Q4 2019 Earnings Call
[music].
Good day, everyone and welcome to the Eastgroup properties fourth quarter 2019 earnings Conference call.
Yeah.
All participants are in listen only mode later, you'll have the opportunity to ask questions. During the question and answer session registered to ask a question at any time by pressing the star is one on your telephone keypad.
Please note this call may be recorded.
It's my pleasure to turn todays conference over to Marshall Loeb, President and CEO.
Yeah.
Good morning, and thanks for calling in for our fourth quarter 2019 conference calls as always we appreciate your interest.
Third our CFO is also participating on the call center will make forward looking statements. We ask that you listen to the following discussion.
Please note that our conference call today.
Well contain financial matters, such as PNM and so that are non-GAAP measures as defined in regulation G. Please refer to our most recent financial supplement into our earnings press release.
They were both on the Investor page of our website into our periodic reports furnished are filed with the FCC.
<unk> for definitions and further information regarding our use of these non-GAAP financial measures in a reconciliation of them to our GAAP results.
Please also note that some statements. During this call are forward looking statements within the private Securities Litigation Reform Act.
Forward looking.
Since in the earnings press release, along with our remarks are made as of today and we undertake no duty to update them as actual events unfold.
Such statements involve known and unknown risks uncertainties and other factors that may cause the actual results to differ materially we refer to certain.
These risk factors in our FCC filing.
Thanks, Kina, we had a strong team performance this quarter, maintaining the pay said earlier in the year. Some of the positive trends. We saw our funds from operations came in above guidance, achieving a 7.6% increase compared to fourth quarter last year.
And for the year FFF also came in above guidance with an increase of 6.9% and your prior year.
This march 27 consecutive quarters of higher AFFO per share this compared to the prior year quarter.
And we're especially pleased with our fourth quarter and 2019 F <unk> growth.
Given that the equity raise far exceeded our original budget.
The mentality of the industrial market is further demonstrated through a number of metrics such as occupancy same store NOI and releasing spreads.
As these statistics bear out the operating environment continues to allow us to steadily increase from that.
And create value through our ground up development and value add acquisitions.
At year end, we were 97.6% leased and 97.1% occupied.
Further quarterly occupancy was 95% or does afford is now 26 consecutive quarters.
In short demand continues growing for our infill locations small day last mile parks.
We're seeing this growth in terms of tenant expansions as well as a broad range of tenants.
So markets, where 98% leased or better, including Houston, our largest market.
And while still our largest.
Hi, Good Houston has fallen from roughly 21% in Hawaii tour for just a 13.4% for 2020, and even below 13% and fourth quarters here.
Supply and specifically shallow bay industrial supply remains in check our markets.
And this cycle the supply is.
Only institutionally controlled and as a result deliveries remain disciplined as a byproduct of institutional control, it's largely focused on big box construction.
Well sourcing development sites within the fast growing sunbelt markets as a growing challenge, it's keeping supply imbalance.
Hi.
Quarterly same property NOI growth was 4.5% cash, 3.7% gap and our annual same property NOI growth was 4.7% cash and 3.7% gap.
We're also pleased where the average quarterly occupancy at 97.1% of the full 60.
Basis points from fourth quarter 2018.
Rent spreads continued their positive trend rising, 9.3% cash and 18.3% gap last quarter.
And for the year GAAP rents grew 17.3%, marking our fifth consecutive year of double digit scam increase.
Yes.
Given the intensely competitive and extensive acquisition market. We view our development program is an attractive risk adjusted path to create value.
We effectively manage development risk isn't a majority of our developments or additional phases within an existing park the average investment for our shallow they business.
Distribution buildings is roughly 10 million.
And while our threshold is 150 basis point projected investment return premium over market cap rates, we've been averaging two to 300 basis points premiums.
At year end the development pipelines projected return was 7.4% whereas.
We estimate a market cap rate to be in the floors.
During fourth quarter, we began construction on for developments totaling 593000 square feet.
And as of year end, our development and value add pipeline consisted of 28 projects containing 4.1 million square feet with a projected cost of approximately.
420 megawatts. Meanwhile, during the quarter, we transferred five buildings into our portfolio totaling 775000 square feet each 100%. Please.
Looking back from 2017 to 29 team, we've transferred 34 stars into our portfolio.
With 33 of those being 100% leased.
For 2020, we're projecting starts at the high 50 million spread over nine cities.
This geographic diversity further reduces risk, while enhancing our ability to grow the development pipeline.
Ongoing basis.
As a reminder.
The majority of our starts are based on the performance of the prior phase we're going to park.
In fact over two thirds of our 2020 starts are projected to be that next building.
As a result market demand dictates, new construction, rather than us pushing supply into the market.
Two outcomes of this.
Roger one it allows us to manage risk as in most cases were simply re stocking the shelves in many cases the start is driven by the expansion needs of an existing tenant in the park and it most of those cases were able to backfill the original stays at higher rents.
We had a busy quarter.
In terms of new investments and dispositions were pleased with the quality of our investments as well as the geographic diversity, New investments were made in Las Vegas, San Diego, Dallas and Phoenix.
From a dispositions perspective, we sold three or four R&D buildings in Santa Barbara and in Tucson, a long term.
Acquired they're building.
And some all the markets strong we're working to find development and valu land opportunities. While also using this environment to shed those assets, which are less likely to drive our future growth.
Hi historical transaction levels, we achieved in each of the categories doing during 2019.
Are examples of the market strength.
Ill now review a variety of financial topics, including our 2020 annual guidance.
Good morning, we continue to see positive results due to the strong overall performance of our portfolio.
For share for the fourth quarter exceeded the midpoint of our guidance at $1.20.
He seven per share and compared to fourth quarter 2018 of $1.18 represented an increase of 7.6%.
We continue to experience terrific leasing results in both operating and developed programs.
Average occupancy for 29 team was 96.9% and we transferred.
Team development and value add projects totaling 1.8 million square feet into the operating portfolio that are currently 96% leased.
FFO per share for 20 night team was $4.98 per share compared to four dollarssixty six cents per share last year, an increase of 6.9.
For said.
Our continued strong performance, both operationally and in share price is allowing us to further strengthen our balance sheet.
From a capital perspective, when she was 68 million common stock at an average price of $132.52 per share during the quarter.
That increased our 29.
18, gross equity raise to a record high 288 million.
Also during the quarter, we closed on a seven year senior unsecured term loan for 100 million.
With the addition of an interest rate swap agreement. The total effect is fixed interest rate is 2.75%.
We remain pleased to have.
Yes, the capital via equity and debt at attractive pricing.
The company had one milestone that man and overload. So wanted to mention it on todays call in December we declared our hundred sixtyth consecutive quarterly cash distribution de screw shareholders or 40 consecutive years eastern pads.
Increased are maintained its dividend for 27 consecutive years, including increases in 24 years over that period.
The street stability and growth of the dividend is a testament to the successful implementation of our strategy over an extended period.
Looking forward at that FFO guidance for the first quarter of.
2020 is estimated to be in the range of $1.27 to $1.31 per share and 525 to 535 per share for the year.
The asset the Pershare midpoint for 2020 represents a 6.4% increase over 2019.
The leasing assumptions that comprise 2020.
Guidance produce an average occupancy of 96.3% for the year and the cash same property increase range of 2.5% to 3.5%.
Other notable assumptions for 2020 guidance include 95 million in acquisitions and 40 million in dispositions 100.
The million in common stock issuances 100 million of unsecured debt, which will be offset by 105 million in debt repayment and 300000, a bad debt net of termination fees.
In summary, our financial metrics and operating results continued to be some of the best we have experienced and we anticipate that momentum.
Renewing into 2020.
Now Marshall will make some final comments.
It's brown industrial property fundamentals are solid and continue improving across our markets.
Following the fundamentals, we continue investing in upgrading and geographically diversifying our portfolio.
As we pursue the opportunities we're also.
Committed to maintaining a strong healthy balance sheet with improving metrics as demonstrated by the equity raise last year. We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the strong current operating environment.
The mix.
Our team our strategy and our markets has this optimistic about our future and we'll now open it up for questions.
At this time.
Please press star one keys.
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Keep in mind.
The question Q.
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Okay.
Good question today.
And one keys.
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First question, Jamie Feldman with Bank of America.
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Great. Thank you I guess just to start.
Yeah.
You're seeing kind of expansion in a broadening range of tenants can you talk more about that broadening range of tenants.
Just to give a picture of what we might see going forward.
Sure Good morning, Jamie its Marshall.
I'll add some of what we've talked about in a little bit in the past and then it and it continues to broaden.
It's been interesting maybe I'll go about two or three years, our traditional tenants are still doing well in the economy is kinda chugging along side the granite tile guy the flooring the H.B.A.C. contractors all are.
Doing well and expanding and really what's been a new trend for us is.
More I'd say retail related or along those lines, where they rework their supply chain logistics chain some of it E commerce some of it not necessarily but.
No maybe the handful that come to mind would be though the home depots and lows and then well I guess, what's actually we'll see I'm in a market and then they'll spread and we'll see.
I'm in Florida, Texas, California, Arizona throughout our markets I'd say Wayfair best buy.
Oh blade probably in the you know maybe in the last couple of quarters, we've seen peloton, if you're familiar with them the exercise equipment. We've gone from no leases to maybe three with them and a couple of more.
Stations going on.
And probably two years ago, we were having we had more leases with Amazon Threepl groups that were doing deliveries and the last call. It a couple of quarters as well we've seen more activity of signed leases with Amazon and have conversations we may or may not get them, but they're in.
In the market. So there certainly coming across our radar much more frequently and that's been what's really been interesting maybe the last 18 months as want someone shows up and it's good we build that relationship and have a conforming lease we think it gives us hopefully if were fair to negotiate wed have a conforming lease if we do at.
He said Tampa like with Tesla for example is another new name then we have an opportunity to work with them in Dallas or in Las Vegas.
Okay. That's helpful.
I guess that you think about your guidance.
I mean last year. Your you ended up well above what you initially provided.
Can you just help us think through kind of the upside and potentially downside.
Your range.
Moving higher.
Well I guess <unk> no limit starts in the same store.
Yeah, Jim hands, Brent good morning, Yeah that the five thirtyth.
Part of the challenges and budgeting this year's.
On the heels of two consecutive quarterly record years, and so the template that we put in the press release with all the assumptions basically you know that shows directly the factors that we put in place that that result in the 530 midpoint and so yeah, we do show occupancy down little bit same.
Store download it from the prior year, but there the record levels were very optimistic about the year certainly last year, we were fortunate enough to be able to raise that throughout the year.
So certainly if occupancy where to be slightly better that would be obviously, a help to the bottom line into same store.
If we can lease the developments at the same.
I'm very brisk <unk> that we enjoyed last year certainly there would be upside the stars. There. So we you know if things go positive like they did last year and we've got no reason to think now that that wouldn't happen but.
There could be some room, but when you start getting around those 97% type numbers at record highs its.
I guess you learned over the years were little hasn't come in and say Hey, we're gonna budget to a third consecutive record years. So I think our occupancy that we budgeted two this year, even if it happened exactly is budgeted it would be our second highest occupancy for the year in the history of the company. So.
I guess, it's a high class you know conundrum to be into Woodbury.
Bullish on the year.
Looking at it looks today.
Yes. Good question today, Please press the star.
Telephone keypad.
Trust of time.
So two questions.
Question from.
Please go ahead.
Oh I, Thank you and good morning, good morning down there.
I said were too high two questions.
First.
I Marshall you guys are clearly an AFFO company. So same store is not as much of a focus.
Given your development, but that said.
You're looking at your same store guidance for this coming year, you're obviously, it's lower you guys speak about why did push right. It more in and you know given and maybe trade off some occupancy, but I would think on those two levers the bottom line is that you're driving more overall in Hawaii.
So can you talk about how the reduction of of occupancy how you would more than offset that as if as you push rents.
Yeah good point.
Probably I guess mathematically if you push.
Hi, good and this is just speaking it yeah theoretically mathematically but.
Other than downtime, if you lose a tenant over rats, even though we may get 510% higher rent from the next tenet you probably won't have enough time to ending when it happens during the year to really catch up and catch it we may do better over a five year period about dividend up snapshot of 2020, you probably wont catch up.
I'd like to thank you know our guys have.
As we said five years of double digit gap rent increases and last year was actually a record GAAP increase for said a little over 17%. So hopefully we'll see similar numbers and we've got with 97.5% leased at year end, we think it's.
A good time with rising construction.
It is to keep pushing and hammering on rents, where we have those opportunities, but that said if we think the right thing is it's a great time to also improved credit quality. So you could lose some tenants and we may lose some occupancy that way, where we if somebody's had trouble paying rents and things like that and then pushing rents. So hopefully we can make the.
A trade off and maintain our NIM improve our analyze and do it all in one year, but but as Brent said last year was such a great year for us we budgeted a little bit along and then a few mathematically work through it we were saying the caught the 60 basis points, that's about 200000 square feet for us So it's not.
Yeah, that's about six on average about six or seven tenants. So it it's not I see you know it's almost like coin toss is on that many that many leases rolling and 200000 feet six seven tenants if I hope, we're guessing wrong and we get those renewals done and we push rents that there could be some upside to the numbers.
Okay. So it sounds like it's just.
The downtime between the tenants is really the Delta that's helpful. The second question is on development.
Sort of a two parter won some recent articles about increased supply, but you mentioned your comments about you know sort of less supply maybe it's a geographic market thing maybe all the new supply is still out in the corner.
Fields, whereas you guys are closing and so I will comment on that and it to you bought a bunch of land again, just thinking about how costs have have accelerated you are you still seeing rent growth in excess of cost and therefore, you are 7% plus you know that three to 400 spread basis points, Brad still is.
This is is applicable today as it has it has been over the past few years.
Sure I guess a couple of different.
Thoughts were then that we are saying you know, we're certainly cognizant of supply and the fact that the industrial market has been hot now for a few years, there's certainly attracted the world really.
In terms of investments and acquisitions and even development everybody.
As an industrial platform now it feels like whether they're a developer or an acquirer. So we see that we also know we struggle for infill sites in fast growing sunbelt markets. So that's that's helped along with the institutional but where we are watching.
Apply what what makes us feel a little better as we think about it is as you said not all suppliers equal a lot of an awful lot of it is in the corn fields and its bigger box.
Average tenant size is 30000 feet about it's roughly 60% of our tenants are under 50000 feet. So.
Lot of those supply isn't simply isn't design for our Howard tenants and then there's a fast growing markets, where in 13 of the 15 fastest growing cities so with the growth in our markets there shouldn't be more supply.
And then really with E commerce and supply chain logistics that's the.
The other thing even if.
Even if Dallas had an added 120000 jobs last year there'd be more demand, but does 120000 jobs and the secular shift away from brick and mortar retail towards Iran is really helping us there so.
We feel optimistic about it and really I guess I'd also.
What I love about our model is it almost doesn't matter what Brendan I feel it's really how well did the last building lease and if it did well will restart the shelves and if it's if its languishing a little better we're behind on pro forma well hold off we've said I kind of rents are rising but that our yields would.
I would camp come down maybe that a low to mid sevens that said, we everything we transferred in last year was it a seven and a half and our pipeline for development as canceling out at seven four and value adds it on six four and cap rates are staying compressed in the four so even if we.
I've kept thinking will come down.
On the lower Sevens, just with construction prices, but we've been able to hang in there so far and some of that they believe stuff what for their starts last year faster than we anticipated.
Our pro forma.
Thank you Marshall you Okay.
[noise] from Citi. Please.
Go ahead.
Hey, good morning.
You talked about the tenant relationships, taking up for space I mentioned, some names like home improvement retailers et cetera.
Those conversations are happening because they had relationship with you and your.
No relationship for new deals versus them.
Wanting to be in the markets your and and then on the flip side of that how often are they asking.
[music].
Or find them opportunities markets that you're not in but they want.
Good morning, and good question, I mean, I'd love to evolve to the former and it's probably more of the latter today what'll happen is.
Yes.
Make sense, everybody has a tenant rep broker and what kind of smaller company you know what we have pretty good grapevine within the caught me, we'll we'll hear that best buy is looking for space, We signed a lease with them recently in Miami is looking in Miami, and we'd signed a lease with them in Charlotte or.
Lay Ryan had worked with them and so that word of mouth and that is usually follows. The initial contract from the tenant that they're out looking for space and then we'll connect those dots and try to get in front of woman and get a leg up that helped US for example in Las Vegas, and our acquisition, we bought three buildings, there and one of the full building users we got it.
It was a tenant rep broker that we knew and he learned we were acquiring the building and I think that wont speak for him, but I think that was helpful for us landing that tenant he was out of Dallas and was doing national Rep work for that tenet and once he has done a handful of deals where that's already and he was comfortable about so that help that helps but were more.
Active at this point still.
Got it thanks.
For you.
If we think about your guidance going into 2019 versus your guidance going into 2020.
Yeah.
At the levels of both acquisitions dispositions and an equity.
Those moved up.
Quite significantly 19 versus where you first came out.
That's better for 2021 needs to change for you to sort of increase those targets for both acquisitions and dispositions and then also what would make you raise more equity than a 179 that you haven't guidance.
Yes, good morning, Manny I.
I think it would be just what you're saying that you know the our equity issuance really is just a byproduct of what we budget from acquisition standpoint, So we certainly like the pricing of our stock price indoor debt, if we needed to issue. It. So we're certainly don't view ourselves as capital constrained. So our guys in the field at all the markets.
On the ground daily tried to drama acquisitions are very difficult value add we've had some success and then of course the majority of our success in the development program. So as we have success and have those opportunities we will certainly ratchet those but given where our balance sheet is we won't do that just in a vacuum without.
You know given where we are today, we're not looking to drive our debt market cap, even lower that type thing just arbitrarily. So we're in a good position I think just in terms of that volume will be a matter of.
You know what the guys can come up with I know Marsland team got a couple of value adds early next year, which the good start that a.
We have in that category is are basically what we hope are known at this point.
So so we'll go from there, but we there are certainly upside on the capital side that will not be limiting limiting us in any way.
Thank you guys.
Welcome.
[noise].
Question from Bill Crow with Raymond James Please go ahead.
Good morning, guys I want to.
Oh that last question with another question.
It feels like year over Equitized.
Goals for expansion.
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What.
When you start.
Cost.
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It's more.
Hey, Bill that's you know it's a conversation we have quite frequently in I think Marshall jet when they will tell you didnt. We didn't realize we were hoarders until we saw the stock price now certainly.
Become.
Borders I I guess, you remember Keith.
Long time, CFO predecessor, even kind of an overstatement of you get equity when you can and this window has certainly been open longer than than than historical or you know historically typical and so like I said, the saying I don't view that we're in a position now.
But we would issue equity just for the sake the further strengthening.
But given those situations you know build it as bright and Sun is today, there will be a time, where it's maybe not quite surprising we would like to it served us very well in the last great recession to have what was viewed as a very conservative balance sheet it turned out to be.
You know in hindsight, probably where we should have then and we were position then to pick up on some other people's.
Weakness and certainly if that were to happen again, we would want to be in that same bode. So.
It's a.
Trick one way the other but we do keep an eye on debt last year weep.
When we did the 2.75 it was more of.
Reaction to where the markets for until we're able to move on that pretty quickly and that wasn't something that we had said, let's just go do this it was the market looked attractive at the moment, so we pull that lever versus equity lever. So we'll keep an eye both ways.
And Bill I think I agree with Brown and I'll jump in and add it's been interesting over the last.
Here is an a lot of ways to do it but as we look at our cost of equity versus where the tenure in the spreads are there have been moments in time, where that difference really wasn't very great. So given how close they were rolling towards equity just for the safety for our shareholders of it but well and so I agree we like where we.
Our balance sheet why is that it's been interesting to see how how close that gap is come at different times.
<unk>.
Commercial.
Hi.
Hi, just up on the watch list from a supply demand.
Perspective, as the closest to the press.
Which.
Yes.
You know, it's you know we watch all of them in Houston, Dallas Atlanta are always a big the last few years supply markets typically in a Dallas Atlanta has been south of town and and literally far enough away, especially Atlanta, where where.
North of town and all that so much of the supplies.
South you know the port area of Houston is pretty far away, but we've watched supply creep up in Houston to that point, where we're definitely keeping an eye on it.
I'd like at least if we look kind of within our own portfolio and you.
We're I'm thankful.
Grateful that were 90, a little over 98% leased in Houston is we ended the year with a little under 7% set to roll. This year kind of another context is is we like and this isn't so much Houston as any market, but last year. It was within our pro forma budget. It was 13.8% of our in Hawaii.
Hi, this year is projected to be 13.4, so we dropped 40 basis points on in Houston, and then even at the end of the or it falls below 13% and that's without any dispositions. So we may pull the trigger on an asset or so in Houston, We said and the two buildings I guess I say.
That at a high level on Houston, and we finished two buildings at world Houston in the fourth quarter and by the time, we delivered on the guys had on the 100% leased and occupied so yes, I hate to.
Stop that when you're getting that kind of performance, but we'll we'll probably build to the sevens and selling the fives.
You know somewhere in the fours wherever the market allows and kind of kind of watch yet, but you're right. It has crept up 17 million as a square feet Houston's are pretty decent size number when they've been absorbing about 11 million square feet. So not all of that competitive, but it's definitely on our radar.
<unk>.
One more quick question.
Are you.
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From tenants.
[music].
Other owners.
<unk>.
Ships coming over.
From anything.
No. It's a good I will let you violates.
Oh violated three answers and short I'll be brief and it is no. We really have not we've kind of watch for it and maybe just with the nature of our tenants and portfolio of not no one's used as an excuse done that times to back out in Malaysia, There's always a first but I haven't heard that one.
I appreciate the time, thank you very well.
Yes.
With Stifel. Please go ahead.
Great. Thank you.
Rather.
Stunningly good quarter and guidance congratulations.
Just out of curiosity and I don't know, if John calling into on the call or not.
I noticed that Euro 43 acre site and Miami 465000 square eight you're in it for about 35 million 34 million, that's about $75 per square foot is that a.
Is that because you've got a lot of infrastructure you built out or.
That's just the cost are valued dark down in Miami These days.
Yeah, I'm trying to I don't have the.
And poll numbers and maybe we can circle back if we need to John its Marshall, but.
We have added the infrastructure for the part have.
Built and delivered two of the five buildings there and are building.
Third building, so well you know that land we were in it for we bought it for about $10 a foot and so that's fairly and land prices are really risen in Miami and Alaska.
The success of industrial a fair amount as well so we like our basis in the land I see when you're looking at now so it's probably.
It was really put the roads and on the retention so everything is in.
And I'll brag on John since he's not on the call again, the complement he'll have everything sat and his goal is to have the permit in hand, so as our third building as you saw with our second building leased out with best buy he quickly moved to the third building this quarter.
When we started and then went as that building leases opera gets full will pull the trigger fairly quickly on our fourth building there.
And I'm embarrassed I should already know the answer to this but if you look at your pretty sizable lease up portfolio 2.3 million square feet.
You're obviously, a capitalizing all your costs during the.
Lease up period.
But a lot of these are generating income are you a capitalizing. The income also are you read according the income in your topline revenue.
Oh, I'm, which on the development on the development at one year lease up on your lease up assets.
Yeah on the Lisa based the way it works we.
Capitalize on the unoccupied portion and then of course on the occupied portion as it becomes occupied you collect the rins and so as you see the lease percentages based on a little bit a timing, but it basically works in that manner and obviously when you see a property, 100% lease, but it's going to lease up it means we've signed a lease but the tenant hasn't yet I can.
Occupied because as soon as they occupy at that level that would transition in so as long as you're still in that lease up category window.
The unoccupied portion a expense related to that is capitalized.
Okay and income is always a put into the topline.
New though.
It is you know rents even if you have a 25% leased property and that tenants occupying paying rent you are booking that 25% rental income to the bottom line as soon as they start paying rent yes.
Alright, Thank you great.
We'll take our next question from John Peterson.
With Jefferies. Please go ahead your line is open.
Great. Thanks.
You talked about a you know pushing harder on rent this year as Karen you can talk about lease term. If you guys are pushing harder on that.
The renewal of them with new leases and also where are you guys or add on annual escalators on new leases you're.
Mining versus the ones that are rolling off.
Well, we won't pushed it turns use is construction the more Marshall I should say as T.I. calls construction costs have risen usually again, everybody will have a tenant rep broker and you'll get an RFP for a five year seven year lease.
We'll typically start you'll want to match that with our initial response and as we work through the deal and a lot more recently is the T.I. cost of escalate and you can end up adding a little more term and or a little bit higher rent. So that's that's typically how that conversation goes as they settle on our building and we got the.
Function bids that will say you can either fund dollars over call it $12 a foot or whatever if its new space. However, it works out or overall amortize it but we need another year of terms. So turns are probably crop up a little bit, but they've always kind of stayed within the 4% to 5% portfolio wise dialing in renewals four to five year.
Errors.
And bumps typically two and a half 3% the longer the term of the lease and maybe the higher the rent starts we've seen a little bit of push back on that but it's typically two and a half 3% and almost a release we have has some type of escalator in it.
I guess, what's the difference, though between you know when you sign a renewal.
On the de escalators on the the at least that's rolling off in the new the new one that you're signing or you still pushing those higher you kind of holding the line on the same escalator, if the or at least.
They may be a little they're pretty close but they may be a little bit higher up in on a three year as his renewal you're probably can get more of that 3% type.
Comps if it someone signing a brand new tenure lease and the rents climbed up they are pretty high they'll push back and get you may get two and a half to two and three quarters. So it's not nine day difference, but that's where that.
Bill the longer the lease term and maybe the higher the rent starts out of those bumps you may get as high as absolute.
In places, but that percentages gets pretty high.
Thanks, and then.
On acquisitions, I'm curious to 2020 going to be a year that we see eastgroup enter any new market and if so which which markets look appealing to you.
Sure. Good good question, we feel like we just got to Greenville, South Carolina.
Last year, which was a market, we like and we're continue to kind of kick tires and turnover stones, there and there's some we've considered like a national in some markets like that but if I were going to gas than it is that I'd, probably say no I'd, rather if if we had our preference I'd rather us fill in.
And on the markets, where we're under allocated today, you've seen us do a lot out in the western region, which is.
Then we like South, Florida, we feel like we're still fairly new to Atlanta and have some runway there that we're active in Dallas, So I'd, rather see us grow in our existing markets, but if the right opportunity came along and it probably fit our.
You won't see his job you know overseas or do anything hopefully surprising I don't we don't think that would be well received by the market. So we'll stick with kind of the markets, we know and kind of manage our portfolio allocation within those most likely.
Okay. Thanks, so much.
Well.
Well take our next question from Eric Frankel with Green Street Advisors. Please go ahead. Your line is open.
Thank you I just want to know if there's any known tenant move outs in which markets. We should be focused on just given that a lot of your lease rolls and be concentrated or Florida, I get to a lesser extent.
Next year.
Yes, I'll start mark filling would they be individual transactions, but you know on the known vacancies or are there is nothing specific that were overly focused on I would even add on our tenant watch list you are bad debt, we've got budgeted as a generic bad debt number we don't have that scientists.
Specific tenants I know Tampa is a little higher roll over this year. There's a couple of large leases I think more she has done a couple of those are or even in the positive category early potentially.
Yeah.
Tampa, we had.
About a 200 since year end about a 225000 foot lease renewal that's been.
Sign So downs done with then Vanity Fair and then in Charlotte, We had home depot is about 200000 feet has renewed there as well so good either pick up you know what kind of look and see where where we have large lease roll in and thankfully weve knocked out a couple of big leases and each of those.
Markets and then talking to those teams the balance it's a pretty mixed bag, that's remaining and we.
Typically you know end up renewing enough with you and I were building a model Eric I'd say, let's assume 70% retention rate and we may miss that in a quarter or two but over four quarters are little bit longer we always.
Synta hover around that that ratio. So I think that we'll probably do that in Tampa, and Charlotte plus or minus.
Okay, 70% it is.
Final question, obviously, you tend to lean I guess, but on the conservative side in terms of near your guidance in your investment budget for.
For for this year, but maybe you could touch upon whether I think last year, you bought a fair amount of a newly developed that that that were in lease up and maybe you can talk about that opportunity set this year.
Yes. Thanks.
I hope you're right we're conservative.
Again, we've been accused of worse things so.
That's a good thing I hope we hope you know again this is our budget not our goal is kind of one of our internal sayings and you're right. We liked that value add category because core acquisitions are so competitive I think last year. We bought one property was all of our either acquisitions or value add that was actually.
We are listed property, we we came in second and third a lot and we will pursue those though with everybody has got to check book. So we really have no differentiating factor there and we are turning over a lot of stones are value add kind of it within our development pipeline those are averaging about a 6.4.
Yields and with cap rates, where they are we're getting a good hundred 50 to maybe 200 basis points spread over core assets. So we like that risk return given that someone else's held the land gotten a zoning done taken the construction risk and it's usually either all.
All or some portion of leasing risk that we have to take so there.
Hard to combine as Brent mentioned that 30 million in our budget as of today is identified and project specific projects and we will.
Try to grow that number it's a little bit of a shadow development pipeline, we set as another way to create some in a v. the.
Breads aren't quite as high as development, but we'd like the risk return of those and there's it's usually a developer with financial institution as their partner and they can.
Make some money it with their IR promote maybe not as much as they would have made if they had finished the project, but they're happy to take the promote and kind of.
Build the next building before the cycle lands is more their mentality. So we keep.
Chasing it and I guess the risk of that as people have pointed out as you don't want to create faults demand, but so far you know when you look at our yields and when we were looking back at the end of the year that 33 of 34 buildings over the last three years of roll down at a 100.
Hundred percent lease you can be feels like we're busy and I know the teams, let's say that doing a lot more but you could be critical that we should have done even more.
30, 330 forced to have a batting average.
Okay. Thank you.
As a reminder, interest of time with the.
Yourself to two questions take or next question from Rich Anderson with SMBC. Please go ahead your line is.
Thanks, Good morning.
So I'd like to if you could.
Do you have a sense of what percentage of your portfolio is truly infill last mile I.
Well you know the vast majority is on the smaller side, but like in Atlanta for example, you're a bit far afield from.
Oh, a population center if memory serves correctly and so just wondering if you could you know kind of give some parameters about no what is really inside the.
Population center and truly fits into this last mile concept.
Sure. Okay. Good question and up trickier, one to answer, but maybe here's a couple of staff as I mentioned I'd say.
In our average tenant size is 30000 feet. So that's not really you know logistics chain getting.
Goods from China to New York for example type thing.
Let's not doing this from memory, 60% of our tenants roughly are under 50000 feet and 85% of our 1500 tenants are under a 100000 feet. So we have a lot of smaller tenants that do distribute.
Within their regional area, and we've said, probably a better or really our strategy better indicator of our growth is people moving to Orlando people moving to Phoenix people moving to Austin, Texas.
And last mile in Atlanta, It's interesting is we studied it almost.
Maybe having spent some time.
In retail it reminded me, where you're right. If you look at the map of Atlanta, where we are isn't the bulls eye of the Atlanta mouth, but that north quadrant of the city call. It 10 to 12 o'clock or what locals refer to as the Golden triangle.
If you're with Wayfair for example that so.
Pretty good.
Highly educated above average per capita income that's a good last mile delivery spot or if you're just an H.B.A.C. contractor and your your restaurant your services out and it's July and you need to get your guys to the location quickly that's where the higher end.
Retail as so a little bit similar it really struck me Jacksonville, where we've been for 20 years, where on the south side of Jacksonville away from the city center of the city, but in the path of population growth and that type of population growth, it's attractive to tenants as well so it's a little.
Little bit light.
He wants me a little bit of like retail in times of where do you want to be where.
Where is your customer going to be and that's fits well for our tenants. So back of the envelope, 85% you would say is definitionally last mile.
[noise] stretched yes, just because there that.
All I know in probably even more than that 85%.
They really are not in that they may be you know selling off of a website and shifting around the country, but they're not in any type of supply chain for 10 depot or loans.
Understood and second question for me, how would you describe the price.
Sensitivity of your tenants in other words is the rent that you charge sort of low on the totem pole for them.
And hence gives you the ability to be a bit more aggressive or.
Is it a little bit more important to them and are they more focused on on rent you know, particularly now with past couple of years of the of the strength.
Fundamentals.
No I think it certainly matters to them, but in their equation, it's pretty low so thankfully, we've got a low component within their overall cost and that's where I thought too in a rising market that often helps when they have a tenant rep broker. So by the time, we sit down they know where.
It is and will push as hard as we can so there's always competition. They always seem to have an option and you're trying to figure out if they like your what your advantages are over the competition, but thankfully. It's a low component. So it's that's why you've seen us and our appears to be able to probably push rents the way we have it it's becoming more.
This is the location I certainly location specific and labor pool, driven the bigger the Senate the more the labor full factors that do you have a rent coverage number of any kind that you can share.
Like an property.
Yes, not not really because you get into things like side yarns and is.
At Hvdc, and I guess I'm equating it I'm going to go back to retail again, where you could say 14% of occupancy costs, you could pay as gross rents kind of plus or minus spending on your sales per square foot theres really not that.
Kind of same factor or it's not as formulaic as I've seen an office or retail.
Fair enough okay. Thank you.
Sure.
We'll take our next question from Craig Mailman with Keybanc. Please go ahead. Your line is open.
Marshall mentioned two thirds of your 2020 starts are going to me existing parks what markets are the other one third and.
And.
Can you just described kind of how that differ.
It's good some yeah.
Sure happy happy to good morning.
And usually that other third for the most part I'm kind of looking down our list. It means we we ran out of landed apart and the guys have done a good job of ran a weve comparative to.
Residential subdivision finding land for the next subdivision so and.
Orlando, where.
John and Chris and the team have done a great job with horizon, we have land tied up havent closed yet but for our next park in Orlando. So this would be our third kind of.
Million square foot Park, if everything tracks and goes.
Well in Fort worth you saw us.
Close on some land in fourth quarter. We finished the buildings that we were a value add as well as the land we acquired in Fort worth So that's the next new start.
There.
I'm kind of looking down doing this from from memory from the list we have.
Rich view and San Antonio I'm trying to think we finished eisenhauer point and that's our next new part there. So it's really where we've run out of for the most part that others third is where we ran at a land and we need to go start. The next three four or five building parks I would say as an aside as hard as.
And Scott I mean, you've seen like world Houston in some of our parks that that ones.
Crazy and that Brent.
Land for 40 buildings typically if we can get to 10 or 12 buildings. It's a good size Park is someone described to me now land is so hard if we can do at 345 building part that's about as big as you can find the land.
So as anymore. So it probably leads to more churn with the next part just because they're not we can't find the land, we could 10 years ago.
That's helpful. Then.
Operating land you guys bought in San Diego during or subsequent to quarter and I think it was HM.
When does that.
Into production.
We're working through we've made good headway on zoning and all the compliance to break ground, there's still a little more work to be done. It is a it's a it's really it is leased to about think it's 28 tenants. It's a junkyard storage yard today I hate to say junkyard.
If you were there you'd call it a junkyard honest, there's nothing about ice junkyard [laughter], but as we get the zoning done and we're ready to break ground. It's a nice way to earn think we're about a 5.5% yield while cars are stored there and rvs and things like that and when we as soon as we can get through all the zoning and ordinance.
Hurdles in California, which takes a little bit longer than our other markets, they're month to month tenants and will terminate their leases and put it into production and we've actually already had a meeting or two with possible pre lease there was some tenants that were excited about so hopefully you know maybe a year and hopefully it's a.
2021 start.
And then just one last one I know people haven't seen really any impact from supply and the big way, but on the merger are you seeing kind of tenant decisions, taking a little bit longer as maybe some people have some other options.
Supply or anything.
Kind of an early indicator of any potential weakness from supply.
Not not really haven't heard is honestly on supply as much other that certainly a little more out there given everybody success. What we're hearing is it takes a little longer as well as one of our guys describe that deals.
Given the Red zone, and take a little bit longer to close but their thoughts or what we've heard from a couple of people tenant size is continue to grow a little bit even within our build it you know maybe from 40000 feet to 60, 70000 feet and with rents as a higher per square foot number that commitment is taking.
A little bit takes maybe another layer of approval and things like that so we get deals close and then they have or for a while and they don't most of them knock on wood don't die they do get over the finish line, but it takes a little bit longer to get leases done than it used to and the best explanation I've heard of that is it is it's more layers of approval given.
More square footage and a higher rent per square foot I think Craig one thing I would would add to that as we would talk about multi tenant supply versus big box supply and I'll just point out that you know we're still building Fortunately in that mid to low seven yield and only if you looked really at some of the big box developers. They are building more in a number five around.
Yes yield and I think that's you know a direct example of supply demand I mean, obviously you would build at the highest yield you can if you could and I think that just goes to show there's a little more competition in the mix. There that you know depressed as those yields a little bit side I think if you look at our yield being a true multi tenant developers.
Some of the big box, you'll maybe get a kind of a picture there have had the playing field, we have competition to but maybe not quite as rigorous.
As the others.
Great. Thank you.
[noise] <unk> take our next question from Kevin Kim with Suntrust. Please go.
Hedge your line is open.
Hi out there.
So going back to develop and maybe I can just asking on a different way if I look at your dollars at risk from development. So after taking account percentage lease.
Hi, it's about 3% little more at 3% every gross asset value and I just want to understand little better.
Your internal motivation do you look at it that way.
Or do you look at it may come more practical way of what can we get done and not necessarily base. It off the company size and what moves the needle endo things.
Glenn can go and last second part that is you know.
If you want to grow it where should we expect that too.
Within the party. So maybe you started doing two buildings instead of one or is it really trying to expand that one third of portfolio, where you're looking for new.
Business Park.
Okay. Good good question good morning.
We don't look at development I guess, I'd say is direct quite like that like the 3%, but we we do.
With that and what we view as our low earning bucket and so we'll look at land development and value add and what percentage of our assets.
Is that and then hopefully that pipeline as moving pretty rapidly it's been a great value creator and Navy creator and AFFO creator force. The last few years, but we don't want to get.
As you said too far out over our skis and things like that so we'll walk the value adds in as well as just the land we're carrying waiting for the next development. So we do definitely do watch that and don't want to get too far out there and again in each component hopefully the value adds if we can get the leasing done can move pretty quickly.
Finally in and out of that pipeline, certainly as compared to where the land sense. Today is just a shorter gestation period.
Okay and the second question what are your market rent growth forecast for your portfolio and how that compared to 2019, So I don't mean lease spread something about the spot rates increasing.
Yeah as far as spot rates I guess, I'd first say keeping that our expectation for the overall portfolio. We really three consecutive years now and no need no reason to think this would be a lot different where we've had high single digit cash mid to upper teen in the case of this past year gap, we feel like that.
Probably still a good run rates based on our vibe in terms of just bought rates market to market that that would vary.
Probably in the Marcellus and I look at each other maybe in the 4% to 5% range and again that could be higher in some markets and maybe a little tighter and some other.
And some other markets, but we have it feels like.
Mike rental trends are still kind of on pace, where where they've been the last three years or so.
Okay. Thank you.
Yeah.
Our next question today from Blaine Heck with Wells Fargo. Please go ahead. Your line is open.
Hi, Thanks, Good morning, just a couple of quick ones.
Can you remind me how do you guys have any additional properties in the Houston market that you identify as noncore and earmark for sale or have you guys kind of worked through all that noncore product at this point.
Nothing in the held for sale category.
That said, we will keep pruning away in Houston and we.
You know, maybe an indirect way, we probably two or three assets that we've said and really we try to do that in every market. If you could sell two or three assets or if you got to call about a tenant bankruptcy, which building would you want to get that in middle east or where are we in terms of leasing on every maxed out the value. So we've got a couple of three buildings we.
Might sell in Houston that that's probably dialed into our disposition guidance a little bit this year and I'm idle like other like Houston and our team does a great job there I like that Houston continues to drift lower as a percentage from over 21% to projected to be under 13%. This year absent any cells.
Got it that's helpful. And then just on retention, obviously, 70% is great and a solid target, but I wanted to talk about that 30% or so that aren't expected to renew can you just talked about the most common reason for the move outs that you've seen so far that usually just a tenant that needs to expand and you.
Accommodate their needs or is there any pushback on rental rates that you're seeing out there.
It's good question not as much rents. It is more expansion I know we lost I was glad we got the land in Tampa that we did the back half of last year that we we lost Ferguson plumbing and we had a couple of other tenants in.
Onto expand and we were really fall and couldn't accommodate them. So a lot of downs I mean could it almost feels like a rubik's cube, what you're trying to figure out how we can accommodate our tenants and that's what's great about building. These larger parts what drove horizon. So rapidly was an existing tenant expansion and we can move your from building three to building a so it's it's.
Expansion in some cases, its consolidating two or three locations to under one roof, and maybe where we're one of those two or three and they're moving around town. So it seems to be more of a logistics type chain or there. They're just shuttering their business in some cases are relocating to a different state and things.
Like that that's probably accounts for the majority of them.
Great. Thank you.
Sure. Thank you.
There are no further questions on the line at this time I'll turn the call back to Marshall Loeb for any closing remarks.
Thank you everyone for your time, we again, we appreciate your.
Interest in East group, we're certainly available this afternoon for any questions and.
Thanks for your time, thank you.
This does conclude today's program. Thank you for your participation and you may now disconnect.
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