Q4 2019 Earnings Call

And to answer session to ask a question during the session you'll need to press star one in your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would only to have the copper over to speaker today, Mr. Art Harmon Vice President of Investor Relations I'd marketing. Thank you. Please go ahead Sir.

Thank you my area.

Everybody and welcome to our call before we discuss our fourth quarter and full year 2019 result, an additional 2020 guidance. Let me remind everyone that are coal may include forward looking statements as defined by federal Securities laws. These statements are based on managements expectations plans estimates of our prospects they see things maybe time sensitive.

Accurate only as of today's date Thursday February 13 2012.

Yes, no obligation to update our statements or the other information we provide.

Actual results may differ materially from our forward looking statements factors, which causes are described in our 10-K and other ASCII file.

You can find a reconciliation of non-GAAP financial matters discussed in today's call in our supplemental report and hopefully.

Supplemental report earnings release, and that's easy filings are available it first industrial dot com R&D investors.

Our goal to begin with remarks by Peter but certainly our president and Chief Executive Officer has dropped mutual our chief Financial Officer, After which we'll open it up for your questions also on the call today or two ago, yet or Chief investment Officer, Peter Schultz Executive Vice President, Chris Schneider, Senior Vice President of operations and Bob Walsh.

<unk> capital markets massive Matt, let me turn call over to Peter.

Thank you work and thanks to everyone joining us for the call today.

We finished 2019 with an excellent fourth quarter to cap off another successful year.

For 2020, we expect more the same leveraging our platform to generate more cash flow growth and value creation.

Occupancy at year end was a very strong 97.6% and full year cash rental rate growth was 13.9% a company record.

Both of these metrics reflect continued strong tenant demand for logistics space and the great work of our leasing operations professionals.

We developed a number of high quality facilities at strong margins and replenished our pipeline with the acquisition of several exciting news sites in target markets, particularly Miami.

In addition, we continue to shape our portfolio to drive long term growth as we further increase our capital allocation to higher barrier markets.

Before we get into the specifics of the quarter. Let me provide you with a quick overview of the national industrial market.

According to see Barry Econometric advisors, new supply for 2019 was 224 million square feet compared to net absorption of 183 million.

This marks the first time since 2009, new supply exceeded net absorption.

Despite this our outlook for 2020 is similar to that of 2019.

They can see has remained low and access new construction continues to be concentrated primarily in larger format buildings in certain submarkets, most notably Atlanta, Dallas and Houston.

We continue to see new tenant requirements from a range of industries across all of our markets.

So the overall environment remains very favorable for strong demand and rent growth.

That's also the case for our portfolio.

We've signed leases for approximately 60% of our 2020 rollovers at a cash rental rate increase and more than 9%.

Included in these results is the long term renewal of our largest roll over a 675000 square foot single tenant building in central Pennsylvania.

Our expirations for the balance of 2020 are fairly granular.

For the full year, we expect cash rental rate growth of approximately 10% to 14% on our new and renewal leasing.

Turning now to a few highlights from our development program.

In the fourth quarter, we placed in service seven developments totaling 2.1 million square feet with a total investment of $165 million included in this total is our 556000 square footer at first there were a commerce center in Denver.

As evidence of the strength of this market, we signed a long term lease for 100% of the space, which commenced shortly after completion of construction.

In total for 2019, we placed in service 13 buildings totaling 4.4 million square feet with an estimated investment of 325 million.

These assets are 91% leased with an estimated cash yield of 6.7%.

This represents an expected margin of 40% to 52%.

At the midpoint that would translate to a little over one dollar per share in any of the accretion.

At year end, our pipeline of completed developments and lease up in under construction totaled 3 million square feet with a total estimated investment of 277 million and a projected cash yield of 6.9%.

They are 36% lead and have an expected margin of approximately 40% to 50%.

This pipeline includes a few new starts in the fourth quarter on both coasts and in Dallas.

Starting on the West Coast first Redwood Legit Logistics Center too is a 72000 square foot building in the inland Empire West with an estimated total investment of 12.6 million.

Completion is set for the third quarter with a cash yield of 5.2%.

In Los Angeles, one mile North of the Port of long Beach, we acquired a 1.8 acre site for $6 million, it's at least as a surface lot within in place yield of 5.4%.

In northwest Dallas, We broke ground on our 435000 square foot Multitenant building at phase two of our first part 121.

With an estimated investment of 31.2 million and a targeted cash yield of 6.7%. This building is 77% preleased.

We expect to complete this development in Q3.

Moving across the country to South, Florida, we've been very active and expanding our development pipeline there.

We broke ground on our first Cypress Creek Commerce Center, a three building park totaling 374000 square feet on land for which we have a 50 or ground lease.

Our estimated total investment for the buildings is 35 point sixmillion with a targeted cash yield of 7.1%.

And completion is slated for Q4.

We also acquired seven acres of land and broke ground on first Sawgrass Commerce Center, a 104000 square foot or in Broward County.

Estimated investment is 15.3 million with a targeted yield of 5.8%.

Cliches is expected in Q3.

On our last call we discussed our 19.6 acre covered land investment in South, Florida for 19.8 million.

Recall this site has three below market ground leases that are currently yielding 3.5%.

We also added another nine acre site in the Miami market for eight point, Sixmillion, which we can develop 131000 square feet.

Thus far in the first quarter of 2020, we're very pleased to announce the acquisition of a new land site, we call first Park Miami.

We acquired 63 developable acres and medley a great infill location Orlando is difficult to come by.

Our acquisition price was 48.9 million and we can build 1.2 million square feet in total on the site.

We will begin the first phase of development. This summer with Threed multi tenant buildings totaling approximately 600000 square feet.

Total estimated investment for these three buildings is approximately 90 million, reflecting land predevelopment and construction costs.

Our target stabilized yield is in the mid fives.

For the year building acquisitions totaled 542000 square feet for $67 million, well, then expected stabilized cap rate of 5.4%.

So far in the first quarter of 2020, we've acquired our first building in the East Bay market of Northern California.

The property is a 23000 square footer in the I hate 80, Hayward Submarket purchase price was 4.9 million and are expected yield is 5.3%.

Moving to dispositions.

We completed 155 million of sales in the fourth quarter, comprising 3.6 million square feet and one land parcel.

These sales were consistent with our ongoing portfolio management efforts that support better long term cash flow growth.

With these sales are market footprint has significantly changed.

The largest portion of these dispositions came from the sale of substantially all of our Indianapolis portfolio, which totaled $98 million and 2.7 million square feet.

Other notable sales included two buildings in Saint Louis totaling $13 million and 245000 square feet.

Well just one building remaining in each of these markets. We've moved those properties to the other category in the portfolio reporting section of our supplemental.

Thus far in the first quarter, we sold 226000 square feet in Tampa for 26.5 million.

With this sale, we've now effectively exited the Tampa market with just leased land remaining there.

Our efforts in Florida are now focus in the South, Florida and Orlando markets.

[laughter], given the leasing progress and rollover status of our portfolios in each of these three markets. We felt the time was right to further simplify our market exposure and redeploy these proceeds into higher rental growth opportunities.

For 2019 dispositions totaled 261 million and comprised 5.2 million square feet and for land parcels.

These figures exclude the sale in Phoenix recognized for accounting purposes in the third quarter of 2019 that is scheduled to close in the third quarter.

For 2020, our guidance for sale is 125 to 175 million.

As is typical we expect the majority of 2020 sales to be back end loaded.

No. This guide this guidance does not include the sale of the Phoenix asked that I just mentioned.

Based on our strong 2019 performance and outlook.

Which Scott will discuss shortly our board of directors declared a dividend of 25 cents per share for the first quarter of 2020.

This is a dollar per share annualized which equates to an 8.7% increase from 2019.

This dividend level represents a payout ratio of approximately 64% of our anticipated at FFO for 2020 as defined in our supplemental.

Another note on a AFFO.

Our last Investor day in November of 2017, we discussed our opportunity to achieve adjusted funds from operations of 200 million and 2020.

If we achieve the midpoint of our overall guidance for the year.

We will deliver on that opportunity.

This would represent compound annual growth of 9% over the period.

With that let me turn it over to Scott to walk you through some additional details on the corridor and our 2020 guide. Thanks.

Thanks Peter.

In the fourth quarter diluted EPS was 76 cents versus 40 cents, one year ago and for the full year diluted EPS was $1.88 cents versus $1.31 cents the prior year.

They read funds from operations were 45 cents per fully diluted share compared to 42 cents per share in for Q2 thousand 18.

Excluding a penny of income related to insurance settlements for damage properties.

For Q 18 at that FFO was 41 cents per share.

For the full year, they read AFFO per share was $1.74 cents versus $1.60 cents in 2018.

As Peter noted occupancy was 97.6% down 10 basis points for the prior quarter.

In the fourth quarter, we commenced approximately 4.1 million square feet of leases.

757000 square feet, where new.

1.3 billion were renewals and 2.1 million square feet were for developments and acquisitions with lease up.

Tenant retention by square footage was 81.4%.

Same store NOI growth on a cash basis, excluding termination fees was 2.1% and for the full year 2019 cash same store growth before lease termination fees was 3.1%.

Cash rental rates were up 9.7% overall.

With renewals up 8.2%.

And new leasing 12.4%.

On a straight line basis overall rental rates were up 20.4%.

With renewals, increasing 18.5% and new leasing up 23.8%.

For the year cash rental rates were up 13.9% overall, which is a company record and on a straight line basis, they were up 26%.

Moving onto a few balance sheet metrics.

At the end of for Q, our net debt plus preferred stock to adjusted EBITDA is 4.6 times.

At December 31st the weighted average maturity of our unsecured notes term loans and secured financings was 5.8 years with a weighted average interest rate of 3.9%.

These figures exclude our credit facility.

Moving onto our initial 2020 guidance for our press release last evening.

Our neighbours at the FFO guidance is $1.77 cents to $1.87 cents per share with the midpoint of $1.82 sets.

Excluding the penny per share of costs related to severance from the closure of our Indianapolis office and costs related to your projected Vestings equity awards for retirement eligible employees.

FFO guidance is $1.78 cents to $1.88 cents per share with the midpoint of $1.83 cents.

The key assumptions for guidance are as follows.

Core and average in service occupancy for the year of 97% to 98%.

We anticipate first quarter occupancy will have a typical seasonal dip which could be as much as 75 to 100 basis points.

Our bad debt expense assumption for 2020 $2 million consistent with last year's assumption.

One of our largest tenants pier one imports has been in the news lately.

Our guidance assumes that pure one we'll continue to occupy or 644000 square foot facility in Baltimore for the entire year. As this facility is a critical part of their supply chain and I note that the our current on their rent.

Also for your information the expected at the FFO from the least appear one for the period of March.

Through year end is approximately $2.5 billion.

Same store NOI growth on a cash basis before termination fees is expected to be 4% to 5.5%.

And our cash same store metric for the first two quarters is expected to be higher than the remainder of the year due to the benefit of burn off a free rent related to developments.

Our guidance range is $31 million to $32 million, which excludes a penny per share a severance costs from the closure of our Indianapolis office and costs related to your projected vesting of equity awards for retirement eligible employees.

Please also note that besides the normal annual increase in expenses.

She also includes incremental costs related to a new compensation plan. The compensation Committee put in place in 2020, which is more tilted toward total stock return than the prior plan.

Guidance also includes the anticipated 2020 costs related to work completed.

An under construction developments at December 30, Onest, plus the plant start a first park Miami.

In total for the full year 2020, we expect to capitalize about three cents per share of interest related to our developments.

Our guidance does not reflect.

The impact is any other future sales acquisitions or new development starts after this call other than the Phoenix sale and the expected started first park Miami, We just discussed.

The impact of any future debt issuances debt repurchases or repayments, except the payoff of $15 million of secured debt in the second quarter at an interest rate of 6.5%.

The impact of any future gains related to the final settlement to insurance claims from damage properties.

In guidance also excludes the potential issuance of equity.

Let me turn it back over to Peter.

Thanks, Scott before we open it up to question let me. Thank the entire first industrial team for their tremendous efforts in 2019, delivering outstanding results and positioning us for growth in 2020 and beyond.

We're excited about our new developments through which we can serve the logistics needs of our customers, while expanding our portfolio in key markets and creating value for shareholders.

With that operator would you please open it up for questions.

As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound key please standby well, we compile the Kennedy roster.

Your first question will come from Craig Mailman with Keybanc capital markets. Please proceed with your question.

Hey, guys.

Scott I think I heard you say, two and a half million enough AFFO for pure one from March to December is there any reason why you excluded one Q.

We already collected in January and February is payments, Craig So, we basically still need to collect marks through December.

Gotcha, Okay. So it's it's pro rata, though right. If we just wanted to the gross up for the other two months.

Yes, you can take two and a half million divided by 10 and Natur monthly amount you couldn't extrapolated any any way you want for the year.

Okay perfect.

And then.

Given you any indications I know I think in the past you told us that they adapt fulfill the Canada the out of that warehouse I mean are they using all the space kind of what what's your conversations going with them.

Greg Good morning, as Peter So they continue to fully occupied the building.

And it's apparent to us that they've consolidated more operations in there.

So they are quite busy they also have been hiring additional people.

Your next question will come from Rob Stevenson with Janney. Please proceed with your question.

Good morning, guys cash rent growth on the 275 leases you did a nine team was close to 14% versus.

Seven 8% over the prior three years anything abnormal at the end of the day about the Twoq 2019 leases or is that just reflect the strength of the market today and are you expecting 2020 to be more on the seven 8% range. The previous three years or is this 19 level something that can be replicated again in 2020.

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Hi, This is Chris if you look at.

I was very strong we're looking at.

Rental rate increases of 10% to 14%.

Youre down a tick from 2019 goers bookings is very very strong rental increase.

In 2020, yes that tend to 14% is for 2020 and Thats, what we just mentioned in the script so as Chris mentioned.

Down two percentage points from from 2019 levels would still very strong double digit.

Okay. So there's nothing to abnormal about 19, though in that number is it sort of pulls you down well, that's just where the market is today.

Thats, where the market is today markets are strong and the mix today year.

Okay and that you guys have done a good job of Backfilling. Your land Bank again in 2019, another 200 million or so after closer to 300 million in 2012.

In 2018, you talk about how you see the land market today versus last few years in terms of pricing and availability in your target markets and how willing are you today to buy land that may take significant time to get through the entitlement process.

So I'll start with that and then kick it over to Jojo right. Now we have about 200 million at book of land. There's no question land pricing is going up certainly in the higher barrier markets, it's going up significantly.

So far rent growth is mitigating some of the pain from the higher land cost.

And we are especially in California really focused on a unentitled land Jojo you want to talk about.

Sure in terms of so Peter answered yet so there. The the then price appreciation question in terms of our willingness yes, we have a local team at boots on the ground, we're always looking for additional land opportunities for future growth.

Of course, when we look at these deals we got to have to maintain our spreads and thats. The financial criteria that we will stick to and that basically we compare where rents are going bizarre that pricing in terms of.

Taking time, that's we've done that for the last 10 years in some markets. It takes 18 months to 24 months entitled are hit ratio and entitlement has been 100% and of course before we take quantity site for those areas, where he and I entitlement process pretty significant we do cuiab process with me.

The demand is about lease we meet with our consultants to increase the certainty of those entitlement.

Okay. Thanks, guys.

Your next question will come from John Guinee with Stifel. Please proceed with your question.

A good quarter good guidance.

It looks to me like you're trading at a four four implied cap and over 100 kind of square why on Earth wouldn't you raise equity.

Yes, Hey, John It's Scott when you when you looked at our sources and uses in our leverage levels were in very good shape. So let me walk through where we stand today.

We're projecting in 2020 about $170 million of development spend that's just for developments in process at December 30, Onest and the first part Miami start that we mentioned in the script.

And with our sales proceeds that we're expecting this year our midpoint guidance is about 150 million and then John also remember we expect to close the Phoenix sale in the third quarter, which is another 55 million. So our sales proceeds Arctic and excess of what we need for development, we're going to retain about 70.

$1 million of excess cash flow after dividends and Capex. This year in our Leverages at 4.6 times. So we're very good shape from leverage liquidity point of view.

John what we'd saying we've been consistent with this for the last several years.

We would consider raising equity if we had an excess of investments that we're going to be able to cover by those sources I just mentioned and we raised equity back in 18 17 in 16. They were used to fund investment primarily spec development and we bought a lot of folks on this call through our pitch books, we thought it was a very good use of.

Capital because of the yields we were getting on the development margin. So long story short in good shape now as we stand today, John if something happens where a pipeline loads to a level, where we need equity will consider at that point in time.

Well done Okay, just curiosity it looks like you John.

You're welcome [laughter].

Bravo.

Looks like you sold Indianapolis at about 36 Bucks, a foot and Saint Louis at 53 Bucks dollars a thought if I'm doing my up.

Math correctly, what what are those assets look like at 36 and $53 a square foot.

So John it's Peter Schultz in and can be add but two of those assets were in two parts and the price per pound is largely a function of the rents in that market.

Would you know is a tax abated markets. So the growth rate there is somewhat minimal but these were.

Older lower cash flow growth.

Multi tenant mix of ceiling heights.

And functionality and our team did a great job getting the occupancy to as high as it's ever been and securing leases for terminal as Peter said in his remarks, we thought it was a good time to sell those assets in particular had been occupancy challenge for a long time the team got them up over 99%. So that was a big help.

That's where those rents below $2 net.

In one of the buildings yes.

Wow, Okay. Thanks, a lot.

Once again as a reminder to ask a question you will need to press star one on your telephone. Our next question will come from Eric Frankel with Green Street Advisors. Please proceed with your question.

Well thank you.

I just wanted to circle back on your investment decisions. This quarter. So maybe just walk me through just your your thought process on exiting.

As in Indianapolis in more detail and and how you're thinking about other market potential market exits over the next year or two and.

And then not be South, Florida, I know you want to have a little bit more coastal market exposure, so you're kind of making a pretty big bet on self lot or maybe good so walk us through what you're thinking.

Okay. So that's the first question you know Eric our program is always to manage the portfolio into divest of lower growing assets and redeploy that capital into higher growth opportunities and naturally in some markets overtime that means our footprint is going to shrink and in some cases go to zero like it just in Indianapolis Saint Louis.

Tampa So I.

I wouldn't say that the commentary on the markets as much as it is if those were the assets that.

We felt were time to dispose of because of certain leasing status that we achieved and then the future outlook for rent growth.

With respect to Miami.

That is a fantastic site.

Very infill.

Rents are growing very rapidly in Miami and in medley market and land is very very difficult to combine so we're excited about that opportunity and Joe do if you got anything else you sure I mean, that's.

Yeah I was just sites add you know our view on.

Hi, Andy market long term above average population growth, which we think will drive.

The higher than average employment growth and will drive a little bit higher consumption growth, which all grade for distribution.

And we think you know and at what we're we're at the mid five yields that's a good margin over what product would sell for so all in all for our financial basis from a submarket long term view basis.

We like that we'd like to invest in the lab and that's a that's a four catfish market. So up to 35 plus percent margin that mark is very strong.

Okay, and maybe just circling also circling back to what John Gotti said is about in terms of how you're thinking about raising equity, which I think you've you've explained before it's good to hear it again you could you talk about your dispositions, obviously that also funds your investment activity, but that seems to be more opportunistic in terms of disposition is that correct.

I hope you have a really good leasing year in them and a again in some markets, where maybe some of the assets you're are lower growth it.

It could be likely that your disposition target could be high again, if we can really really successful.

Well were 97.6% leased overall, so generally speaking the assets that were looking to dispose of this year well leased.

Yes, yes, I would I would say, Eric I think you're right. If we do see other opportunities, we're able to get great pricing at other sales, we might sell more than our $150 million mid point.

We will get proposals from users that we didnt expect that are that are really strong and we take up.

In fact, many of the sales that we do our to users to 10 31 buyers into local.

Net worth individuals so.

Programs.

Yes, it's a.

As an asset by asset portfolio management, it's something that we do a beer area as you know talk about it and we will continue to do this and we see weekend sell or lower growth cash flow assets and reinvest a higher growth we'll do that.

Okay. Thanks for the input.

Our next question is from Rich Anderson with SMBC. Please proceed with your question.

Thank you and good morning, and great quarter.

Particularly impressed with the same store guidance for 2020 significant acceleration off of 2019.

I'm curious, where that's coming from how much of it is a free rent burn function.

And how much of it is sort of just real.

Real good rent growth coming off of it as you mentioned very high occupancy.

Hey, Rich, it's Scott same store is a little bit easier this year than it was last year. So in general the construct is going to be a little over 2% is from rental rate bumps a little over 2% has to do with increase in rental rates on new and renewal leasing.

A little over 1% of that has to do with free rent burn off a big piece of that is our first Andina Logistics Center development that we placed in service at the end of 18.

And then a slight offset to that of about 50 basis points is our increase in our projected amount of bad debt expense. So that gets you around the 4.75% midpoint and then keep in mind was one of reiterated again that assumes that pure one stays in pays until they see.

2020 in this in the space that we discussed in her script, okay, great in terms of dispositions.

One thing or if that's true about you guys is the concentration in southern California, and and you know and you're now budding interest in Miami.

I'm wondering if southern California, despite a strength.

Becomes an interesting place to monetize to sort of balance out the portfolio a little bit because because that concentration you know is sort of somewhat striking relative to the rest of your markets.

Yes.

Our view first of all.

We were very very sad about our.

Allocations to.

Born yet what are the things. So Cal is the largest market in the U.S. right now in terms of a home would you use industrial product. It also bose the highest rent growth and one of the largest consumptions zones to us we think that will continue and one of the things that will allow that continue is at California has.

The hardest entitlement process in the U.S. and so if you put that together, we will continue to see constrained supply and and continued high rent growth, we like Miami alone because it does not share as much as a land constraint or in Thomas Southern California, but it's getting.

Close and the demographics in Miami is very very good. So overall, we you like you know.

We like our exposure in California, and again, but we will continue to look at it asked by asset we want to make sure. We have the margin in every additional investment we may take.

Okay, Great last question for me.

What are your thoughts in 2020 about turnover how does it how does that compare to 2019. If you can read if I can get a recollection there and also what's the what's the sort of the mindset of investor Im sorry of tenants that do choose to leave visit driven by.

You know rising rents or is that sort of a rounding error issue to them and that's not necessarily the reason why they they go someplace else more about just growth in their own businesses.

Yes, Chris I'll, just touch on the retention you know we've been averaging right around it is 85% than the last three or four years.

We're expecting something similar in 2020, 70% to 80% and this was a very consistently done the vast I'll turn it over to Jojo.

It's about the.

In terms of overall the cost structure Ren I still comprises a very small amount of any business. This logistics costs. So stay still raised 5% to 7% despite rising rents.

In cost transportation cost the labor cost events will increase as well so as a proportion real estate has not moved significantly higher as a percentage so when they will.

It's usually because of today's market is used to be because although we supply chain change because of their methods the distribution of fulfillment and oral gross.

Okay, great. Thanks very much.

Our next question is from Dave Rodgers with Baird. Please proceed with your question.

Personally I think you should have ended the call after John Guinee said, well done, but that's just me.

Yes.

Right now.

[laughter].

And you would tend to 14% that cash spread that you guys gave guidance too can you talk about that by size range and when you talk about kind of the credit loss that you build then what you really haven't experience.

Are you seeing that more on the large tenant side or the small tenant side and how do you feel about kind of that breakdown.

If you look at.

Overall by size.

Last year, but a 14% if you look at the kids under 200000 square feet. We saw about 200 basis points higher so we're seeing a little bit higher rental rate increases in the.

The smaller.

Little bit smart glasses, and they David a bad debt expense, it's been I think about a half million Bucks on average the last several years per year and it's been it's mostly the smaller tenants, that's causing that bad debt expense. So I'd say 100000 square foot or last into might even be smaller than that.

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Thanks for that and then I guess acquisitions, obviously I didn't see any in the guidance and cap rates have really compressed is there anywhere were acquisition still makes sense for you I think Peter you detailed a a quite small acquisition about $4 million on the East Bay just to enter that market, but are there any is there anywhere where you see acquisitions and the potential use of capital in that direction or will everything just be funded and delay.

And in development.

Acquisitions are definitely part of the opportunity set for us, but not in huge numbers you will still continue to see the bulk of our new investment go into new development.

But we do have our boots on the ground across the country and we do from time to time Ferret out some great acquisition opportunities where they haven't.

For one reason or another the owner isn't looking to E Bay the asset. So we're typically not going to be competitive in a really broadly auction situation, but.

From time to time, we can find good acquisitions that are that are broadly marketed.

I know you guys will typically talk in terms of margin, but in terms of that spread were where are you comfortable kind of buying versus that development spread today.

Well on a development thread you know, we're still targeting 100 to 150 basis points.

We've been achieving it sitting on some markets is tougher, but on a portfolio basis or should I say on an annual basis, we invest capital we're achieving it on average.

And on acquisitions, it really just depends on the package it depends on the opportunity for rent growth what land values are doing in that market.

Because forward looking not only at the initial profitability, but the total return.

Got you then to clean ups for me one severance in the first quarter question Mark and then the second one was first Joliet did you could comment on leasing activity, there and maybe I missed it costs severance is the first quarter Dave.

Turning over to Joliet, we've got a 148000 feet remaining out of that 355000 square foot building, we have showings and activity, but we don't have anything to report yet there is basically 60% leased today and I just want to highlight that does that leasing came in early you know as you know in a development we use it in budget one year downtime.

And so that 60% leasing there came in pretty early.

Thanks, guys.

Thanks, David.

We do have a follow up question from Craig Mailman with Keybanc capital markets. Please proceed with your question.

Hey, guys.

Just look it up to sales activity or last three years, I think you're about 725 million an average cap rate of about seven cap.

Just curious how much more of those higher cap rate assets do you have in the portfolio.

At you're going to need to get rid over the next couple of years.

Paul.

Craig Heights still I mean, all our assets are performing well if you look at occupancy and rent growth and we project red growth in all the markets that we're in because our portfolio Greenfield, but lets you will find us continue to do well we've been doing this for the last 10 years is that we portfolio managers as part of.

Our business. So every year, we will look at every asset we will project cash flow growth and we will see hey, you know what it is something that.

You can sell the great value and reinvest and use that a source of proceeds to fund our new investments. So we will always some sales I mean, that's part of the portfolio management, we we have committed to do.

Yeah, we take a new investment decision on our assets every year and that's how we come up with the buckets that we're going to dispose of.

Right, but I I guess I'm, just trying to get that if we're looking kind of that that's what do you guys have done from a portfolio.

Transition kind of standpoint, how much of these kind of older vintage higher cap rate assets are laugh. Because these are primarily used to finance development in some cases, if you're building Miami to five and a half compensation.

At a seven cap, there's some initial dilution.

Yes, I would say that will keep keep up well first of all obviously in our supplemental you can see where we own real estate, but as important you know the higher cap rate assets tend to be more capital intensive and so the ETF over the cash flow from those assets is.

And this for in the fourth quarter for example in the mid fours and we're taking that capital and we're putting it into new development said, five five and a half plus and new developments don't require capital for a long time, so it's actually cash flow accretive anup and value accretive to make that exchange.

Okay, great. Thank you.

Again, if you would like to ask a question you will need to press star one on your telephone you do have a follow up question from John Guinee with Stifel. Please proceed to put their question.

Great.

Technical question in this day in age do you think you can 10 31 exchange your dispositions into development or do you have to do it into.

Income producing assets and then the second what's the status on.

Your land up at Park 94, North of Chicago.

John It's Scott ill take the first part of it you can 10 31 your sales into the land piece of it. So you definitely can do that.

If you wanted to you could also set up a reverse exchange where are you titles the land within an intermediary and start developing it you can get more full value doing it that way, but when we've done tenthirty ones in the past, we've just done operating properties and land to offset the gains from sales.

When it first park 94 as you know we have two buildings that are 100% leased.

But basis in that land is about a buck of foot and you know, we're we're entertaining discussions up there on a regular basis about built to suits et cetera. We just don't have anything to report right now.

Is that a submarket you would goes back or is that something you'd only do a build to suit.

We would consider both.

Great. Thank you.

Our next question is from Bill Crow with Raymond James. Please proceed with your question.

Good morning, guys.

Peter is there a point.

At which the absolute stabilized development deals.

Would become more important than the spread to existing assets.

I I say that because you're talking about developing to.

Mid and low fives.

And is there just a point at which.

The risk is too great.

Well the biggest risk in development in our in our space is obviously leasing because typically we don't have the same risks that you did building an office building or a shopping center and a close and so.

So and we do get certainly environmental challenges on the risks side, but it's mostly leasing.

If what you're asking as G., if you're trading at a three something capital one build that.

Hi, three cap that that's.

I don't know the answer to that question it well I mean, it isn't the risk also the second lease.

I mean, as we as we think about how ecommerce and everything else could evolve.

Could change on but right.

Well, certainly you're making a bad on rent growth absolute and that's where we spend a lot of time and we have different views in some cases and other players on rent growth in terms of how much of it that we're willing to take so yes, you build at a really low yield you don't get the rent growth the expected the total returns not going to be there.

So that's definitely a risk.

But below the other thing I'd add this is Peter Schultz.

Aside from the rent growth has a long term owner, we're very focused on the flexibility in the features and attributes that we're including in these buildings. So if you compare those two some existing buildings.

We feel that this was a superior product for the longer term. So while yields may fluctuate rents go up and down right. You're hearing your out. These are assets are gardening leave some perform and there's a lot of situations where were building is in high barrier infill markets again, we have a long term view that.

Ill try your best to increase allocation to land constrained heavy entitlement mark is that supplies would be constrained and overall I mean at the end of May supply is really the one that drives you know rent slower but in our in our situation. We we look to invest.

And you know and the markets where in the supply demand fundamentals are much better than the national average.

Okay. That's helpful.

Any other tenants besides pure one on your watch list.

We're pretty granular and everybody seems to be in good shape other than the smaller tenants as Scott referenced and we went through January bad debt review and I think we recognized $60000. So still very low yeah, So bad debt and then.

Finally from me.

Many more markets are left that you could actually in their entirety.

Again this is an asset by asset decision, you've seen where we've been selling and used you can tell by what we owned in the supplemental and it's again, it's all about rent growth and all about future opportunity, which relates back to your last question. So.

Ends on our view on rent growth.

We don't really look at it market by market, we look at it asset by asset there's no advantage economic advantage margin advantage.

From actually in a market entirely as opposed to maybe keeping one asset in one market.

Not really no I mean, 20% of our real estates in California, I suppose there'd be a difference there, but we're not looking to exit California yeah.

All right appreciate it thank you.

And your final question will come from Sam Shamie with Shamie development companies. Please proceed with your question.

Thank you for the opportunity.

You mentioned, a Orlando in South, Florida, but what about Tampa Bay and the.

The development going on in that region is why.

Not for US we're not focused on Tampa right now, we like the Red care growth characteristics of the Orlando in the South Florida market better.

Good to know that would be that's our choice so somewhere I guess at this point.

Yeah.

And at this time there are no further questions in queue. We will now turn it back over to Peter but still leave for any closing remarks at this time.

Thank you operator, and thanks to everyone for participating on our call today.

Please feel free to reach out to Scott Army with any follow up questions and we look forward to seeing some of you in south, Florida and a few weeks.

Ladies and gentlemen, this concludes today's call. That's cool. Thank you for participating you may now disconnect.

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