Q3 2019 Earnings Call
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Right into the call.
Projected returns, 7.4%, whereas we estimate a market cap rate and the force.
During the third quarter, we began construction on five developments totaling 930000 square feet Nasser quarter in our development and value add pipeline consisted of 26 projects containing 3.8 million square feet with a projected cost of approximately 360 million.
For 2019 were raising our projected starts to 260 may yet.
Colin commentary on 148 million in starts last year were record. So were excited to again raised the target and to exceed last year's results.
Finally, our activity is spread over 10 different cities. This geographic diversity further reduces risk while enhances our ability to grow the development pipeline on an ongoing basis.
And as a reminder of the majority of our starts are based on the performance of the prior phase within the park.
In fact over three quarters of this year starts or the next building and apart.
As a result market demand dictates, new construction, rather than us pushing supply into the market.
Two outcomes of this approach will one it allows us to manage risk as in most cases were simply re stocking the shelves in many cases the star is driven by expansion needs of in existing tenant in the park and in most of those cases were able to backfill the original space at higher rents.
Secondly, our record number of starts demonstrates the strength of the industrial market I team and our parks year to date, we've been pleasantly surprised by demand levels and the resiliency and our occupancy.
We've had a busy quarter in terms of transactions closing during the quarter had a few after quarter end.
And others, we view as likely transactions prior to year end.
We're pleased with the quality of our investments as well as the geographic diversity, new investments were made or are being made in Las Vegas, San Diego, Dallas Phoenix Greenville in Tampa.
From a dispositions perspective, we had for R&D buildings in Santa Barbara why don't we expect to close within a couple of weeks to others also have funds it rests with a projected fourth quarter close and finally in Tucson tenant as acquiring their building and we expect closing there this quarter also and.
Some while the market a 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.
Brett 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 the strong overall performance of our portfolio at this though 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 $1.70.
<unk> 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 and a physical year for the company.
Also during the third quarter, we closed 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 hundred 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 75 cents per share in the third quarter, which represented a 4.2% increase over the previous quarters dividend at an annualized dividend rate of $3 per share the third quarter dividend would the company's a 159th consecutive quarterly cash distribution to shareholders.
Looking forward.
FFO guidance for the fourth quarter of 29 team is estimated to be in the range of $1.24 to $1.28 per share and for 94 to 498 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 three cents per share to the midpoint of our guidance of our prior 2019 guidance. Our FFO ranges were impacted by an estimated increase in fourth quarter DNA of three cents 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 onetime initial charged to record the immediate accounting implications. These are charges, we would have anticipated occurring in future periods, but with the written policy in place we're 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 range. Other notable assumption guidance revisions include increasing development starts by 60 million increasing API.
Rating property acquisitions by 50 million, increasing value add property acquisitions by 35 million and increasing termination fee income by 250000 due to known fees with opportunities to invest capital ahead of expectations. We continue to take advantage of an attractive stock price and low into.
Just rates, we increase 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 and we anticipate that momentum continuing as we close out the year now Marshall will make some final comments.
Brent industry 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 operate.
Adding environment.
The mix of our team our operating strategy and our markets has us optimistic about the future and I'll be now happy to take any of your questions.
And at this time, if he would like to ask a question again please.
And one.
We do I see you please limit yourself to two questions for persons to allow everyone to ask your questions today.
Star and one.
Two Alexander Goldfarb with Sandler O'neil. Please go ahead.
Hey, good morning down there.
So first question is the external side you guys have been quite busy I Marshall I think you touched on just the competitive nature of the acquisition market, Yes, I notice that you had nothing and now layer or the bay area, but can you talk a little bit more about development because that's really the key to you guys are you seeing you can do.
You 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 that.
Some of those yields erode.
So you just comment.
Sure happy happy to and good morning.
Good question and I right is you're right with land prices are Theres no fire sale land left construction prices.
Rising and then simply as we've developed a little bit in Miami as a bigger component, where the the cap rates are lower but our yield projections, there a little bit lower off the all our development pipeline yields would trend down, but pleasantly surprised weve hung in there north of seven 7.4 kind of in both buckets.
Under construction and lease up this quarter, so theyre thankfully rents are rising.
With construction prices and thoughts on cases outpacing at so we've been able to maintain those spreads and that's about as large a gap between market cap rates and construction hills as we've ever had where we're developing ended up kind of lower seven seven a quarter seven four and the last couple of lease portfolio try.
Then in the mid mid fours so its.
With us thought it would drift down a little bit, but stay certainly well above 150 basis points, but.
As tight as the market is rents have kept pace and offset that.
And really in terms of the amount of development.
I mentioned to I guess, it's touch on that.
Pleasantly surprised a little bit that we've gotten the 260 million in starts last year was a busy year 140 something million and this year, it's really been that we'll get a call from the field or the guys will call and say where about out of space in phase two where we had to call earlier. This week and the comment was we have more prospects than stay.
Base.
So we're going to kick off the next phase. So it's really driven by leasing demand and we've kind of just said its re stocking the shelves were out of this inventory we need a new we need funds from Brent to kind of fund that next round of development at the park.
And it looks like we'll go next.
Feldman. Please go ahead with bank of America.
Great. Thank you I guess just first.
It doesn't kind of the question, but just to confirm and the DNA you mentioned so that three cents was not in your prior range, but it is in the new range. So effectively your guidance would have been three cents higher is that correct.
Yes, good morning, Jamie that's correct. We of course had a three cents beat third quarter, and we would have guided three cents higher fourth quarter, but as I mentioned in the paired remarks, we anticipate adopting a retirement policy just as a consistent means of treating equity awards when when someone retires and that required we had a few employees.
Let me some of those early eligibility requirements. Once is adopted we had to catch up and so yes, theres a onetime three cents charge that we're incurring a fourth quarter. We plan from operating perspective that we basically absorbed that charge and was able to at least maintain our fourth quarter.
Anticipated anticipated range.
And then how does that work for the run rate into next year.
Let me see an agent now three cents lower next year is that again is that an annual.
That's not an annual it would be three cents lower they'll pay some costs associated year to year, but will be much less material and much more year to year comparable from a run rate perspective.
But that would not be that'll just be a lot fourth quarter DNA.
Certainly fourth quarter of 2020, there would not be that amount there. So its anticipated the a onetime ketchup charge.
Okay, all right. Thanks.
And then I guess, just big picture you guys can we talk about how you're shallow they infield product is getting good demand can you provide unlike some anecdotal stories, there or leases examples of leases of why you why your portfolio really is differentiated and why it does seem to be working here and maybe just talk about with why you think it does.
Such leg 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 that at least I was reading the other day, we've signed up thankfully a couple of the leases with Lowe's and some with best buy and home depot and was reading were lower.
Just focusing on them for example, they were saying they were moving their inventory really more from a store base model to a market based model and I'm interpolating too much or assuming too much in that but I think thats, where we pick up one of the examples in Miami and a new development there they signed a lease where.
It's cheaper and more efficient keep white goods as they call it.
Washer dryer refrigerator stove and eastgroup type buildings in the back of the store with up higher retail type rent. So as each of the retailers shifts there model to that supply chain evolution evolves to faster and faster delivery and in these fast growing.
Markets like Miami, or a Dallas or our Los Angeles. The traffic is so bad you really need that infill location near a growing consumer base and so it's almost effectively repricing, some brick and mortar with industrial space and Thats, where were each quarter, we seem to pick up a new tent peloton.
John is a new prospect, we've talked to Tesla people that we hadn't weren't in our portfolio in those aren't signed leases, but just some of the names that kind of pop up from time to time that are tried and true tenants thankfully are still out there and doing well, but will pick up.
Tenant or a customer we typically haven dealt within the past as they and I think we're still early early in in terms of what we see Amazon and lows and home depot I think theres 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 stay.
So are more more at a more cheap basis to deliver quickly.
Jamie the only thing I would add to that is and you guys are good at show of the various stats and portfolios, but we have 59% of our revenue comes from leases that are less than 50000 square feet in size another 25% in the 50 to 100000 square footage.
Side, so more simply said, 84% of our revenue stream comes from tenants, who have leases with us that are less than 100000 square feet in size. So when we say multitenant, that's really like we've said for.
Many years now that's really our.
Bailiwick and that that kind of shows that there.
And those are the size leases there like low is is looking for.
Yes for the most part and we've even seen I think what some of the with Amazon and best buy in some of those I've been pleasantly surprised by some of them smaller sizes that they that they're seeking and markets.
Okay, and then I guess, just as we think about next year.
You've got your you said you development pipelines at an all time high I mean do you think you can be in a position to have a similar size pipeline or larger next year and then similarly on same store you are trending 4.7%. This year I assume you have some occupancy headwinds next year just given your at peak occupancy how do we think about what leasing spreads in rent bumps could do to.
Cash same store next year versus this year.
Sure I think in at least on the development I. If you had asked me earlier in the year.
To give you wants to get to to 60 again I'm confident in our team and I like our parks in locations and where the market's going I wouldn't have thought we'd get there I'm not trying to be coil I'm just not that smart.
Really saw I hope, we can get back to these type levels I think what the market what 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, but hopefully the tenant demand is there and we keep going from part to park to park and running through land quickly. So it's certainly possible wolf.
Obviously come out next call with our 2020 guidance and we fill certainly good about the market and thing where things are going I hope, we can maintain the pace or we'll see where the market takes us.
In terms of same store next year, you're right. It will be we're about as full as we've been ever in the mid 90 sevens, so probably it could see that drift down, but when terms of rent growth if you've seen from us and from some of our peers 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. So I don't see demand slowing down thankfully and I don't see rent growth moderating just yet until there is an economic event.
Okay. Thanks.
Sure you're welcome.
Well go next to John Canny.
Cycle. Please go ahead.
Great job.
So here I'd reference development is re stocking the shelves.
Question for yet.
Martial law you guys have a.
Stunningly low cost of capital how much of your.
Acquisition and development would you attribute to your current cost capital.
I see what do you think your volume would be if you were trading at a 100 instead of.
Hundred $32.71 a share.
Good question and good morning.
I'd like to thank you know, we actually do talk about decoupling.
Stock price or debt cost away I guess week, we you've kind of know and thankfully we've been in a spot where brents been able to ground, some really low interest rates and.
Where we and our stock prices then there, but so we can do more but I've always said I don't want to go buy something and and get the volume there and then in a couple of years. When we have the same colleague John you're asking me what in the World, where we think and when we bought.
X y or Z properties, so try to decouple that as best we can and buy things that we think we some of the assets. We've owned for 2030 years. So I hope we're buying today, we want to own for those same time period. So try to decouple. It does help in terms of spread I mean, we do look certainly.
Some expensive markets like South, Florida, and La San Diego's.
Bay area of Okay, where where do we think our weighted average cost of capital as versus market cap rates, but we certainly also look at the rent growth. We've gotten in those markets are that we anticipate for the next two years. So try to short answers trying to decouple. It as best we can and just does this make sense for our shareholders.
That we buy this unknown it for the next decade or not.
Great. Thank you.
And we'll go next to Bill Crow with Raymond James. Please go ahead.
Hey, good morning, guys.
Commercial you talked about some of those.
Well known.
The retail.
Thats Lowe's home depot, Amazon et cetera.
Is there any difference in the lease duration.
Signing with those big companies compared to.
Maybe your local or regional tenants.
Good good question and not really I mean for the most part. They then about the same stance in terms of kind of within that lease and I hope I'm, not saying some comfortable sometimes wayfair and always Nick just their model is evolving so quickly.
We'll lean towards a three year lease, but I'm seeing them execute leases that are longer than that and are 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 using a new development its longer than that but average lease term, but by and large or the other two.
What's that may have a unique lease term it will see the third party logistics, especially if they are awarded a contract will build want to match the lease term up with their their contracts. So you could end up with a three year term five year term, but for the most part they've been the same and weve seen people a little bit and I think.
Pulled the requirement back in house, but Walmart was kind of as I say that wave that's coming they were looking at multiple small kind of shelf stick with shallow bay kind of smaller spaces and they were I think a lot. So many of the retailers are figuring out do we going or is it going to be order online pickup in store or.
Order online and how that delivered from an east group type warehouse of at 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 than the rest of the world was likely following suit.
Yes.
Okay.
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 to like and we're up.
One of the acquisitions, where we announced was in north San Diego the Rocky point.
North County, and Thats on expense of one and it's just under $200 a square foot and.
I had to talk some of our investment Committee members. So you know Leland.
David off the allege a little bit, but when you look there there's really no to land left you've got camp Pendleton than the North obviously Pacific Ocean West and.
Really no great freeway system running to the Eastern Mountains. So you get into some of those like in La and San Francisco and in Miami, where I think it's less of a factor because there's so little industrial land left if we were in a jacksonville or some of our other markets. It would be a bigger bigger factor here on the edge.
The town I would say cost per square foot should be a.
Really large factor on an 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 welcome. Thank you.
And we'll go next to Craig Melman with Keybanc capital markets. Please go ahead.
Hey, guys.
A couple of questions here I guess to go back to your commentary you guys are definitely seeing more national kind of fortune 100 tenants versus.
More of a regional kind of tenant that you had seen.
Earlier in the cycle on in past cycles, I guess just as.
Your space as a percent of their cost structure is much lower than maybe traditionally where your tenants were.
Your attention really still pretty high.
Rent spreads are good but.
How are you guys kind of changing the mindset of the people on the ground to push even harder on rents knowing that location kind of trumps.
A couple percent of higher rent for some of these newer tenants that you're talking too.
Good good morning. Good question I think we certainly do spend a lot of time talking about.
Rents occupancy all that kind of maximizing NOI certainly on any given given year, even given quarter.
I guess the good news I think at this point in the cycle all of our tenants just about probably 99 plus percent have a tenant rep broker or at least an in house real estate Department and then we'll have the third party brokers typically that we're working with so there's usually I think divestments and everybody we'll know both sides where.
The market rents are and then pending if it's a new tenant or a renewal tenant you kind of know what's your competitive advantage is or how you're space.
We're seeing them. So it's really almost I guess and helps hopefully that Brent knife, both than in the field and Ben asset managers at times I've always thought at its best case, you knew exactly who your prospect or your tenant what their other options were and how your how your property compared to that property and even priced at that property. So I think.
The guys are pushing rents as hard as they can without losing too much I think you can keep occupancy and push rents at the same time, we certainly you save on the downtime and the re leasing cost anti things like that once you lose someone but I think they're pushing rents are hopefully we believe they're pushing rents about as hard as.
I can.
Yes, I would agree with that and used to weigh that all the time in the field and when you put pencil to paper you want to push as hard as you can be pushed to the edge and saying, okay. We're going to lose the tenant if they're really close to what you perceive as a market rent than you only have a few months of downtime to where you can come out positive in much past that from it.
Timeframe over say a four to five year lease period. Then then you lose even if you get a higher rate in the future. So it's something dislike Marshall said, we we look at we push hard on.
And we like to think we're pushing and doing both certainly with the rental increases we've seen in California, we are making a push to get more exposure there to try to get more exposure to some of these really high increased markets, but the Gaz our guys are pushing everyday.
Occupancy and rents.
Okay, I mean, I guess, maybe asked another way what are your competitors talking about couple of years ago rent was never the reason people left today, it's a little bit higher but not high enough kind of when you guys do exit interviews are exit surveys, how often does it rent.
Versus expansion space, maybe they need more than you guys currently have a park or just more than what your your typical sizes.
Yes, good good point, usually at this you're right, it's not rents will push rents as if the kind of Britain office.
Such as we can and in some cases sector I was glad we got that detail. The Tampa acquisition that we got for example is contiguous to an existing park role where in the process of tying it the two together, but that was we lost a national tenant and Tampa simply because we did I won't say simply but we didnt have the land to build and.
Building for them and we've got a couple of other tenants that are outgrowing their space. So you've tried to have that inventory on hand to kind of keep up with demand, but it's usually you're right. It's they've outgrown the space or they've been acquired and they are consolidating with another company or consolidating several locations into why.
One on the outskirts of town or doing some kind of bigger strategic shift as probably by far more the reason, we lose them unless you're just well over market and then somebody it's worth the moving costs.
Just you had mentioned earlier to now that your time to be a stellar as you guys look at the portfolio look at your different market exposures.
How much of the portfolio do you think be cold at this point, where theres just no more growth laughed or.
Theres theres better use of that capital.
Thankfully, it's not that much I guess Paul.
Thank the team that's that's been here, we almost all of it is industrial we don't have really anything meaningful other product types in terms of like office or medical office or anything.
Kind of unique probably where we're aware we've looked at our dispositions is really managing the size of Houston really like the market a lot. We've created a lot a lot of value in Houston over the time, but we realized when we were north of 20%, but that was aligned in the market certainly agreed with US a few years ago and so we will.
Continue we're delivering I'll give the guys credit 200% leased buildings that their finishing construction up there so probably look to keep selling in Houston, and then what we're kind of picking and choosing their good assets in their well leased it's more R&D buildings in Santa Barbara that really are true industrial build.
Things or service center buildings that Weve sold you've seen us sell in Tampa, and Orlando or trying different things. We sold a 50, a couple of 50 plus year old assets that were industrial but they were 100% leased one in Dallas and then one and Phoenix that worked well you and I could on them and they would.
Cash flow, it's just the rent growth in the NOI growth is going to be less than the portfolio average. So that says we try to really think about a batting order and I think we should always be pruning the portfolio from the bottom unless it's Justin absolutely horrible market, but you're right now is a good time to be a seller theres this wallet count.
A little bit likes industrial so we're selling as much as we can as far as fast as we can while maintaining the earning maintaining AFFO dividends all the things like that and trying to raise capital while we havent attractive stock price. So it's a little bit of a three d. equation, which we work at de Leon.
Yes.
Great. Thanks, guys.
Welcome.
Well take our next question from Jason Green with Evercore. Please go ahead.
Good morning, just a question on the acquisition side, how is the better pool changed for call it $15 million to $20 million assets that are you seeing a lot more competition today than you were call it 12 months ago.
Good question it.
Certainly more competition than 12 months ago, but it little bit it with a lot call. It a year ago into the better pool still the same groups that we've typically had although you used to could drop down to smaller assets in that wouldn't be as many institutional buyers and I'd say that certainly change that.
And there's.
I would always there there's groups that are industrial that have an industrial platform or forming an industrial platform that weren't industrial companies that are have been around but really weren't in industrial a few years ago. So every kind of year every quarter, it's not a very well kept secret than industrial has been an attractive sector over the last.
Handful of years and every quarter. It seems like someone else is becoming an industrial read or launching an industrial platform and so that's.
I'd say by definition whats pushed us more into development and into value add and and really even looking at acquisitions Weve Thankfully had an active year, but outside though the airways in Denver everything we've we've acquired or are acquiring has been off market. So it's really been just turning over a lot of stuff.
Phones that if you wait and get a sales package, it's highly competitive even that certainly at the billion dollar plus portfolio pools type thing, but even at the 15 20 million dollar asset size and a major city it will be highly competitive.
Got it and then on the development side.
Yields have continued or at least projected yields and your pipeline continued to be in the mid sevens. We know that construction costs are rising so how have you been able to.
The managed to maintain those yields that just passing on the increases in construction to consumers or something else that we should be thinking about.
Yes, I think again have been kind of waiting for some you know not horrible downward pressure, but a little bit of downward pressure on them for for those reasons, you name and and thankfully as tight as the markets have been the rents have maintained that pace. So we've we've hung in there in the north of seven to kind of seven for this.
Quarter, so knock on wood weaken.
Hang in there and in the meantime cap rates I'd say have been have been compressed in the major markets and maybe that's one thing we've seen in the last 12 to 18 months as cap rates getting compress not only not only being low in the major kind of top five six markets, but in Denver, Phoenix Las Vegas Orlando.
Charlotte.
I won't call them secondary markets, but maybe markets number six the 30 around the country those cap rates have come down because all the capital can't simply can't go to Northern New Jersey, Los Angeles, Chicago, Atlanta, Yes, I would just add to that too that I think it's a testament to our multi tenant our 80 to 100000 square foot buildings, they tend to be less of a come.
Modesty in each of our markets. If we were building bigger box with nothing wrong with those assets, but if we were building those there certainly would be more pressure from a commodity standpoint from a rental rate pressure standpoint. So.
I think if you compare our development yields maybe the peer group for someone that does a bigger box you're going to see that spread because of the smaller tenant size pay a little more in red and little less commodity little less supply in each of those markets as well.
Got it thank you very much.
You're welcome.
Well go next to Manny Korchman with Citi. Please go ahead.
Hi, good morning, everyone.
Marshall you you'd mentioned in one of the discussions about investing.
At the top David off the leverage on some of these valuations. Okay. Yes, if we were to say.
If you were still CEO .
Whether you were there were not.
What would you be doing differently, if anything or do you think that this is just going a little bit market and it's a matter of him adjusting for times.
Yes no.
Good question, and I guess, and David Defense, a little bit I'm, a little bit facetious and I'm as much in Sean just we've seen prices per square foot I'd like to think Davids, certainly chair of our board and on our investment Committee. So I think the difference would be.
Very little or were you know, it's still a team it's not.
You guys don't won't need making the decisions you'd rather be at a teen type thing so David still in the room for us to see prices at $200 per square foot or I, we chased in loss our property and the Bay area. The other day and I could it and we had two or three options in the first one started in the high threes.
Hundreds per square foot I said, let me that I don't think either of us thought you'd see industrial prices, where cap rates and really 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, but even what we bonds.
In North San Diego aware about to acquire North San Diego, we have.
Detailed replacement costs from one of our brokers and so it at 190 something dollars a foot, it's actually below replacement cost and Rexford bought a building within the same park fairly recently and it's an even higher price per square foot. So its numbers none of us ever really thought we'd see so you kind of go in and out here.
You know people that have done it for a few decades ago, you're not going to believe where we're used to being 60 70 $80 per square foot were on now, saying, Hey, Here's here's one that's $200 a foot and I think it's a good deal. We think it's a good deal type thing. So we certainly no major push back. It's just prices you you say well too which is.
The problem that shows were industrials going.
Thanks Brent.
Question for you. So the last couple of quarters you guys have.
Your own internal quarterly guidance from falling quarter.
Can you just walk us through sort of how how your approach to budget things, maybe little bit off there or if trends or just how much better than you are having trouble keeping up with what's actually happening on the ground.
I think it's more of the latter a many that you know each time, we we do a very thorough lease by lease roll up from the field all the way up to the top and then put in corporate expense and just our occupancy is have continue to pace higher than we had anticipated were 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 all operating acquisitions, we've been able to fine several value add acquisitions and from quarter to quarter.
Yes, I don't know as we sit here today at another three three and a half months, we may buy and other value add project or two or an operating project or too.
And so the good thing about at many has made a challenging budgeting is it's not just been one thing it's been bad debts commend little better term termination fees, a little higher occupancy a little higher developments done little better actually you know, it's when you roll all that up and then you wind up being.
A few cents a share ahead and.
If you had told me that we would have been able to beat and raise as.
Has consistently and that the margins we mailed new this year I would have really been skeptical that at the beginning of the year, but it's just been a testament to.
Our strategy in a very strong industrial market and so.
Manny I hope that trend continues into in perpetuity.
Thank you.
Okay.
Our next happy from.
With Morgan Stanley . Please go ahead.
Thanks.
The rent on it.
Well.
Thanks.
Okay, very very high number.
Give us some butter.
Market.
Right.
Thanks Fort Myers.
Hi.
Thank you.
The other mark.
Okay.
Okay.
Okay.
Sure.
Happy to.
But the for amount.
Hum through we're a little bit weaker quality, but.
I think on say, our strongest rent growth markets, we certainly see California, when I say, California, the major markets, Southern California, La Orange County, San Diego Bay area.
And thankfully all of the markets all the major markets that were active then we're seeing good rent growth in the major markets in Texas, and Florida, as well, where where I guess, good or bad where we're not seeing rent growth quite as strong I would say, it's usually the secondary markets, where we don't have much in those mark.
Thats, a Jackson, Mississippi, and New Orleans, Louisiana, some of those markets the rents aren't going backwards, certainly by any stretch, but they're not growing as fast and Thats why you see us or in other product types, where Santa Barbara rents are back about where they were at the peak, but they havent really picked up since then but again thats R&D rent.
It's not industrial rents. So we're continuing to see pretty strong rent growth and really where do you see us placing on capital. It's something we talk about another one when we do that I know, we've 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.
Due to grow Las Vegas, as a market for example arm.
Excited about our southwest commerce and that the land prices are in that submarket above in many cases, where industrial can be developed in terms of where rents are endo vacancy rates about 1.5%.
And there's a lot of new construction in Las Vegas. So we're we're in the southwest Mark Submarket, which is near the airport near the strip, where the new Rader Stadium is being built its going to displace a lot of industrial building. So thats, one where we like the project going in and I think I like it better 10 years from after the Crystal balls.
Hi.
Well go next to Blaine Heck with Wells Fargo. Please go ahead.
Thanks, Good morning.
On the acquisition side, what's the difference in pricing you guys are finding between core deals and value add maybe if you're looking at them on a stabilized yield basis and has that spread gotten any narrower or wider over the past few quarters as other investors, maybe chasing one strategy over the other.
Good good.
Typically and it or.
You add is something I think I'll give Brent credit our first one I can remember I think was in 2016 and and Fort worth and and there we kind of said, we're not taking the construction risk obviously, but we are taking the leasing risk so kind of using really round numbers of market cap rates are four and a half where the last few portfolios.
We've traded in a far development yields were seven and a half and I realize I'm rounding up slightly there versus our supplement then you'd want to be about the metal for value added depends on how much vacancies there and what lead time, we can get on leasing and and we have seen those spreads come in I mean, we're still in the sixs, but.
Given the market strength I would say one thing we've seen as people are less and less afraid may be a 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.
We bought it or not but with all in contact center and the great southwest Submarket, but there was a portfolio that traded there that was partially occupied that had some vacancy that was listed ours was off market and the one that was listed went for about 120 130 basis points below us as what I was told so you are.
We're seeing where it gets listed and out there in the market that people are willing to pay out because they're having a hard time, placing their industrial allocation. So thats why.
We've done better just Weve really spent the last couple of years trying to get boots on the ground and more and more markets and finding things that are off market, where we can maintain those spreads. So it's a we're making good profits and they're probably about the spreads or may be half are probably averaging more like a half to two thirds of what we learn on our develop.
On the yields.
Got it that's helpful and Marshall you touch a little bit on selling Houston assets in one of your peers recently identified Houston once again of one of the markets with potential over supply concerns.
Clearly there is significant differences from Submarket to Submarkets. So can you discuss just on what you're seeing in that market in general and whether you guys have any exposure to those submarkets that are seeing the high levels of supply.
Sure. Good question and I guess, we'll as I mentioned, our we'd like Houston and it's been a good market for us there's probably.
Three main submarkets, where the majority of the new supply as being northwest, where we're active there north where we're active wear world. Houston is for example, about George Bush Airport, and then southeast where we're not but up fuse if I can bear with me through a few stats that you that the mark.
It's 5.6% vacant.
Instruction has been up in Houston, but actually came down this quarter was at 20 million, it's down to 17 million and then really where we fit in that that's a big number and probably as much by Submarket. It's the type building that gets delivered that the numbers, we read about 55% of the new supplies and build.
Things over 225000 square feet and over 70% of the Bill some of the supplies and buildings over 150000 square feet. So most of it is really not aimed is kind of as Brent touched on earlier those tenants 50000 75000 feet and below.
No option year to date again was 17 million under construction that obviously, one all deliver this year, there's 7.3 million square feet got absorbed and per JLL, There's 15, and a half million square feet of active requirements in the markets.
I know Houston makes people nervous, but a couple of other things that we.
Well I think about it it was over 80000 jobs created in the last 12 months and then I was surprised in the last decade, they've added 1.3 million people. So thats a ton of growth for a metro area and there's probably not in any cities in the country that have grown that much population wise, Dallas and maybe a few others.
As I talk about our Houston dispositions were and maybe again.
Our own stats defending the market were 98% leased so happy with those numbers were 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 and and a decade, but also know were just finishing.
Two buildings and thankfully before we could finish them they they lease both of those and that's in that North Submarket.
So kind of.
Thoughts as we've talked about Houston, we like.
Certainly don't want to get in the high teens or even kind of mid teens again, we'll keep developed to this and the sevens and then picked some or other assets in Houston and sell so if you can develop into the sevens and sell at a five rounded or maybe below a five in some cases I like that value creation model and and let the red.
Most of the portfolio keep growing so it's more of them.
Portfolio allocation than a Houston specific I think we'd be doing the same thing if it were Los Angeles Orlando for example, so I know accused and always seems to make people nervous and we'd 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.
Our next question from Jon Petersen with Jefferies. Please go ahead.
Okay. Thanks.
Just wanted to ask a quick clarification on guidance.
Your guidance is 96 eight is your average month end occupancy I think you're 96 nine if you average the first three quarters and you're 97 or at the end of the third quarter, So that would imply a modest drop.
Into the fourth quarter is that just conservatism or there's some expected move outs in the portfolio.
And I guess it will prove it fits conservator are not John but you know third quarter, we really took a nice.
Bump up and our occupancy for for example for first quarter. We were 96 eight second quarter 96, six and then we swung up to 97, one this quarter our fourth quarter same store budget is showing 96, five which is pretty much in line with the first and second quarter that obviously shows a little bit of declined from third quarter, but.
I think part of that May play into budgeting, we don't have any large known specific move outs that we're trying to you know that's dialed into that so we will see if that third quarter was another bump up and we can hold that or if that will come down slightly our budget shows it'll come down slightly.
Okay. Thanks, and then.
What do you guys seem from municipalities in terms of property taxes and what there.
What they're pushing for and warehouse that these days, obviously valuations continue to rise should we expect that to be up pressure on on margin at all.
Yes, short answer biggest civil them and they obviously values keep rising and municipalities or.
Noticing that and we do appeal, our taxes are protest where appropriate thankfully, we're 98% leased and are almost all of those 99% of the 98% or triple net where that gets passed through so short term were covered in terms of property tax increases, but you're right. They continue.
Due to drift higher and higher in certain markets, though there are a little more aggressive than others in terms of pushing those.
Okay and then.
In terms of incremental investment what are your thoughts on kind of debt versus equity given where your stock prices and your cost of equity would you.
I guess lean toward over Equitizing acquisitions versus historical.
Investment standard.
That has been our trend lately and we like that we have the option of both and we feel very good about a low interest debt and very good stock price.
Relative to any internal calculation of in a b.
I will be primarily driven I would remind the main reason we've raised much capitals that we've been able to generate the guys in the field in the generate some much opportunity, but as we continue to go up 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, but we'll still supplement that with.
Some debt, we don't have any large debt maturing anytime soon so that will have something coming at us quickly where it might prompt us to go out and do debt more quickly than.
Then we would if not but so what you'll see us.
Both sides and probably little heavier on 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. It is it fair to say that it yet that sub market as a greater determinant of how rents have been trending obviously mark.
Where there's been a lot of supply there to be a lot of land, that's where a lot of large boxes are built that small box as by when do as well. There are you seeing that across your markets as well generally it sounds like Keith and that kind of the game.
Yes, I'm trying to probably okay, and even in Houston, what we typically see is we'll look at supply and I'm answering your question correctly by them and that probably 80, 85% of that supply isn't really competitive it's usually larger buildings either.
It's a lot as you typically a larger institution, so they've got canceled or place, but even the local regional players will have a.
Heitman ADW Clarion kind of the list of names as their partner and therefore, they're not there are competitive developments, but it's usually larger box and then these infill sites and certainly what we're reading from CBR ease research and things like that that it's the smaller infill science. The rents are are growing fee.
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 and those type because there is going to be less new product delivered an infill sites. It. If you said, what certainly worries us long term is finding the land to keep feeding the development pipeline, but.
Right now it's also help helping keep supply in check on helping us push rents. There. So it is a little bit submarket by Submarket and Thats why we like being infill and then even infill kind of on I guess, what you might say the right side of town, where that where the population is growing and where the consumers are that are living.
And thats pretty sticky compared to a logistics chain from China to Orange County for example.
Sure just a quick another quick question, it's related to Texas.
It looks like.
Releasing spread that.
Accelerated in Dallas, and San Antonio So just wondering if that was it the lease issue our rents going faster in those markets.
Probably in any given quarter I'd say, it's just a mix of leases, but we've been happy and both of those markets Dallas is.
What I can give us the numbers it was 100 plus thousand.
New jobs 116000, new jobs in Dallas for the year ended through August .
It is.
And we are spread out from Fort worth the northeast Dallas, So it feels like driving in southern California that you will drive 50 miles and still be in the same city more or less but it as a really healthy strong economy and a lot of.
These relocating there so I don't think either one of those should slow down and and really Texas. If you. If you dug in and said how is your development pipeline gone from where you started I'll admit we were at 140 million engaged 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'neil. Please go ahead.
Oh, Hey, and thank you for taking in Iran has been a long call.
Marshall just big picture.
Everything you've talked about the call is incredible demand off from tenants added it seems like the trade war and the issues that we hear about certain either manufactures or producers or whoever.
Having their business get impacted doesn't show up at all in any of your portfolio. So is it just a matter that the market is just so deep that the tenants that are being or that the people who are being hit by the trade War just have zero overlap or is it that yes. They are your tenants are being impacted.
By the trade war, but that Hasnt impacted there needs to expand their space and take more and more pay more and ready to be closer to their tenants. So just trying to rationalize the headlines that we read versus the results and the commentary that you guys provide.
Yes.
Good question and I'll Heartland to answer scientifically I think it's more the latter and that was 1600 tenets something our our top 10 or just 8% of our revenues. So we have the.
The lowest percent of kind of tenant concentration of the industrial rates I have to believe somebody or some of them are being affected by the trade wars, but also hope that within that as things continue to shift to industrial and we're a low cost provider if you're delivering goods.
End of these major cities or maybe they are being impacted and we're also were offsetting it with 116000, new jobs in Dallas type thing that if you're.
If your business, it's typically local or metro area deliveries that if you're there with a growing pie you could lose some of your customers, but were placed on just with the growth in Orlando or Dollarsor. Austin for example, so hopefully it's got to be there, but hopefully it's being muted by the kind of that evolution in the.
Supply chain as well as growth in Sunbelt markets.
Okay. Thank you.
Yes.
Well take our next question follow up from James Feldman with Bank of America. Please go ahead.
Hi, my questions answered thank you.
Thanks, Jamie.
So there are no further questions in the queue at this time I will turn call back over the speakers Marshall for any closing remarks.
Okay. Thank you thanks, everybody for your time, we relative as busy its 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.
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