Duke Realty Corp (DRE) Q2 2019 Earnings Call Transcript

DRE earnings call for the period ending June 30, 2019. Read More...

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Duke Realty Corp (NYSE: DRE)
Q2 2019 Earnings Call
Aug 1, 2019, 3:00 p.m. ET

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] And as a reminder, your conference is being recorded.

I would now like to turn the conference over to your host, Ron Hubbard. Please go ahead.

Ronald M. Hubbard — Vice President-Investor Relations

Thanks, Louise. Thank you. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien, CFO; and Nick Anthony, Chief Investment Officer.

Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks and other factors could adversely affect our business in future results. For more information about those risk factors, we would refer you to our 10-K or 10-Q that we have on file with the SEC and the Company’s other SEC filings. All forward-looking statements speak only as of today, August 1, 2019, and we assume no obligation to update or revise any forward-looking statements.

A reconciliation of the non-GAAP financial measures that we provide to the most applicable GAAP measures on this call is included in our earnings release. Our earnings release and supplemental package were distributed last night after the market close. If you did not receive a copy, these documents are available in the Investor Relations section of our website at dukerealty.com. You can find our earnings release supplemental package, SEC reports and an audio webcast of this call in the Investor Relations section of our website as well.

Now, for our prepared statement, I’ll turn it over to Jim Connor.

James B. Connor — Chairman and Chief Executive Officer

Thanks, Ron. Good afternoon, everyone. Demand for modern logistics space in our markets remains very robust, while a few data points tied to global trade and business investment have decelerated a bit, consumer confidence and spending remains strong. Moreover, supply chain expansion and reconfiguration trends remain exceptionally strong as we’ve witnessed firsthand in our business.

Regarding tariffs, in light of the President’s tweet earlier today, I’ll reiterate what we’ve been saying for the last two or three quarters, that we have not been observing any impact on decision-making from our customers. It’s not to say that global trade uncertainties could not have the impact on the consumer on the margin, but we believe continued expansion and modernization of the supply chain configuration should be resilient through any soft patches.

Industrial fundamentals continued to remain relatively balanced. Second quarter of supply and absorption were both about 40 million square feet and there was no change to national vacancy rates, which remain at record low 4.3%. Although there are pockets of oversupply in a few sub-markets that we’ve discussed in the last few quarters, we have very little exposure in these sub-markets. Generally speaking, there are still labor shortages and land scarcity dynamics, which seem to be creating a natural discipline on the supply in the majority of our markets.

Nationally, rents grew 6.4% for the quarter compared to the second quarter a year ago and we expect these rent growth trends to remain consistent for the remainder of the year.

Turning to our own operating results, we are seeing similar strength in our own portfolio, with stabilized occupancy at 98.2%. Total portfolio occupancy is up 40 basis points to 93.4% due to the overall leasing volume of 7.5 million square feet in the portfolio, which includes 1.4 million square feet of new leasing in spec projects that had been delivered over the last few quarters, as well as 2.2 million square feet of leasing in new build-to-suit transactions.

We’ve been hearing concerns from some that leasing in larger facilities was slowing. As we’ve said, other than a few low barrier sub-markets that are a bit oversupplied, we’re just not seeing this. For both sub-markets, we think it’s more a matter of lack of available large spaces than lack of demand. I think our results for this quarter would demonstrate that. Our leasing activity during the quarter was broad-based, spread across 18 markets, including five leases signed in excess of 500,000 square feet and 13 leases over 200,000 square feet.

Overall, the leasing activity and strong fundamentals led to a record quarter of rent growth of 12% and 28.3% on a cash and GAAP basis, respectively. On a year-to-date basis, we’ve realized 18% rent growth for buildings under 100,000 square feet, 28% rent growth for buildings between 100 and 250,000 square feet, 21% rent growth for buildings between 250,000 square feet and 500,000 square feet, and 48% rent growth for buildings greater than 500,000 square feet. This reflects very strong fundamentals and perhaps more importantly, that we are located in the very best sub-market in each MSA.

We started $395 million of development projects this quarter, across eight different markets that were 83% pre-leased overall. The new starts included seven build-to-suit transactions, highlighted by last night’s announced two-building, 1.3 million square foot transaction with Home Depot. The transaction will comprise two state-of-the-art facilities located on a brownfield site in the Perth Amboy sub-market of New Jersey. This is a complex project where we had placed the land under contract well over a year ago. Home Depot’s investment with us is part of their previously announced $1.2 billion supply chain overhaul to enhance delivery to consumer and commercial customers in one day or less.

We also executed two 100% leased build-to-suit transactions totaling 164,000 square feet for a major e-commerce retailer to serve their last mile needs. We also executed a 500,000 square foot 100% pre-leased build-to-suit in Atlanta near Hartsfield Airport with a 3PL customers.

Lastly, on development leasing, we executed a significant transaction in our development pipeline in South Florida. We began a speculative development in the first quarter totaling 146,000 square feet. Shortly thereafter, a 3PL tenant of ours requested that we expand the facility to 162,000 square feet. As a result, we executed a long-term lease for the entire expanded building, effectively turning this into a build-to-suit transaction just months after the project started.

Several of you have picked up on a recent press release by Amazon regarding the development of a new G+3 fulfillment center in Ohio. We were acting as the fee developer for Amazon. We will not own this facility nor are we the general contractor, therefore, we are not counting this project in our development volume or incorporating it into our revised guidance for new development starts for the balance of the year. Since most of this development volume will occur in 2020, this will have very little impact on our 2019 service operations income and will get incorporated into our 2020 guidance to be released in January of 2020.

Our overall development pipeline at quarter-end had 19 projects under construction totaling 6.4 million square feet at projected $821 million in stabilized costs for our share. These projects are 46% pre-leased and our margins on the pipeline have improved to over 30%. Though our pre-leased percentage dipped below 50%, this is due to highly occupied deliveries in the in-service pool this quarter. And keep in mind, our second quarter development starts were 83% pre-leased.

Our development outlook for the remainder of the year is very solid. We have a very healthy pipeline of prospects across our entire platform. This, combined with our outstanding year-to-date results, is driving our increased guidance for development, which Mark will cover later.

I’ll now turn it over to Nick Anthony to cover acquisition and disposition activity for the quarter.

Nick Anthony — Executive Vice President and Chief Investment Officer

Thanks, Jim. We continue to be proactive in our strategic capital recycling for the purposes of both contributing to self-funding development and achieving greater Tier 1 geographic exposure. During this quarter, we closed on the sale of a 855,000 square foot recently completed and 100% leased facility in Columbus, Ohio, which generated $96 million of proceeds. In turn, we recycled a portion of these proceeds into 110,000 square foot cold storage facility acquired for $33 million located in the East Bay sub-market in Northern California.

Looking out to the second half of the year, we have a couple of portfolios and one-off assets that are in various stages of their marking process. At this time, the majority of our remaining asset sales are expected to close near the end of the third quarter. The acquisition market remains challenging due to pricing and we will remain selective and disciplined on any transactions.

As Mark will touch on in a moment, our revised guidance [Technical Issues] of these current market conditions and our desire to invest more capital into our development pipeline.

I will now turn the call over to Mark to discuss our financial results and capital transactions.

Mark A. Denien — Executive Vice President and Chief Financial Officer

Thanks, Nick. Core FFO for the quarter was $0.36 per share compared to $0.33 per share in the first quarter of 2019 and $0.33 per share in the second quarter of 2018. Core FFO increased from the first quarter of 2019, due to typical first quarter spike in non-cash general and administrative expense related to our annual stock-based compensation grant in February, along with continued strong operating results.

Core FFO increased from the second quarter of 2018 due to growth in our asset base and strong overall operational performance. We reported FFO as defined by NAREIT of $0.35 per share for the quarter compared to $0.33 per share for the first quarter of 2019 and $0.33 per share in the second quarter of 2018. With the increase also being driven by positive operating results. The impact of the new lease standard had an approximate $0.01 per diluted share impact on FFO as defined by NAREIT for each of the first and second quarters of 2019.

Same-property NOI growth for the quarter was 4.4% on a cash basis, down from 7.2% in the first quarter. As you may recall from the last quarter, we had noted 300 basis point positive impact from free rent burn off for the first quarter. This quarter’s growth is a result of continued strong rental rate growth on releasing as well as improved average commencement occupancy in the same-property pool over the prior period.

Same-property NOI for the second quarter on a GAAP basis was 3.2%. Looking forward, and as I noted last quarter, we expect the second half of the year same-property NOI to moderate due to more challenging occupancy comparables, given that the second half of 2018 average commencement occupancy was an incredibly high 98.8%. Although we believe our same-property occupancy levels will remain around 98%, it is just not reasonable to assume the 98.8% level we had achieved last year.

In addition, the second half of the year will be negatively impacted by about 50 basis points for two unique situations. As we mentioned on our last call, we have a tenant in two different spaces in our same-property portfolio totaling about 425,000 square feet. They consolidated and expanded into a recently completed 620,000 square foot build-to-suit with strong rent growth, but this creates a drag on same property NOI from the vacated spaces of about 30 basis points from the second half of the year. This is still a great transaction for us, and will increased total NOI, but will be a drag on the same-property NOI for the last half of the year until we can release their former spaces.

The second situation involves the bankruptcy of a tenant in Atlanta this month. The good news is we already have signed a long-term lease to backfill the entire space with very strong rent growth. Even though this is a great outcome that will provide strong future NOI growth, it’ll be 20 basis point drag on second half 2019 same-property NOI as the lease and rent for the new tenant won’t commence until later this year.

Even with the negative impact on same-property from these transactions and the tough occupancy comps from the prior period, rent growth and overall occupancy are still expected to be better than originally estimated leading to our increased guidance. We continue to fund the majority of our growth with internally generated cash flow such as disposition proceeds, notes receivable and retained cash flow from operations.

In addition and as noted before, we also have significant leverage capacity to fund growth for the next several quarters, yet given our significantly increased growth prospects from development, we issued $57 million of equity at an average price of $32.20 to fund a portion of this growth. Equity will not be a major source of capital for the foreseeable future, but we’ll consider using our ATM in relatively small amounts if we believe our share price warrants and only if we have outsized opportunities for growth.

Based on this, we do expect to file a new ATM program tomorrow to give us adequate capacity to act under the program. We are still targeting a gradual increase in overall leverage to the low to mid-5s on a debt to EBITDA basis.

Let me now address revisions to our 2019 expected range of estimates, which is an exhibit at the back of our quarterly supplemental as well as on our website. To reflect our continued leasing momentum, particular our recently completed and under development portfolios and strong rental rate growth, which continues at a pace that continues to exceed our original expectations, we have further increased guidance for core FFO to a range of $1.41 to $1.45 per share, which equates to an additional $0.01 per share increase at the midpoint and 7.5% growth over the prior year.

We are also increasing our guidance for growth in adjusted funds from operation, AFFO, on a share adjusted basis to a range of 8.5% to 11.9% from the previous range of 5.9% to 11%.

Given the year-to-date development starts and a very strong build-to-suit prospect list and momentum heading into the second half of the year, we are raising guidance for development starts to a range of $900 million to $1.1 billion from our previous range of $600 million to $800 million, representing a significant $300 million increase at the midpoint. In addition, we are also decreasing our range on acquisitions by $50 million at the midpoint to a range of $100 million to $200 million.

Revisions to certain other guidance [Technical Issues] can also be found in the Investor Relations section on our website. And now I’ll turn the call back over to Jim

James B. Connor — Chairman and Chief Executive Officer

Thanks, Mark. In closing, we’re obviously very pleased with our team’s execution through mid-year. Market fundamentals are exceptionally strong and we’re capturing growth opportunities with both new and existing customers and should achieve our objectives for high single-digit growth in cash flow, corresponding dividend growth and continued investment growth in Tier 1 markets.

I also want to point out that last quarter, we published our Annual Corporate Responsibility Report, which I would encourage everyone to review on our website. It’s an important element of our culture and our strategy. We believe our ESG characteristics and the initiatives are a unique and positive differentiator of the Duke Realty investment proposition.

We will now open up the lines to the audience and we’ll ask participants to keep the dialog to just a few brief questions to allow everyone to participate and you of course are always welcomed to get back in the queue. Louise, you can open up the lines for questions now.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question is from the line of Jeremy Metz. Please go ahead.

Jeremy Metz — BMO Capital Markets — Analyst

Hey, guys. In terms of the developments, your pre-leasing dipped a little bit below 50% here. It sounds like you’re comfortable taking on even more spec leasing, given the strength in the market. So should we expect to see that number trend a little lower or do you want to keep it more balance at around that 50% mark?

James B. Connor — Chairman and Chief Executive Officer

No, I think we actually started talking about this as early as probably NAREIT late last year and then again at Citi and NAREIT this year that we were anticipating the possibility that it would dip below 50%. Part of it is just simply timing. The second aspect of it is the size of some of these transactions that we knew we were going to start. So we didn’t want anybody to be too surprised, I think you’ll see that number moderate in the third quarter, somewhere between where it is today and 50%, and then, I think by the end of the year, it will be back up over 50%.

Jeremy Metz — BMO Capital Markets — Analyst

All right. And then I was wondering on the investment front if you guys looked at the IPT portfolio deal. Any thoughts there. In terms of pricing if you did underwrite it? And then maybe just bigger picture, willingness or interest in taking down a large portfolio transaction like that?

James B. Connor — Chairman and Chief Executive Officer

Well, I’ll let Nick talk to underwriting IPT and then I can give you some higher level comments.

Nick Anthony — Executive Vice President and Chief Investment Officer

Yeah. Jeremy, we did, we did look at it. Any portfolio we look at today is going to be dilutive to our portfolio from a quality perspective and actually as we grow our Tier 1 exposure, especially our high barrier Tier 1 exposure, the geography isn’t as accretive either. So it was a good portfolio out there and I think it priced really well.

James B. Connor — Chairman and Chief Executive Officer

Yeah. And then, Jeremy. I guess the last comment in terms of our desire and/or our ability, clearly, we’ve got the ability with our balance sheet where it is to make some big acquisitions, but it’s really hard for the senior leadership team and our Board to endorse a major transaction when at that kind of pricing you’re looking at very best breakeven and in the case of IPT probably modestly dilutive. So we’d much rather keep the balance sheet in good shape and reinvest money back into the development pipeline where we’re making much higher margins and much more value creation for the shareholders.

Jeremy Metz — BMO Capital Markets — Analyst

Got it. Thanks.

Operator

The next question is from Caitlin Burrows. Please go ahead.

Caitlin Burrows — Goldman Sachs — Analyst

Hi. Good morning, or I guess, good afternoon, now. [Indecipherable] Good afternoon. Your 2Q leasing spreads was the highest in at least recent history, maybe history overall. So I guess I was just wondering if you could comment on your thoughts on in-place rents versus market rates and with the stabilized occupancy of either 97% or 98%, you talked about how do you think you could keep pushing occupancy versus right going forward?

Mark A. Denien — Executive Vice President and Chief Financial Officer

Yeah. Caitlin, I’ll start with that. It was our best quarter ever from a rent growth perspective. I think for the balance of the year, we’re probably still targeting internally that 10 to 25 and 10 on a cash basis 25 on GAAP for the year, and I think we’re still very comfortable that we’ll be right around that range for the full year. So last half year will probably look a lot like the first half of the year. Looking into next year, obviously, it gets a little foggier the further out you go, but I think we’re still very bullish on our ability to continue to push rents at pretty close to levels we’ve been doing. And keep in mind, we have a little bit of a drag on our same-property because we have longer lease terms, but that’s a positive once they finally do roll. We generally better roll offs because of the leases were signed even longer ago so to speak.

So we’re trying to balance the occupancy versus rent growth level. The one thing I would say is, in some respect at 81% renewal rate, that seems higher than what we would think, may be questionable, are you pushing rents enough, but when you just came off of the best quarter we’ve ever had, I think that’s pretty good evidence that we are pushing rents pretty high.

Caitlin Burrows — Goldman Sachs — Analyst

That makes sense. Then maybe just on the development. I know you made a bunch of comments on how that is generally more accretive than acquisitions at this point. The pipeline did grow versus the first quarter. So I guess in terms of buying land and getting entitlements, are you seeing anything to make you think that Duke wouldn’t be able to keep its development volumes at least as high as they are today going forward, while also saying accretive?

Mark A. Denien — Executive Vice President and Chief Financial Officer

No. Caitlin, I would tell you that we already own the land that we need for the balance of the development in the second half of the year. So we’re very active in the markets acquiring land and tying up land and working land through the entitlement process, but our challenge there is for the 2020 and 2021 pipeline, but 2019 looks pretty good right now because that’s all on the books already

Caitlin Burrows — Goldman Sachs — Analyst

I guess in terms of the 2020 and 2021 outlook, is it too soon to tell at this point, or would you say, you’re rather confident or not in being able to keep the volumes up?

Ronald M. Hubbard — Vice President-Investor Relations

I would tell you, I’m confident we’ll be able to keep the volumes up as long as the market dynamics justify it. We’ve got really good talented people on the ground. And like some of the deals we talked about today, the Home Depot deal in Perth Amboy, we tied that site up back in 2017. So we’ve got really good people on the ground, and that’s a strength of ours. So I think we’ll be able to continue to find the right opportunities to create value, particularly in the infill markets where the margins are so strong.

Caitlin Burrows — Goldman Sachs — Analyst

Great. Thanks.

Operator

Your next question is from the line of Manny Korchman. Please go ahead.

Emmanuel Korchman — Citi — Analyst

Hey, guys. Jim, the Home Depot deal, could we just talk about anything that they’re doing there that’s special in terms of revamping their logistics pipeline or is it just a matter of moving into larger facilities closer to population centers?

James B. Connor — Chairman and Chief Executive Officer

Well, Manny, I can’t tell you that I have enough direct operational knowledge in terms of what’s going to go there versus some of the traditional ones, other than what’s in our press release and Home Depot’s press release about this $1.2 billion investment that they’re making in order to get their products to their stores and their customers in a day or less. So, I can’t tell you that this is e-commerce specific versus supplying the stores or some combination thereof, but they are very active across the country right now. They’ve become a very good client of ours, they are now in our top three clients and we hope to have the opportunity to do some more business with them.

Emmanuel Korchman — Citi — Analyst

Got it. And then maybe one for Nick. Just anything else out there that you’re looking to sell, especially to fund the development pipeline?

Nick Anthony — Executive Vice President and Chief Investment Officer

Yeah. We’ve got our midpoint at $450 million on dispositions. I would tell you, we’ve closed on about a quarter of it, we’ve got about half of that under agreement and then we got the remainder in process. So like I said earlier, I think we will have most of this wrapped up close to the end of the third quarter.

Emmanuel Korchman — Citi — Analyst

Great. Thanks.

Operator

Next question is from the line of Blaine Heck. Please go ahead.

Blaine Heck — Wells Fargo Securities — Analyst

Thanks. Good afternoon. Just a few follow-up questions on the Home Depot build-to-suits. Number one, can you share how long the lease term is on those projects? Number two, do you guys have any agreement to do more with them in conjunction with their supply chain overhaul? And number three, can you give us any sense on the yield on such a low risk build-to-suit project like this versus maybe what you would get on or target on a spec construction?

James B. Connor — Chairman and Chief Executive Officer

Okay. Blaine short and sweet 20, no and no, I’m just kidding. It’s been reported. So I can confirm. It’s a 20-year lease. As I said, they are a very good customer of ours. I think they’re now our third largest tenant in the portfolio. We are active with them, but we do not have any other agreements in place in terms of additional facilities around the country. I would certainly hope based on our conversations that we’ll be able to garner some more business from them, and I really can’t disclose margins or yields on a transaction like that. We just don’t do that [Indecipherable] deals.

Blaine Heck — Wells Fargo Securities — Analyst

Okay. But fair to say, it’s a little bit lower, 50 bps lower than maybe what you would target it on a spec project?

James B. Connor — Chairman and Chief Executive Officer

You might say, but what I would counter to — the traditional arguments that build-to-suits are much thinner margins is, this was a fabulous site and we had an unbelievable amount of demand for this project and we hope to when this building is either further along toward completion or once it’s complete, host some property tours out there for those of you who haven’t been by the site or don’t know where it is. It’s a fabulous infill site with great access and it’s a very, very valuable commodity. We took some risk back in ’17 when we tied it up. We took it through entitlement. We took it through environmental cleanup. We raised the site substantially. So there was a lot of value creation there. So I think that, combined with a 20-year lease with the A-rated tenant, you might be surprised.

Mark A. Denien — Executive Vice President and Chief Financial Officer

The other thing I would clarify with that Blaine, like Jim just mentioned, all that happened getting back in ’17, the deal with Home Depot didn’t come together until recently. So it’s not like they were tied together back that far.

Blaine Heck — Wells Fargo Securities — Analyst

That’s helpful. And then Jim you talked about the Amazon project, where you’ll be the fee developer. Is that a role you guys think will become more common in development for some of the largest tenants or do you see this as more of a one-off or rare type situation?

James B. Connor — Chairman and Chief Executive Officer

I would tell you that, it’s more of the exception rather than rule. As you know, Amazon is a very good partner of ours and we continue to do a lot of business with them. We have built fulfillment centers for them that we still own all over the country. We’re doing last mile facilities. We’ve done sortation facilities. These G3s and the next generation, we want to have some experience developing those and understanding the technology and the construction techniques. So we proposed that we’d like to do a few of these with Amazon. So beyond that, I think, we’ll have to step back and see how it works out and the amount of resources that it takes, but we’re committed to try and do a couple of these with Amazon.

Blaine Heck — Wells Fargo Securities — Analyst

All right. Thanks. Thank you.

Operator

Our next question is from Vikram Malhotra. Please go ahead.

Vikram Malhotra — Morgan Stanley — Analyst

Thanks for taking the question. Just wanted a bit more color on your comments around market rent growth. You mentioned 6% is what your expectation is. Can you maybe give us a little bit more color by market, where are you seeing a bit more deceleration versus where there is the more strength in your markets?

James B. Connor — Chairman and Chief Executive Officer

Yeah. Sure, I think I know I sound like a broken record, because I think we’ve referenced this in previous calls and at conferences. We’re pretty consistently seeing low double digit rent growth in the coastal markets and the high barrier markets and more mid-single digits in the Interior and the second/tertiary markets. So I think if you just look at the 6.4%, which is CBRE reported number, if you look at 10% to 12% in the coastal and high barrier markets, and let’s say 5% to 6% in the interior and the second/tertiary, you’re going to run about that average. And we’ve seen that the last few years, and I think we anticipate seeing that going forward, at least, through the end of the year.

Vikram Malhotra — Morgan Stanley — Analyst

Okay. That’s helpful. And then just for me a value perspective, I heard you mentioned the Home Depot 20 year lease. These bigger build-to-suits, whether you’ve done for Amazon or Home Depot or any of the other large retailers, is there a difference between these boxes today where you’re doing 20-year leases versus maybe the typical five, seven year that’s more average in terms of the economics, the bumps and then ultimately what you’ve bought boxes could trade for on a cap rate basis?

James B. Connor — Chairman and Chief Executive Officer

Well, let me answer that in a couple of ways. I think the build-to-suit facilities tend to be a little bit more — I’m reluctant to say specialized, but they are in fact in terms of, they build in the exact amount of parking, trailer storage, clear height, power requirements. So they are probably build to a higher standard with more ups and extras than you would see in a traditional spec building. And as such they garner better rents and with that, the clients want to protect their long-term interest in the facility given the amount of money that they’re investing inside the facility for material handling equipment and robotics and everything else. So that’s the — the clients are driving these longer-term leases. The numbers are a little bit bigger because the facilities are a little bit more highly improved over a traditional spec building.

Vikram Malhotra — Morgan Stanley — Analyst

Okay. That’s helpful. And then just last one, you referenced one of two peers mentioning supply impacting a few markets and maybe a little pull back in some of the starts. Are there any markets that are maybe not flashing red, but are yellow, where you’re saying, hey, we want to moderate our starts maybe in the future. In across any of your sub-markets or markets, are you seeing that?

James B. Connor — Chairman and Chief Executive Officer

Yeah. Well, I think you made the right differentiation in the last part of the statement, it’s sub-markets and not markets. I will tell you in any of the markets we’re operating in today, we have spec and build-to-suit opportunities and we are pursuing all of those. You really got to limit it to sub-markets. And I picked on these sub-markets before and I’ll do it again. We’ve all talked about South Dallas, low barrier market, incentives down there to encourage spec development. We own property in South Dallas, but we don’t have anything available right now and you won’t see us build a spec building down there.

Northeast Atlanta, in the last quarter or two has worked its way onto this list, and it’s a little soft. We do have one spec building up there and I would tell you, while we’ve got activity, it’s modest. Central PA, we don’t have anything in Central PA. All of our stuff is in the Lehigh Valley and the Central PA has been a little soft. And then, lastly was I80 Corridor up in Chicago. Although I was in Chicago last week and I would tell you based on market activity I heard about in talking to our own people and the brokers in the marketplace, I think, Chicago is going to make the turn in the third quarter and work its way off that list, but that’s really the extent of it.

I think in the vast majority of the markets and the sub-markets, supply is very, very much in check, you’ve got really good rent growth and you got really good demand characteristics.

Vikram Malhotra — Morgan Stanley — Analyst

Okay. Thank you.

Operator

Thank you. And our next question is from the line of Eric Frankel. Please go ahead.

Eric Frankel — Green Street Advisors — Analyst

Thank you. Just based on some of the portfolio sales that have occurred with IPT and GLP, can you make a comment on whether you’ve seen overall pricing has changed? Obviously, you guys have said that you had a difficulty of acquiring the assets you want in the markets that you’re targeting. I just want to get an understanding whether things have gone [Phonetic] even more competitive?

James B. Connor — Chairman and Chief Executive Officer

Well, Eric, I guess I would make a couple of comments. Those pricing levels are not anything new. I mean we started seeing those pricing levels in 2018 with the IDI deal that was done. We’ve seen it with a number of other small and mid-sized portfolio. So I think the market has come to accept that industrial portfolios today are going to trade between 4.5 and let’s say, 5, based on size and quality and everything else.

I, of course, have made the argument that, that should cause some of you guys to change your NAV calculations. But the industrial is — it was a very strong sector. It’s continued to perform well. The size of these portfolios and the size of some of the projects has attracted some of the larger investors who are looking at opportunities to invest in a very strong performing sector with good credit tenants, with long-term leases, with good rent escalation.

You factor in the fact that there is very little capital that has to go into these buildings during the lease term or after the lease term, and industrial has become a very attractive place for people to want to put their money. So there is a premium out there, and there is a lot of interest for everything that the trades out there. Nick can speak to the amount of interest in just the smaller portfolios and the one-off deals that we’re selling.

Nick Anthony — Executive Vice President and Chief Investment Officer

Yeah. We’ve had really good — better-than-expected activity even on the Midwest portfolio [Technical Issues].

Unidentified Participant

Okay. Thank you. And maybe just a follow-up on that. I understand you guys have kind of simplified you’re operating structure over the last couple of years and you’ve lowered the size and scale of your third-party construction management business [Indecipherable] out of office and simplify some joint ventures. Have you ever considered partnering up with other private capital to both dilute your interest in some of your Tier 2 and 3 markets where there’s probably still a lot of investor interest as you just stated? And help your expansion for some of these other kind of Tier 1 markets?

James B. Connor — Chairman and Chief Executive Officer

Yeah. Eric, I would tell you that we look at — every time we look at a major acquisition, we look at various structures, whether it’s wholly owned, whether it’s a 50-50 joint venture or potentially even a 70.30 joint venture to use other people’s capital that might have lower yield parameters. We also look at it when we look at pruning our portfolio. And we’ve got a number of smaller joint ventures, some of which we’ve had in place for probably 15 years. So it’s an arsenal that’s in our toolbox. It’s one that we don’t use all that often, but we do use it and we continue to look at it, particularly given where pricing is today on these portfolios and packages.

Eric Frankel — Green Street Advisors — Analyst

Okay. Thank you.

Operator

The next question will come from the line of John Guinee. Please go ahead.

John Guinee — Stifel Nicolaus & Co. — Analyst

John Guinee here. First, hey. Nick, I’m looking at page 25, your acquisitions and dispositions and there has got to be a typo, because it says here that you sold an 855,000 square foot building in Columbus, Ohio, for $112 a foot,

Nick Anthony — Executive Vice President and Chief Investment Officer

John, that is not a typo. That is correct.

John Guinee — Stifel Nicolaus & Co. — Analyst

Who, what, why?

Nick Anthony — Executive Vice President and Chief Investment Officer

We were just a seller.

John Guinee — Stifel Nicolaus & Co. — Analyst

Special improvements, long term leases.

Nick Anthony — Executive Vice President and Chief Investment Officer

So it was on a 15-year lease with a major e-commerce player with 2% bumps and there is tremendous demand for those types of facilities today.

James B. Connor — Chairman and Chief Executive Officer

Going back to the question we answered earlier, this is an opportunity for somebody to put a $100 million to work in a single transaction on a long-term lease with the A-rated credit and we had a lot of strong interest in that deal.

John Guinee — Stifel Nicolaus & Co. — Analyst

Okay. And then just out of curiosity, why cold storage in Northern California, $300 a foot?

Nick Anthony — Executive Vice President and Chief Investment Officer

Well, first of all, we’ve got about 1.5 million square feet of cold storage in our existing portfolio, inside of our existing warehouse buildings. We’re just intrigued by this transaction. We are not going to go buy a bunch of this stuff, but it was a very functional asset in a good location, with a good yield here on the mid-5% and it’s a market where we were under allocated. So we liked the deal and transacted on it.

John Guinee — Stifel Nicolaus & Co. — Analyst

Okay. And then, Jim, Home Depot, I think, you mentioned multi-billion dollar effort to change their whole supply chain and then you mentioned Amazon 3G, which I guess means 3rd generation facility in Columbus. Will this result in Amazon or Home Depot giving back functionally obsolescence space into the market and not renewing leases, et cetera?

Unidentified Speaker

John, that day will come. We have never not renewed Amazon in any of the Amazon leased facilities that we own. But as I tell our people, it will happen someday. Someday, a building will be too small, too big, too inefficient and I go back to what we have always said, which is, we own the box, we don’t own any of the material handling equipment and any of the robotics or any of the mezzanines. And when I get that space back, they are obligated to take it all out, and I have a nice clean box, plenty of parking, great loading, good clear height, good power and I’ll go out and release the building to somebody else, either an e-commerce or a retailer or a consumer products company. I’ll divide the building of I have to, but we’ve been very disciplined about that and not invested money inside the box for tenant improvements. And so I think our long-term strategy on all of these big boxes, whether it’s Amazon or Home Depot or anybody else, is a very, very sound strategy. I like our basis in all these buildings and we’ll be fine for the long term.

John Guinee — Stifel Nicolaus & Co. — Analyst

Event that cold storage building in Northern California?

Nick Anthony — Executive Vice President and Chief Investment Officer

That cold storage there — no one is building spec space for that and there is like [Speech Overlap].

John Guinee — Stifel Nicolaus & Co. — Analyst

I know.

James B. Connor — Chairman and Chief Executive Officer

He knows he answered to his question.

John Guinee — Stifel Nicolaus & Co. — Analyst

I know. Thanks. See you.

James B. Connor — Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Dave Rodgers. Please go ahead.

Dave Rodgers — Robert W. Baird & Co. — Analyst

Yeah. Maybe for Mark. Beyond the two leases that you denoted for the second half of the year, where you’re going to see the same-store impact, as you look out into the end of the year and into 2020, are there any other watch list tenants or tenants that might be moving out of your existing spaces to developments that we should be aware of?

Mark A. Denien — Executive Vice President and Chief Financial Officer

None of any significance, Dave. I think, the comp occupancy in the prior period was like 98.8%, I think, I said. We would probably project that to be closer to 98% flat. And of that 80 basis point decline, about 50 basis point of it is what I just described in those two specific tenants. So the other 30 basis point is what I would just call natural expirations or attrition, where we, like I said, are trying to push rents as hard as we can and ultimately will lose a couple of tenants because we push harder than they’re willing to sign. So nothing any significant individually.

Dave Rodgers — Robert W. Baird & Co. — Analyst

And then maybe just for Jim and Mark maybe together on the leverage goal. You guys have talked about low to mid-5s I think and I think since the second quarter of about 2017, you’ve been stubbornly well below that. You’ve been dabbling in the ATM market. I guess what gets you to deploy that extra debt capacity? Because you’ve created quite a bit of liquidity and capacity out of that, but haven’t really to this point shown the willingness to really deploy that. So are you waiting for something special or give us some more color on that?

James B. Connor — Chairman and Chief Executive Officer

Did Nick put you up to this question?

I will just say, they keep selling assets on me. That’s the problem. Every time that we think we have a need for leverage, Nick goes and sells assets. IN all honesty, that is a large reason, Dave, we didn’t — I think looking back a year and a half ago, we would not have projected to be as big of a net seller as we have been. And that’s a combination of — I think, it’s really asset pricing in the existing asset markets. So I think we’ve been taking advantage of it more than we thought on the disposition side and being a little bit more disciplined on the acquisition side. So we’ve been more of a net seller, then we would have thought. That’s a big reason.

Nick Anthony — Executive Vice President and Chief Investment Officer

Yeah. We’ve accelerated our three-year plan on the disposition side. So we’ve had a disproportionate amount in 2019.

James B. Connor — Chairman and Chief Executive Officer

Yeah. So we still are targeting that. It’s just taken us a little longer to get up to those leverage levels from what we targeted, but I will tell you, with the increase in development guidance that we just put out today or last night, coupled with what could be a good end of the year and maybe a good start to next year, I think you’ll definitely start to see that creep up into early 2020.

Dave Rodgers — Robert W. Baird & Co. — Analyst

Okay. Thanks guys.

Operator

Our next question is from Nick Yulico. Please go ahead.

Nick Yulico — Scotiabank — Analyst

Thanks. So just going back to your lease expirations, I know you don’t disclose your lease expirations by market, but I wanted to see if we can maybe dig into some of the markets, sub-markets where you have some supply concerns, Jim, and whether it’s South Dallas or Northeast Atlanta, we can go through list. I mean how should we think about your expirations over the next year in those sub-markets, where there are some supplies? I mean what are you going to be dealing with?

Mark A. Denien — Executive Vice President and Chief Financial Officer

Nick, I’ll cover that. Over the next two years, we have virtually no rollover in any of those sub-markets, as Jim mentioned. So South Dallas, Central PA, coming out of Southwest Chicago and in Northeast Atlanta, no roll over. In fact, you’ll start to see more of our lease expirations start to hit in the coastal markets. If you look back over the last 12 to 24 months, I think, just going from memory here, but about 7% of our rollover has been in coastal markets. That’s going to move closer to 25% over next three to five years, and that’s just a function of we are newer to those markets, so we haven’t been through a period of roll yet in those coastal markets. So more of our rolls start hitting the coastal markets and those specific sub-markets we mentioned, there’s virtually no roll in the near future.

Unidentified Participant

Okay. Great. That’s helpful. And then just going back to the change in guidance for AFFO. I mean you’ve had this note here about lower capital expenditures this quarter, last quarter. I mean maybe you touched on that topic. I mean is this something that you can even get more efficiency on over the next year?

James B. Connor — Chairman and Chief Executive Officer

Nick, I think we’ve taken a wait and see attitude. We’re in a very stable proposition right now and we like our revised AFFO and that growth percentage tied to that. I think there is a chance that we could improve on that. At the same time, we’re starting to look at capital projects that had been budgeted for ’20 and ’21, and probably, more importantly, like we did last year, do we have any critical lease rollover over in the next couple of years that we want to accelerate and put the capital into this year.

So, I think we’ll potentially have a little bit of room and I think we’re trying to be prudent with that. If we can’t find good places to spend it, I think you’ll see our AFFO number come up. You certainly won’t see it come down from what we’ve put in the reprojected, but it could go up or we could do some proactive leasing and capital spending just to be safe.

Nick Yulico — Scotiabank — Analyst

All right. Thanks, Jim.

Operator

Thank you. Our next question is from the line of Rich Anderson. Please go ahead.

Richard Anderson — SMBC Nikko Securities — Analyst

Hey. Thanks. Good afternoon. So when I was forming my first question I was thinking about your elevated level of occupancy and whether or not that could bite into your overall same-store growth profile looking into next year, but then I noticed that you’ve been sitting at 98% occupied, at least same-store occupied, for the past, at least, few years. So when you think about — so, I am kind of giving a little bit of lay up here, but when you think about growth into 2020 and I’m not asking for guidance unless you want to give it, do you worry about ability to sustain a level of growth in the absence of occupancy growth?

James B. Connor — Chairman and Chief Executive Officer

I don’t think we worry about it Rich. I think that you’re right, there will be an absence of occupancy growth. I think that’s a prudent thing to think about right now. Flat is probably pretty good on occupancy, but the reality is, if you think about it like this, the last half of this year, if you just do the math, you’re probably going to be in the low to mid 3%s on a same store basis for the last half of the year to equal the midpoint of our guidance. That’s what we guided to. And that’s coming with an 80 basis point decrease in occupancy, right. I said we were 98.8% in the last half of last year and we’re looking at more like 98% for the last half of this year.

So even with, what I would call, a fairly substantial decline period-over-period, not in occupancy, we’re still producing fairly healthy same-property growth. And that’s a function of the substantial rent growth that we’re getting on deals that just takes away to work its way into that pool, if you will. And I think that that profile will still be with us for the foreseeable future headed into next year. We keep signing these 28 and 12 deals like we did this quarter. That won’t really impact same-property until next year. So we keep getting — that’s more of a lagging indicator, if you will, or it’s a tailwind for us. So I think we’re still bullish on our overall ability to produce nice overall same-property results.

Richard Anderson — SMBC Nikko Securities — Analyst

Okay. And then, Jim, on the Amazon development fee deal, you called that an exception not the rule, but along the lines, if you’re saying at some point we’re going to lose Amazon in a building, at some point in the future, whenever that may be, the question is, with companies like Amazon having to leases turn into debt now, is there a risk that they start to choose to own their real estate? Because from a balance sheet perspective, it’s kind of a wash and if they are better control their own real estate. I’m just trying to dig into that transaction a little bit further more broadly speaking.

James B. Connor — Chairman and Chief Executive Officer

Yeah. Rich, that question has been asked from time to time. And I would tell you, Amazon’s got right of first offers, they have a right of any — all the options to protect themselves and they’ve never exercised one with us or anybody else. And I think their strategy has been very consistent throughout their roughly 20-year existence and not only with their industrial, they don’t own any of their office, they don’t own any of their data centers. So they’ve been very consistent that they don’t want to invest in bricks and mortar, the returns are far too low for them and they’ve got significant capital expenditures to go inside of these buildings. So it’s not even on the radar. Could that change in the future? I suppose, in which case, maybe our relationship would evolve into more of a just pure fee developer. But I will tell you right now, they’re not — certainly doesn’t appear like they are even thinking about that.

Mark A. Denien — Executive Vice President and Chief Financial Officer

And the only thing I would add Rich on this particular project, it’s in a market that we didn’t want to be in. I mean we could have own that building quite frankly, but it was market driven and the specifics of the building, not because Amazon wanted to own it. That’s not why is the transaction happened the way it did.

Richard Anderson — SMBC Nikko Securities — Analyst

Okay. Good color. Thanks, guys.

James B. Connor — Chairman and Chief Executive Officer

Sure.

Operator

Our next question is from the line of Michael Carroll. Please go ahead.

Michael Carroll — RBC Capital Markets — Analyst

Yeah. Thanks. I want to talk a little bit about I guess the development starts. I know you guys have been pretty disciplined over the past few years in terms of pursuing new developments and breaking ground. Obviously, there is a pretty big uptick that was announced today. I mean, what’s your thought process behind there? Is there just more interesting deals that you’re seeing, is it just the stronger markets that you think you can get more aggressive? I guess what’s your thoughts behind that?

James B. Connor — Chairman and Chief Executive Officer

Mike, I’d make a couple of comments. First of all, all the markets are very strong , and so, we’ve got a lot of opportunities. I think, probably more impactful for us is, you’re starting to see our teams in Southern California, Northern California, Seattle and New Jersey, who are newer, younger teams for us, they have now been on the ground a year, or two years, are really starting to make an impact on our development volumes. And as we talked about earlier, many of those are infill developments that take a while to get put together, but the margins on those are incredibly strong. So I think you’ll continue to see us pursue those opportunities and I think that’s one of the things that’s obviously contributing to our higher development volumes.

In terms of build-to-suit versus spec, I think, this quarter’s leasing in our spec pipeline just continues to reassure us that we can be prudent about building spec across the country and execute on that. And we’ve still got enough build-to-suit opportunities that we’re more or less going to try and keep that pipeline at around 50%. But we’re not afraid to dip below and when we do, we’ll try and tell you guys in advance what’s driving that. But there is plenty of opportunities out there for us and we think we’re creating great value there and we’ll continue to put our money to work there.

Michael Carroll — RBC Capital Markets — Analyst

Okay. So these elevated development start levels that we’re seeing today, I mean, can that continue in 2020 and beyond?

James B. Connor — Chairman and Chief Executive Officer

Yeah. I don’t know that I can say. Mark’s kicking me, telling me that might sound like guidance. My General Counsel is probably running down the hall right now, but we’ve been on a pretty good run. If you look at our revised guidance this year, and what we’ve done in the last three years, it certainly feels as long as the macro economic drivers of this marketplace continue like they have been, I think we can continue to put up strong numbers.

Michael Carroll — RBC Capital Markets — Analyst

Okay. Great. Thank you.

Operator

Our next question is from the line of Michael Mueller. Please go ahead.

Michael Mueller — JPMorgan — Analyst

Yeah. Hi. I was just wondering what is the average time it’s taking you to lease up the spec developments?

James B. Connor — Chairman and Chief Executive Officer

Mike, we’ve been consistent all along in underwriting 12 months and we’re averaging right now right at 9 months, which we’ve been averaging 9 months for probably the last two years. So, maybe we should change our underwriting, but we continue to underwrite one year and we’re right at 9 months.

Michael Mueller — JPMorgan — Analyst

Got it. Okay. That was it. Thank you.

James B. Connor — Chairman and Chief Executive Officer

Sure.

Operator

[Operator Instructions] And we have a follow-up from Eric Frankel. Please go ahead.

James B. Connor — Chairman and Chief Executive Officer

Hey, Eric.

Eric Frankel — Green Street Advisors — Analyst

Yeah. Thank you. Just a very good question on big box leasing. Has the nature of the customer change at all over the last few years and what they’re doing? Obviously I’m guessing that Amazon is probably taking up little bit less of the overall leasing activity than they were, call it, three or four years ago. I’m just wondering if it’s all exclusively e-commerce, is it business-to-business, or some combination thereof?

James B. Connor — Chairman and Chief Executive Officer

Yeah. In general, Eric, I would say it’s a combination thereof. The e-commerce guys tend to ebb and flow and they get really busy and then they get quite for two or four quarters and then they get really busy. The consumer products guys, grocery, food, liquor has been very strong. We did a nice 3PL deal this quarter, but I would tell you, we probably haven’t seen the amount 3PL business that we would have anticipated, it’s more been direct with the clients. But it’s all across the board. I can’t tell you there is any one particular sector that’s driving more than the others.

Eric Frankel — Green Street Advisors — Analyst

Okay. [Technical Issues]. Thank you.

Operator

Thank you. And at this time there are no further questions in queue.

Ronald M. Hubbard — Vice President-Investor Relations

Yeah. I’d like to thank everyone for joining the call today and we look forward to reconvene during our third quarter call, tentatively scheduled for October 31. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Duration: 55 minutes

Call participants:

Ronald M. Hubbard — Vice President-Investor Relations

James B. Connor — Chairman and Chief Executive Officer

Nick Anthony — Executive Vice President and Chief Investment Officer

Mark A. Denien — Executive Vice President and Chief Financial Officer

Unidentified Speaker

Jeremy Metz — BMO Capital Markets — Analyst

Caitlin Burrows — Goldman Sachs — Analyst

Emmanuel Korchman — Citi — Analyst

Blaine Heck — Wells Fargo Securities — Analyst

Vikram Malhotra — Morgan Stanley — Analyst

Eric Frankel — Green Street Advisors — Analyst

Unidentified Participant

John Guinee — Stifel Nicolaus & Co. — Analyst

Dave Rodgers — Robert W. Baird & Co. — Analyst

Nick Yulico — Scotiabank — Analyst

Richard Anderson — SMBC Nikko Securities — Analyst

Michael Carroll — RBC Capital Markets — Analyst

Michael Mueller — JPMorgan — Analyst

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