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Prologis Inc (NYSE:PLD)
Q4 2019 Earnings Call
Jan 22, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Prologis Q4 Earnings Conference Call. My name is Julianne, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. Also note, this conference is being recorded.

I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

Tracy A. Ward -- Senior Vice President, Investor Relations

Thanks, Julianne and good morning everyone. Welcome to our fourth quarter 2019 conference call. The supplemental document is available on our IR website on prologis.com.

I'd like to state that this conference call will contain forward-looking statements under Federal Securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings.

Additionally our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures.

On October 27, we announced the merger between Prologis and Liberty Property Trust. Materials regarding the transaction are posted on the company's website and are available on the SEC's website. This includes the joint proxy statement containing detailed information about the transaction. This call will focus on our fourth quarter and full year results as well as our 2020 outlook. The company will not provide comments related to this transaction beyond what is included in our prepared remarks.

This morning, you'll hear from Tom Olinger, our CFO, who will cover guidance, results in the company's outlook, and also with us today -- for today's call are Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Colleen McKeown, Ed Nekritz and Gene Reilly.

With that, I'll turn the call over to Tom. We'll get started.

Thomas S. Olinger -- Chief Financial Officer

Thank you, Tracy. Good morning everyone and thank you for joining our call today. The fourth quarter closed out another excellent year. Core FFO was $0.84 per share for the quarter, $3.31 per share for the year. The full year includes a record for net promotes of $0.18 per share. Core FFO excluding promotes grew 10% for the year and was more than 2% above our initial guidance.

As we enter 2020, market conditions are very good and we've seen no meaningful impact on our business from trade or retailer bankruptcies. Supply chains are increasingly mission critical to our customers' businesses, which is generating demand as they undergo structural changes to deliver high service levels. We see increased requirements, across markets and product categories as more customers seek to strengthen their fulfillment capabilities. Our proprietary customer metrics reflect healthy activity showings deal gestation and conversion rates are consistent with the third quarter.

US market fundamentals remain excellent. I'd like to share Prologis' assessment of supply and demand as data providers use a variety of methodologies, resulting in a range of estimates. Completions in 2019 were 275 million square feet, flat compared with 2018; higher replacement cost, land scarcity, the elongated permitting remain governors to supply. Net absorption was 240 million square feet, but limited by historic low market vacancy, which ended the year at 4.6%, up 10 basis points from last quarter and 20 basis points from last year. Market rents in our US portfolio increased by 8% in 2019.

We have no new additions to our watch list this quarter, but here us some color on two markets that remain on the list. In Houston, while demand is strong vacancy is 6.7% and expected to remain elevated, which will constrain near term rent growth. We have a low roll in the IPT and LPT Houston portfolios in 2020. Our near-term outlook for Pennsylvania is more positive, specifically core Lehigh Valley, where demand has accelerated, the supply pipeline has decreased and vacancy declined 140 basis points to 3.2% at year-end.

In Europe, activity remains healthy. Rent growth on the continent in 2019 was more than 6%, the highest on record. Fundamentals in Japan continue to improve, with vacancy in Tokyo and Osaka at their lowest points in five years and rent growth is accelerating.

Turning to operations for the quarter. We leased nearly 38 million square feet, with an average term of 73 month. Quarter end occupancy was flat sequentially at 96.5%, while the US ticked down 30 basis points as our team is focused on pushing rate and term. Rent change on rollover was just under 30% and led by the US at 34%. Our share of cash same-store NOI growth was 4.6% and was impacted by a 60 basis point reduction in average occupancy, again consistent with our strategy to maximize long-term lease economics. Globally, our in place to market rent spread increased once again and is now over 15.5% or more than $450 million in annual NOI.

Moving to strategic capital, 2019 was a record-breaking year. We raised $6.5 billion of equity from 75 new and existing investors and grew our third-party AUM to $38 billion. Our strategic capital business delivers a durable revenue stream with 90% of fees coming from long-term or perpetual vehicles, a critical differentiator that is often overlooked and undervalued.

For deployment, we had a record year for development starts and stabilization. We started $2.9 billion in new projects, 43% of which were build-to-suits. Stabilizations were $2.5 billion, with an estimated margin of 37% and value creation of $911 million. Additionally, we realized $468 million in development gains in 2019.

We continue to have significant investment capacity to self-fund our run rate deployment for the foreseeable future. With over $11 billion of liquidity and potential fund sell downs as well as an incremental $4.5 billion of third-party investment capacity in our ventures today.

For 2020, Given we just held our Investor Forum in November, our guidance remains consistent and includes the acquisition of IPT, which closed on January 8 and Liberty, which we expect to close on February 4. Here are the highlights on our share basis, but for complete detail refer to page 5 of our supplemental. Our cash same-store NOI growth range is unchanged at 4.25% to 5.25%. And I'd like to highlight two points, first, we are increasing our 2020 global market rent forecast by 120 basis points to 4.8%. This increase will have a minimal impact on same-store this year, given our lease expirations, but importantly will increase our mark to market and future NOI growth. And second, the first quarter of 2020 will be up against the tough comp from Q1 of 2019, which benefited from 80 basis point occupancy uplift. As a result, we expect same-store NOI growth to be lower in the first quarter, but then accelerate in the back half of the year. For strategic capital, we expect revenue, excluding promotes of $350 million to $360 million and net promote income of $115 million.

The IPT integration is largely complete and the Liberty closing preparations are on track. We are confident about hitting our Liberty synergy targets on day one. For dispositions, we now expect a range of $1.3 billion to $1.5 billion, which includes approximately $1 billion of sales from the IPT and Liberty portfolios.

When we announced the IPT and Liberty acquisition, we identified approximately $3.8 billion of combined non-strategic sales on share basis. Of this balance, $350 million has already closed or is under contract. And with the sale of an additional $1 billion in 2020, we will have approximately $2.4 billion dollars of non-strategic assets remaining at the end of the year, representing just 2% of our asset base. These are good assets, we will work through these portfolios in due time and we don't see a need to hurry. Given our low leverage at 18%, we will dispose of the non-strategic assets at a pace that allows us to match sales proceeds with deployment opportunities.

For net G&A, we're forecasting a range between $275 million and $285 million, which includes $6 million to $8 million of one-time transition and wind down costs related to Liberty. Excluding these costs annual G&A growth at the midpoint of 2.4% while managing 15% more real estate. We expect 2020 core FFO to range between $3.67 and $3.75 per share, including $0.15 of net promote income. Year-over-year growth, excluding promotes is approximately 14% at the midpoint.

To wrap up, we expect 2020 to be another exceptional year of growth. We look forward to adding Liberty's high quality assets to our portfolio and welcoming 35 of their employees to the Prologis team.

With that, I'll turn it back to Julianne for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Jeremy Metz from BMO. Your line is open.

Jeremy Metz -- BMO -- Analyst

Hey, good morning. Just in terms of the -- the rent side of the house, you obviously continue to see very healthy spread I think you had previously indicated some of the second half uplift was going to come from a higher percentage of coastal leases rolling here in the US. And so as you look at the US here in 2020, is there anything notable in terms of geographic breakdown or just box size break down that's creating maybe an outsized opportunity from a rent side and from the increase to the global mark to market, the 120 basis points that you mentioned, Tom, how much of that is US [Indecipherable] you driven? Thanks.

Thomas S. Olinger -- Chief Financial Officer

I'll take the second part of that Jeremy, the increase -- the majority of the increase of 120 basis points related to the US, Europe, Continental Europe was about flat. And from a mix standpoint, nothing really stands out. I mean things can move a little quarter to quarter, but given the size of our portfolio we are very well distributed across space, sizes and geographies.

Yeah, in terms of markets, I mean you guys can see this reflected in brokerage stance, the vacancy rates will give you a pretty good idea of where things are healthy and things aren't. I would say, we saw a bit of a slowdown in big box activity during the year in '19, but -- that actually picked up in that segment later in the year. So if there's anything really new, it is that the demand is strengthening a little bit in big box.

Operator

Your next question comes from Derek Johnston from Deutsche Bank. Your line is open.

Derek Johnston -- Deutsche Bank -- Analyst

Hi, everybody. Good morning, thank you. Just to follow-on, do you feel this big box demand could be due to any delta that we've seen with the Phase 1 trade deal completed or Brexit visibility? And how is 2020 leasing velocity feeling to you guys and shaping up from your vantage due to these two events? Thank you.

Thomas S. Olinger -- Chief Financial Officer

Yeah, I don't think that the pickup in big box has anything to do with the two geopolitical items you mentioned. And the year is starting off pretty good, we're early in the year, but I'd say we feel little better than we did a quarter ago. So things are starting off well.

Operator

Your next question comes from Craig Mailman from KeyBanc. Your line is open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hi everyone. Just quickly on the clarification. Tom, it sounds like nothing in the underlying assumptions changed broadly in guidance, but does the improved market rent growth assumption change at all the accretion estimates for IPT or LPT?

And then just separately, I know you guys have been aggressively trying to kind of push rents over occupancy, but as you think about kind of revenue management here, is there a lower bound to how far you'd want occupancy to fall here just given kind of the timing it takes to recoup the loss revenues from downtime?

Thomas S. Olinger -- Chief Financial Officer

Hi Craig. I'll take the first part of that. On the accretion from higher rent growth given the relatively low remaining role for IPT and the LPT portfolios post-acquisition, similar to the [Indecipherable] portfolio, you won't see much, it's pretty minimal impact for 2020. But again, as you point out, the important thing is that it's going to build our in-place to market and drive our same-store growth even more in the out years. And I'll let Gene respond to revenue management.

Eugene F. Reilly -- Chief Investment Officer

Yeah, I'd hesitate to put a lower bound on that, but I would say that in general this was a good opportunity for us to introduce. We've been 97% range and as you can see, particularly in the US where we have the strongest market opportunities, we're ticking down and we're very comfortable with that in the sort of mid-96 range. Historically 95% is sort of been a rule of thumb in this business. I think that may be changing. So rather than get specific, I would just say, there is some room to go. We're comfortable pushing hard at it.

The markets that have higher demand as a percentage of base can tolerate to lower occupancy because it represents fewer periods of lease-up and markets that have lower percentage of growth compared to base. We need to be more full to have the same equivalent pricing power.

Operator

Your next question comes from Nick Yulico from Scotiabank. Your line is open.

Nick Yulico -- Scotiabank -- Analyst

Thanks. I just wanted to hear a little bit more about kind of what drove the increase in development guidance and I know you gave the mix on some of the spec versus build-to-suit, but how are you thinking about increase in development right now. And particularly, which markets, do you think it's really attractive?

Thomas S. Olinger -- Chief Financial Officer

Yeah, so let me let me at least start with that. So if you look at the health in the markets as defined by vacancy rates, as I said earlier, that's a good start. We want to focus on markets that are constrained more in the US, that's New Jersey, that's Southern California, that's the Bay Area, but it also includes some submarkets places like Dallas or Chicago. In Continental Europe, there are several places we like to be doing more development, but there you're seeing constraints on supply more -- more significant than really anywhere else in the world.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

The reason the number of starts went up, is that we have more visibility into -- into this year as we get closer to this year. We were a couple of months earlier. So some of the things that we weren't sure were going to happen, happened in a positive way, so the numbers are up. But you know just like for many years I've commented on acquisition volume being highly predictable. The spec portion of the development volume is also have some volatility associated with it. We are not compelled to start spec development and those are really dependent on minute-by-minute market conditions and supply demand dynamics in those markets. The build-to-suits were built because we're pretty sharp of the demand obviously there, but 60% of the start to spec and if the market is better we'll do more and if the market is not as good we'll do less.

Operator

Your next question comes from Jamie Feldman from Bank of America Securities. Your line is open.

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

Great, thank you. I was hoping you could take kind of a big picture view or provide a big picture view maybe reading from -- from the holiday season and just kind of the conversations you're having with tenants, where does it seem like people still need to get their supply chains right, where does it seem like they are still, things are not going so well, just as we, we've been at this for several years now. Just how should people think about the runway ahead?

Thomas S. Olinger -- Chief Financial Officer

Retail sales and the online category grew at 18% and in the bricks and mortar category. It's shrunk in real terms so that tells you where kind of demand is on the margin, and that demand has gone up. I mean Amazon is a big chunk of it and they are probably more active every year. Certainly going forward, we see them being more active than before, but they are 40 some percent of the market. The other -- the other people are catching up and we are seeing a broadening of demand for e-commerce facilities as we move further into this category. So e-commerce is very strong. And I would say on the margin, the autos are probably a little weaker than they have been historically. And that's sort of a global thing and probably housing is likely to be stronger at that on the margin than we saw last year.

Operator

Your next question comes from Ki Bin Kim from SunTrust. Your line is open.

Ki Bin Kim -- SunTrust -- Analyst

Thanks, good morning out there. So if 2019 was the first year where national supply of 1.6% growth outstrips demand of about 1.1%. And there is probably a good degree of nuance in those statistics, for example in LA probably doesn't contribute much because of national demand growth numbers because you can't absorb what's not available. So when you kind of dig into the numbers, what do you think PLDs exposure is to unfavorable markets where real supply is kind of eating away at the demand?

Thomas S. Olinger -- Chief Financial Officer

Well, I mean if you take our US market that are in the soft side, I would say, Atlanta, Houston and Pennsylvania would be the three markets. Dallas has come off the list, Dallas has just had an incredible run in terms of demand, much better than we expected. And those markets, those three markets represent -- the leasing that remains to be done in those markets this year is about 14% of our total leasing. And once you add IPT and LPT interestingly, that number goes down to 12% of the remaining leasing that we have to do this year. And the global portfolio also is 12%. So there is no over concentration if you will, in the weaker markets. They are exactly in line with our -- with our overall markets and they're actually -- the percentage is coming down as a result of these two acquisitions. I meant Central Valley, Central PA if I said something different. These guys are giving me [Indecipherable] anyway, so the weaker markets are proportional to all our other leasing and we're basically not concerned about it.

Operator

Your next question comes from Blaine Heck from Wells Fargo. Your line is open.

Blaine Heck -- Wells Fargo -- Analyst

Great, thanks good morning out there. Maybe I can go at the development starts guidance question from a different angle. 2019 starts came in at $2.9 billion, and your share which was over $1 billion more than you had guided to at the beginning of 2019, yet for 2020 and despite the IPT and LPT acquisitions, you're looking at start guidance that's $2.2 billion at your share. So I guess I'm just wondering how much conservatism is built into that start number and what are the chances we could end up closer to $3 billion, again this year?

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

That would be a good question for you to ask us next year just like you pointed out this year. I don't know, I mean you know we don't feel compelled to do any development other than places where there is customer demand. And I think to try to predict something is actually irresponsible because it then gets the organization to drive to a number and we don't need to drive to a number. I mean that -- nobody gets paid for driving to a number or anything like that, we all get paid as the company does well and we'll do whatever we can to make sure that the market stay in balance and that our developments lease up appropriately and that we have good margins. So it's all dependent. Remember a year ago when we were sitting right here, we have just seen the stock market decline significantly, we have ratcheted down our business plan and the world just looked very different than the way it ended up playing out. And by the way, we weren't the only people who were conservative in our outlook. That was the responsible thing to do, but as the year unfolded and we saw demand being better we obviously scaled up our activity. We have the land to do it, we have the talent to do it, but we don't feel compelled to do it unless there is demand.

Thomas S. Olinger -- Chief Financial Officer

We will always tell you exactly what we think in a moment in time, but particularly with spec development we will ratchet that down or up as the market tells us. And remember that our development program is 200 roughly speaking 200 bets across 65 different markets. So it's big and it's going to be dynamic over time.

Operator

Your next question comes from Tom Catherwood from BTIG. Your line is open.

Tom Catherwood -- BTIG -- Analyst

Thank you very much. Following up on Blaine's question on the developments, obviously huge start quarter in the fourth quarter and back at the Investor Day, Hamid you had mentioned how the development timeline is extended from 9 months to 12 months to kind of 18 months, plus, just given the complexity. Due to that and the starts, does that mean you need to carry more land on your books to continue to feed the development pipeline? And if that's the case, kind of where you looking from a complexity standpoint or a risk standpoint, as far as kind of how far out you're willing to go to take risk on land right now?

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, if that were and Tom, if that were the only variable that would be the right conclusion to draw. But remember, there are two other variables that are going on. One is that we are generally trying to reduce land as a percentage of our total assets around the company. We are almost to our goal, not quite and there are actually some markets where we are thin on land and other markets where we are balanced. So that's one headwind going the other way. And also we're controlling a lot of land via options and other things that don't show up on the balance sheet. So that's how we're kind of dealing with the need for more land without taking on more balance sheet exposure. Mike, you want to say anything about that anymore -- anymore about that?

Michael S. Curless -- Chief Customer Officer

Yeah, in terms of our land exposure I think we're in pretty good shape. We manage that very effectively last year and I think we'll be picking land in our strategic spots going forward in the major markets where our customers are migrating to and I think we're in good shape there.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

The expansion and the development. I'm sorry, the expansion and the development cycle is mostly on the front end and on the entitlement side, I mean it's not taking us any longer to physically build buildings and certainly our lease up assumptions to get them stabilized has not been extended. So really it's on the front end of the entitlement.

Operator

Your next question comes from David Rodgers from Baird. Your line is open.

David B. Rodgers -- Robert W. Baird & Co. -- Analyst

Yeah. Hey, everyone. Tom, you did a good job at the beginning of the call I think laying out some of the supply demand fundamentals that you guys track and we all use different numbers, but I think one of the things that had been a little concerning was just kind of no matter what source you use kind of net absorption, before the impact of construction has been kind of trailing a little bit lower. I guess maybe through a couple of questions at that one, are you guys seeing that as well and can you kind of denote where that's coming from maybe outside of a global auto? And then to maybe Hamid, on your comment about Amazon being 40% of the market. Can you just clarify, was that 40% of e-commerce or the embedded base and just of what you're getting out of that comments? Thanks.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yeah they are actually 45% of e-commerce sales I think is the latest number, I might be a point or two off, but it is in the percentage of e-commerce and I think e-commerce is like 12% of the overall market. So they're like 4.5% of overall retail sales. I think this came up earlier, but maybe I can emphasize it. The demand is not uniform around the country and some of the markets where there is exceptional demand, the supply is just so tight that a lot of that demand just doesn't show up. I don't know what that number is, but I can tell you it's a positive number and God after 10 years of supply falling short of demand, we've all been predicting this year where supply exceeds demand for the last 5 years, and we've got it now. So -- but I don't, I mean it's a big market, it's 15 billion square feet of base and we got 30 million feet of difference between supply and demand and that doesn't even take into account all the real estate, all the investor real estate that's being scraped for higher and better uses and is becoming obsolete. So I'm not losing any sleep over that.

Thomas S. Olinger -- Chief Financial Officer

Hey David. Just on the specific numbers, we have net absorption in 240 in 2019. The four year average is 250 million square feet. So pretty consistent with the four year average and really at work there is the 4.6% vacancy rate. That just made it more difficult to absorb stock. And you saw some of that growth more in price than in net absorption. So rents were up 7%, 8% in the US last year. When we look at the demand trends late in the year as Gene discussed, whether it's really good momentum in the fourth quarter or whether it's a proprietary indicators like the IBM [Phonetic], which is at 61 makes us feel like growth will improve in 2020.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, the picture going into 2019 was much more negative than -- I mean or less positive. I mean it was positive, but it was less positive than it is today. Market feels a lot better, right now than it did on the call a year ago.

Operator

Your next question comes from Jason Green from Evercore. Your line is open.

Jason Green -- Evercore -- Analyst

Just a question on development yields in total. You're developing assets now to 120 basis point spread for the supplemental, I guess at what point do spreads become too narrow to continue developing assets?

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

When we stop developing. Chicken or the egg. I'm not -- I mean 120 basis points is a pretty healthy margin win cap rates as low as they are, but you know we're really margin focused and if we can really get going in and pretty say 15% on spec and maybe low teens on build-to-suit, we just won't do it, I guess we'll do a build-to-suit at about a 10% margin for a great tenant with a great credit that we can easily do and sell or something like that, but I mean that's the range of it. The only problem is in the last, however many years, 10 years we had double or triple those margins. So someday we'll have lower than those margins for sure. The market goes through cycles, but there is definitely an arrow up of margins from where we pro forma these deals. And I would say, nine out of 10 deals, at least maybe even more, maybe 19 out of 20 of them that we do a recap on, we do a recap on every deal that we do when it stabilized and we look at what it costs, what the yields were and sort of grade our performance on that. I would say there are very few of them that have any reds [Phonetic] on them. I mean, all of them have big green numbers on them. So far so good and I expect that to continue for at least the foreseeable future.

Operator

Your next question comes from Eric Frankel from Green Street Advisors. Your line is open.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. I sincerely apologize for asking another development question, but can you -- this is based on your 4Q starts and a little bit higher development volume in '20. Can you talk about whether you think that overall supply is bound to increase more than it has last couple of years and how does that reflect on market rent growth generally?

And then second, and it certainly it seems like you guys are a lot more active in buying assets of different types in the New York City boroughs, but we also noted that Walmart -- Walmart is not going to be using that Bronx facility you guys acquired a couple of years -- on lease to them. So maybe you could just talk about your experiences there? Thank you.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, I think the experience in Bronx has nothing to do with the real estate. It has to do with the Walmart's decision not to pursue a strategy that they were going to pursue. We actually think the releasing market for that building is an upside from where that building is leased. So and obviously we have Walmart credit on it. So we're not -- I don't think it means anything other than a change in strategy of the company.

And with respect to the supply picture, I think we're feeling better about supply right now than we did a quarter or two ago. Gene, what do you think?

Eugene F. Reilly -- Chief Investment Officer

Yes. I think in -- for sure, a quarter ago, we felt a little bit worse about supply. And Eric, if you look at the last couple of years, what's happened is that the development engine in the US, the industry wasn't able to hit Chris' estimate for supply. So I'd expect that next year, it's the same thing. And it's -- the explanation is pretty simple. It is very difficult and more difficult every day to develop the space. So I would probably say there is a down arrow.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Look, if you -- we're all looking for things to worry about. I would be more worried about a recession because of something like totally out of left field like this virus thing or something globally that can affect something more on the demand side than on the supply side. Supply may be 10 million, 20 million, 30 million feet one way or another. But that, at the end of the day, doesn't move the vacancy rate or the pricing power, but if demand falls off the clip because of some unknown thing or war or some bad thing like that, that is the thing that I worry more about. Supply, one way or another, it's going to be pretty close to what we think. Certainly a year out, you have pretty good visibility into what supply is, because two-thirds, maybe three quarters of stuff that's going to be supply should be under construction right now. So we know kind of what that number is. So really the wiggle room is on the last 25%, 30% of supply.

Operator

Your next question comes from John Guinee from Stifel. Your line is open.

John Guinee -- Stifel Nicolaus -- Analyst

Great. Very, very impressive 14% year-over-year growth, but probably even more impressive is issuing 110 million shares that looks like about 25 times forward multiple and a 3.6 implied cap. If you're at liberty to talk about it, can you talk about -- because of FAS 141 accounting, you're probably bringing both the IPT and the Liberty Portfolio and at a much higher GAAP cap rate than a cash cap rate. Are you at liberty to talk about the GAAP cap rate that these assets are coming in and also your thoughts on FAD growth and dividend growth for 2020?

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yes. Can't talk about the first component, but you can guestimate it pretty well. I mean average lease is six years and an average built-in rent growth in these leases call it, 3%. So you can kind of do the math, three years of 3%, that's how much the gap is higher than -- by the way, the reason I'm not going to get in trouble, because I don't actually know what the number is. But the math on it should be pretty damn close to my guestimate.

Thomas S. Olinger -- Chief Financial Officer

And John, I'll point you back to the presentation we gave when we announced the transaction. We had $25 million in fair value lease adjustments, but that also includes straight line rent adjustments. And that's a net number, because you back out the straight line rent that's embedded in the IPT and Liberty portfolios, but more to come on that. To your point about FAD ultimately getting to the dividend, as we've said in the past, we -- our dividend levels are going to need to increase pretty consistently with what you see our FAD and AFFO growth, because we're -- we'll pay out as close as we can to the minimum threshold at which -- where we're staying. So that's a consistent theme you're seeing here.

Operator

Your next question comes from Michael Mueller from J.P. Morgan. Your line is open.

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

Yeah, hi. You talked about I think a pickup in demand that you were seeing in Lehigh Valley. I was just wondering if you can give us a little more color on what you see driving that?

Eugene F. Reilly -- Chief Investment Officer

Yes. Your question was a little bit low, but I think your question is about recent activity in Lehigh Valley. And Lehigh Valley has over the past year experienced a little bit overbuilding, but news in the last six months is pretty good. So demand there is strong. I would say that is contrasted with Central Pennsylvania, where demand is still a little bit weak right now.

Michael S. Curless -- Chief Customer Officer

Yeah Gene, I think driving that is a combination of both general supply chain modernization. So we see some customers who are feeding their store network and also a fair amount of e-commerce also wanting to serve the greater region and in particular New York. And probably record low vacancy in New Jersey.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yeah, Southern New Jersey, there's virtually no product.

Michael S. Curless -- Chief Customer Officer

So a key message there would be the prioritization of proximity and the proximity of core Lehigh Valley to New Jersey and in particular New York. That's driving that demand.

Operator

Our next question comes from Eric Frankel from Green Street Advisors. Your line is open.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. I guess, I'd -- I guess I also have a few more thoughts from earnings this quarter. But one quick question, housekeeping item. Of the $1 billion of sales from IPT and Liberty, how much of that is office?

And then second, I think Walmart, just speaking to them, they debut an automation product they're going to be using in their stores to distribute product just directly to consumers via pickup. Can you talk about automation and how that's impacting supply chains obviously, Amazon is always trying to reinvent how they're utilizing the fulfillment centers. And maybe you could touch upon how your other customers are thinking about it?

Eugene F. Reilly -- Chief Investment Officer

Well, I'm going to pitch this to Chris, because he spent a lot of time together with Will O'Donnell on the topic of automation and its impact generally on logistics demand. And one of these days, you may see a paper coming out on that, that's pretty extensive and detailed. But we don't think that it is a -- we think automation is a way of making employees more productive, because it's so hard to get employees to do this kind of work. I mean that's really the impetus for automation.

And the downside of automation is that unless you have very standardized products the state of the industry is not such that you can have special purpose automation or general purpose automation installed that can handle a lot of different goods, sizes, shapes, etc. etc. We're marching in that direction, but we're quite some time away. And also what we're hearing from our customers -- the majority of our customers, particularly the three PLs is that the capital needs of automation are just way beyond their ability to be able to do that. So -- and in order to implement automation, they need to have longer-term contracts with their customers and be able to amortize those investments over a longer period of time. Chris?

Chris Caton -- Senior Vice President, Global Head of Research

Yes, spot on. Underlying the variety of operations that are going in our customer space, and that translates to two things. One is an adoption rate of automation within logistics facility that is low and rising at a moderate pace and two, the ROIs on some of these investments are still pretty low, given the complexity and the complex nature. Another point I'd make relates to productivity enhancing equipment. That's what this really is. That's been around for a long time, whether you look back 40 years at forklifts. And so we've seen a constant effort to improve employee productivity within our facilities and this is no different.

As it relates to specific reference you make, kind of in-store automation as well, something we have seen in the marketplace are more requirements not just to serve e-com, but also to serve store fleets that are needing to handle this buy online and pick up in store. There's more activity to also think about the existing supply chains to support that activity in store.

Thomas S. Olinger -- Chief Financial Officer

I'll respond to your first question relative to the split out of the $1 billion in sales for IPT and LPT. I would say this, it's going to be fluid, but the office component that remains is quite small. But as we said, we're going to match fund disposition proceeds with opportunities to redeploy them. And so I would say it would be fluid, but again, the office is a small piece that's left out of that.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yes, the non-Comcast office, I would expect to -- we're through that. So really office comes down to Comcast. And that is as you know pretty liquid, pretty straightforward type of position. And it's only a matter of what's the ideal time to do that and the dynamics with the customer which is a very important customer anyway over time what happens, but that's kind of -- there's not a lot of wiggle room on the economics of that deal. We know it's 100% leased and we know what the economics are. So office is gone. We're not in a big hurry on the industrial. We've just kind of match funded. I mean we're 18% leased -- 18% levered. So why would we want to do more than match funds. We're not in a hurry. It's a good market.

Operator

Your next question comes from Vikram Malhotra from Morgan Stanley. Your line is open.

Vikram Malhotra -- Morgan Stanley -- Analyst

Hi, thanks for taking the questions, two quick ones. On Slide 15 of the slide deck, you gave the occupancy broken out by its size. Could you give us the rent spreads using that same breakout?

Thomas S. Olinger -- Chief Financial Officer

Yes, Vikram, this is Tom. The rent spreads were pretty consistent this quarter across all the different size categories. I think the small space under 100 probably picked up a little bit, a little higher than normal, but this quarter, very consistent across all three sizes.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

I would say small space recovered a bit -- small space was way ahead of big space, maybe a year, year and half ago. Then it went the other way and softened and now it's coming back a little bit. Most recently, the big space is recovering more in the last couple of quarters. So they're all even, but they're coming to even from different directions.

Operator

Your next question comes from Manny Korchman from Citi. Your line is open.

Michael Bilerman -- Citi -- Analyst

Hey, it's Michael Bilerman here with Manny. Hamid, I had a question for you just sort of about the sort of acquisition market overall. And we clearly know there's an insatiable desire by private capital to put capital to work really on a global basis in industrial, right it's a favorite asset class, it's been that way for the last few years. And I wanted to get your sort of thoughts on [Indecipherable] comment that he made earlier this year that the market is paying full price even for assets with works on them and that their focus is on development and granted it was self-serving. But he made a comment about the acquisition market and I sort of wanted to get your feel about what you see on a global basis about how investors are pricing assets and differentiating assets and how that may play into your disposition plans as well?

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Yes. I mean we've basically been saying the same thing, more or less, with a slightly different accent. I mean the acquisition market in Europe, which is remember that's what they're talking about is pretty expensive. And if you have a good land bank and you are an active developer, like they are and we are obviously the best use of capital is to put your land bank to work and the incremental returns on those investments are quite high. But there are still opportunities here and there that are priced below replacement cost. For example, short-term income in Europe is discounted. So if you have a building that has a two year lease on it or something, maybe a perfectly good building, but you could buy that below replacement cost, that kind of thing we'd be interested in but you can buy $1 billion of it. I mean I don't know where you would go to buy $1 billion of that kind of stuff in Europe.

The rest of the world is a different story. I mean there are places where -- I mean like in Mexico, if an acquisition opportunity were to come up, cap rates, for the very best product, are around seven, but you can buy some things that are eight or nine. And if you look at their treasuries, the goal on their treasuries, there's a big spread there in that market. So the global picture is a little different, but I would generally agree with their commentary for Europe. Gene?

Eugene F. Reilly -- Chief Investment Officer

Yes, I wouldn't add much to that. And Europe, while expensive on a relative basis, look at risk-free yields in Europe. I mean, you get negative rates and the best economies, there's got to be four countries in negative rates. So I'm not frankly sure that cap rate environment today in Europe is all that expensive.

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

The other thing I would say about Europe, Europe has -- it will be interesting to do the math on this. We haven't, but this is a guess. There are a lot of institutional investors in Europe that are focused in Europe, and the size of the industrial asset class in Europe it's still a relatively new industry and institutional quality products proportionately is a lot smaller than it is in the US. So you've got a lot of institutional private capital focused on a market with fewer opportunities and I think that's pushing on yields in Europe pretty hard. So development is preferred to acquisitions in all these markets anyway.

I think that was the last question. Thank you for joining our call and we look forward to talking to you next quarter, if not sooner. Take care.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Tracy A. Ward -- Senior Vice President, Investor Relations

Thomas S. Olinger -- Chief Financial Officer

Eugene F. Reilly -- Chief Investment Officer

Hamid R. Moghadam -- Chairman of the Board of Directors and Chief Executive Officer

Michael S. Curless -- Chief Customer Officer

Chris Caton -- Senior Vice President, Global Head of Research

Jeremy Metz -- BMO -- Analyst

Derek Johnston -- Deutsche Bank -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Nick Yulico -- Scotiabank -- Analyst

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

Ki Bin Kim -- SunTrust -- Analyst

Blaine Heck -- Wells Fargo -- Analyst

Tom Catherwood -- BTIG -- Analyst

David B. Rodgers -- Robert W. Baird & Co. -- Analyst

Jason Green -- Evercore -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

John Guinee -- Stifel Nicolaus -- Analyst

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

Vikram Malhotra -- Morgan Stanley -- Analyst

Michael Bilerman -- Citi -- Analyst

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