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Duke Realty Corp  (NYSE:DRE)
Q1 2019 Earnings Call
April 25, 2019, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty First Quarter 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.

Ron Hubbard -- Vice President, Investor Relations

Thank you. Good afternoon, everyone and welcome to our first 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 statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from the expectations. For more information about those risk factors, we would refer you to our December 31, 2018 10-K that we have on file with the SEC.

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

James Connor -- Chief Executive Officer

Thanks, Ron. Good afternoon, everyone. I'll start out with a few comments on the national logistics market and then I'll cover our first quarter results. In the national markets, according to CBRE, vacancy across the US remained at record low levels, 4.3% and has now been below 5% for over 13 quarters. First quarter asking rents grew an estimated 8% over the prior year nationally. For the full year, CBRE and others expect rent growth on asking rental rates to be in the 5% to 6% range.

For the first quarter, supply exceeded demand by about 1.6 million square feet. So still fairly in balance and it represents only the third quarter in the last 36 quarters, where supply outpaced demand slightly. We see supply and demand in balance for the remainder of the year and expect both to finish in the 200 million square foot range. We believe this balance combined with historic low vacancy rates will continue to provide an environment for strong rent growth.

In addition, the March macroeconomic figures have been solid with favorable retail and e-commerce sales, consumer business inventories and employment data points. Even with 2019 GDP growth projected to be in the low to mid 2% range, we still feel confident in the macro demand drivers for logistic space, like increased truck tonnage, port traffic and intermodal volume, all support a very favorable outlook.

Now, turning to our own results, we followed up a very strong 2018 with a solid start to 2019. Given the significant leasing we had in the fourth quarter of 2018, we had a comparatively light quarter, with leasing volume of 2.8 million square feet. We simply did not have that many expirations, particularly any of any size to renew or backfill. We increased our stabilized occupancy by 40 basis points to 98.4%. This was primarily driven by leasing up three speculative facilities, totaling 927,000 square feet.

Our in-service portfolio was 95.5% leased. This is down from 96.3% in the previous quarter, which was due to speculative projects just placed in service, as well as a slight impact from acquisitions that were 72% leased. We renewed 83% of our expiring leases during the quarter, and rent growth averaged 23.4% on a gap basis and 9% on a cash basis, which was impressive given that less than 10% of this activity came from South Florida and there were no second generation leases in any other coastal markets.

Rent growth was broad across all building sizes and all leases sizes as it has been throughout this cycle. Once again, this demonstrates that we have high quality assets in the right submarket, with a top tier operating platform, all of which we have. We're in a position to capture demand and rent growth in all markets. We had a good start to the year in new developments with a $165 million across five projects totaling, excuse me, 2 million square feet. All of these projects were speculative starts in key sub markets with tight fundamentals across our Southern California, Dallas, Houston and South Florida markets.

Looking at the landscape today, our leasing prospect list is strong for our recently delivered and soon to be delivered spec projects, supported by my earlier comment about the stabilization this quarter of three previously delivered spec projects. We also have a nice backlog of build to suit projects with requirements of between 100,000 square feet to over 1 million square feet, all across the country. In aggregate, it's possible, our pre-leasing percentage may dip slightly below 50% during 2019 due to timing, but overall, we're very comfortable with our development pipeline and the speculative projects we have under way and their ability to contribute significant earnings growth beyond 2019.

Our overall development pipeline at quarter end had 20 projects under construction, totaling 9.2 million square feet at a projected $765 million in stabilized costs for our share. These projects are 52% pre-leased and our margins on the pipeline are expected to continue to be in excess of 20%. With stabilized occupancy at 98.4%, these projects provide a valuable source of future growth.

Now, I'll turn it over to Nick to cover our acquisition and disposition activity for the quarter.

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

Thanks, Jim. We had a light quarter on acquisitions and dispositions. We acquired two state-of-the-art 36 foot clear logistics facilities totaling $78 million in Seattle and Eastern PA. In aggregate, the two assets totaled 577,000 square feet and were 72% leased on average. On dispositions, we sold one JV asset in Indianapolis with our share of the proceeds totaling $8 million. However, as I alluded to on the January call, we acquired a few assets projected to be sold in our Middle West markets this year, with timing expected in the third quarter.

Regarding the broader acquisition market, we continue to look at many opportunities, however, the market is extremely competitive and thus, making it difficult to find select asset in our target growth markets, which is reflected in our modest full year range of guidance for acquisitions.

I'll now turn it over to Mark to discuss our financial results and guidance update.

Mark Denien -- Chief Financial Officer, Executive Vice President

Thanks, Nick. Good afternoon, everyone. Core FFO for the quarter was $0.33 per share, compared to core FFO of $0.35 per share in the fourth quarter of 2018. Core FFO was negatively impacted by an approximate $0.03 per share increase to non-cash general and administrative expense, compared to the fourth quarter of 2018, which is a normal first quarter item, resulting from the accounting requirement to immediately expense a significant portion of our annual stock-based compensation grant that takes place every February. Core FFO per share increased by 10% from the $0.30 per share diluted reported in the first quarter of 2018 as a result of grocery development as well as continued improved overall operational performance.

We reported FFO as defined by NAREIT of $0.33 per share for the quarter, compared to $0.31 per share for the first quarter of 2018, with the increase also being driven by improved overall operational performance. AFFO totaled $119 million for the quarter, compared to $108 million for the first quarter of 2018. This 10% increase was driven by the same positive factors impacting FFO, in addition to lower capital expenditures that our modern portfolio affords us. This impressive AFFO growth continue to be the driver of future dividend growth.

Same Property NOI growth on a cash basis for the three months ended March 31, 2019, was a very strong 7.2%. In addition to increased occupancy and rent growth, our same property NOI growth this quarter benefited from about 300 basis points of burn off of free rent compared to the first quarter of 2018. This was attributable to some acquisition and development properties that stabilized in late 2017 and had some free rent in early 2018. Same Property NOI for the first quarter on a GAAP basis was 4.3%, which was lower than the cash number due largely to the lack of the impact from the free rent burn off on a GAAP basis, but nonetheless still very strong.

We do expect subsequent quarters to remain solid, based on continued strong rent growth and high occupancy levels, but to decelerate a bit from the current level as there will not be as much of a lift from free rent and 2018 occupancy comparables get tougher. Also the last half of the year will be negatively impacted by about 40 basis points or about 20 basis points impact for the full year, due to one unique situation. We have a tenant in two different spaces in our same property portfolio, totaling about 425,000 square feet. They were looking to consolidate and expand and needed 620,000 square feet. So we're building a new building for them, which should be completed by the end of the second quarter. This is a great transaction for us and we'll increase total NOI, but will be a drag on same property NOI for the last half of the year, until we can release their former space. In addition, we would like to stress that about 14% of our total cash NOI for the first quarter came from our non same property pool, and was 73% occupied, reflecting substantial NOI growth prospects from this segment of our portfolio.

I would now like to address some refinements to our 2019 guidance that we announced yesterday. First, we've increased our guidance for core FFO to a range of a $1.39 to a $1.45 per diluted share from the previous range of $1.37 to $1.43 per diluted share, which equates to $0.02 increase at the midpoint. We've also increased our guidance for NAREIT FFO to a range of $1.36 to $1.46 per share from the previous range of $1.33 per share to $1.43 per share. Although growth in same property NOI will moderate from the 7.2% reported this quarter, we still expect solid results and have increased our guidance for same property net operating income to a range of 3.5% to 5% from the previous range of 3.25% to 4.75%. We're also revising our guidance for growth in adjusted funds from operations on a share adjusted basis, upward to a range of 5.9% to 11% from the previous range of 5.1% to 10.2%. Finally, we increased our guidance for our stabilized portfolio average percentage leased to a range of 97.5% to 98.5%, which is up 0.3% at the midpoint.

Now, I will turn the call back over to Jim.

James Connor -- Chief Executive Officer

Thanks, Mark. In closing, just a couple of comments. Logistic demand drivers for modern facilities remain very strong in both traditional distribution and e-commerce fulfillment. The macro front may be a little bumpier than prior years and we are mindful of those risks, yet we still feel very good about 2019 as represented by our increase in expected ranges for key growth drivers. And finally, we are confident in our overall ability to drive high single digit AFFO growth and corresponding dividend growth for the foreseeable future.

We will now open up the lines to the audience. We would ask participants to keep the dialogue to one question or perhaps two short questions. You of course are always welcome to get back in the queue. Lois, you can open up the lines for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question is from Jeremy Metz. Please go ahead.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey, guys. I was just wondering if you could talk about how you think about the trade off between pushing rent and occupancy at this stage, given the strong rent strategy you achieved and continue to achieve, balance against the upward revision to your occupancy guidance here, and just some of your comments on your outlook for supply and demand balance at this point.

James Connor -- Chief Executive Officer

Well, thanks, Jeremy. I would tell you that's always a question we're asking. And I think at the end of the day, when we look at our cash and GAAP rent growth, and we look at our CapEx to net effective rent, which are both very strong numbers and we were able to improve on occupancy, I think we're really hitting on all cylinders. As you know and we've all talked about this before, it always costs us more capital to retenant a building than it does to renew a tenant. So if we can continue to keep our renewal percentage high, keep our occupancy percentage high, but maintain these roughly 25% and 10% rent growth numbers that we're getting, I think we'd hit the right balance.

Jeremy Metz -- BMO Capital Markets -- Analyst

Appreciate it.

James Connor -- Chief Executive Officer

On supply and demand, you know, I think we're -- I think we're in a really good spot. The difference between the two of this quarter of 1.6 million square feet. In the US logistics market, that's one or two deals. So it could have been timing or anything else. I think we've all been prepared for a point in this cycle when we're going to reach some level of balance and we may in fact, be there. And if we are, I think at 4.3% vacancy, that's a pretty good spot. And I think we'll continue to be able to maintain our occupancies and continue to push rent growth.

Jeremy Metz -- BMO Capital Markets -- Analyst

Appreciate, then just second one from me. I just wanted to touch on the development starts yet, $170 million in the quarter was all spec. So maybe just, what the leasing prospects look like for that as well as where you just placed in to service in the quarter and then from here, should we just expect to see that, naturally our starts to be more tilted to build to suits at this point?

James Connor -- Chief Executive Officer

Yes, as you guys know, quarter to quarter, it's all timing. I didn't put it in the script, but we've actually already this quarter signed three build to suits. Would I love to have them in the first quarter, absolutely. But that's just what it is. So yes, I think you'll continue to see us maintain that balance. Our build to suit pipeline is as good as it's ever been. And it's as I referenced in the script, it's anywhere from 100,000 square feet up to north of 1 million square feet and pretty consistent across all the markets. So, I think you'll see us continuing to have very positive results on the new development pipeline.

Jeremy Metz -- BMO Capital Markets -- Analyst

Thanks, Jim.

Operator

Thank you. Our next question is from Manny Korchman. Please go ahead.

Emmanuel Korchman -- Citi -- Analyst

Hey guys. Good afternoon. Nick, I've got one for you. If you think about sort of the acquisition pipeline and maybe especially the two acquisitions you closed, why are those buildings I guess leasing quicker? Is it something wrong with the way that the developer or the owner is trying to lease them, if demand is so good and you guys proved out (ph) the bridge, how quickly you can get them leased? Why are they leasing them before selling them to you or others?

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

Well, first of all, one asset was already fully leased in Seattle. The other lease -- the other building where we bought in the Lehigh Valley, had just delivered and they signed a lease in that and we've got three RFPs in that space right now. So we do expect it will -- we underwrite 12 months, but we fully expect that we will beat that underwriting like we do typically on other acquisitions we've done. So I don't think -- it's not a lack of demand.

Emmanuel Korchman -- Citi -- Analyst

And if you look at the rest of the pipeline, are those similar deals, whether new out of the ground and either -- not stabilized yet or getting closer to stabilized or is it going to be in general flavor to sort of value add that -- than that MO?

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

You mean, the other acquisitions we're pursuing?

Emmanuel Korchman -- Citi -- Analyst

Sure. Yes.

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

Yeah. Most of those -- most of the acquisitions we've been pursuing are pretty well leased. In fact, this last acquisition that was half leased was unusual for us. I think it was the first one we've done in the last 18 months.

Emmanuel Korchman -- Citi -- Analyst

Thanks, Nick.

Operator

Thank you. And our next question is from Nick Yulico. Please go ahead.

Nicholas Yulico -- Scotiabank -- Analyst

Thanks. Jim, I guess given all the positive commentary on fundamentals and the trends in the overall market and in your portfolio as well, have you considered increasing development start activity? It isn't -- but I guess I'm just wondering why not.

James Connor -- Chief Executive Officer

Yes, we have and we actually talked about that from a guidance perspective and I think, as indicated by Jeremy's question with five spec buildings in the first quarter, we thought it wouldn't be prudent to wait to reassess at the end of the second quarter and hopefully get a little bit more build to suit volume and a little bit more leasing teed up before we made a move on the development pipeline. I think --sitting here today, I would tell you we think it's trending toward the high end of the range that we had announced in January. And as we've said, it feels an awful lot like it has the last couple of years so, we would hope we'd be able to get these build to suits signed up and be able to give some good news in the second quarter call.

Nicholas Yulico -- Scotiabank -- Analyst

Okay. And then Mark, just a question going back to the guidance. I mean it sounds like there are -- we should think about occupancy, not being as high as again to the back half of the year. I guess I'm just wondering, I mean what's going to -- what would surprise the upside there? I mean, is it just tenants willing to stay in place more? Is it even better leasing on the spec projects? I mean, what's sort of the upside to occupancy?

Mark Denien -- Chief Financial Officer, Executive Vice President

Yeah, I think Nick it's everything you just said. You hit around the head. I would tell you that, first off in the first quarter, we were surprised a little bit to the upside based on our occupancy levels. We quite frankly did not budget or underwrite and our renewal rate will be as high as it was in the first quarter. So that was part of the reason, we're already off to a better start in Q1 than what we had budgeted. We do believe occupancy will tick down a bit from here, one, because as those leases roll, we're pushing rents like Jim said and I don't think we believe we'll keep the same retention rate for the remainder of the year that we posted in the first quarter, so we're anticipating a little downward tick there.

I mentioned the two spaces that we have a tenant in, that total 425,000 square feet, that we know is coming back to us at the end of the second quarter, because of moving into a build to suit, so that will bring occupancy down as well. So to the upside, it would be the quicker releasing of space like that. It would be retention rates coming in for the rest of the year closer to what they came in, in the first quarter compared to our -- what I would say, normal run rate of closer to 75%. So it will be some combination of all that, that could cause it to go to the upside.

Nicholas Yulico -- Scotiabank -- Analyst

Thanks.

James Connor -- Chief Executive Officer

Yeah.

Operator

Thank you. Our next question is from Jamie Feldman. Please go ahead.

Jamie Feldman -- Bank of America -- Analyst

Great, thank you. I was hoping you could talk a little bit about the types of demand you're seeing. I think there's been a lot of discussion in the market about smaller tenant demanded some markets versus larger. Have you seen any split in that along those lines in your portfolio?

James Connor -- Chief Executive Officer

Yes, thanks Jamie. No, we really haven't. We had picked up on some of the chatter and that questioned (ph) some of our peers. So we took a look at our first quarter results, which obviously with only 2.8 million square feet of leasing wasn't a particularly deep pool of data. So we went back and looked at all of 2018 as well. And the truth is, it all performed really well. I mean, I'm not going to kid you for us in actuality. The big spaces, north of 500,000 feet did perform the best for us, in terms of occupancy and rent growth. And the smaller under 100,000 was probably the lowest performing. But you're talking about the under 100,000 foot buildings, being 97.2% compared to the over 500,000 at 98.8%.

So they all are really good, rent growth was probably the strongest in the big buildings, at 31% and 10% and 22.4% and 7.1% in the smaller buildings. Again, really good numbers for the -- for any which way you want to slice it and it's funny, because a lot of people think of our portfolio and we get a lot of credit for the million square foot Amazon buildings. But you have to remember that we have 300 buildings out of our 504 that are in service. That are under 250,000 feet, and that totals 40 million square feet of our 146 million that's in service. So we've got a fair bit of exposure and we're really active in this -- in this size range. So I'm happy to tell you, it's good all over the board.

Jamie Feldman -- Bank of America -- Analyst

Okay. And then as you guys think about growing the portfolio through acquisitions, I mean, do you the bias, would you want to get more into kind of a smaller footprint infill type assets or your content staying investing even more in kind of larger bombers?

James Connor -- Chief Executive Officer

I would tell you under a 100,000 feet, we don't have a particularly strong appetite, unless it was part of a package of deals like that. But between 100 and 1 million square foot , it fits in our portfolio like anything else. And a number of the one off deals that Nick and his team have acquired, this year and last, would fall into that 100,000 to 250,000 square foot category. And many of those are multi tenant buildings. So that's a product type that we've always played in. We're just probably not as well known for that as some of our peers, but we've got a lot of that product and we do a lot of that leasing.

Jamie Feldman -- Bank of America -- Analyst

Okay. And the ones that Nick been buying, is that just more because you can find them, or that's more because you felt like you wanted to round out the portfolio with more of that?

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

Well we're really just refining our geography a little bit with those small amount of acquisitions we're doing and using disposition proceeds for it and it's very selective and just a handful of high-barrier Tier 1 markets.

Jamie Feldman -- Bank of America -- Analyst

Okay.

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

And those assets tend to be a little bit smaller.

Jamie Feldman -- Bank of America -- Analyst

I'm sorry.

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

And those assets tend to be a little bit smaller.

Jamie Feldman -- Bank of America -- Analyst

Right, OK, all right, thank you.

James Connor -- Chief Executive Officer

Sure.

Operator

Thank you. Our next question is from Blaine Heck. Please go ahead.

Blaine Heck -- Wells Fargo Securities -- Analyst

Thanks. Good afternoon. So you guys are a little fluid out of the gate this year on the disposition front, relative to kind of the quarterly pace to hit guidance. You talked last quarter about getting Midwest dispositions done in the first half. So is there anything to read into that related to the appetite for properties in Tier 2 markets? Are sales taking any longer to complete than kind of your expectation or are those sales still on track?

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

No, there are no issues. In fact we have about 100 million square foot (ph) of volume non-refundable right now, that we expect to close very early in the third quarter and we've got most of our target disposition lift in various stages of the process. So traditionally, dispositions have always happened later in the year and we always -- for whatever reason, people wait till the end of the year to get things sold.

Blaine Heck -- Wells Fargo Securities -- Analyst

Okay, got it. And then maybe sticking with you Nick, the acquisitions, just to get from the 3% in place to the 4.5% stabilized in there, is it just a matter of leasing them up to a stabilized level or is there any rent growth assumption built in that?

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

No rent growth assumption built into it. It's just one unit that get -- need to get leased up.

Blaine Heck -- Wells Fargo Securities -- Analyst

Got it. Thanks guys.

Operator

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

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. Jim, I guess you might have answered my question partially with your comment on the build to suit on in this quarter. But just looking -- I understand you have your 50% kind of pre lease minimum requirement for your development pipeline, but if you combine your unstabilized portfolio with your under development portfolio, I think you wake the occupancy decrease from safe or lease percentage decrease from about 45% to about I think 37% or so. Do you guys -- are you guys thinking about altering your measure, kind of what your risk cap is in terms of development and on stabilized assets?

James Connor -- Chief Executive Officer

No, Eric. I can't tell you we're going to start looking at it, any differently than I think we historically have. I think a combination of the occupancy of the underdevelopment -- the in-service and the stabilized is was the right cross-section of all of our occupancy metrics to look at. And then, as big as we are, we have to look at the development pipeline in totality. And we look at every spec project and measure the risk, that we're taking on. And as we've talked in the past, that's not just from a company perspective, it also looks at what's going on that business unit. What we've got coming at us in the next 12 to 18 months in terms of lease roll. What kind of rent growth and occupancy and net absorption we're seeing in those specific markets.

So I think we've got our hand on the pulse of the right metric, when we're making all of those decisions. But we're always happy to talk about slicing and dicing the data differently, if there's a better way to do it.

Mark Denien -- Chief Financial Officer, Executive Vice President

Yes, the only thing I would add to that Eric is like Jim said, the 50% kind of pre-lease in the development pipeline is an easy thing to talk about. But we've got a whole lot more metrics in that internally that we look at, before we pull the trigger on any deal.

Eric Frankel -- Green Street Advisors -- Analyst

That's helpful to know. Thank you. I just have one follow up and I'll move, I'll queue beck in. Just on the build to suit that you're seeing for the rest of the year, had the margins at all changed for what you're able to offer? I mean, it sounds like -- while supplies in check, it still seems -- it looks like a more -- even more competitive environment than even what it was a year or two ago. So any thoughts on build to suit margins?

James Connor -- Chief Executive Officer

No, our margins -- we're projecting our margins to be -- to continue to be north of 20%, which is where they literally average for the last probably 10 years. And that's a makeup of some of the more competitive build to suits, are probably in the mid to high teens, maybe 15% to 17%. And the speculative development, particularly on land that we bought right, is probably 25%.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. I'll queue back in. Thank you.

James Connor -- Chief Executive Officer

Sure.

Operator

Thank you. Our next question is from Ki Bin Kim. Please go ahead.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Hey, guys. So if you look back at the industrial market for the past few years, I don't think it matter where you owned it, you probably made money on it, but --

James Connor -- Chief Executive Officer

We're OK with that.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

And I didn't make any money on it. So there goes on our story. So but going forward, how do you think about long term market mix? And is it better to buy things in LA for caps even at this point versus -- and selling assets in the Midwest at low to mid five caps, I just want to get a sense of your broader thoughts on that topic?

James Connor -- Chief Executive Officer

Well, keep it up, I'll give you a couple of comments. We've done a pretty good job of analyzing the rent growth in our portfolio and market dynamics and I think that's one of the big reasons you're seeing us as we've transitioned the company over the last few years, pushing into those coastal markets because those coastal markets are where you have historically always gotten the strongest rent growth. When we go into a downturn or a recession, all of the markets are going to move the wrong way, but typically those coastal markets, particularly the high barrier ones that we've talked a lot about, those are the markets where you get the greatest returns. I would tell you, our primary focus is on development and not necessarily acquisition, although we do, do a bit of that. But I'd much rather be developing in as you referenced LA at a 5.5 as opposed to buying at a four. But in today's world, you're creating value with either one.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

And like the asset in 4375 Paris Boulevard, look, I'll be honest. I don't know if that submarket, although submarket is a good one or a bad one, I know it's only one mile or two miles south of the other development that you have, that was fully leased, but is development or build to suit activity taking you away -- further away from the city center? And is there some risk with that?

James Connor -- Chief Executive Officer

Well, if you want to look at individual assets, we do a combination of infill redevelopment and more traditional greenfield development. So if you look at what we're doing or what we've done in Southern California, when you go out to Paris in the Moreno Valley, that's more traditional greenfield development. But when you go into the IE West and into Orange County, where we've done a number of projects, that's much closer in, infill. It has a higher degree of difficulty because you're generally dealing with -- having to assemble a complicated site there's probably environmental issues. The development process in California as you know is a challenging one. So in order to get the site fully entitled, you're probably looking at 12 or 15 months worth of work. But again, we do it all. We're doing a lot of infill development, we own a lot of infill properties, we will continue to have a focus there. But we're also doing the bigger Greenfield, because if you're in Los Angeles and you need 1 million square foot distribution center, you can't do it in Orange County, that doesn't exist. That's why all those big -- those big million square footers have gone out to the IE, because that's where the land is available for those kind of developments.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

All right. Thank you.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Thanks. Jim I just wanted to touch on I guess your development leasing. And I'm sorry if I missed this, but I know you recently completed a number of projects where there's been some available space and last quarter, you gave us some pretty good details about the trends at those projects. I guess are those trends -- are you still happy with that leasing progress and we should expect to see some leases signed here over the next few quarters, is it still just a timing thing and why some of that space is still available?

James Connor -- Chief Executive Officer

Well, you better expect to see some leases signed because I expect to see some leases signed, people will be in some serious trouble. No, I'd tell you, Michael, the thing that we look at and again you can't get hung up looking at an individual building because when we underwrite a speculative development, irrespective of how good we think it is or how mediocre we think it is, we put in 12 months of lease up. And some of those buildings get leased in the first month and some get leased in month 12 and unfortunately, some get leased in month 18.

If you look across our entire portfolio for the last two years or three years -- three years, we've been averaging across all our speculative development complete lease up and stabilization in month nine. So we've been running ahead of our underwriting. A lot of winners, a lot coming out on budget, but a few losers and that's what I think you'll continue to see. That's the nature of the beast with speculative development.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. And then I guess your highlight on build to suit pipelines, should we read into that, that since you started, so many spec projects in 1Q that you're going to be more focused on build to suit left on spec over the next few quarters or is spec still interesting to you?

James Connor -- Chief Executive Officer

Oh, no. Spec is still very interesting to us and we're always focused on build to suit, because that's what has enabled us to drive new development to the levels that we have. What I would tell you and we've talked about this from time to time, when I've referenced our development pipeline may did below 50%, as we have worked our way into high barrier markets like Northern New Jersey and further into the Southern California infill markets like Orange County and even in Dade County, where we have some very, very expensive land tied up. It pays for us to put that into production absolutely as soon as we can. So in years gone by, I might have wanted to move some of those around from quarter to quarter to maintain that 50%. But in these instances, we think the market is strong enough and they carry on the land is significant enough that we're probably going to move ahead and put those into production as soon as possible. And that's what's driving Mike, what's behind my statement of where it may dip below. It's not going to go to 35% or 40%, but we just may choose from a timing perspective to move ahead with a few spec projects sooner than we would have in the past. But you'll also continue to see us as I referenced earlier, since we have already signed three build to suits, have a good number of build to suit projects.

Michael Carroll -- RBC Capital Markets -- Analyst

Great, thank you.

Operator

Thank you. (Operator Instructions) And we'll go to the line of Rich Anderson (ph) . Please go ahead.

Richard Anderson -- SMBC Nikko Securities -- Analyst

Thanks. Good afternoon. So Jim or anyone, I wonder if you could talk a little bit about obsolescence, not maybe this year but as the business of logistics moves closer in and that's kind of been touched on already in this call, away from perhaps these huge fulfillment centers into smaller spaces even Amazon is doing that more and more. What is an alternative use of 1.2 million square foot rectangle?

James Connor -- Chief Executive Officer

Well, we've talked in the past, we've never lost Amazon from any one of our facilities. Now that isn't to say, they haven't moved out of some and eventually someday they'll move out of one. And as we've spent a lot of time --

Richard Anderson -- SMBC Nikko Securities -- Analyst

They moved out of Coffeyville, I believe. I recall reading that, but that was a long time ago. Anyway, yes.

James Connor -- Chief Executive Officer

Yeah, that was one of our projects.

Richard Anderson -- SMBC Nikko Securities -- Analyst

Yeah, I know. Yes.

James Connor -- Chief Executive Officer

So -- but you know what, someday they will. You're absolutely right. And what we want to remind everybody is we own just the box. We don't own any of the material handling equipment or mezzanines or robotics or anything like that. And we've got restoration clauses. So at the end of the day, I own a good clean functional 1.2 million, 1.1 million, whatever the size is box with plenty of parking and plenty of trailer storage, plenty of loading facilities. That building can be released to WalMart, to Procter and Gamble, to Target, that building can be divided into half or quarters and I can do 500,000 foot leases or 300,000 foot leases. So we've always got an eye toward the future in any of our development, whether it's speculative or build to suit. And we think we've underwritten those at the right bases that at the end of that lease term, if we were to lose an Amazon, we'd be able to compete for deals very favorably.

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

Rich, the only thing I would say is these -- taking Amazon for an example, these 90,000, 80,000 square foot buildings are not replacing anything, they're purely additive to their supply chain. Those are still serviced by these fulfillment centers. So it just may be that the fulfillment center is servicing both the direct in consumer and those delivery stations or whatever you want to call them. So they're not replacing anything, they're just additive to their supply chain.

Richard Anderson -- SMBC Nikko Securities -- Analyst

Okay, fair enough. And then, another thing that was touched on, but I don't know if it was explicitly answered. You don't have a bent (ph) either way about having your average assets size go higher or lower, over the course of the next few years, do you -- or are you thinking in terms of -- well, maybe -- because you said 100,000 to 1 million square feet fit into our kind of business model. Are you kind of showing your cards a little bit they'd be willing to get a little bit smaller?

James Connor -- Chief Executive Officer

Yes, I would tell you, we do not have a component of our strategic plan or our annual budget. That says we want to get our average building size bigger or our average tenant size bigger or the inverse smaller, by any stretch of the imagination. Our local operating teams are out just trying to do good quality business. And we own -- we still own, I'm looking at the latest numbers here. We still own 95 buildings under a 100,000 square feet. 202 between 100,000 and 250,000 feet, 140 between 250,000 and 500,000 and 87 over 500,000. I mean that's pretty good balance across all sizes and I'd happily take more of any of those.

Mark Denien -- Chief Financial Officer, Executive Vice President

And if you look at our pipeline of what we're building, Rich, we're building everything from 140,000 to 1 million and everything in between. It's more about where the asset is and what it's going to serve than how big the asset is.

Richard Anderson -- SMBC Nikko Securities -- Analyst

So, size doesn't matter? Sorry?

James Connor -- Chief Executive Officer

Rich, I'm not going there buddy. Not on a public line.

Richard Anderson -- SMBC Nikko Securities -- Analyst

Just kind of possibly stumble -- to get you guys to stumble first time our. All right. That's all.

Operator

Our next question is from John Guinee. Please go ahead.

John Guinee -- Stifel Nicolaus & Co. -- Analyst

Great, thank you. Mark, by the way you're building a 77,000 foot building in Indianapolis, just saying.

Mark Denien -- Chief Financial Officer, Executive Vice President

That's true. I forgot about that one, too, John you're right.

John Guinee -- Stifel Nicolaus & Co. -- Analyst

Yes. So, big picture Jim. Not all these submarkets are created equal and some of them are basically out of land clearly out of Greenfield land and into repurposing land. Can you talk about the bigger markets say Atlanta, Dallas, Chicago, you've got it -- you guys have a great team in Atlanta, great team in Dallas. Maybe whatever market you care about that, where you're essentially out of land and where particularly sub markets, say the DFW submarket and then where there's land as far as the eye can see, and then take it into the ability to have long term pricing power in these markets where you're essentially out of land?

James Connor -- Chief Executive Officer

Well John, you've hit on what is the key to some of these Tier 1 markets. I do in fact have some data handy because I thought we might -- we might get this question. So if you take Dallas for example, which by and large in its entirety is reasonably healthy, has good strong net absorption. But you drill down to the submarket level and you go down to South Dallas and we've all talked about South Dallas before. No barriers to entry, plenty of available land, good expressway access, a reasonably new intermodal and the vacancy in South Dallas is 15.3%. So like four times the national average. You go up to the DFW submarket, which you and I would call infill and there's very little available land. The vacancy is 6%. If you go to Chicago, it's the same extreme.

You go down to the I-80 Corridor, you know, again not a lot of barriers to entry, good expressway access and the vacancy down there is 11.7%. You go to the O'Hare market, we've all been and toured through the O'Hare market, it's 2.4% vacancy. So you're absolutely right. Not only do you not have pricing power today when the vacancy in those overbuilt markets is where it is, but you can't anticipate having any pricing power over the long term. So if you have a building down there and you've got lease roll coming at you, your tenant probably has the opportunity to look at a number of different spec buildings or potentially go to a build to suit, whereas you go to these infill markets around the airport and some of the other high-barrier Tier 1 markets that we've talked about and those opportunities don't avail themselves and which is why you can generally get up to twice the rent growth in those markets that you can in some of these low barrier markets.

John Guinee -- Stifel Nicolaus & Co. -- Analyst

Well said. Good job. Thanks.

Operator

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

Michael Mueller -- J.P. Morgan -- Analyst

Hi. I guess in the release upfront, you called out that you're going to have a low level of lease rollover the rest of 2019. And I guess I'm curious, is there anything unique that you're trying to point out about this year that you're trying to get us focused on, because when I look at the first quarter of '18 SOP, it was the same exact dynamic.

James Connor -- Chief Executive Officer

No, I don't necessarily think so Michael. I think it's just -- it's lower risk. I mean, we may not have the ability to push rent growth quite as much as some of our peers, but at the same time, there's a risk related to doing that. So it's a little bit around the guidance that we gave on same property NOI. That's another reason that it will decelerate a little bit for the remainder of the year, because we won't be rolling as many tenants as maybe we would like to in this environment. But in the long run, we like the balance of what we have.

Michael Mueller -- J.P. Morgan -- Analyst

Okay, so it's nothing really atypical about this year, than it --

James Connor -- Chief Executive Officer

Not necessarily. I think this year was still a little lower than the past because we did just a tremendous amount of pull forwards in the fourth quarter that we talked about on the fourth quarter call. And when I say pull forward, some of them were just four to six months early, it's not like they were dramatically early, but we just took care of more of this year's expirations at the end of last year than I think would be normal. Not a lot more, but a little bit more.

Michael Mueller -- J.P. Morgan -- Analyst

Got it, OK, that was it. Thank you.

Operator

Thank you. (Operator Instructions) And we'll move to the line of Eric Frankel, please go ahead.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. I think one, Mark, and maybe I just want maybe some -- it will be nice to have some better clarity on is Atlanta. We've done some spec development. Can you just describe the leasing activity there and how quickly you think you can lease up your recent development?

James Connor -- Chief Executive Officer

Yeah, we've got really good activity down there. And I know when you look at Atlanta in its entirety, people see 6%, that's actually down first quarter of 2018, it's 6.8%. And I think Atlanta had depending on who you talk to, 18 million square feet plus or minus. So a lot of good activity, but there is as you pointed out Eric, a fair bit of development down there. So we've got three buildings. One of which is 589, one of which is 193, hold on, I'm searching for the other one, the other one is 498. The 498 is I'm looking at a prospect list right now, we've got two good prospects.

The 193 we've signed a lease for over half of that building, that'll be announced at the second quarter. So we've got 90,000 feet there left and my sheet says, we've got two prospects for that. And then the big building, the 598, we've got three prospects for. So we're continuing to see good demand across the board and we always are evaluating at this point in the cycle, whether we want to hold out for full building tenants or we're willing to break the building up and that's a little bit of what's going on depending on the kind of activity that we're seeing. But again, those buildings have a fair bit of flexibility. So we can do single tenant buildings or we can break the building up and lease it to two different tenants.

Eric Frankel -- Green Street Advisors -- Analyst

Okay and then maybe another market, just to touch up on Central PA. Any concerns there? I hear that the leasing activity is a little bit soft there and there seems to have been a lot that's been developed and it's going to be coming online in the next few quarters.

Mark Denien -- Chief Financial Officer, Executive Vice President

Yeah. As I mentioned in the past, Central PA has been a little bit slow. We've got a big building there looking for it on my list here, 832. We've got one full building prospect and two partial building prospects, 0.5 and 0.75 of the building. So I would tell you activity is good, but that building came into service in the third quarter of last year and as I like to remind, my leasing team out there, I think it's ripe for leasing.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. So all right, we'll see what happens. Are there any tenants on the watch list in terms of credit that we should know about, that may be factored in same store guidance?

James Connor -- Chief Executive Officer

No, nothing new other than we do have one tenant, one new event, I guess you would say. Z Gallerie filed bankruptcy back in March. They are current on their rent. They're down in about 200,000 square feet in Atlanta. From everything we've been told, there -- it's a Chapter 11 situation. The facility is pretty critical to their supply chain. So we think, it'll be business as usual. But if something were to change in that, the rent is below market. So I think it would be a situation of kind of like the hhgregg or be a period of time to retenant it if that would happen, would it be at better rents. Other than that, nothing new Eric.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. Final question, you might have seen a pretty short article from the Journal yesterday about a fairly large portfolio of platform coming on the -- coming online, that might come to market this year. Do you think there's actual investor appetites to take down a super large portfolio that's worth say $15 billion or $20 billion.

James Connor -- Chief Executive Officer

Eric on that, I don't know. That order of magnitude, there's an awful lot of dry powder out there changing -- chasing logistics properties. And I think a number of the deals that have been done over the last couple of years, in a let's call it $3 billion to $7 billion range have had multiple bidders. So I don't think it's out of the question. I don't think it's out of the question that you could create a partnership that could take down a project of that magnitude. But I was telling guys earlier, looking at big deals like that, it's a little bit like shopping for a new big boat. It's really fun to look at it and talk about it. But it's financially hard to do.

Eric Frankel -- Green Street Advisors -- Analyst

Yes, understood. Okay. Thank you.

Operator

At this time, there are no further question in queue.

Ron Hubbard -- Vice President, Investor Relations

I want to thank everyone for joining the call today. We look forward to seeing many of you at the NAREIT conference in New York in early June. Operator, you may disconnect the line.

Operator

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

Duration: 48 minutes

Call participants:

Ron Hubbard -- Vice President, Investor Relations

James Connor -- Chief Executive Officer

Nicholas Anthony -- Executive Vice President, Chief Investment Officer

Mark Denien -- Chief Financial Officer, Executive Vice President

Jeremy Metz -- BMO Capital Markets -- Analyst

Emmanuel Korchman -- Citi -- Analyst

Nicholas Yulico -- Scotiabank -- Analyst

Jamie Feldman -- Bank of America -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Richard Anderson -- SMBC Nikko Securities -- Analyst

John Guinee -- Stifel Nicolaus & Co. -- Analyst

Michael Mueller -- J.P. Morgan -- Analyst

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