposals from users that we didn't expect that are really strong, and we take them. In fact, many of the sales that we do are to users, to 1031 buyers, and to local high-net-worth individuals. That's in the program.
It's an asset-by-asset portfolio management. It's something that we do every year, Eric, as you know. We've talked about this, and we will continue to do this. When we see we can sell lower growth capital assets and reinvest for higher growth, we'll do that.
Okay. Thanks for the input.
Our next question is from Rich Anderson with SMBC. Please proceed with your question.
Thank you, and good morning, and great quarter. I was particularly impressed with the same-store guidance for 2020, significant acceleration off of 2019. I'm curious where that's coming from. How much of it is a free rent burn function, and how much of it is sort of just real good rent growth coming off of, as you mentioned, very high occupancy?
Hey, Rich. It's Scott. Same-store is a little bit easier this year than it was last year. In general, the construct is going to be a little over 2% is from rental rate bumps. A little over 2% has to do with increase in rental rates on new and renewal leasing. A little over 1% of that has to do with free rent burn off. A big piece of that is our First Medina Logistics Center development that we placed in service at the end of 2018. A slight offset to that of about 50 basis points is an increase in our projected amount of bad debt expense. That gets you around the 4.75% midpoint.
Keep in mind, I just want to reiterate it again, that assumes that Pier 1 stays and pays until the end of 2020 in the space that we discussed in our script.
Okay, great. In terms of dispositions, one thing that's true about you guys is the concentration in Southern California and your now budding interest in Miami. I'm wondering if Southern California, despite its strengths, becomes an interesting place to monetize to sort of balance out the portfolio a little bit because that concentration is sort of somewhat striking relative to the rest of your markets.
Yeah. Here's our view. First of all, we're very excited about our allocation to California. One of the things, SoCal is the largest market in the U.S. right now in terms of a homogeneous industrial product. It also boasts the highest rent growth and one of the largest consumption zones in the U.S. We think that will continue. One of the things that will allow that to continue is that California has the hardest entitlement process in the U.S. If you put that together, we will continue to see constrained supply and continued higher rent growth. We like Miami a lot because it does not share as much as a land constraint or entitlement as Southern California, but it's getting close. The demographics in Miami is very good. Overall, we like our exposure in California.
Again, we will continue to look at it asset by asset. We want to make sure we have the margin in every additional investment we make.
Okay, great. Last question from me. What are your thoughts in 2020 about turnover? How does it compare to 2019? If I can just get a recollection there. What's the sort of the mindset of tenants that do choose to leave? Is it driven by rising rents, or is that sort of a rounding error issue to them, and that's not necessarily the reason why they go someplace else, more about just growth in their own businesses?
Yeah, this is Chris. I'll just touch on the retention. We've been averaging right around 80%-85% in the last three or four years. We're expecting something similar in 2020, 70%-80%. That's very consistent with what we've done in the past. I'll turn it over to Jojo on his comments about the tenants.
In terms of overall the cost structure, rent still comprises a very small amount of any business' logistics cost. They still range 5%-7%. Despite rising rents, trucking costs or transportation costs and labor costs have actually increased as well. As a proportion, real estate has not moved significantly higher as a percentage. When they move, it's usually because of, in today's market, it's usually because of a supply chain change, because of their method of distribution and fulfillment and/or growth.
Okay, great. Thanks very much.
Our next question is from Dave Rodgers with Baird. Please proceed with your question.
Personally, I think you should have ended the call after John Guinee said well done, but that's just me.
We can cut it off right now if you want. We're happy to take more questions.
With the 10%-14% cash spreads that you guys gave guidance to, can you talk about that by size range? When you talk about the credit loss that you build in, which you really haven't experienced, are you seeing that more on the large tenant side or the small tenant side? How do you feel about that breakdown?
If you look at on the rent increases overall by size, last year we were about 14%. If you look at the tenants under 200,000 sq ft, we saw about 200 basis points higher. We're seeing a little bit higher rental rate increases in the little bit smaller size space.
Dave, on the bad debt expense, it's been, I think, about $500,000 on average the last several years per year, and it's mostly the smaller tenants that's causing that bad debt expense. I'd say 100,000 sq ft or less, and it might even be smaller than that.
Thanks for that. I guess acquisitions, obviously, I didn't see any in the guidance and cap rates have really compressed. Is there anywhere where acquisitions still make sense for you? I think, Peter, you detailed a quite small acquisition, about $4 million in the East Bay just to enter that market. Is there anywhere where you see acquisitions and the potential use of capital in that direction, or will everything just be funded into land and development?
No, acquisitions are definitely part of the opportunity set for us, but not in huge numbers. You'll still continue to see the bulk of our new investment go into new development. We do have our boots on the ground across the country, and we do, from time to time, ferret out some great acquisition opportunities where they haven't, for one reason or another, the owner isn't looking to eBay the asset. We're typically not going to be competitive in a really broadly auctioned situation. From time to time, we can find good acquisitions that aren't broadly marketed.
I know you guys will typically talk in terms of margin, but in terms of that spread, where are you comfortable kind of buying versus that development spread today?
Well, on the development spread, we're still targeting 100 - 150 basis points. We've been achieving it. In some markets, it's tougher, but on a portfolio basis, or should I say on an annual basis, when we invest capital, we're achieving it on average. On acquisitions, it really just depends on the package. It depends on the opportunity for rent growth, what land values are doing in that market. We're looking not only at the initial profitability, but the total return.
Got you. Two cleanups for me. One, severance in the first quarter? The second one was First Joliet. Did you guys comment on leasing activity there? Maybe I missed it. Thanks.
Severance is the first quarter, Dave, and then I'll turn it over to.
Joliet, we've got 148,000 sq ft remaining out of that 355,000 sq ft building. We have showings and activity, but we don't have anything to report yet.
There's basically 60% leased today. I just want to highlight that leasing came in early. As you know, in a development, we usually budget one year downtime. That 60% leasing there came in pretty early.
Thanks, guys.
Thanks, Dave.
We do have a follow-up question from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Hey, guys. Just looking at the sales activity over the last three years, I think you're about $725 million and average cap rate of about 7% cap. Just curious, how much more of those higher cap rate assets do you have in the portfolio that you're going to need to get rid of over the next couple of years?
Well, Craig, hi. It's Jojo. All our assets are performing well. If you look at occupancy and rent growth, we project rent growth in all the markets that we're in because our portfolio is pretty in-filled. What you'll find us continue to do, and we've been doing this for the last 10 years, is that we portfolio manage as part of our business. Every year, we will look at every asset, we will project cash flow growth, and we will see, hey, you know what? Is this something that we can sell at a great value and reinvest and use that as source of proceeds to fund our new investments? We will always have sales. That's part of the portfolio management that we have committed to do.
Yeah, we take a new investment decision on our assets every year, and that's how we come up with the bucket that we're going to dispose of.
Right. I guess I'm just trying to get at, if we're looking at what you guys have done from a portfolio transition kind of standpoint, how much of these kind of older vintage, higher cap rate assets are left? Because these are primarily used to finance development. In some cases, if you're building Miami to a 5.5% cap and selling at a 7 cap, there's some initial dilution, right? I would look at it that way.
First of all, obviously in our supplemental, you can see where we own real estate, but as important, the higher cap rate assets tend to be more capital intensive, and so the AFFO or the cash flow from those assets is in the fourth quarter, for example, we're in the mid-fours. We're taking that capital and we're putting it into new developments at 5.5% , and new developments don't require capital for a long time. It's actually cash flow accretive and value accretive to make that exchange.
Okay, great. Thank you.
Again, if you would like to ask a question, you will need to press star one on your telephone. You do have a follow-up question from John Guinee with Stifel. Please proceed with your question.
Great. Technical question. In this day and age, do you think you can 1031 exchange your dispositions into development, or do you have to do it into income-producing assets? The second, what's the status on your land up at Park 94 north of Chicago?
Hey, John, it's Scott. I'll take the first part of it. You can 1031 your sales into the land piece of it. You definitely can do that. If you wanted to, you can also set up a reverse exchange where you title the land with an intermediary and start developing it. You can get more full value doing it that way. When we've done 1031s in the past, we've just done operating properties and land to offset the gains from sales.
Yeah, at First Park 94, as you know, we have two buildings that are 100% leased. The basis in that land is about $1 a foot. We're entertaining discussions up there on a regular basis about build to suits, et cetera. We just don't have anything to report right now.
Is that a sub-market you would go spec, or is that something you'd only do a build to suit?
We would consider both.
Great. Thank you.
Our next question is from Bill Crow with Raymond James. Please proceed with your question.
Good morning, guys. Peter, is there a point at which the absolute stabilized development yield would become more important than the spread to existing assets? I say that because you're talking about developing the mid- and low-5%. Is there just a point at which the risk is too great?
Well, the biggest risk in development in our space is obviously leasing, because typically, we don't have the same risk that you do building an office building or a shopping center in a closed-in. We do get certainly environmental challenges on the risk side, but it's mostly leasing. If what you're asking is, gee, if you're trading at a three-something cap or you build at a high three cap, I don't know the answer to that question.
Well, isn't the risk also the second lease? As we think about how e-commerce and everything else could evolve, the risks could change a little bit, right?
Well, certainly you're making a bet on rent growth. Absolutely. That's where we spend a lot of time, and we have different views in some cases than other players on rent growth in terms of how much of a bet we're willing to take. Yes. You build at a really low yield, you don't get the rent growth that you expected, the total return's not going to be there. That's definitely a risk.
Bill, the other thing I'd add, this is Peter Schultz. Aside from the rent growth, as a long-term owner, we're very focused on the flexibility and the features and attributes that we're including in these buildings. If you compare those to some existing buildings, we feel that this is a superior product for the longer term. While yields may fluctuate and rents go up and down year in, year out, these are assets that are going to lease and perform.
In a lot of situations, where we're building is in high-barrier infill markets. Again, we have a long-term view that if you try your best to increase allocation to land-constrained, heavy entitlement markets, that supply should be constrained. Overall, at the end of the day, supply is really the one that drives rents lower. In our situation, we look to invest in the markets wherein the supply-demand fundamentals are much better than the national average.
Yeah. Okay. That's helpful. Any other tenants besides Pier 1 on your watchlist?
No, we're pretty granular, and everybody seems to be in good shape other than the smaller tenants that Scott referenced.
We went through our January bad debt review, and I think we recognized $60,000, so still very low.
Yeah.
Of bad debt expense.
Finally from me, how many more markets are left that you could exit in their entirety?
Again, this is an asset-by-asset decision. You've seen where we've been selling, and you can tell by what we own in the supplemental. Again, it's all about rent growth and all about future opportunity, which relates back to your last question. It depends on our view on rent growth. We don't really look at it market by market. We look at it asset by asset.
There's no advantage, economic advantage, margin advantage, from exiting a market entirely as opposed to maybe keeping one asset in one market?
Not really, no. 20% of our real estate's in California. I suppose there'd be a difference there, but we're not looking to exit California.
Yeah. Okay. All right. I appreciate it. Thank you.
Our final question will come from Sam Shamie with Shamie Development Companies. Please proceed with your question.
Thank you for the opportunity. You mentioned Orlando and South Florida, but what about Tampa Bay? Any development going on in that region, and why?
Not for us. We're not focused on Tampa right now. We like the rent growth characteristics of the Orlando and the South Florida market better. Jojo, you have anything to add to that?
No, that's our choice of sub-market at this point.
All right, at this time, there are no further questionas in queue. We will now turn it back over to Peter Baccile for any closing remarks at this time.
Thank you, operator, and thanks to everyone for participating on our call today. Please feel free to reach out to Scott, Art, or me with any follow-up questions, and we look forward to seeing some of you in South Florida in a few weeks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.