Q3 2019 Earnings Call
Officer.
Well, we are prepared remarks, let me remind you that certain statements made during this conference call maybe forward looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.
These risks and other factors could adversely affect our business in future results for more information about those risk factors would referring to our 10-K, our 10-Q that we have on file with the SEC and the company's other SEC filings.
All forward looking statements speak only as of today October 31, 2019, and we assume no obligation to update or revise any forward looking statements reconciliation to GAAP of the non-GAAP financial measures that we provide on this call is included in our earnings release, our earnings release and supplemental package were distributed last night after the market close.
If you did not receive a copy these documents are available in the Investor Relations section of our web site at Duke Realty Dotcom. You can also find our earnings release supplemental package FCC reports and an audio webcast of this call in the IR section of our web site.
Now for our prepared statement I'll turn it over to Jim.
Thanks, Ron and good afternoon everybody.
Demand for well located stated the art logistics space in key sub markets continue to rain remain robust overall fundamentals are still strong driving rent growth and development opportunity and our platform continues to provide creative solutions for our clients and outstanding value creation.
Let me start off with a bit of macro strategic front and then the rest of the team will expand on our operational results in our capital activity.
Yesterday preliminary third quarter, GDP was announced at 1.9% down slightly from the 2% pace in the second quarter, but still above consensus.
One of the bright spots in the GDP report was consumer spending which was up 2.9% on annualized basis.
It also indicates business spending continues to weaken a bit which we've seen in some of the other recent indicators were monitoring this closely for any possible impact to the consumer but it doesn't appear to be an issue at this time.
Additionally, ecommerce sales have grown by 13 was 13.1% and bricks and retail sales were up 2.4% through the first half of the year. The retail inventories continue to trend up 3.9% year over year through third quarter.
As we've done our previously we're seeing significant investment by not only ecommerce company, but also retail and consumer products companies into their supply chains to improve delivery times and efficiency. This combined with continued increases in consumer spending will continue to drive demand for well located.
Logistics real estate.
Now turning to the real estate fundamentals vacancy across the us markets ticked up about 10 basis points in the third quarter, 4.4%.
CVR preliminary data shows third quarter absorption of 45 million square feet trail by deliveries of about 56 million square feet.
On a year to date basis, the gap is less than 15 million square feet with projected full year 2019 deliveries exceeding demand by about 25 million square feet to put this in perspective across a 14.5 billion square foot stock in the US. This gap will approximate to about a 10 per 10 basis point rise in vacancy.
From the beginning of the year level. So we're looking at roughly 4.5% nationwide vacancy range by the end of the year. This is still 300 basis points below long term historical average vacancies in the United States.
CVR. He is also reporting asking rents during the third quarter have increased 5.7% year over year more than two percentage points above the average annual growth rate since 2012.
So at a high level, we're continuing to see low vacancies good rent growth and positive demand for buildings in high quality well located portfolio.
I'll turn it over to Steve Shneur to touch a bit more on market fundamentals at the sub market level as well as our third quarter operational performance.
Thanks, Jim I'd like to start by expanding a bit on this market supply data points as it pertains to certain markets and more importantly, some markets have been in the headlines in the last several quarters. Let me first they have yet to be careful and looking in MSC level data on supply, particularly in some of the larger tier one metro areas that can.
Have a geographic diameter of up to 80 miles. So if you look at our NOI exposure of the total city level of Atlanta, Dallas Chicago. It comprises about 20% 24% of our total NOI.
However, in the heavier supply pockets of northeast Atlanta, South Dallas, an idea Chicago. Our exposure is just nine assets would contribute only 2.8% of our total company in NOI.
Furthermore, only about 800000 square feet in those three submarkets expires through the end of 2021.
From a vacancy standpoint, the three sub markets I mentioned are about 9.5% begun yet comparatively our remaining assets outside of these three submarkets or the other 21 point, 21% of our NOI the market vacancy is 6% and our portfolio occupancy across those three cities is between 99.
And in 100%.
Finally, as a testament to our portfolio performance in these three large metro's our rent growth year to date and these three cities as averaged 14.6% on a cash basis and 30% on a GAAP basis.
The supply risk data points and rent growth figures of the submarket level support where we have been emphasizing that our location strategy is heavily focused on the top logistics corridors for local and regional distribution within each MSA.
As a result as a case in point our across our 20 Mark is there a roughly 220 total submarkets of these 220 Submarkets are 513 properties touch only 77 of those Submarkets. So again you have to be careful with some of those data and hopefully each deal have an opportunity to get out to our regional markets to.
This first hand.
Now, we'll move on to the highlights in our portfolio for the third quarter.
We executed over 7 million square feet, a leases across 17 markets at an average size of 117000 square feet. This includes 22 leases signed over 100000 square feet and five leases signed over 250000 feet.
Some of the more notable lease transactions were with customers such as Snyder's Lance Foods International paper, Coca Cola, Walmart and XPO logistics at quarter end, our stabilized portfolio was 97.9% leased our in service occupancy increased from 95.4% to 96.2%.
Third quarter, primarily through the lease up of recently completed speculative developments, we sign over 1.8 million square feet of first Gen leases and recent recently completed spec projects that helps us they will stabilize over seven facilities.
As everyone is aware this first generation leasing will not impact same store results in the near term, but it will drive significant overall in July growth going forward.
The leasing activity combined with strong fundamentals led to another quarter of solid rent growth of 14% and 27% on a cash and GAAP basis, respectively with only 5% of this activity derived from our coastal markets of California, New Jersey and Florida.
There was also meant a lot of discussion recently about tenant demand by building size. So I thought it would be important to share with you some of our year to date staff by building size.
Year to date, we realized GAAP rent growth for buildings under a 100000 square feet of 18%.
29% rent growth per billings between 100, 250000 feet, 23% for buildings to 50% to 548% for building greater than 500000 feet. This reflects strong fundamentals across the size spectrum and it also at goes our strategic and concentrated sub market focus I just laid out.
On the development side of the business momentum continues to be very strong during the third quarter, we generated $211 million of starts across six projects totaling 2.1 million speed that are 49% pre leased.
The new development starts included a 210000 foot build to suit in Atlanta Airport Submarket for Porsche USA and a 615000 foot build to suit in the eastern Pennsylvania for one of the largest higher wholesalers in the northeast.
On the speculative development side, we started a project in the inland Empire totaling 800000 square feet and a 210000 foot project in the East Bay Submarket in Northern California, Our overall development pipeline at quarter end at 19 projects under construction totaling 7.2 million square feet and are projected $916 million.
Stabilized costs. These projects are 46% pre lease and our estimated margins on the pipeline remain over 30%.
Our development outlook for the remainder of this year is very solid we have a healthy pipeline of prospects across our entire platform.
This combined with our outstanding year to date results is driving our increased guidance for development, which Mark will cover later on I'll now turn it over to Nick Anthony to cover capital transaction activity.
Okay.
Thanks, Steve we continue to be strategic in our capital recycling for the purpose of both self funding development, achieving our strategic objective for tier one geographic exposure.
During this quarter, we closed on the sale of five transactions located primarily in the Midwest totaling $280 million. The bulk of the activity comprised 18 building 4.1 million square foot portfolio across Indianapolis, Cincinnati and Columbus, that's all for $218 million.
The billings in this portfolio had an average age of 25 years and we believe the sale maximized. Our return on these property. The remaining sales were small portfolios or one off assets across Minneapolis, Atlanta, Indianapolis, and Washington DC.
And turn we recycled of course in these proceeds during the third quarter into a 262000 square foot facility noted located in Miami at County line Corporate Park. In addition, after the third quarter in late October we completed the second acquisition also accounting line totaling 241000 square feet in aggregate.
Acquired 490008, 0.9, 3000 square feet for about $70 million, we now own 1.8 million square feet in this part and together with our Miami Industrial logistics partner by one over 2.4 million square feet of what we believe are the most desirable facility in the medley Submarket of Miami.
Yeah acquisitions, the K line, bringing our year to date till acquisitions to 180 million in coupled with about development have increased our tier one exposure on a GDV basis to 64%.
This is up from 59% at 12, 30, 118 and on that path to reach our tier one strategic will have approximately 70% by the end of 2021.
Now I'll turn it over to marketing to cover our earnings results and balance sheet activities. Thanks, Nick Good afternoon, everyone core FFO for the quarter was 37 cents per share compared to 36% 36 cents per share in the second quarter of 2019, and 35 cents per share in the third quarter of 2018 on a year to date percentage basis.
As core FFO per share is up over 9% compared to the similar year to date period in 2018 and AFFO on a share adjusted basis is up right about 10% year over year.
Same property NOI growth on a cash basis was 2.8% for the third quarter down from 4.4% in the second quarter as we discussed extensively in our last earnings call. This moderation is same property NOI growth was expected due to coming off an extremely high comparable occupancy level of 98.8% in the third quarter of 2000.
18. In addition, third quarter same property NOI was negatively impacted by previously announced tenant bankruptcy, which was immediately back filled but will not begin paying rent until the end of the year and also from the relocation of a tenant from two of our existing properties to one of our newly completed build to suit developments the combined impact.
Back to these tenants situations to same property NOI was about 35 basis points for the third quarter and will be about 60 basis points in the fourth quarter. Once again, we expect this negative impact of 50 basis points on the second half of 2019 to turn to a positive in 2020 as rent commences from the bankruptcy backfill.
The other two spaces released we do expect same property NOI growth to accelerate modestly in the fourth quarter and this considered in our revised guidance, which I'll cover in a minute.
Same property NOI growth on a GAAP basis was 2.9% for the third quarter and 3.5% on year to date basis.
In August we took advantage of the low interest rate environment and issued $175 million of unsecured notes as part of the reopening of our 3.375% coupon 2027 bonds at a 2.8% effective interest rate between August in early October we issued 6 million shares through our ATM program.
At an average price of $33.56 generating net proceeds of $200 million I'll add some context, given we're very thoughtful and deliberate on issuing equity which are significantly increased development prospects since the beginning of the year. We felt was prudent to issue a bit of equity to maintain a strong competitive balance sheet to fund these investments.
In addition, the equity markets are providing a very competitive cost that we estimate is significantly accretive to our overall investment returns, while our leverage metrics improved this quarter from already strong levels. This is temporary we view this as a portion of the Prefunding for our current development pipeline, along with future development prospects rather than a de Levering Act.
Tivity.
This funding will come from future unsecured debt issuances in other capital sources as we head into 2020, I anticipated gradual path towards a debt to EBITDA ratio in a low five times area from the mid fours area. Currently this levels in the range. We previously discussed.
Last week, we redeemed $250 million of 3.9% unsecured notes, which had a scheduled maturity in February of 2021, the approximately 6 million dollar prepayment of interest incurred in connection with this redemption will impact FFO as defined by knee read in the fourth quarter 2019, with no impact to core FFO.
The source of funds for this redemption will ultimately come from a new unsecured debt issuance, we anticipate in the near future.
Let me now address revisions to our 2019 expected range of estimates, which is an exhibit at the back of our quarterly supplement as wells on our web site as we near the end of 2019, we have narrowed our guidance for core FFO to a range of $1.42 to $1.46 per share, which equates to an additional one cent per share increase at the midpoint.
And 8.3% growth over the flat over the prior year, we increased our guidance for same property net operating income to a range of 4.4% to 4.8% from the previous range of 4.0% to 5.0%. We've also increased our guidance for development starts to a range of $1 billion to 1.15 billion dollar.
Representing a $75 million increase at the midpoint revisions to certain other guidance factors can also be found in the Investor Relations section of our website now I'll turn the call back over to Jim.
Thanks, Mark in closing, we're very pleased with the team's execution on leasing performance capital redeployment and development starts.
We laid out solid growth expectations for the year and weeks have exceeded all of those expectations. In addition, we're executing on our long term strategic goal to generate high single digit AFFO growth in a modest economic environment and execute on our goal to achieve 70% tier one geographic exposure by 2001 with a very top.
But its submarket focus of course, we're carefully watching macro economic data trends trade negotiations and our customer sentiment, but for now we continue to be optimistic about a solid finish for the remainder of a year and demand drivers continuing intact for a good start to early 2020.
I'm also very pleased that our overall strong performance has allowed us to raise the quarterly dividend by two cents a share or 9.3% over the previous dividend rate, while maintaining our very conservative payout ratio.
The increase is reflective of our teams outstanding execution and strong year to date results.
We will now open up the result opened up the lines to the audience. We would ask participants to keep the dialogue to one question or perhaps two short questions and you of course are welcome to get back into queue. I've also been notified that there were some static on the line during my remarks, and Steve remarks. So if you need us to re address any of those numbers are any of those comment.
It's feel free to ask and.
Address Tony you can open up the lines for our first question. Thank you, Sir and ladies and gentlemen to cure for question you a press star followed by one at this time.
Once again for any questions you May press star followed by one well take our first question for Manny Korchman. Please go ahead.
Hi, everyone. Good afternoon.
Can we focus on the asset sales for a second talk about the buyer pool that you are looking at hardware that was looking at those assets.
And whether there you marketed other asset the you didnt sell through them.
Yes, so many that mostly getting along as the Midwest portfolio sale and.
We were very pleased with the buyer pool was very deep.
It was.
Low double digit number of bidders app operating on that and I believe we had I think three or four around a final building final bidding with the final field sealed bid process.
Yes.
And then as we think about your portfolio improvement from selling out of these.
More secondary markets.
What is it that limit further sales were the gains in sort of using those into other properties.
Do you like the rest of your portfolio.
As you get that 70% goal that you mentioned do you think you do that are buying and development or do you think there are more sales that we should think about.
I would tell you that we're very happy with our existing portfolio. So it is very it's getting harder hard to find asset that we do want us out.
So we've been gradually doing the sales.
To partially fund our development.
But going forward the bulk of our growth into the tier one will be through development.
Thanks, Nick.
Yes.
You are next question in queue that will come from a line of Blaine Heck. Please go ahead.
Thanks. Good afternoon. So you guys highlighted the fact that only 5% of your leasing volume was in tier one markets and you were still able to put up very strong rent spreads can you provide us with that percentage of 2020 rents that are in tier one markets and I guess what are the implications for for rent spread as we look forward.
Yes, Blaine I'll try to address that first of all make sure we were clear and I just made and apart. We're static the 5% was actually not tier one markets. It was coastal markets. So that was California, New Jersey in South Florida.
We obviously count Atlanta, Chicago Dallas of tier one so that was not in that 5% number just the coastal markets was five.
So as we look forward for the next 18 to 24 months that 5% going to be about 20%.
It could be lumpy from quarter to quarter.
For example, we've got I want to say about 22% to 25% in coastal markets that are expiring in 2020, but it's likely we may get a couple of those deals done here in the fourth quarter actually so the way that translates into overall rent growth expectations. As we look forward I would tell you for the next 12 to to.
24 months on average unlike say there may be some swings from quarter to quarter, but on average we expect similar results. So what we've shown this year so call it high to low high high single to low double digits on a cash basis and you know right around the mid Twentys on a GAAP basis, and then for our whole portfolio. We've done a trying to done an hour.
This is to look at what that would be on a mark to market basis on a GAAP and we think we're close to 14% to 18% somewhere in that range on a on a total GAAP basis.
Very helpful. Thanks, Mark and then so what's the breakdown of your exposure between tier one tier tier two in tier three at this point and then maybe for Jim what's the ideal portfolio is that all tier one or is that.
The targeted 70% that you're looking for buying 2021, and you still do want to have some exposure to those secondary markets.
Well I'll, let Nick give you the breakdown.
Between the high barrier tier ones, the tier ones in there and the remainder.
But at this point, we're just trying to get to our target of 70, I think beyond that you will continue to see that that number grow but we haven't set specific targets.
We have grown pretty substantially in southern California, and New Jersey, but we have a long way to go before we think we would reach.
Our target our long term target size, plus we're still relatively new in northern California, and Seattle. Those also represent good growth opportunities for us in those tier one high barrier markets and in turn to the composition, our hikari our high barrier tier one on a gross asset value basis is just over 40%.
And the low barrier tier one is right around 25%.
Going forward and what we've seen historically is the high barrier tier one is the went to moving the most that moving us to that 70% the low barrier tier one are really staying rather static and as we go to is.
Repositioning.
Thanks, guys.
Thank you. The next question in queue will come from Jamie Feldman. Please go ahead.
Great. Thank you so we see more consolidation in your sector. This week with that for a largest and Liberty I just wanted to get your thoughts.
Now have a player in the space is just getting larger and larger and it's kind of pitching the idea that theres real synergies in the business from doing that I just want to get your thoughts on the need to get larger compete.
And as you think about that combined entity as a competitor what changes for you guys.
Well I, Jamie I'll take that the second one first I don't think anything changes.
Our friends at pro lodges had.
Then the proverbial 900 pound gorilla for some time.
I don't think this really changes the landscape.
We've all talked about the advantages of scale in the sector and we are in fact big believers in that but within enterprise value of 14 or $15 billion, we don't have to get big for the sake of getting big.
We have a hard time convincing our board and our senior leadership.
To get big if we weren't creating additional value. So when we look at portfolios and we look at M&A. Obviously, we're looking at the impact to topline FFO growth, but we're also looking at a AFFO growth and a b and.
The the sector is is very expensive today in a little bit frothy, and we haven't seen that value creation opportunity.
Since the probably the larger bridge portfolio that we bought a couple of years ago. So.
And I think thats, probably a fairly realistic outlook for the foreseeable future in our sector in terms of the pricing.
Okay. I mean, you take a closer look at Liberty and as you strategically did you think it would've been a good fit it sounds like pricing maybe not.
I think you can assume that were large is substantial enough that we look at every opportunity both private and public.
Thank you.
Yes, the amount of detailed underwriting we do depends on.
And what we what we think the fit would be but we've had a lot of respect for for bill in the and the the Liberty guys in their portfolio over the years and.
It's a good company and.
We we applaud our friends at PLD for.
To put the deal together.
Okay all right. Thank you.
Thank you. The next question in queue that will come from Eric Franco. Please go ahead.
Thank you I just want that further illustrate this position as a little bit further.
The Midwest portfolio is the capital that disclosed in your supplemental would that be it would that applied to that portfolio within that that was fully occupied thought here and it should be thing here is that correct.
Yes that is roughly equates to that portfolio.
The reason that portfolio was so was highly leased though is we actually as part of that transaction.
On a vacant building out our portfolio and sell into another buyer that was describing more value to that building.
And then that was part of that 4.1 million square feet.
Yes, no that was outside the 4.1 to 4.1 was the Midwest portfolio.
Okay Thats got it okay that makes sense and then more broadly I think on I think the public market. It is it.
At pretty.
Different views on how fundamental than that and we're value for different marketing in the us, though I think cocoa market claim to be getting a really good bid and anywhere else is probably a little bit softer what do you see on the ground and a lot maybe in your in your Nonaccruals. So Q1 market clinical in the markets are recycling out of one of the fundamentals apps, we look like as high rise.
Non up at a good bit thoughts here, they have been kind of flat with where where supply than.
Yeah, Eric this is Steve.
Yes, I would tell you we see good demand in in all the Submarkets we operate in.
I think we're pretty choosy as I tried to lay out hopefully it came through with the with the static, but they were pretty choosy and our sub market focus.
In terms of the demand drivers Jim touched on this but.
E Commerce retail consumer Nondurables food and beverage so and I guess, the one thing that I would point out that we don't publish but we track pretty closely here is our our build to suit development pipeline and that that pipeline for us has been pretty consistent.
In terms of the number of prospects were chasing and that seems to be seems to be a good indicator of the health of our clients are looking out 12 to 24 months.
For new space, and we watch that pretty closely because I think it's a good indicator for us.
Okay. Thank you.
The only thing I would add is if you look at the occupancy of our non coastal markets. It's continued to be very strong and as mark alluded to earlier, our rent growth numbers, which were pretty good for this quarter and have been pretty good for the year.
Based on the fact that only 5% of of our leases rolled in those costs and those high barrier coastal markets. So.
Look we've said this all along.
The sectors in great shape, all across the country vacancies are at record low theres still really strong demand and they're still really good rent growth.
And we see that at all sizes as well.
Okay. Thank you appreciate it.
Thank you at the next question is from diagram Malhotra. Please go ahead.
Thanks for taking the questions.
Two quick ones. So just on based on your commentary around the exploration now being going forward being a bigger part.
In the coastal markets would you actually expect accelerating cash rent spreads or or similar cash rent spreads to this year.
It's probably going to be fairly similar I would say Vic in the near future that part of that you got to remember.
The leases that will be rolling in the coastal markets are generally shorter term leases.
Five year deals, let's just call it on average where some of the leases that are rolling in the non coastal markets were kind of what I would call legacy longer term build to suit leases. A 10 years. So you have just as good as embedded rent growth in some of those non high barrier markets because of the linked to the lease term that's coming up.
Okay. That's that's fair and then just to clarify I know you've narrowed the.
Same store NOI growth.
Range, but I just want to understand.
What cause you to kind of narrow the top end.
What we narrowed both ends I think we raised the bottom end and we lowered the top end just to get closer to where we are during the year. So our new midpoint went from four or five up to four six and then if you just compare that to our year to date number where we're at four nine keep in mind Thats, 75% of the total.
Sure in a while at the four nine that would imply I think if you just do simple math to 3.5% expected growth in the fourth quarter to hit that four six but okay. Narrowing as you said later in the year, we we have better data now.
And the diesel is essentially what you called out at 60 basis point impact.
Yes, It was 60 basis points, we use from the third quarter for the two tenants in the third quarter that I mentioned answered the two situations one bankruptcy tenant in Atlanta, and then we had one tenant in two spaces in Cincinnati that we moved into a new development.
The two spaces in Cincinnati, the tenant held over in one of them for most of the third quarter, while they were moving into their new building and then there will be out of both spaces in the fourth quarter. So what you have with those two situations you had a 35 basis point negative impact in the third quarter that will grow to 60 basis points in the fourth quarter, because there will be out.
Of all those spaces, but more than offsetting that because that is part of the 2.8% growth from third quarter. We do expect a reacceleration so more than offsetting that will be the continual.
Pop we get from all the leases, we've been saying on the rent growth side, plus a little bit less free rent in the fourth quarter.
Of 2019 compared to 2018, so all that even though occupancy will probably dip down a little bit more in the fourth quarter, because those situations should be more than offset by continued positive momentum elsewhere.
Got it okay. Thank you.
Thank you next question is from Cai bin Kim. Please go ahead.
Thanks.
Going back to your comments about the tier 170% go overtime I think thats about 750 million on a gross asset value basis just.
Just curious how you how you want to get there is that more by building your way there or buying.
Yes, we.
The majority of it will be through development, and obviously, we will be selling a little bit out of the tier two markets and redeploying on tier one, but the majority of it will be in the development side.
The vast majority of our land current landbank is focused on high barrier tier one markets right now.
Yes, Kevin just for example, if you looked at our 900 million dollar development pipeline now over 80% of that's in those tier one markets already.
Okay.
And.
Any particular reason why some of the assets that you sold I think were less favorable eyes as the demand just that strong where you're getting.
Scott full pricing, even though it's there's always some unusual circumstances like that.
The one wasn't vacant building that got carved out of a portfolio.
A lot of kinds that the buyer is more optimistic on the underwriting than what we are then we're a seller thats kind of way we look at it.
And then there were two two office buildings and two legacy office buildings and at that population too.
They had lower occupancy.
Okay. Thanks.
Thank you. The next question that will come from Michael Carroll. Please go ahead.
Yes. Thanks, I was hoping you could provide some color on your ongoing on development strategy and as Steve commented that there is a pretty big pipeline to build to suits and through most of 2019, you've been increasing your your star guidance, meaning is it fair to assume that you can break ground about $1 billion projects a year now stabilized.
Pace going forward or is it going to be more or like the start guidance attend the beginning of the year.
Oh, Mike I think we always want to start the year with maybe a little bit more conservative guidance, because we're building budgets effectively 15 months out.
So I wouldn't be surprised if in January .
This was a little bit more conservative, but you know if market dynamics stay pretty consistent in 2020 with what we've seen in 2019 I think we can add we can absolutely replicate the year.
The build to suit pipeline as Steve alluded to is as strong as it's been in the last three years in terms of number of prospects the size of the deals and the just the geographic coverage so that mix with spec development selected spec development around the country.
We certainly hope to be having this same conversation next year, where we've raised guidance to these kind of levels.
Okay, Great and then I guess second question can you talk a little bit about your acquisition strategy I know it seems like you've been doing a couple one off acquisition in these top tier markets. I mean is there anything behind those deals are they adjacent here existing land parcels you see some value add opportunities I guess, what makes you pursue.
Those low cap rate deals in those good markets.
We are primarily actually exclusively focused on the high barrier tier one markets, where we want greater exposure.
Thats, where you talk by a billion Northern California, we bought several billions in south Florida as part of a.
Transaction, where we have right of first offer on future buildings, and we evaluate those on a one off basis.
And then obviously one that asset like in southern California that provide some diversity to our current base there in California, which is our largest market now.
Okay, great. Thank you.
Thank you. The next question in queue will come from John Guinee. Please go ahead.
John Guinee here, how are you on pay Steve you had some great stats about I think you've owned assets in 73 of the 220 Submarkets.
Some of your peers actually track the key Submarkets, where there is simply no more land and no more income of LNG to increase supply.
Do you guys go to that level of detail and give any of that sort of information about share up portfolio.
I wouldn't say I guess it would it would depend on what sort of information, you're referring to exactly but I'd say in all of our markets.
Certainly like Submarkets weathers.
Yes, salable opportunities for development.
We do a fair number of redevelopment projects I think half of our.
Projects. We currently have in our pipeline. We are building about 24 buildings right now half of those projects would be considered redevelopments, where we've either taken down an existing facility beta manufacturing plan or an old office building or steel plant or something.
So that's where we're spending a lot of our time and effort. So I guess, it's a long way to answer your question that obviously, we're focused on those markets I don't know that theres that out there that tracks availability of sites, though.
I think it varies quarter to quarter I mean, our people are always out looking for those opportunities.
Defied functionally obsolete facilities that we can turnaround and redevelop cost effectively into new logistics facilities that were doing it in south Florida, We're doing it New Jersey, we're doing it Chicago Southern California.
Steve even pointed out we just torn down to office buildings in northern California to develop state of the aren't logistics in the East Bay. So.
There may be out a vacant land, but they're not out of opportunities and we're continuing to find good ones.
Great. Thank you very much Kevin Good day, Thanks, Josh.
Thank you. Our next question will come from Caitlin Burrows. Please go ahead.
Hi, there I mean, I know, we talked a little bit about the development pipeline already but I guess in terms of you were saying that the advance side is as strong as ever in terms of buying landing getting entitlements are you seeing anything from there that makes you think that you wouldn't be able to keep up the development volumes.
Hi, Steve reached this year.
I think other people have commented on this as well I think it does get more difficult and certainly with the infill markets that we're pursuing and those opportunities to go through the entitlement process. I think it's added some linked to the overall duration of projects. So what used to be maybe of a nine or 10 month project may have made major.
I got to 13 14 months.
Well I guess that could have some some lingering effect, but right now we see a lot opportunities and as Jim said I think sitting here today, assuming that the build to suits in the and the prelease universe spec projects can keep up I think you'll see similar results for what we have going forward, yes, okay. On the thing that I would add to that is we already.
Have the land.
In our portfolio or at the very least under contract in the process. This is going to feed our 2020 development pipeline.
The village, we're going to build next year are not on sites that we haven't identified and have to go out and find that would be the 2021 to 2022 pipeline. So I think Steve Zee.
You know very he's very comfortable that he's got Atlanta needs to meet our development needs for 2020.
That makes sense on and then maybe also on.
Amazon and looks like they grew again in terms of your largest tenant I guess on one hand, I definitely positive, giving their growing needs and Youre development services that are what what are your thoughts I not kind of concentration risk and also what kind of pricing power do you have.
With such a large tenants.
We've had a great long term partnership with Amazon and we continue to do a lot of business with them I told the story before our direction to the Amazon team and our teams in the field is we'll take as much of that business that we think makes financial sense around the country. So.
Let me last mile facilities Forum delivery sortation facilities, as well as fulfillment centers and we'll manage our our exposure to Amazon at the corporate level through mix group with either dispositions joint venture funds. How are the case may be sitting here today I think there in the seven and a half.
Percent range given the activity that we had if we don't do anything.
That number works its way up probably two nine or 9.5%.
But I think we'll we'll address that in 2020.
As we look to maybe prune some of that exposure yen to Jim's point, we sold 100 100 million dollar facility in Columbus, Ohio earlier, this year to manage our exposure and then finally as far as pricing power started keep jumping around on year came on the spot pricing power, we've had for Amazon leases come up for renewal in the last 24 months.
And I would say the rent growth we achieved on those renewals in each particular market was better than the market average we've achieved in that market.
So a pretty good that's helpful. Okay, great. Thanks.
Thank you. The next question that will come from Rich Anderson. Please go ahead.
Thanks, Good afternoon.
So if anything about the Liberty deal.
And for two cap rate that makes you recall circa 2007 in ERP selling and does that does that kind of.
No topping sort of number can it get any better.
What do you think about that for two number for the Liberty portfolio in context of the future and the ability to see value creation from this point going forward.
Well rich I'll make it I'll make a couple of comments relative to the cap rate.
You know a good for the Liberty shareholders I guess.
You know every year at at the conferences that we all see each other at we've been asked about our projections for cap rates in the amount of capital this flowing into our sector. At every year I've said I literally for the last three years cap rates kick it any lower and cap rates continue to get lower and I think today.
We're still seeing a significant amount of capital both domestic and foreign capital that wants to be in us industrial.
And there is upside there are premiums being paid for portfolios and we've seen we've seen that consistently throughout this year and quite candidly for the last several years. So sitting here today. It wouldn't surprise me at least if cap rates continue to compress in this sector as we have more and more capital that wants to be put two.
Estriol sector, so I think it could get better.
Right.
And when you made the comment about perhaps coming out conservatively on the development side in 2020.
Much of that was just simply being conservative and not being a hero coming out of the gate and how much of it with some of these observations.
You made early in the call, perhaps splitting hairs, but you know the GDP on or spending down so on and so forth or any of those sort of observations influencing your your thought process about development going forward.
Well rich my first thought process is to under promise and over deliver.
And it's been my experience that you guys don't react well what I disappoint you in the second third quarters, so a little bit of conservative and in January is a good thing sitting here today I think we all recognize that the macro drivers that we look at for our sector in a lot of instances are not as strong as they have been in the past couple of years.
There's.
We've heard the term decelerating at a number of these areas. So.
I think a certain amount of of of caution is probably warranted, but as we've said and I don't want us in the wrong message I'm pretty optimistic about 2020 based on everything that we're seeing today.
In terms of the drivers and what our clients are saying.
Our existing tenants in their need to grow. So I think 2020 is going to be a pretty good year for us absent some.
Really.
A large catastrophic thing that you know that we may not know about today right and then last question said earlier that the I think it was more for somebody.
Over the next 12 to 24 months, you're looking at gap releasing spreads in the Twentys and that the mark to market for the full portfolios, 14% to 15% I want to make sure that logically correct that stuff that's about to expiring next year or two is call. It has that had the benefit of 10 years of of existence, and so you kind of get the market rent growth from that.
And then at the other ended the spectrum.
Stuff that just got re let.
Is effectively zero percent gap releasing spread you know at this point from a mark to market perspective that the way to think about it like over a 10 year time horizon in that the average of all that is somewhere in the middle is that is that what you're kind of thing when you're given that Matt I think thats the rate of first I need to clarify on of course, this will make mark nervous, it's 14% to 18% not 40.
The 50 per show I forget it.
[laughter], so I know, you're absolutely right, but I will tell you in some of our infill markets like Northern New Jersey, and Orange County in Southern California deals that we did six months ago are under market right now I mean, that's how strong some of those markets Army Utah.
Talking about Orange County, we had a presentation on our border early this week me you're talking about vacancies that are under 2%.
And not a lot of new supply out there. So that continues to allow developers and landlords to push rents. So you know it's the combination of all of those things and and our ability to go out and execute on it but I think your your logic is right on rich I mean, obviously the the deals that are closest to.
Coming at US are generally the older deals.
The deals that we just signed will roll for 10, or 12 years, which is why create quite frankly, I don't necessarily put a whole lot of stock in a number we just quoted but it is what it is so the deals that we just signed to have 50 more years of term maybe close to zero in the deals that are coming up are going to be on liner.
Okay, great. Thanks very much.
Thank you. The next question in queue that will come from Jeremy Metz. Please go ahead.
Hey, Thanks, Hey, Jim just a little bit of a high level question. Here you guys continue to focus on pretty shift in mid tier one markets is there also our desire as you go and buy and sell in barrels.
Also ships, the seismic shift into more and multi tenant create a little more whether it be annual tenant roll three or take advantage at times.
Where the markets added in their desire to continue to shift the portfolio and other way beyond just kind of geographic region in those markets.
Yes, Jimmy that that's a good question I'm actually glad you brought that up because.
People think our portfolio is.
As all million square foot buildings.
But the reality is 20% of our portfolio is building, a 100000 square feet or smaller and a lot of our two and 300000 square foot buildings, our executive as you describe multi tenant so what drives the development decisions and in many cases the acquisition decisions of those buildings in those markets is driven by tenant need.
In those markets. So when you go to.
South, Florida, or Central Florida, or you know you know even Houston, it's not million square footers, it's much more reasonable average size buildings and we've always been an active player.
In that marketplace, and Steve could give you a little bit more color on our average tenant size and some of the some of the other factors, yes, Jeremy I indicated my opening remarks in our average deal size was 117000 feet and then if you look at our new development pipeline.
What were what we learn construction with right now I think our smallest building 66000 beaten our largest though is upward over a million so.
As Jim said, it really depends on the sub market were in.
In terms of what the demand is that we're going after.
Appreciate it thanks.
Sure.
Thank you. The next question that will come from Michael Mueller. Please go ahead.
Hi, a quick question in looking at the various JV that you have what portion of them are actively growing.
Well this is Nick we really only got one significant joint venture at this point.
And that is we've had it for several years, it's primarily focused on Dallas and there hasn't been a lot of growth in that portfolio going forward now we do have a couple development joint ventures that are active on the development side.
Most of those assets are sold.
On stabilization.
I guess free to do something there is it the partners bring you land. They find a site will end up doing it there as well now they didnt lands already been established and we are co developing those projects and then selling them.
Okay. So it sounds like it's going to everything's going to stay pretty small from that perspective. It sounds correct correct. Our JV exposure, we narrow we cleaned it up quite a bit over the years.
And it's.
Gross rent very small part of our business right now.
Got it okay. Thank you.
Thank you we do have a follow up in Q, that's from Cai bin Kim. Please go ahead.
Thanks.
Just a quick one.
How much of the new leasing.
Or leasing in the development pipeline.
Would you say assist net new demand tenants expanding versus shuffling fees I know you last one tenant to dipalma pipeline, but maybe excluding that one.
I'd say the majority of the deals we're seeing is a net new demand we've got Theres Theres, a Jim indicated I think when when he was talking through some of the demand drivers. There is a lot of investment going on in the supply chain. So there is some consolidation business that that we're benefiting from and I guess in.
A case of dependent that moved out of tumor buildings and the into a larger build to suit.
Was not a total net add to us but.
Outside of the consolidation most of the demand were seeing I'd say would be net new demand.
Okay, and I know that business has always done on a.
Square foot basis, but I'm, just curious if you ever it looked at.
The cost of a real estate to your tenants in terms of cubic square foot I could I would bet the cost per square per cubic square foot is actually not that bad so maybe the rent growth what kind of it's not as high as well maybe we think.
Yeah, Kevin I would make a couple of comments.
It's not unlike some of the coastal markets, where rent is quoted a monthly basis as opposed to an annual basis.
We do have a small number of tenants that are looking at their occupancy costs on a cubic basis, but I would tell you that it is the money it's the minority.
And those are the clients that are using the clear height, they're using the full 36 or 40 foot clear some of them are exploring going beyond that particularly in the infill markets. So.
Well Thats, just math, you know, whether you sort of square foot or the or the cubic foot, but as life is you have probably heard or seen.
Some of the tenants are starting to look more closely at that and finding that to be advantageous to go up as opposed to out.
Yeah, I might just more implicitly not you know.
Forbade I'm fine all right. Thank you.
Thank you very much at this time there is no additional questions in the Q.
Thanks, Tony Thanks, everyone for joining the call today, we look forward to re convening during our fourth quarter end yearend call tentatively scheduled for the same time on Thursday January three 2020. Thank you.
Thank you, ladies and gentlemen that does conclude your conference for today, we do thank you for your participation answers. The 18 Chief Executive teleconference. You may now disconnect.
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