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Duke Realty Corp (NYSE:DRE)
Q3 2019 Earnings Call
Oct 31, 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. Welcome to the Duke Realty Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]

At this time, I'll turn the call over to your host, VP, Investor Relations, Mr. Ron Hubbard. Please go ahead, sir.

Ronald M. Hubbard -- Vice President of Investor Relations

Thanks, Tony. Good afternoon everyone and welcome to our Third Quarter Earnings Call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien, Chief Financial Officer; Nick Anthony, Chief Investment Officer and Steve Schnur, Chief Operating 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, October 31, 2019 and we assume no obligation to update or revise any forward-looking statements.

A reconciliation to GAAP of the non-GAAP financial measures that we provide 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 IR section of our website.

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

James B. Connor -- Chairman and Chief Executive Officer

Thanks, Ron and good afternoon everybody. Demand for well located, state-of-the-art logistics space in key sub-markets continues to remain robust. Overall, fundamentals are still strong, driving rent growth and development opportunities and our platform continues to provide creative solutions for our clients and outstanding value creation.

Let me start off with a bit of macro and strategic front and then the rest of the team will expand on our operational results in our capital activity. Yesterday, preliminary third quarter GDP was announced at 1.9%, down slightly from the 2% pace in the second quarter, but still above consensus. One of the bright spots in the GDP report was consumer spending, which was up 2.9% on an annualized basis.

Report also indicates business spending, continues to weaken a bit, which we've seen in some of the other recent indicators. For monitoring this closely for any possible impact to the consumer, but it doesn't appear to be an issue at this time. Additionally, e-commerce sales have grown by 13.1% and versus more retail sales were up 2.4% through the first half of the year. The retail inventories continue to trend up the 3.9% year-over-year through the third quarter.

As we've noted previously, we're seeing significant investments by not only to e-commerce company, but it also retail and consumer products companies into their supply chains to improve delivery times and efficiency. This combined with continued increases in consumer spending, will continue to drive demand for well located logistics real estate.

Now turning to real estate fundamentals. Vacancy across the U.S. markets ticked up about 10 basis points in the third quarter, to 4.4%. CBRE's preliminary data shows third quarter absorption of 45 million square feet trailed by deliveries of about 56 million square feet.

On a year-to-date basis, the gap is less than 15 million square feet, with projected full year 2019 deliveries exceeding demand by about 25 million square feet. To put this in perspective across a 14.5 billion square foot stock in the U.S., this gap will approximate to about a 10 basis point rise in vacancy from the beginning of the year levels, so we're looking at roughly 4.5% nationwide vacancy range by the end of the year. This is still 300 points below long-term historical average vacancies in the United States.

CBRE is also reporting asking rents during the third quarter has increased 5.7% year-over-year, more than 2 percentage points above the average annual growth rate, since 2012. So at a high level, we're continuing to see low vacancies, good rent growth and positive demand for buildings in high quality well located portfolio.

I'll now turn it over to Steve Schnur to touch a bit more on market fundamentals at the sub-market level as well as our third quarter operational performance.

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

Thanks, Jim. I'd like to start by expanding a bit on this market supply data points as it pertains to certain markets, and more importantly sub-markets have been in the headlines for the last several quarters. Let me first say that you have to be careful and looking at MSA level data on supply, particularly in some of the larger Tier 1 metro areas, that can have a geographic diameter of up to 80 miles. So if you look at our NOI exposure at the total city level of Atlanta, Dallas, Chicago, it comprises about 24% of our total NOI. However, in the heavier supply pockets of Northeast Atlanta, South Dallas and I-80 of Chicago, our exposure is just nine assets would contribute only 2.8% of our total company NOI.

Furthermore, only about 800,000 square feet in those three sub-markets expires through the end of 2021. From a vacancy standpoint, the three sub-markets I mentioned are about 9.5% vacant. We had comparatively our Romanian assets outside of these three sub-markets for the other 21% of our NOI, the market vacancy is 6% and our portfolio occupancy across those three cities is between 99% and 100%.

Finally, as a testament to our portfolio performance in these three large metros, our rent growth year-to-date in these three cities as averaged 14.6% on a cash basis and 30% on a GAAP basis. The supply risk data points and rent growth figures of the sub-market level support what we have been emphasizing. That our location strategy is heavily focused on the top logistics corridors for local and regional distribution within each MSA. As a result, as a case in point, across our 20 markets there are roughly 220 total sub-markets, of these 220 sub-markets, our 513 properties touch only 77 of those sub-markets.

So again, you have to be careful with some of this data, and hopefully each of you will have an opportunity to get out our regional markets to see this first hand.

Now we'll move on to the highlights in our portfolio for the third quarter. We executed over 7 million square feet of leases across 17 markets at an average size of 117,000 square feet. This includes 22 leases signed over 100,000 square feet and five leases signed over 250,000 feet. Some of the more notable lease transactions were with customers such as Snyder's-Lance Foods, International Paper, Coca-Cola, Walmart and XPO Logistics. At quarter end, our stabilized portfolio was 97.9% leased.

Our in-service occupancy increased from 95.4% to 96.2% during the third quarter primarily through the lease-up of recently completed speculative developments. We signed over 1.8 million square feet of first gen leases and recently completed spec project, that helps us stabilize over seven facilities. As everyone is aware, this first generation leasing will not impact same-store results in the near term, but it will drive significant overall NOI growth going forward. The leasing activity, combined with strong fundamentals led to another quarter of solid rent growth of 14% and 27% on a cash and GAAP basis respectively, with only 5% of those activity drive from our coastal markets of California, New Jersey and Florida.

There is also been a lot of discussion recently about tenant demand by building size. So I thought it would be important to share with you some of our year-to-date stats by building size. Year-to-date, we've realized GAAP rent growth for buildings under 100,000 square feet of 18%, 29% rent growth for buildings between 100,000 and 250,000 feet, 23% for buildings 250,000 to 500,000 and 48% for buildings greater than 500,000 feet. This reflects strong fundamentals across the size spectrum and it also echoes our strategic and concentrated sub-market focus I just laid out. On the development side of the business, momentum continues to be very strong.

During the third quarter, we generated $211 million of starts across six projects totaling 2.1 million speeds that are 49% pre-leased. The new development starts included a 210,000 foot build-to-suit, and the Atlanta airport sub-market for Portia USA and a 615,000 foot build-to-suit and the Eastern Pennsylvania for one of the largest tire wholesalers in the Northeast. On the speculative development side, we started a project in the Inland Empire totaling 800,000 square feet and a 210,000 foot project in the East Bay sub-market in Northern California. Our overall development pipeline at quarter end had 19 projects under construction totalling 7.2 million square feet at a projected $916 million in stabilized costs. These projects are 46% pre-leased and our estimated margins on the pipeline remain over 30%.

Our development outlook for the remainder of this year is very solid. With the 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 on.

I'll now turn it over to Nick Anthony to cover capital transaction activity.

Nicholas Anthony -- Executive Vice President and Chief Information Officer

Thanks, Steve. We continue to be strategic in our capital recycling for the purpose of both self-funding development, achieving our strategic objective for Tier 1 geographic exposure.

During this quarter, we closed on the sale of five transactions located primarily in the Midwest totaling $280 million. The bulk of the activity comprise an 18 building 4.1 million square foot portfolio across Indianapolis, Cincinnati and Columbus, that's all for $218 million. The buildings in this portfolio had an average age of 25 years and we believe the sale maximized our return on these properties. The remaining sales were small portfolio a one-off assets across Minneapolis, Atlanta, Indianapolis and Washington DC. In turn, we recycled a portion of these proceeds during the third quarter into a 252,000 square foot facility located in Miami at Countyline Corporate Park.

In addition, after the third quarter in late October, we completed a second acquisition also accounting loans [Phonetic] totaling 241,000 square feet. In aggregate, we acquired 493,000 square feet for about $78 million. We now own 1.8 million square feet in this park and together with our Miami industrial logistics park nearby, we own over 2.4 million square feet of what we believe are the most desirable facilities in the Medley sub-market of Miami. The acquisition of Countyline bring our year-to-date total acquisitions to $188 million and coupled with development have increased our Tier 1 exposure on a JAV basis to 64%. This is up from 59% at 12-31-18 and on the path to reach our Tier 1 strategic goal of approximately 78% by the end of 2021.

I'll now turn it over to Mark Denien to cover our earnings results and balance sheet activities.

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

Thanks, Nick. Good afternoon, everyone. Core FFO for the quarter was $0.37 per share compared to $0.36 per share in the second quarter of 2019 and $0.35 per share in the third quarter of 2018. On a year-to-date percentage basis, core FFO per share is up over 9% compared to the similar year-to-date period in 2018 and AFFO on a share adjusted basis is up right about 10% year-over-year.

Same-property NOI growth on a cash basis was 2.8% for the third quarter, down from 4.4% in the second quarter. As we discussed extensively in our last earnings call, this moderation of same-property NOI growth was expected due to coming off an extremely high comparable occupancy level of 98.8% in the third quarter of 2018. In addition, third quarter same-property NOI was negatively impacted by a previously announced tenant bankruptcy, which was immediately backfilled, but will not begin paying rent until the end of the year. And also from the relocation of a tenant from two of our existing properties to one of our newly completed build-to-suit developments. The combined impact of these tenant situations to same-property NOI was about 35 basis points for the third quarter and will be about 60 basis points in the fourth quarter.

Once again, we expect this negative impact of 50 basis points on the second half of 2019 to turn to a positive in 2020 as rent commences from the bankruptcy backfill and the other two spaces released. We do expect same-property NOI growth to accelerate modestly in the fourth quarter, and this is considered in our revised guidance, which I'll cover in a minute. Same property NOI growth on a GAAP basis was 2.9% for the third quarter and 3.5% on a year-to-date basis.

In August, we took advantage of the low interest rate environment and issued $175 million of unsecured notes as part of the reopening of our 3.375% coupon, 2027 bonds, at 2.8% effective interest rate. Between August and early October, we issued 6 million shares through our ATM program at an average price of $33.56 generating net proceeds of $200 million. I'll add some context given we're very thoughtful on delivering on issuing equity.

With our significantly increased development prospects since the beginning of the year, we felt it was prudent to issue a bit of equity to maintain a strong competitive balance sheet to fund these investments. In addition, the equity markets are providing a very competitive cost that we estimate a significantly accretive to our overall investment returns. While our leverage metrics improve this quarter from already strong levels, this is temporary. We view this as a portion of the pre-funding for our current development pipeline along with future development prospects rather than a delevering activity. This funding will come from future unsecured debt issuances and other capital sources.

As we head into 2020, I anticipate a gradual path toward a debt to EBITDA ratio in a low five times area, from the mid-fours area currently. This level is in the range, we've previously discussed. Last week, we redeemed $250 million of 3.9% unsecured notes, which had a scheduled maturity in February of 2021. The approximately 6 million pre-payment of interest incurred in connection with this redemption will impact FFO as defined by NAREIT in the fourth quarter of 2019, with no impact to Core FFO. The source of funds for this redemption will ultimately come from a new unsecured debt issuance we anticipate in the near future.

Let me now address revisions to our 2019 expected range of estimates, which is an exhibit at the back of our quarterly supplement as well as on our website. As we near the end of 2019, we have narrowed our guidance for Core FFO to a range of $1.42 to $1.46 per share, which equates to an additional $0.01 per share increase at the midpoint, and 8.3% growth over the prior year.

We increased our guidance for same property net operating income to a range of 4.4% to 4.8% from the previous range of 4% to 5%. We've also increased our guidance for development starts to a range of $1 billion to $1.15 [Phonetic] billion representing a $75 million increase at the midpoint. Revisions to certain other guidance factors can also be found in the Investor Relations section of our website.

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

James B. Connor -- Chairman and Chief Executive Officer

Thanks, Mark. In closing, we're very pleased with the team's execution on leasing performance, capital redeployment and development starts. We laid out solid growth expectations for the year and we have exceeded all of those expectations. In addition, we're executing on our long-term strategic goal to generate high single-digit AFFO growth in a modest economic environment and execute on our goal to achieve 70% Tier 1 geographic exposure by 2001 [Phonetic] with a very targeted sub-market focus.

Of course we are carefully watching macroeconomic data trends, trade negotiations and our customer sentiment. But for now, we continue to be optimistic about a solid finish of the remainder of the year and demand drivers continuing intact for a good start to early 2020. I'm also very pleased that our overall strong performance has allowed us to raise the quarterly dividend by $0.02 a share or 9.3% over the previous dividend rate, while maintaining our very conservative payout ratio. The increase is reflective of our team's outstanding execution and strong year-to-date results.

We will now open up the lines to the audience. We would ask participants to keep the dialog to one question or perhaps two short questions and you of course are welcome to get back in the queue. I've also been notified that there were some static on the line, during my remarks and Steve remarks. So if you need us to readdress any of those numbers or any of those comments, feel free to ask and you'll be addressed.

Tony, you can open up the lines for our first question.

Questions and Answers:

Operator

Thank you sir. [Operator Instructions] We'll take our first question from Manny Korchman. Please go ahead.

Emmanuel Korchman -- Citi -- Analyst

Hi everyone, good afternoon. Can we focus on the asset sales for a second, talk about the buyer pool, that you're looking at -- that was looking at those assets and whether there you marketed other assets that you didn't sell to them?

James B. Connor -- Chairman and Chief Executive Officer

Yeah. So Manny, the most significant one was the Midwest portfolio sale and we were very pleased with the buyer pool, it was very deep. It was low double-digit number of bidders operating on that. And I believe we had, I think three or four rounds of final bidding with a final sealed bid process.

Emmanuel Korchman -- Citi -- Analyst

And then as we think about your portfolio improvement from selling out of these more secondary markets. What is it that limits for their sales, is of the gains and sort of using those into other properties? Do you like the rest of your portfolio? And as you get to 70% goal that you mentioned, do you think you do that you're buying a development or do you think there are more sales that we should think about?

Nicholas Anthony -- Executive Vice President and Chief Information Officer

I would tell you that we are very happy with our existing portfolio. So it is very -- it's getting hard and hard to find assets that we do want to sell. So we've been gradually doing the sales to partially fund our development. But going forward, the bulk of our growth into the Tier 1 will be through development.

Emmanuel Korchman -- Citi -- Analyst

Thanks, Nick.

Nicholas Anthony -- Executive Vice President and Chief Information Officer

Yeah.

Operator

Our next question in queue that will come from the line of Blaine Heck. Please go ahead.

Blaine Heck -- Wells Fargo Securities -- Analyst

Thanks, good afternoon. So, you guys highlighted the fact that only 5% of your leasing volume was in Tier 1 markets, and you are still able to put a very strong rent spreads. Can you provide us with that percentage of 2020 rents that are in Tier 1 markets? And I guess what are the implications for rent spreads as we look forward?

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

Yeah, Blaine. I'll try to address that. First of all, make sure we are clear and I just made and the -- static. The 5% was actually not Tier 1 markets, it was coastal markets. So that was California, New Jersey and South Florida. We obviously count Atlanta, Chicago and Dallas as Tier 1. So that was not in that 5% number, just the coastal markets was 5%. So as we look forward for the next 18 to 24 months, that 5% is going to be about 20%. It could be lumpy from quarter to quarter. For example, we've got -- I want to say about 22% to 25% in coastal markets that are expiring in 2020, but it's likely we may get a couple of those deals done here in the fourth quarter actually. So the way that translates in the overall rent growth expectations if we look forward, I would tell you for the next 12 to 24 months on average, like say there may be some swings from quarter to quarter, but on average we expect similar results to what we've shown this year.

So call it high to low, high-single to low-double digits on a cash basis. And you know right around the mid-20s on a GAAP basis. And then for our whole portfolio, we've done a -- trying to done an analysis to look at what that would be on a mark-to-market basis on a GAAP, and we think we're close to 14% to 18%, somewhere in that range on a total GAAP basis.

Blaine Heck -- Wells Fargo Securities -- Analyst

Very helpful. Thanks, Mark. And then, so what's the break out of your exposure between Tier 1, Tier 2 and Tier 3 at this point? And then maybe for Jim, what's the ideal portfolio? Is it all Tier 1 or is it the targeted 70% that you're looking for by 2021, and you still do want to have some exposure to those secondary markets?

James B. Connor -- Chairman and Chief Executive Officer

Well, I'll let Nick give you the breakdown between the high barrier Tier 1, the Tier 1 and the remainder. But at this point we're just trying to get to our target of 70%, I think beyond that, you'll continue to see that that number grow but we haven't set specific targets. We've grown pretty substantially in Southern California and New Jersey, but we have a long way to go, before we think we would reach our long-term target size. Plus we're still relatively new in Northern California and Seattle, those also represent good growth opportunities for us in those Tier 1 high barrier markets.

Nicholas Anthony -- Executive Vice President and Chief Information Officer

Again, in terms of the composition, our high tier -- our high barrier Tier 1 on a gross asset value basis is just over 40%, and the low barrier Tier 1 is right around 25%. Going forward and what we've seen historically is the high barrier Tier 1 is the one that's moving the most, that moving us to that 70%. The low barrier Tier 1 are really staying rather static, as we go through this repositioning.

Blaine Heck -- Wells Fargo Securities -- Analyst

Thanks guys.

Operator

Thank you. The next question in queue will come from Jamie Feldman. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. So we've seen more consolidation in your sector, this week with Prologis and Liberty. I just wanted to get your thoughts, you now have a player in this space who is just getting larger and larger and is kind of pitching the idea that there is real synergies in the business from doing that. I just wanted to get your thoughts on the need to get larger to compete, and as you think about that combined entity as a competitor, what changes for you guys.

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

Well, give me, I'll take the second one first. I don't think anything changes. Our friends at Prologis had been a proverbial 900 pound gorilla for some time, and I don't think this really changes the landscape. We've all talked about the advantages of scale in this sector and we are in fact big believers in that. But with an enterprise value of $14 billion to $15 billion, we don't have to get big for the sake of getting big. I would have a hard time convincing our Board and our senior leadership to get big if we weren't creating additional value. So when we look at portfolios and we look at M&A, obviously we're looking at the impact to top-line FFO growth, but we're also looking at AFFO growth and NAV. And the sector is very expensive today and a little bit frothy. And we haven't seen that value creation opportunity, since the -- probably the larger bridge portfolio that we bought a couple of years ago.

So, and I think that's probably a fairly realistic outlook for the foreseeable future in our sector in terms of the pricing.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. I mean if you take a close look at Liberty and as you -- the strategic way did you think it would have been a good fit? It sounds like pricing maybe not.

James B. Connor -- Chairman and Chief Executive Officer

I think you can assume that were large and substantial enough that we look at every opportunity, both private and public. You know the amount of detailed underwriting, we do depends on what we -- what we think the debt would be. But we've had a lot of respect for Bill and the Liberty guys in their portfolio over the years. And it's a good company and we applaud our friends at PLD for putting the deal together.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay, all right. Thank you.

Operator

Thank you. The next question in queue that will come from Eric Frankel. Please go ahead.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. Just wanted to drill down through dispositions, a little bit further. The Midwest portfolio, is the cap rate did you guys disclosed in your supplemental, would that be -- would that apply to that portfolio? And assuming that was fully occupied for the last year and it should be for next year. So is that correct?

James B. Connor -- Chairman and Chief Executive Officer

Yeah, that it roughly equates to that portfolio. The reason that portfolio was so -- was highly leased though, is we actually as part of that transaction spun a vacant building out of that portfolio and sold to another buyer, that was ascribing more value to that building.

Eric Frankel -- Green Street Advisors -- Analyst

And that was part of that 4.1 million square feet?

James B. Connor -- Chairman and Chief Executive Officer

Yes, no, no, that was outside of the 4.1. The 4.1 was the Midwest portfolio.

Eric Frankel -- Green Street Advisors -- Analyst

Okay, got you. Got you. Okay, that makes sense. And then more broadly I think the public market is, it has pretty different views on how fundamentals and where values offer to different markets in the U.S. So I think coastal markets seem to be getting a really good bid and anywhere else is probably a little bit softer. What are you seeing on the ground, I mean, maybe in your non-coastal Tier 1 markets and some of the markets you're recycling out off. What are the fundamentals actually look like is -- have rents gone up, but a good fit, the last year or they've been kind of flat with where supply has been?

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

Yeah, Eric, this is Steve. Yeah, I would tell you we see good demand in all the sub-markets we operate in. I think we're pretty choosy as I tried to lay out and hopefully it came through with the static. But I think we're pretty choosy in our sub-market focus. In terms of the demand drivers, Jim touched on this but e-commerce retail, consumer non-durables, food and beverage. So, and I guess the one thing that I would point out that we don't publish but we track pretty closely here is our build-to-suit development pipeline. And that pipeline for us has been pretty consistent in terms of the number of prospects we're chasing. And that seems to be -- seems to be a good indicator of the health of our clients who are looking out 12 to 24 months for new space, and we watch that pretty closely. So I think it's a good indicator for us.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. Thank you.

James B. Connor -- Chairman and Chief Executive Officer

Eric, the only thing I would add is, if you look at the occupancy of our non-coastal markets, it's continue to be very strong. And as Mark alluded to earlier, our rent growth numbers, which were pretty good for this quarter and have been pretty good for the year are based on the fact that only 5% of our leases rolled in those high barrier coastal markets. So look, we've said this all along. The sector is in great shape all across the country. Vacancies are at record low. There is still really strong demand and there still really good rent growth, and we see that in all sizes as well.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. Thank you. Appreciate it.

Operator

Thank you. The next question is from Vikram Malhotra. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the questions. I have two quick ones. So just, based on your commentary around exploration is now being, going forward being a bigger part in the coastal markets. Would you actually expect accelerating cash rent spreads or similar cash rent spreads due this year?

James B. Connor -- Chairman and Chief Executive Officer

It's probably going to be fairly similar I would say, Vic, in the near future. But part of that, you got to remember, the leases that will be rolling in the coastal markets are generally shorter-term leases, five year deals let's just call it on average, where some of the leases that are rolling in the non-coastal markets were kind of what I would call legacy longer term build-to-suit leases at 10 years. So you have just as good of embedded rent growth in some of those non-high barrier markets, because of the length of the lease term that's coming up.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, that's fair. And then just to clarify, I know you've narrowed the same-store NOI growth range. But I just want to understand what caused you to kind of narrow the top end?

James B. Connor -- Chairman and Chief Executive Officer

Well, we narrowed both -- so I think we raised the bottom end and we lowered the top end, just to get closer to where we are to the year. So our new midpoint went from 4.5%, up to 4.6%, and then if you just compare that to our year-to-date number where we're at 4.9%, keep in mind that 75% of the total year NOI to 4.9% that would imply, I think if you just do simple math of 3.5%, expected growth in the fourth quarter to hit that 4.6%. But -- later in the year and we have better data now.

Vikram Malhotra -- Morgan Stanley -- Analyst

And the diesel is essentially what you called out that 60 basis point impact?

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

Yeah, we're at 60 basis points from the third quarter for the two tenants in the third quarter that I mentioned for the two situations, one bankruptcy tenant in Atlanta and then we had one tenant in two spaces in Cincinnati that we moved into a new development. The two spaces in Cincinnati, the tenant held over and one of them, for most of the third quarter while they were moving into their new building, and then they'll be out of both spaces in the fourth quarter. So what you have with those two situations, you had a 35 basis point negative impact in the third quarter, that will grow to 60 basis points in the fourth quarter because they'll be out of all those spaces. But more than offsetting that, because that is part of the 2.8% growth in the third quarter, we do expect to reacceleration, so more than offsetting that, will be the continual path we get from all the leases we've been signing on the rent growth side, plus a little bit less free rent in the fourth quarter of 2019 compared to 2018. So all of that, even though occupancy will probably dip down a little bit more in the fourth quarter because of situations should be more than offset by continued positive momentum elsewhere.

Vikram Malhotra -- Morgan Stanley -- Analyst

Got it. Okay. Thank you.

Operator

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

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Thanks. So going back to your comments about the Tier 1, 70% goal over time. I think that's about $750 million on a gross asset value basis. Just curious how you -- how you want to get there? Is it more by building your way there or buying?

James B. Connor -- Chairman and Chief Executive Officer

Yeah, we -- the majority of it will be through development and obviously we will be selling a little bit out of the Tier 2 markets and redeploying on Tier 1, but the majority of it will be in the development side. The vast majority of our land -- current land bank is focused on other Tier 1 markets right now.

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

Yeah, and Ki Bin just for example, if you look at our $900 million development pipeline now, over 80% of that's in those Tier 1 markets, already.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And any particular reason why some of the assets that you sold, I think were less than stabilized, is the demand just that strong where you're getting kind of full pricing, even though the demand...

James B. Connor -- Chairman and Chief Executive Officer

Yes, there is always some unusual circumstances like that. The one was an -- vacant building that carved out of the portfolio. A lot of times the buyer is more optimistic on the underwriting than what we are, then we're a seller. That's kind of the way we look at it. And then there were two office buildings and two legacy office buildings in that population too. They have lower occupancy.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks.

Operator

Thank you. The next question that will come from Michael Carroll. Please go ahead.

Michael Carroll -- RBC Capital Markets -- Analyst

Yeah, thanks. I was hoping you could provide some color on your ongoing development strategy. I know Steve's comment that there is a pretty big pipeline to build-to-suits and through most of 2019 you've been increasing your start guidance. I mean is it fair to assume that you can break ground about $1 billion of projects a year in a stabilized pace going forward or is it going to be more like the start guidance that you had in the beginning of the year?

Nicholas Anthony -- Executive Vice President and Chief Information Officer

Mike, I think we always want to start out the year with maybe a little bit more conservative guidance because we're building budgets effectively 15 months out. So I wouldn't be surprised if in January our guidance was a little bit more conservative. But if market dynamics stay pretty consistent in 2020 with what we've seen in 2019, I think we can absolutely replicate the year. The build-to-suit pipeline as Steve alluded to is as strong as it's been in the last three years, in terms of number of prospects, the size of the deals and the geographic coverage. So that mixed with spec development, selected spec development around the country. We certainly hope to be having this same conversation next year, why we've raised guidance to these kind of levels.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. Great. And then I guess, second question, can you talk a little bit about your acquisition strategy? I know it seems like you've been doing a couple of one-off acquisitions in these top tier markets. I mean, is there anything behind those deals, are they adjacent to your existing land parcels, you see some value-add opportunities? I guess what makes you pursue those low cap rate deals in those good markets?

James B. Connor -- Chairman and Chief Executive Officer

We are primarily, actually exclusively focused on the high barrier Tier 1 markets where we want greater exposure. That's why you saw us viabe in Northern California. We bought several buildings in South Florida, as part of a transaction where we have a right of first offer on future buildings, and we evaluate those on a one-off basis. And then obviously one that assets like in Southern California that provides some diversity to our current base there in California, which is our largest market now.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. Great. Thank you.

Operator

Thank you. The next question in queue will come from John Guinee. Please go ahead.

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

John Guinee here. How are you?

James B. Connor -- Chairman and Chief Executive Officer

Hey, John.

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

Hey, Steve, you had some great stats about I think you've own assets in 73 of the 220 sub-markets. Some of your peers actually track that key sub-markets where there is simply no more land and no more ability to increase supply. Do you guys go to that level of detail? And do you have any of that sort of information about your portfolio?

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

I wouldn't say, I guess it would depend on what sort of information you're referring to exactly. But I'd say in all of our markets, we certainly like sub-markets where there is less available opportunities for development. We do a fair number of redevelopment projects. I think half of our projects we currently have in our pipeline, we're building about 24 buildings right now. Half of those projects would be considered redevelopments where we've either taken down an existing facility, be at a manufacturing plan or old office building or steel plant or something. So that's what we're spending a lot of our time and effort. So I guess it's a long way to answer your question that, obviously we're focused on those markets I don't know that there is a stat out there that tracks availability of sites though.

James B. Connor -- Chairman and Chief Executive Officer

Well, I think it's, it varies quarter-to-quarter. I mean, our people are always out looking for those opportunities to find functionally obsolete facilities that we can turn around and redevelop cost effectively into new logistics facilities, and we're doing it in South Florida, we're doing it in New Jersey, we're doing it in Chicago. Southern California, I mean, Steve even pointed out, we just torn [Phonetic] down two office buildings in Northern California to develop state-of-the-art logistics in the East Bay. So they may be out of vacant land, but they are not out of opportunities and we're continuing to find good ones.

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

Great. Thank you very much. Have a good day.

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

Thanks, John.

James B. Connor -- Chairman and Chief Executive Officer

Thanks, John.

Operator

Thank you. Our next question will come from Caitlin Burrows. Please go ahead.

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi there. I know we talked a little bit about the development pipeline already. But I guess in terms of, you were saying that the advanced side is as strong as ever in terms of buying land and getting entitlements. Are you seeing anything from there that makes you think that you wouldn't be able to keep up the development volumes as high as you've reached this year?

Nicholas Anthony -- Executive Vice President and Chief Information Officer

I think other people have commented on this as well. I think it does get more difficult and certainly with the infill markets that we're pursuing and those opportunities to go through the entitlement process, I think it's added some length to the overall duration of projects. So what used to be maybe a nine or 10 month project may drag out to 13, 14 months. So I guess they could have some lingering effect. But right now we see a lot of opportunities, and as Jim said, I think, sitting here today, assuming that the build-to-suits in the pre-leasing of our spec projects can keep up. I think you'll see similar results for what we have gone forward.

James B. Connor -- Chairman and Chief Executive Officer

Yeah, Caitlin, the thing that I would add to that is, we already have the land in our portfolio or at the very least under contract in the process, that's going to feed our 2020 development pipeline. With the buildings we're going to build next year are not on sites that we haven't identified it and have to go out and find, that would be the 2021 to 2022 pipeline. So, I think, Steve think, he is very comfortable that he got the land and he needs to meet our development needs for 2020.

Caitlin Burrows -- Goldman Sachs -- Analyst

That makes sense. And then maybe also on Amazon, it looks like they grew again in terms of your largest tenant. I guess, on one hand, it's definitely positive giving their growing needs and your development services. But what are your thoughts on kind of concentration risk and also what kind of pricing power do you have with such a large tenant?

Nicholas Anthony -- Executive Vice President and Chief Information Officer

We've had a great long-term partnership with Amazon and we continued to do a lot of business with them. I've told this story before. Our direction to the Amazon team and our teams in the field is, we'll take as much of that business that we think makes financial sense around the country. So we're developing last mile facilities forum, delivery sortation facilities, as well as fulfilment center and we'll manage our exposure to Amazon at the corporate level through mix group, with either dispositions joint ventures funds, how are the case maybe. Sitting here today, I think they're in the 7.5% range. Given the activity, we had if we don't do anything, that number works its way up probably to 9% to 9.5%. But I think we'll address that in 2020 as we look to -- maybe prune some of that exposure.

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

Yeah. And to Jim's point, we sold $100 million facility in Columbus, Ohio, earlier this year to manage our exposure.

James B. Connor -- Chairman and Chief Executive Officer

And then finally, as far as pricing power started keep jumping around on here, Caitlin. But as far as pricing power, we've had four Amazon leases come up for renewal in the last 24 months. And I would tell you the rent growth we achieved on those renewals in each particular market was better than the market average we had achieved in that market. So pretty good.

Caitlin Burrows -- Goldman Sachs -- Analyst

That was helpful. Great. Thanks.

Operator

Thank you. The next question now will come from Rich Anderson. Please go ahead.

Richard C. Anderson -- SMBC Nikko Securities -- Analyst

Hey, thanks, good afternoon. So is there anything about the Liberty deal and 4.2 cap rate that makes you recall circa 2007 in EOP selling, and does that kind of topping sort of number can it get any better? What do you think about that 4.2 number for the Liberty portfolio in context of the future and the ability to see value creation from this point going forward?

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

Well, Rich I'll make, I'll make a couple of comments. Relative to the cap rate, a good for the Liberty shareholders, I guess. You know every year at the conferences that we all see each other at, we've been asked about our projections for cap rates and the amount of capital that's flowing into our sector. And every year, I've said and literally for the last three years, cap rates can't get any lower, and cap rates continue to get lower. And I think today we're still seeing a significant amount of capital both domestic and foreign capital, that wants to be in U.S. industrial. And there is a put -- there are premiums being paid for portfolios and we've seen that consistently throughout this year and quite candidly for the last several years.

So sitting here today, it wouldn't surprise me at least, if cap rates continue to compress in this sector as we have more and more capital that wants to be put to work in the industrial sector. So I think it could get better.

Richard C. Anderson -- SMBC Nikko Securities -- Analyst

All right. And when you made the comment about perhaps coming out conservatively on the development side in 2020, how much of that was just simply being conservative and not being a hero coming out of the gate? And how much of it was some of these observations you made earlier in the call, perhaps splitting hairs but the GDP you own is spending down, so on and so forth. Are any of those sort of observations influencing your thought process about development going forward?

James B. Connor -- Chairman and Chief Executive Officer

Well, Rich, my first thought process is to under-promise and over-deliver. It's been my experience that you guys don't react well, when I disappoint you, in the second and third quarters. So a little bit of conservative in January is a good thing. Sitting here today, I think we all recognize that the macro drivers that we look at for our sector in a lot of the instances are not as strong as they have been in the past couple of years. We've heard the term decelerating in a number of these areas. So I think a certain amount of caution is probably warranted, but as we've said, and I don't want to send the wrong message. I'm pretty optimistic about 2020 based on everything that we're seeing today. In terms of the drivers and what our clients are saying, our existing tenants and their need to grow. So I think 2020 is going to be a pretty good year for us, absent some really large catastrophic thing, that's -- that we may not know about today.

Richard C. Anderson -- SMBC Nikko Securities -- Analyst

Right. And then last question, said earlier that the -- I think it was Mark or somebody, over the next 12 to 24 months, you're looking at a GAAP releasing spreads in the 20s. And at the mark to market for the full portfolio is 14% to 15%. I just want make sure is that logically correct that stuff, it's about to expire in the next year or two, is call it -- had the benefit of 10 years of existence. And so you kind of get the market rent growth from that. And then at the other end of the spectrum, stuff that just got relet is effectively 0% GAAP releasing spread at this point from a mark-to-market perspective, is that the way to think about it like over a 10-year time horizon, and that the average of all that is somewhere in the middle? Is that what you're kind of saying, when you're given that...

James B. Connor -- Chairman and Chief Executive Officer

Yeah, I think that's the rate. First, I need to clarify and of course this will make Mark nervous, it's 14% to 18%, not 14% to 15%.

Richard C. Anderson -- SMBC Nikko Securities -- Analyst

I forget it. I forget it.

James B. Connor -- Chairman and Chief Executive Officer

So I know you're absolutely right, but I will tell you in some of our infill markets like Northern New Jersey and Orange County and Southern California deals that we did six months ago are under market right now. I mean, that's how strong some of those markets are. I mean you talk about Orange County, we had a presentation on our Board earlier this week, I mean you're talking about vacancies that are under 2%. And not a lot of new supply out there, so that continues to allow developers and landlords to push rents. So it's the combination of all of those things and in our ability to go out and execute on it.

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

But I think your logic is right on Rich. I mean obviously the deals that are closest to coming at us are generally the older deals. The deals that we just signed will roll for 10 or 12 years, which is why quite frankly I don't necessarily put a whole lot of stock in the number, we just quoted, but it is what it is. So the deals that we just signed have 15 more years of term, may be close to zero and the deals that are coming up, we're going to be a lot higher than that.

Richard C. Anderson -- SMBC Nikko Securities -- Analyst

Great. Thanks very much.

Operator

Thank you. The next question in queue that will come from Jeremy Metz. Please go ahead.

Jeremy Metz -- BMO Capital Markets -- Analyst

Thanks. Hey, Jim. Just a little bit of a high-level question here, as you guys continued to focus on the shift into the Tier 1 markets. Is there also a desire as you go ahead and buy and sell and build, also shift the seismic shift into more multi-tenant, create a little more of whether it'd be annual tenant rolls -- take advantage at times of where the market is added. Is there a desire to continue to shift the portfolio in other way beyond just kind of geographically being in those markets?

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

Yeah, Jeremy, that's a good question. I'm actually glad you brought that up. Because people think our portfolio is all million square foot buildings. But the reality is 20% of our portfolio is buildings 100,000 square feet or smaller. And a lot of our 200,000 square foot and 300,000 square foot buildings are exactly as you described multi-tenant. So what drives the development decisions and in many cases the acquisition decisions of those buildings, in those markets is driven by tenant needs in those markets. So when you go to South Florida or Central Florida or even Houston, it's not million square-footers, it's much more reasonable average size buildings. And we've always been an active player in that marketplace and Steve can give you a little bit more color on our average tenant size and some of the other factors.

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

Yes, Jeremy, I indicated in my opening remarks, I mean our average deal size is 117,000 feet. And then if you look at our new development pipeline, what we're under construction was right now. I think our smallest building is 66,000 feet and our largest building is upward over 1 million. So as Jim said, it really depends on the sub-market we're in, and terms of what the demand is and that we're going after.

Jeremy Metz -- BMO Capital Markets -- Analyst

Appreciate it. Thanks guys.

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

Sure.

Operator

Thank you. The next question that will come from Michael Mueller. Please go ahead.

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

Yeah, hi. A quick question, in looking at the various JVs, that you have, what portion of them are actively growing?

Nicholas Anthony -- Executive Vice President and Chief Information Officer

Well, this is Nick. We've really only got one significant joint venture at this point. And that is, we've had it for several years, it's primarily focused on Dallas, and there hasn't been a lot of growth in that portfolio going forward. Now we do have a couple of development joint ventures, that are active on the development side, but most of those assets are sold upon stabilization.

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

And I guess for you to do something there, is it the partners bringing you land, they find a site and you'll end up doing it there as...

James B. Connor -- Chairman and Chief Executive Officer

Well, no, the land is already been established and we are co-developing those projects and then selling them.

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

Okay. So it sounds like it's going to -- everything is going to stay pretty small from that perspective it sounds?

James B. Connor -- Chairman and Chief Executive Officer

Correct. Correct. Our JV exposure we cleaned it out quite a bit over the years and it's a very small part of our business right now.

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

Got it. Okay. Thank you.

Operator

Thank you. We do have a follow-up in queue. That's from Ki Bin Kim. Please go ahead.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Thanks. Just a quick one. How much of the new leasing or leasing in the development pipeline, would you say it's just net new demand, tenants expanding versus shuffling fees. I know you last one tenant to your development pipeline but maybe excluding that one?

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

I'd say the majority of the deals we're seeing is -- our net new demand. We've got there is, Jim indicated, I think when he was talking through some of the demand drivers, there is a lot of investment going on in the supply chain. So there is some consolidation business that we're benefiting from. And I guess, in the case of the tenants that moved out of two of our buildings into a larger build-to-suit, was not a total net add to us. But outside of the consolidation, most of the demand we're seeing, I'd say, it would be net new demand.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And I know this business has always been on a square foot basis. But I was curious if you ever looked at the cost of a real estate to your tenants in terms of cubic square foot. I would bet the cost per cubic square foot is actually not that bad. So maybe the rent growth to a tenant is not as high as maybe what we think.

James B. Connor -- Chairman and Chief Executive Officer

Yeah, Ki Bin, I would make a couple of comments, it's not unlike some of the coastal markets where rent is quoted on a monthly basis as opposed to an annual basis. We do have a small number of tenants that are looking at their occupancy costs on a cubic basis. But I would tell you that it's the minority, and those are the clients that are using the clear height. They're using the full 36 or 40 foot clear. Some of them are exploring going beyond that, particularly in the infill markets. So to us it's just math, whether use of the square foot or the cubic foot. But as I -- as you have probably heard or seen some of the tenants are starting to look more closely at that, and finding that to be advantageous to go up as opposed to out.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Yeah. I meant just more implicitly not verbatim. All right. Thank you.

Operator

Thank you very much. At this time there is no additional questions in the queue.

Ronald M. Hubbard -- Vice President of Investor Relations

Thanks, Tony. Thanks everyone for joining the call today and we look forward to reconvening during our fourth quarter and year-end call tentatively scheduled for the same time on Thursday, January 30, 2020. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Ronald M. Hubbard -- Vice President of Investor Relations

James B. Connor -- Chairman and Chief Executive Officer

Steven W. Schnur -- Executive Vice President and Chief Operating Officer

Nicholas Anthony -- Executive Vice President and Chief Information Officer

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

Emmanuel Korchman -- Citi -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

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

Caitlin Burrows -- Goldman Sachs -- Analyst

Richard C. Anderson -- SMBC Nikko Securities -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

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

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