Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Duke Realty Quarterly earnings Conference call. At this time all participants are in listen only mode. Later, we'll conduct a question answer session and instructions will be given at that time.
You should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded I would now like to turn the conference over to our host Mr. Ron Hubbard. Please go ahead.
Thanks, Lisa good afternoon, everyone and welcome to our fourth quarter and year end 2019 earnings call. Joining me today, our Jim Connor Chairman and CEO , Mark Dineen, CFO , Nick Anthony Chief Investment Officer, Steve Allen, Our Chief operating Officer.
Before we make our prepared remarks, let me remind you that statements. We make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.
For more information about those risk factors, we would free to December 30, 120 team 10-K that we haven't filed with the FCC now for our prepared statement I'll turn it over to Jim Connor.
Thanks, Ron and good afternoon, everyone.
Let me start by saying that 2019 was another outstanding year for Duke Realty.
We met or exceeded all of our 2019 goals, including our revised guidance throughout the year.
We also capped off the year with an excellent fourth quarter from an operational and financial perspective that sets us up for a great start to 2020 and beyond.
Let me just recap some of the highlights from our outstanding year.
We signed nearly 26 million square feet of leases.
We maintained our stabilized portfolio at about 98% leased on an average throughout the year and our in service portfolio at about 96% leased on average.
We renewed 77% of our leases at attained 29% GAAP ROE correct GAAP rent growth.
12% cash rent growth second generation to generation leases for the full year respectively.
We grew same property NOI at 4.7%, which exceeded our revised guidance expectations.
We commenced $1.1 billion of new development starts that were 55% preleased, 73% of which were in coastal tier one markets.
Well placed 715 million of developments in service that are now 75% leased.
We completed 494 million of property dispositions and 270 million of acquisitions.
Raised 575 million of debt at an average yield of 2.85%, including the first USA issued green bond offering by the industrial rig and raised $266 million of equity.
FFO per share at an AFFO on an adjusted basis by 8.3% and 10.2%, respectively and increased our regular quarterly common dividend by 9.3%.
And finally, we continue to run our company with the most responsible manner in an S.G. culture with numerous CSG achievements.
Now, let me turn it over to Steve Shneur to cover our cover the fourth quarter and touch base on the market fundamentals.
Thanks, Jim I'll first touch Thats based on the overall market fundamentals.
Supply exceeded demand for the quarter by about 7 million square feet and for the full year by about 35 million square feet, which nudged up national vacancy rates from about 4.2% earlier in the year to four four at the end of 2018.
We anticipated this happening and I think it's important to note that vacancy at 4.4% is still about 200 basis points below long term average.
Market rents continue to grow across the country at about 4% during 2019 over the prior year.
The under construction pipeline at year end was about 310 million square feet or about 2.1% of the use stock.
As we discussed last few quarters, there are a handful of sub markets currently out of balance if we add up the five mentioned last quarter and now add north Houston to that watch list. Our total in all our exposure to the sub markets is approximately 4.3% and the tenant roll over the next two years and the sub markets for us as less than 1% of each.
Avenue.
So we have map modest yet at manageable exposure to these high supply sub markets and obviously they are not the focus of our expected 2020 development activities. Moreover, demand in the U.S remains very solid nationwide and exceptionally strong in the submarkets were focused and to grow.
In fact, we are strongest quarter the year as Jim mentioned with 8.3 million square feet of leases executed, which finished a string of three consecutive quarters of leasing over 7 million square feet, which was a record for us.
We signed 20 leases in excess of 100000 square feet and six leases over 500000 feet.
With an average of all leases signed of 139000 feet.
Demonstrated continued strong demand for well located spaces across the entire size spectrum.
In addition, the average lease term we signed during the quarter was 9.2 years.
A few of the more notable lease transaction this quarter were repeat business transaction with customers, including Samsung.
People, Amazon Us foods, and crate and barrel also highlighted handsets in northern New Jersey, where our team got in front of unknown late 2020 lease expiration, we signed a new lease to backfill of 650000 square foot facility when it expired in the third quarter of 2020, the new lease as the term of 15 years had a GAAP rent.
Growth in excess of 50%.
We also had a tremendous quarter on the first generation leasing side when excluding build to suits, we signed 2.3 million square feet, a space and recently completed or still under development spec projects, all of which outperformed our original underwriting projections by about three months on the lease up and roughly 25% on rental rate.
One of these was a million square foot spec projects in southern California that some of you may have seen our navarrete property tour November it was up nine parcel land assemblage of took three years to entitle we broke ground in early 19 and by November before the building was completed we assign a lease for the entire building with a major ecommerce retailers.
The second example is in the New Jersey metal and Submarket, where we delivered a 660000 foot spec facility in the fourth quarter and immediately upon completion sign a lease for the major ecommerce user for the entire building.
We believe this yet another example of e-commerce demand for mid to large size facilities.
As well as our development expertise in densely populated infill markets at quarter end, our stabilize and service portfolio was 97.8% leased the lease activity for the quarter combined with strong fundamentals led to another great quarter rent growth for us with 12% cash and 32% gap.
And looking at the GAAP rent growth by size for the full year in 2019, we realized 24% growth for deals under 250000 feet and 32% for deals over 250000 feet.
We expect rent growth in 2020 to be relatively similar to 2019 by capturing rent upside on our lease expirations over the next 18 months, which continued to be supported by mid to single digit market level rent growth and in general a mark to market in the 14% to 18% range in our portfolio.
We also had a tremendous quarter on development starts in the fourth quarter breaking ground on five projects totaling over $300 million.
These include a 665000 foot build to suit for home depot, and Atlanta near the Hartsfield Airport as well as spec projects in Northern New Jersey in Southern California.
Our development pipeline at year end totaled $1 billion was 74% allocated to coastal tier one markets.
The pipeline was 56% Preleased.
As expected to generate margins in excess of 33%.
One last note on development as you saw from recent press release earlier. This month, we've established a policy to develop all future facilities to elect attain LEED certification.
Not only will this initiative enhance our own corporate responsibility goals, but it will help to meet the needs of growing universe of our customers with sustainability objectives. We also believe on long terminal improve the desirability and operating efficiency of our own portfolio and with that I'll turn it over to Nicking updated to cover the acquisitions and disposition activity for the quarter.
Thanks, Steve we had an active quarter on both at both dispositions and acquisitions consistent with our strategy to increase our exposure to coastal tier one markets, we sold $110 million assets in the fourth quarter supplies of two facilities in Indianapolis and one facility in Columbus, Ohio, and churn we used a portion these proceeds acquired couponing.
Next totaling $68 million one of the investments with a 240000 square foot newly completed asset in South Florida at our Caroline Park in the medley Submarket a transaction I mentioned on last quarter's call. The second investment with a 220000 square fits facility and the east based AD market of Northern California.
While there'll be some minor dilution from these asset trades. Initially we anticipate long term accretion given the higher growth profile the assets we are acquiring.
We expect this recycling to continue into in 2020 with dispositions, mostly in our Midwest markets and potentially a few buildings outside the Midwest to manage tenant exposure.
I'll now turn it over to Mark to cover earnings result in the balance sheet activities. Thanks, Nick Good afternoon, everyone. Im pleased to report decor SSL for the quarter was 38 cents per share compared to core FFO of 37 cents per share in the third quarter and represented an 8.6% increase over the 35 cents per share.
Reported in the fourth quarter of 2018.
Core AFFO was $1.44 cents per share for the full year 2019 compared to $1.33 per share from 2018, which represents an 8.3% annual increase.
The increased core FFO for both to year end the quarter compared to 2018 was result of our continued investment in lease up of new developments as well as rent growth on second generation leases and increased occupancy.
FFO as defined by Navarrete was $1.40 per share for the full year 2019 compared to $1.34 per share for 2018, AFFO totaled $476 million for the full year 2019, and $115 million for the fourth quarter. Our annual results represented a 10.2% increase.
To AFFO on a share adjusted basis.
Same property NOI growth on a cash basis for the three months at 12 months ended December 31, 2019 was 3.7% and 4.7% respectively same property growth for the quarter was driven by continued strong rent growth, which offset a 40 basis point decline in average commencement occupancy within our same property port.
Folio from the fourth quarter 2018.
We anticipate net operating income from non same store properties, which was 18.5% of total net operating income for the quarter. We'll continue to be a source of growth as we lease up recently developed properties and keep up a robust robust pace of new development starts same property NOI growth on a GAAP basis was two point.
7% for the fourth quarter and 3.3% for the full year 2019.
During the fourth quarter, we issued $400 million in green bonds. The first such issuance by an industrial REIT in the us at a face rate of 2.875%. We also redeemed $250 million of unsecured notes, which are set to mature in early 2021, we now have no significant debt maturities until 2022 and finished 2019.
No borrowings under $1.2 billion line of credit, we intend to fund growth in 2020 and beyond with $111 million of cash on hand at the end of 2019, a $110 million that we received earlier this month for the final payment on the seller financing from our medical office portfolio sale annual funds available for.
Reinvestment after dividends, which are expected to exceed $150 million in 2020 as well as proceeds from expected 2020 assets cells with these sources of funding and potentially opportunistic ATM equity issuance, we expect to be able to finance continued growth with a moderate increase in leverage levels I'll turn it back over to Jim.
Right and micro and macro outlook before I get into our guidance components.
Thanks Mark.
From a macro outlook perspective, we expect the economic environment in 2020 to be relatively steady compared to 2019 with GDP forecasts currently around 2% with some potential upside from the recent easing of trade tensions continued strong labor markets and consumer confidence as evidenced by news earlier this week.
Okay.
Regarding real estate fundamentals to supply pipeline today is a bit elevated but not material concern as Steve alluded to earlier in fact, I'll share a downside statistic that I've done before if the estimated on leased segment of the 300 million square feet in the national pipeline were to remain vacant once complete vacancy rates would only.
The rise to about 5.5%, which is still 200 basis points below us historical averages.
Our view is that if we can maintain a steady macro environment is just depicted and the majority of our sub markets remain supply constrained. The overall fundamentals picture is quite supportive of continued market growth and thus sets up a positive year for pricing power New development starts.
With that let me turn it back over to Mark to discuss our 2020 guidance metrics. Thanks, Jim yesterday, we announced a range for 2020 core FFO per share of $1.48 to $1.54 per share with the midpoint of $1.51. We also announced growth in AFFO on a share adjusted basis to range between 3.1%.
7.7% with the midpoint of 5.4%.
Our average in service portfolio occupancy range is expected to be 95.1% to 97.1%.
Same property NOI growth is projected in the range of 3.6% the 4.4% same property growth will largely be driven by rent growth as we actually expect a slight decrease to occupancy in our same property portfolio as we focus on maximizing rent growth when leases roll, which at times May result in temporary periods of vacancy.
In addition, we continue to expect strong rental rate increases from our re leasing efforts on the approximately 5% of our total portfolios and expires during the year. This low level of exploration as a result of our leasing teams being able to accelerate early renewals of very favorable new rental rates. Similarly, we expect to be able to pull so.
Some 2020 lease expirations in the 2020.
Pull some 2021 lease explorations into 2020 to take advantage of the current environment similar to what we did in 2019.
On the capital recycling front, we expect proceeds from building dispositions in the range of 300 million to $500 million. The majority of dispositions are expected to come from certain Midwest Submarkets as well some modest pruning related managing tenant exposures nickel looted.
Acquisitions are projected in a range of 100 million to $300 million with a continued focus on coastal tier one markets development starts are projected in the range of 675 million to $875 million with a continuing target to maintain the pipeline at about 50% prelease, our pipeline of builders, who prospects continues to move to.
We remain robust and our 2020 guidance is higher than the initial development guidance, we provided for 2019.
A range of Gionee expenses $55 million to $59 million with a midpoint of 57 million DNA levels are slightly lower than 2019, which was impacted by the implementation of a new ERP system.
On the balance sheet side, we expect net debt to EBITDA to be in the range of 5.2 to 4.8 times and fixed charge coverage to be in a range of 5.0 to 5.4 times. These leverage metrics are comparable comparable to 2019 levels and with the embedded sources of capital mentioned earlier, we expect to be able to finance continued growth will stay.
Well within the parameters in where current credit rating more specific assumptions and components of our tubular 2020 guidance are available in the 2020 range of estimates documents on the Investor Relations website now I'll turn it back to Jim for final comments.
Thanks, Mark in closing I'd like to reiterate what a great year 2019 was for Duke Realty with many all time first and record highs as we look ahead into 2020, we remain very optimistic about our ability to replicate the type of results, we've been able to achieve since becoming a pure play industrial logistics company in 2017.
With best in class operating teams on the ground in all of our markets our balance sheet as markets just alluded to as good as it's ever been and positioned to fund our growth well into the future.
The value creation of our development pipeline will create strong earnings growth beyond 2020 had exceptionally high margins. We have developed our ability we have demonstrated our ability to grow in the coastal tier one markets and we'll continue to do so.
Finally, I'd be remiss, if I didnt. Thank all of my colleagues at Duke Realty for all of their hard work and dedication that has allowed us to achieve the level of Skus. We have I also want to thank our investor for their continued support and the recognition of our goods stewardship of their invested capital.
Now we'll open it up for questions. We would ask if you limit yourself to one question or perhaps two short questions that of course, you are always welcome to get back into queue.
Thank you operator is not good question.
Thank you, ladies and gentlemen, if you wish to ask your question. Please press one zero on your telephone keypad you may withdraw your question at any time by repeating the one zero come and if you think please pick up the handset before passing the numbers.
You have a question.
One at this time.
Our first question comes from the line Nancy Carmen with Citi. Please go ahead.
Well to new on.
Hey, guys good afternoon.
Tom.
Nick I think you mentioned this person and then mark for Peter but you talked about selling assets to manage tenant exposure is that managing tenant exposure on weak side, where you want to.
Jim.
From those exposures, where do you think there could be and an issues or is it from an exposure just from the type you've gotten too big with some of your larger tenants. If it's the latter Manny. We obviously, we have a large tenant that we continue to do a lot of business wet and we have consistently Dennis over the years is prune some of those assets.
As we continue to do more business with them.
And then in terms of.
Managing the relationship between retention and occupancy and rental rate growth.
Do you guys have revenue management system in place are you building revenue management system to sort of control that or is it more touch and feel in using your market teams to determine what's appropriate or not.
Manny we've got part of our budgeting forecasting system, we do have.
Basically downloads that we get was market data can compare.
Projected deals with what we believe as market rental rate deals to make sure. We're getting fair pricing. So we do have that capability.
And for me. Thank you.
Yes.
Our next question comes from the line of Rick Anderson with NBC. Please go ahead.
Thanks.
I couldn't figure out the one zero Q so.
Sorry for that anyway.
Maybe a question for Jim.
In the age of E. Commerce, there has not been a condition of.
Okay, damaging over supply I think thats correct.
Because obviously things of ramp from a ecommerce perspective over the past several years do you guys have any sense of what that might look like because even in a situation of national oversupply now.
You are still getting some fairly substantial market rent growth. So I just wonder.
What.
Your vision would be of when when this trees do stop growing to the sky here what is going to look like do you think it could be a substantial sort of drop off or more of a sort of an easing type of event.
Well, let me let me answer in a couple of ways I mean, the one correction I would point out is we don't think Theres national oversupply. We've all spent a lot of time talking about oversupply being limited to a handful of submarkets.
And what our otherwise generally pretty healthy markets and we won't digress into the into all the different submarkets, but more specific to your question you have to remember Amazon.
E Commerce industry was around out to the extent that they are today.
Financial in the financial crisis.
But I think what you're seeing today is is their primary activity.
Is there a desire to get closer into major population areas.
And that's typically not where we're seeing the oversupply.
Oversupply is greenfield development in Submarkets with low barrier to entry and I think most of the major ecommerce companies and quite candidly the retail companies in the consumer companies already have most of those regional facilities in place that would be ideal for that.
Most of what Amazon and the others on looking at today is much closer in.
To drive that last mile 24 hour.
Fulfillment promise that they made starting about a year ago.
Okay, and so with that in mind do you see yourselves.
Perhaps moving closer in.
Obviously, you have a lot of different.
Size categories in the portfolio, but do you have a net appetite to get smaller.
As the e-commerce business evolves over time.
Absolutely.
I would make a couple of comments if you just touched on the highlighted transaction that Steve covered from the fourth quarter.
A major deals with with home depot and Amazon in the Meadowlands and you can't get much closer.
In in the Tri State area, a lot of our infill redevelopment in southern California projects that we have teed up for 2020 in the East Bay and that in the San Francisco market and the same in Dade County down in Miami. So you will continue to see us focus on that in those coastal tier one markets.
But the other comment I would make a view we get a lot of headlines from 1 million square footers, and we all love that but you know us as Steve said in his comments I think our average deal size in the fourth quarter was 139000 seat so.
It's not all billion square footage we're doing.
Plenty of 70, 500000 square footers, along with the other mix.
We've just been trying to combat for the last couple of quarters that people think the rent growth in the performance of the smaller buildings is better than the bigger buildings and quite candidly, we just haven't seen that in our portfolio not that 24% rent growth in the smaller buildings is bad it just happens to be better in the bigger buildings, but she will continue to see us take.
A very broad based focus on development.
Steve as from time to time gone through the development pipeline with vehicle and we have buildings from 75000 square feet to 1 million square feet. So you will continue to see us focus on that.
Okay, great. Thanks very much.
Our next question comes from the line of Nick gentlemen, Baird. Please go ahead.
Hi, guys its neck here with Dave Rogers.
Looking at.
Dispositions you had like roughly 500 million last year in around 300 500 million. This year that a good run rate looking into like 2021.
Yes, I would say tie a little higher this year.
Yes, I would say that will consistently run at that those levels for the next few years.
Yes, I think I would add the variable to that is.
It all depends what the development pipeline looks like.
Our guidance was a little lower at the start of last year, just simply because the markets did not perform particularly well at the end of 2007 or a 2018 going into 2019, but obviously, we were able to accelerate development activity over the course of the year and Thats one of the levers we can pull to help fund that development activity.
This increase dispositions by 100 or $150 million.
[music].
Great. Thank you.
Our next question comes from the line of Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you.
I want to go back to the supply question.
And.
Hi can you hear me.
Jamie Vegas, I want to go back to the supply discussion.
So when you talk about these oversupply specific submarkets and I'm just curious like in in the broader markets. When you have an oversupply submarket, how does that impact fundamentals in the not oversupply submarkets like our people just completely.
Treating them as different and you're still able to push rents and people aren't pushing back on concessions or anything like that can you just give some color on how that's playing out within the same market.
Let me start with that and then Steve can give you a little bit more color take take any of the major metro's.
Take Chicago, and we've talked in the past, although I would tell you Chicago's kind of off of our.
Watch list simply because they had a huge second half of the year.
And to vacancies in that I 80 quarter down probably 300 basis points, but when you have softness in that market, particularly in the big box side, but you have markets in Chicago like Dupage County at O'hare.
Which are probably 20 to 40 miles away.
And they sit different customer base so.
Very few people in our world are going to leave one of those markets to go to the 80 corridor.
To take advantage of softness of the market drive the prices down and I think you'd see the same in Dallas. If you were in the DFW market. There's very few people that are going to leave that market and go 30 miles south to south Dallas to take advantage of softer market that could happen, but generally if people are people are where they are has that thats, where they need to be.
Yep, Jamie I'll add to that as I think I think it advantage we have with our local operating teams is knowing the market is very well there is some obviously, there's some drafting and.
Some of the some of the tenant rep folks out there trying to do the best they can for their clients, but no and no one year product known your sub markets I think.
Pays dividends and cases like that.
So when you think about your weakest the weaker submarkets are there any that you have more bleed across the entire market or it's pretty consistent.
No I mean, I think the big Metro's, if you're looking at like Jim mentioned.
South of Chicago out as those I'd dragged down a little bit and 55 again it depends on the kind of requirement that there is.
And what the what the ultimate use of that facility is.
I'd say the same with south Dallas again, it depends how far south what size use it is.
Really need to drill into that level of specificity to to understand if thats going to affect paradigm.
Okay.
And then finally from me do you think about your guidance last year.
Thank you came out at.
Much lower same store NOI growth rate than you I think you came out at four or five and you're ending with the ended much higher than that.
Thank you initially guided to like 700 million of starts and year now, finishing the year. One one can you just talk through kind of how you guys see how youre getting to your initial numbers for this year and what the what would take it a lot higher even lower.
How much conservative is baked into your current estimates.
Yes, Hi, Jamie I'll start and then and then then market chime in we start our budget process.
Literally in August .
And build it up from there.
We think the budget today in our guidance has what I would tell you is the appropriate amount of conservatism in it.
It's it's not overly aggressive we don't think.
Given everything that we're seeing in the world. It's a ton to put an overly aggressive busted out there what would lead us to be able to outperform like we did last year and and the last couple of years since we've become pure play as Steve alluded to it's build to suit activity keeping that development pipeline above 50% Preleased it's leasing.
Our first generation spec space as it comes into service or before keeping that second generation occupancy up as well with our continued focus on rent growth. So if we can continue to do that which we did last year that will give us the ability to to outperform the other thing, which we've we've talked about.
Earlier is you got to remember that even if we outperform on the new development starts by.
Pick a number several hundred million dollars, that's not going to fall to the bottom line in 2020.
That's that's future growth beyond because those are buildings that were starting this year, even if they're build to suits. There's very very little income that's going to thats going to come in from those.
In 2020, so what we're doing this building and growth for 2021 and 2022, but.
Leasing keeping the pipeline occupied and continue to focus on rent growth will allow us to continue to outperform and all the metrics and Jamie the only thing I would add to that.
The same property perspective.
We had virtually no bad debt of tenants default issues in our same property portfolio.
19 or 18.
We believe from a budget or guidance perspective is proving to build a little bit more of a normalized amount in there if it doesn't happen and we have another successful year not having any issues like that there would certainly be some upside based on that.
Okay. So how much how many basis points of your same store growth is is that a drag.
When you look at.
Occupancy bad debt, whatever you want to call it which sometimes are one of the same it's about 50 basis points safety.
Okay.
Alright, Thank you for the color very helpful.
Thanks.
Our next question comes on the line of Graham.
Okay with Morgan Stanley . Please go ahead.
Thanks for taking the questions.
Just so on this the big book small box numbers you alluded to.
I just wanted to clarify the rent number that you were giving the 14% to 18% overall.
Im assuming those with cash rent spreads and can you give a sense.
And how that may look across the properties the property sizes and just related to that one of the appears alluded to the fact that smaller retailers are now sort of starting to retool their supply chains, maybe lagging some of the larger ones and so there is a pickup in big box demand is that is that what you're seeing as well.
Well that that's one of the things we alluded to.
In earlier calls is E. Commerce has been <unk> been a great tailwind for us, but the other one that doesn't get nearly as much credit is as you alluded to retailers in consumer products.
Reengineering their supply chain, because effectively Amazon has set consumer expectations that.
At overnight 24 hour delivery. So if you want to compete you have to have a supply chain in place that can allow you to do that so theres been a lot of that repositioning and thats been obviously, another big benefit for US and then I'll, let Steve give you some of the details.
Well.
I guess I'd add one thing before I get into the rent growth side, just from a demand standpoint, I mentioned my comments, it's pretty broad and and widespread.
I think the categories, leading that demand or Threepl e-commerce retail food and beverage and.
We saw some some auto deals as well this past year so.
Back to your question on on.
Rent growth by size I'll give you our breakdown.
For for deals under 100000 feet for 19, our cash rent growth was 10, six and our GAAP was 25.
Between 102, 50 was 10% cash 24% gap.
250 to 500 was 14% cash and 29% gap and over 500 was 16% cash.
And 44% gap so.
Again, I think as Jim made a comment very good across the board in particular to the assets we own.
Quite opposite of some of the big box headlines that have been out there in the past okay. Great and then just last one for me. So some of your some of that the TPS those have cited.
Maybe slowing down or hesitating to go into certain submarkets, so markets not because of supply or just the absolute level to rents, but more because of.
Labor and the challenges to find labor are there any markets that youd I don't if you want it if we wanted to watch list, but any markets, where youre seeing Dennis just sort of stepped back and say hey, how do I, how do I get this fully operation and because of labor issues.
Yes, I mean, I guess I think two things one I think the labor issue and the oversupply issue. There is not surprisingly there is a little bit overlap there.
Labor as a big issue for our tenants.
It is something that we take very serious on our side and we do labor studies on every every major parcel of land, we look at as well of as well as any big exposures we have.
So the were prepared and how to address that and whether we want to make that investment as it relates to land, but yes labor is a concern.
And I'd say, if you're looking for specific markets are sub markets.
It's actually overlays pretty well with the ones you mentioned.
Well, we've talked about from an oversupply standpoint.
Great. Thank you.
Our next question comes from the line of Aaron Eric Frankel.
Advisors. Please go ahead.
Thank you just per year same property NOI growth guidance can you just provide the explanation of what drives in different in your GAAP and cash same store NOI growth. Thank you.
Yes, Eric.
Probably the biggest thing is if you look at 2020 same property, we added 34 properties to the pool.
So these are properties that got stabilize kind of at the end of 2018. So now if you go to 2020, it's the first time, you've got two full years. So you add those 34 properties in.
Most all of which were already leased on one one of 19. So the GAAP rent growth is exactly zero, but you do have some cash rent growth either through.
Some free rent burn off and or you get the rent bumps at least so thats probably the biggest factor that's driving that maybe a little bit bigger than normal gap between the cash in the GAAP number.
Okay. Thank you and then just.
For your investment this quarter, Nick I think you always say that.
The yields you get on acquisitions, a bit lower than your than your disposition cap rates that it actually looks somewhat narrow this quarter on a relative basis. Maybe you can provide just some color on the deals you struck in and what kind of.
Yield you expecting a couple of years on your acquisitions to that actually 44.8% actually looks fairly high. Thank you.
Yes.
A little narrower this this quarter.
Partly because it was but more of a pure quarter from terms, we're trading industrial for industrial some of the other quarters. We may have had some flex asset or some other assets in there that.
Made this spread a little bit little bit wider and it's also just the mix we actually.
So in a couple of class eight facilities in our at Midwest markets that got very good pricing.
So I think going forward.
Depending on the mix you should see you should see its similar results on this on spreads.
Okay, Qubec and thank you.
Okay.
Our next question comes from the line of Frank Lee with BMO. Please go ahead.
Hi, guys, you mentioned earlier, you're able to complete a decent amount. It's early renewals with only 5% the portfolio expiring. This year. It's just want to get a sense of how do you bounced decisions on early renewals versus holding off a bit potentially for higher rents.
I'll start and then maybe Steve can chime in a little bit.
If you look at 2019, we actually.
Kind of double the amount of leasing we did on the renewal basis from what was going to expire. So if you look in forecast that that would happen again in 2025%. That's expiring I think we can actually roll closer to 10% of those leases.
Only thing I and I'll, let you talked about the economics, how we look at it but just keep in mind and when we talk about early renewals for the most part we're talking a couple of quarters are really we're not talking a couple of years early.
[music].
By the time to lease comes to.
The lease maturity date comps, if you haven't already not renewed a quarter earlier, you're going to lose that tenant. So lot of the deals that are going to be expiring in the second and third quarter. We're doing those deals now in the early renewals, we'll be talking about in 2020 will likely be the first half of 21, so they're not extremely early and then I'll, let Steve comment on how we look.
From a economic perspective, yes from a from a cash from operations perspective.
As an asset management focus in terms of getting out in front of where our exposure is.
But as Mark mentioned is this is still landlords markets. So.
Many times these will call early renewal discussions happen from the other side of the table, where the tenant themes. There facility is mission critical and they want to make an investment in their facility they want to lock tied up longer term and.
We welcome those discussions.
Okay, and then you mentioned in your prepared remarks that you expect a similar level of rent spreads. This year are you able to break that down.
You rank growth expectations between tier one versus non tier one markets.
You know, it's actually pretty consistent across all of our markets.
And a lot of that has to do with lease term because obviously the rents in the postal tier one markets were drawing a lot faster than the are in the non coastal markets, but we got a lot of longer term leases that have several years embedded rent growth in them. So we're really seeing pretty consistent rent growth across all markets.
Okay, great. Thank you.
Our next question comes from the line of Michael Carroll with RBC capital markets. Please go ahead.
Thanks, Jason on for Mike.
Just a follow up on mic in March comments around dispositions I'm wondering what level of concentration single tenant you're comfortable with before you begin looking to term met exposure.
Well, we've always very we've always said.
We would start getting concern when somebody approach 10%.
Last year, our largest single tenant from an NOI perspective.
With six going to 7.5% I think.
And what we're seeing simply because of the amount of business that we have going with that tenet is that number approaching 10%. So we're just trying to be proactive and manage that look at our portfolio look at lease explorations with that tenant and try and select the the most appropriate targets to peel out of the portfolio and.
Hopefully get the best pricing.
Okay. Thanks.
Our next question comes from the line of John Guinee with Stifel. Please go ahead.
Thank you Hey, Jim there might be a typo in your in Europe financial statements, but it looks like you reduce your land held for development down by about 95 million.
In the last 12 months and you're down around 240 million.
If thats correct and not sure. It is and then you assume say $20 per buildable square foot, you're only down to say 12 million square feet.
Development capacity.
If those numbers are ride and correct me if that wrong, where do you have your land inventory.
Well John I assure you the numbers are correct and.
Thats actually we finished the year a little lower than we had anticipated I would have told you.
60 days ago that we thought that number would probably be a little bit closer to 300 million.
But robust development activity in the fourth quarter and our ability to push some land closings into the first quarter of 2020 gave us a somewhat more favorable balance.
So if you remember we control land that is under contract that's not on the books, yet or this under option agreement. So we do have access to more land or just the 240 million. This reference there.
And I will tell you and we've all talked about this.
And is is one of our biggest challenges.
We are out every day.
Pursuing a lot of different sites, particularly as we've talked about in the coastal tier one markets and the infill markets add yes, thats, that's an area, where we've been able to differentiate ourselves quite candidly the more complicated the site.
The better the opportunity for us. So you will continue to see us be very active.
On the land acquisition side.
With the one caveat that you know given where we are in the cycle, we're probably not interested in making really huge land that they've got to take three or four years to to entitle.
Or put into the development pipeline I, just think thats, probably a little bit careless at this point in the cycle, but we monetize $360 million with the land last year doing $1 billion a development.
As I said answering some earlier questions. We can keep the build to suit pipeline going we can keep our occupancy is up we'd certainly like to replicate that and that will have us out buying another $3 million to $350 million with Atlanta.
Okay and then.
Nick or arm.
Mark.
What was your most recent dividend increase.
And where are you up against your.
Dividend payout ratios relative to taxable income.
And how much of any gains in the disposition.
Pipeline can be sheltered versus a need to 10 31 exchange that.
Yes, John we are let our last increase was in October rate for dividend, our quarterly dividend two cents in October .
I will pretty much up against that quite frankly, but we've been able to shelf for all the gains through tenthirty ones.
Most of the Centsthirty ones have been development, because we can 10 31 our development.
Somewhat complicated, but we've been able to do that so we've been able to shelter those of the gains that next creating through tenthirty ones to 2020 is the last year we have.
Taxable income coming in from the medical office. So I mentioned in my prepared remarks that we collected.
The final installment on our note there of $110 million, so that will trigger another gain in 2020 as well.
But long winded answer I don't think we.
Half to half the raised our dividend to meet our requirement, but we're pretty close.
Great. Okay. Thanks, a lot.
Our next question comes from the line of Jamie Feldman with Bank of America. Please go ahead.
Thank you I'm, sorry, if I missed it did you guys say, what you think rent growth could be this year across your markets market rent growth.
Yeah, Jim I think we said that generally for the next 12 to 18 month, we take rate growth sort of look pretty similar to what wasn't 19.
Kind of that low double digit kind of around 10% or maybe a little better on a cash and.
Mid to upper Twentys on a GAAP basis.
Is your leasing spread or actually I'm thinking about market rent growth.
I'm sorry, yes, I think we said in my comments, Jamie I think we'll see us market rent growth similar to what we had 19, which is sort of probably mid single digits.
And the middle part of the country and you'll see some some higher single digits to double digits on the coast.
Okay, all right, thanks, sorry about that.
And we do have a follow up question from the line of Eric Frankel with Green Street Advisors. Please go ahead.
Thank you can you just.
We understand how much of your development starts expectations for 20, it kind of already call for or accounted for.
For for 2020, our development starts yes, I mean, I would value short of the build to suit side of the house.
Obviously, we've got the spec projects identified with with land that we either owner control.
Our builds the pipeline today looks looks good but thats the thats the the variable component.
With that answers your question.
Yes.
Mixes 50, 50, we did 25 projects this year and in 2019, I should say in 13 were spec and 12 or businesses.
Okay. Thanks, and then just on your the timing of some of your Midwest sales this year and that can be.
Towards the beginning the year ended the year or is that just kind of dependent on your on your investment activity generally.
It depends on our investment activity that it will be spread pretty evenly throughout the years, that's sort of how we stage. It out I think was closed one asset. The so far this quarter I think made for square might be a little lighter and the second third quarter of a little heavier.
Thank you.
Is there any further questions. Please first one than zero at this time.
And we didn't have a question from the line of Michael Mueller with Jpmorgan. Please go ahead.
Thanks, Hi.
I was wondering is the mix a building sizes or would you consider to be infill. When it comes here 2020 development starts is that any different than what you saw over the past few years.
No I don't think so you have to remember a lot of the instill the size of the building is driven by the land site, we're simply trying to Max out the building. So in one case it might be.
A mid size building of 150000 seat and that's what might be 350000 square feet.
So.
It's not that were specifically trying to target one size versus the other on the infill.
We are trying to maximize the value is really what we're trying to do.
Got it okay that was that thank you.
Our next question comes from the line of Nick Yulico with Gadea Bank. Please go ahead.
Hey, this is Josh Brown for Nick could you give us a break out of your current exposure to the tier one markets and if you could get to that 70% goal. This year given your higher development and disposition guidance and then can you talk about the development spreads are getting into tier one markets and I see that trending.
Yes, I'll start with that.
Basically on the postal tier one.
We moved that from 31% at 37% on our gross asset value basis by year end to two.
22019.
We because 75% of our land bank is income tier one markets. We expect that to continue to grow and then just overall on tier one the gross asset value went from 59% to 65%.
The non coastal tier ones are basically holding steady and most of the growth is in the coastal tier ones.
And then I would just comment on the yields I think as question on the yield spreads.
I would tell you the margins are still very very healthy I think our whole pipelines at 33% from a margin perspective, I think we expect that to continue our yield does come down.
And really came down during the year, but thats just a factor of what Nick just went through its because more of our development has done analogies infill high barrier markets.
We're creating great value, but you'll has lower on a GAAP basis for the cap rates are lower.
Great. Thanks.
Our next question comes from the line.
Ki bin Kim with Suntrust. Please go ahead.
Thanks, Larry I was pressing star one the whole time, I know you changed that up.
Going back to the sub markets that are prone to oversupply I know you will have a lot exposure there.
Just kind of looking at that as maybe.
Maybe you guys a lesson learned for how those markets behave when it is becoming oversupplied is it fairly typical to what we've seen in other cycles like hired T.I.s or free rent.
Lower rental what are you thinking those up market.
Yes, I think I think in those submarkets that don't have the barriers to entry that that we talked about.
You are seeing concessions in terms of free rent starting to creep and obviously, you're seeing pressure on rental rates.
We've seen T.I.s creep up so those are things I mean, I would tell you that the bigger concern whether its these handful of submarkets or or anything else.
Got a lot of headlines gets talked about relative to supply.
I think you need to keep in mind, we still did 185 million feet of absorption for the year and that's that's better than the historical average of about 175 million and as long as long as that number keeps up.
We will continue to see see good economics in our space.
Well, what do you think like the net effective rent declines are in those markets.
Hi.
It's hard to Thats hard to say I mean, I think I think you've probably seen.
Probably the worst submarkets, maybe you've seen 10% declines, but I mean thats that is that's a nuanced.
For that type of staff.
Okay, and just last question within your tier one.
Bucket.
What's the Submarkets are you in any way I guess I should say this way.
Are you pretty.
If I would that submarkets are in within those tier one for do you think there even.
More kind of movement that you want to do or portfolio reshuffling within those tier one buckets.
To go ended up better than market.
Well I mean, keeping were caught we're always looking at our portfolio in ways that we can improve it. So there will be time, where we may have an asset or two that we either got to flow acquisition or something or we've had for a while in a submarket that we made prune add one of the tier ones I would say, it's mostly going to be end.
Non coastal tier ones that that would occur not the coastal tier launch relatively new in those markets and we're very happy with.
Where though those portfolios are situated right now.
Alright, thank you.
If there any further questions. Please first one zero at this time.
Alright, thank everyone for joining the call today, we look forward to seeing many of you during the year at various industry conferences as well as hopefully getting out to our regional markets. Thanks again.
That does conclude our conference for today. Thank you for your participation and feeling NC conference. The Kevin you may now disconnect.
We're sorry your conference is ending now please hang up.