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First Industrial Realty Trust Inc (NYSE:FR)
Q4 2019 Earnings Call
Feb 13, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Industrial Fourth Quarter and Full Year 2019 Results Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Art Harmon, Vice President of Investor Relations and Marketing. Thank you. Please go ahead, sir.

Art Harmon -- Vice President of Investor Relations and Marketing

Thank you, Maria. Hello, everybody and welcome to our call. Before we discuss our fourth quarter and full year 2019 results, and initial 2020 guidance, let me remind everyone that our call may include forward-looking statements as defined by Federal Securities Laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, Thursday, February 13, 2020.

We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors which causes are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release, and our SEC filings are available at firstindustrial.com, under the Investors tab.

Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which, we will open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.

Now let me turn the call over to Peter.

Peter E. Baccile -- President and Chief Executive Officer

Thank you, Art and thanks to everyone joining us for the call today. We finished 2019 with an excellent fourth quarter to cap up another successful year. For 2020, we expect more of the same, leveraging our platform to generate more cash flow growth and value creation. Occupancy at year end was a very strong 97.6% and full year cash rental rate growth was 13.9%, a Company record. Both of these metrics reflect continued strong tenant demand for logistics space, and the great work of our leasing and operations professionals. We developed a number of high quality facilities at strong margins, and replenished our pipeline with the acquisition of several exciting new sites and target markets, particularly Miami.

In addition, we continue to shape our portfolio to drive long-term growth as we further increase our capital allocation to higher barrier markets. Before we get into the specifics of the quarter, let me provide you with a quick overview of the national industrial market. According to CBRE Econometric Advisors, new supply for 2019 was 224 million square feet compared to net absorption of 183 million. This marks the first time since 2009 that new supply exceeded net absorption. Despite this, our outlook for 2020 is similar to that of 2019. Vacancies remain low and excess new construction continues to be concentrated primarily in larger format buildings in certain sub-markets, most notably Atlanta, Dallas, and Houston.

We continue to see new tenant requirements from a range of industries across all of our markets. So the overall environment remains very favorable for strong demand and rent growth. That's also the case for our portfolio. We've signed leases for approximately 60% of our 2020 rollovers at a cash rental rate increase of more than 9%. Included in these results is the long-term renewal of our largest rollover, a 675,000 square foot single tenant building in Central Pennsylvania. Our expirations for the balance of 2020 are fairly granular. For the full year, we expect cash rental rate growth of approximately 10% to 14% on our new and renewal leasing.

Turning now to a few highlights from our development program. In the fourth quarter, we placed in-service seven developments totaling 2.1 million square feet with a total investment of $165 million. Included in this total is our 556,000 square footer at First Aurora Commerce Center in Denver. As evidence of the strength of this market, we signed a long-term lease for 100% of the space, which commenced shortly after completion of construction.

In total for 2019, we placed in service 13 buildings totaling 4.4 million square feet with an estimated investment of $325 million. These assets are 91% leased with an estimated cash yield of 6.7%. This represents an expected margin of 42% to 52%. At the mid-point, that would translate to a little over $1 per share in NAV accretion. At year end, our pipeline of completed developments in lease-up and under construction totaled 3 million square feet with a total estimated investment of $277 million and a projected cash yield of 6.9%. They are 36% leased and have an expected margin of approximately 40% to 50%. This pipeline includes a few new starts in the fourth quarter on both Coast and in Dallas.

Starting on the West Coast, First Redwood Logistics Center II is a 72,000 square foot building in the Inland Empire West, with an estimated total investment of $12.6 million. Completion is set for the third quarter with a cash yield of 5.2%. In Los Angeles, one mile north of the Port of Long Beach, we acquired a 1.8 acre site for $6 million. It's leased as a surface lot with an in-place yield of 5.4%. In Northwest Dallas, we broke ground on our 435,000 square foot multi-tenant building at Phase 2 of our First Park 121 with an estimated investment of $31.2 million and a targeted cash yield of 6.7%. This building is 77% pre-leased. We expect to complete this development in Q3.

Moving across the country to South Florida, we've been very active in expanding our development pipeline there. We broke ground on our First Cypress Creek Commerce Center, a three building park totaling 374,000 square feet on land for which we have a 50-year ground lease. Our estimated total investment for the building is $35.6 million, with a targeted cash yield of 7.1% and completion is slated for Q4.

We also acquired seven acres of land and broke ground on First Sawgrass Commerce Center, a 104,000 square footer in Broward County, estimated investment is $15.3 million, with a targeted yield of 5.8%, completion is expected in Q3. On our last call, we discussed our 19.6 acre covered land investment in South Florida for $19.8 million. Recall this site has three below market ground leases that are currently yielding 3.5%. We also added another 9 acre site in the Miami market for $8.6 million on which we can develop 131,000 square feet.

Thus far, in the first quarter of 2020, we're very pleased to announce the acquisition of a new land site we call First Park Miami. We acquired 63 developable acres in Medley, a great infill location where land is difficult to come by. Our acquisition price was $48.9 million and we can build 1.2 million square feet in total on the site. We will begin the first phase of development this summer, with three multi-tenant buildings totaling approximately 600,000 square feet. Total estimated investment for these three buildings is approximately $90 million reflecting land, pre-development and construction costs. Our target stabilized yield is in the mid-5s.

For the year, building acquisitions totaled 542,000 square feet for $67 million with an expected stabilized cap rate of 5.4%. So far in the first quarter of 2020, we've acquired our first building in the East Bay market of Northern California. The property is a 23,000 square footer in the I-880 Hayward submarket, purchase price was $4.9 million, and our expected yield is 5.3%.

Moving to dispositions. We completed $155 million of sales in the fourth quarter, comprising 3.6 million square feet and one land parcel. These sales were consistent with our ongoing portfolio management efforts that support better long-term cash flow growth. With these sales, our market footprint has significantly changed. The largest portion of these dispositions came from the sale of substantially all of our Indianapolis portfolio which totaled $98 million and 2.7 million square feet.

Other notable sales included two buildings in St. Louis totaling $13 million and 245,000 square feet. With just one building remaining in each of these markets, we've moved those properties to the other category in the portfolio reporting section of our supplemental. Thus far, in the first quarter, we sold 226,000 square feet in Tampa for $26.5 million. With this sale, we've now effectively exited the Tampa market with just leased land remaining there. Our efforts in Florida are now focused in the South Florida and Orlando markets.

Given the leasing progress and rollover status of our portfolios in each of these three markets, we felt the time was right to further simplify our market exposure and redeploy these proceeds into higher rental growth opportunities. For 2019, dispositions totaled $261 million and comprised 5.2 million square feet and four land parcels. These figures exclude the sale on Phoenix recognized for accounting purposes in the third quarter of 2019 that is scheduled to close in the third quarter.

For 2020, our guidance for sales is $125 million to $175 million. As is typical, we expect the majority of 2020 sales to be back-end loaded. Note this guidance does not include the sale of the Phoenix asset I just mentioned. Based on our strong 2019 performance and outlook, which Scott will discuss shortly, our board of directors declared a dividend of $0.25 per share for the first quarter of 2020. This is $1 per share annualized, which equates to an 8.7% increase from 2019. This dividend level represents a payout ratio of approximately 64% of our anticipated AFFO for 2020 as defined in our supplemental.

Another note on AFFO. At our last Investor Day in November of 2017, we discussed our opportunity to achieve adjusted funds from operations of $200 million in 2020. If we achieve the mid-point of our overall guidance for the year, we will deliver on that opportunity. This would represent compound annual growth of 9% over the period.

With that, let me turn it over to Scott to walk you through some additional details on the quarter and our 2020 guidance.

Scott Musil -- Chief Financial Officer

Thanks, Peter. In the fourth quarter, diluted EPS was $0.76 versus $0.40 one year ago. And for the full year, diluted EPS was $1.88 versus $1.31 for the prior year. NAREIT funds from operations were $0.45 per fully diluted share compared to $0.42 per share in 4Q 2018. Excluding a $0.01 of income related to insurance settlements for damaged properties, 4Q 2018 FFO was $0.41 per share. For the full year, NAREIT FFO per share was $1.74 versus $1.60 in 2018.

As Peter noted, occupancy was 97.6% down 10 basis points for the prior quarter. In the fourth quarter, we commenced approximately 4.1 million square feet of leases, 757,000 square feet were new, 1.3 million were renewals, and 2.1 million square feet were for developments in acquisitions with lease-up. Tenant retention by square footage was 81.4%.

Same-store NOI growth on a cash basis excluding termination fees was 2.1% and for the full year 2019, cash same-store growth before lease termination fees was 3.1%. Cash rental rates were up 9.7% overall, with renewals up 8.2% and new leasing 12.4%. On a straight line basis, overall rental rates were up 20.4% with renewals increasing 18.5% and new leasing up 23.8%. For the year, cash rental rates were up 13.9% overall which is a Company record and on a straight line basis, they were up 26%.

Moving on to a few balance sheet metrics. At the end of 4Q, our net debt plus preferred stocks to adjusted EBITDA is 4.6 times and at December 31st, the weighted average maturity of our unsecured notes, term loans, and secured financings was 5.8 years with a weighted average interest rate of 3.9%. These figures exclude our credit facility.

Moving on to our initial 2020 guidance per our press release last evening. Our NAREIT FFO guidance is $1.77 to $1.87 per share with a mid-point of $1.82. Excluding a $0.01 per share of costs related to severance from the closure of our Indianapolis office and costs related to projected vestings of equity awards for retirement eligible employees, FFO guidance is $1.78 to $1.88 per share with a mid-point of $1.83.

The key assumptions for guidance are as follows. Quarter-end average in-service occupancy for the year of 97% to 98%, we anticipate first quarter occupancy will have a typical seasonal dip, which could be as much as 75 basis points to 100 basis points. Our bad debt expense assumption for 2020 is $2 million consistent with last year's assumption. One of our largest tenants, Pier 1 Imports has been in the news lately. Our guidance assumes that Pier 1 will continue to occupy our 644,000 square foot facility in Baltimore for the entire year, as this facility is a critical part of their supply chain and I note that they are current on their rent. Also for your information, the expected FFO from the lease to Pier 1 for the period of March through year end is approximately $2.5 million.

Same-store NOI growth on a cash basis before termination fees is expected to be 4% to 5.5%. And our cash, same-store metric for the first two quarters is expected to be higher than the remainder of the year due to the benefit of burn off free rent related to developments. Our G&A guidance range is $31 million to $32 million which excludes a $0.01 per share of severance costs from the closure of our Indianapolis office and costs related to projected vesting of equity awards for retirement eligible employees. Please also note that besides the normal annual increase in expenses, G&A also includes incremental costs related to a new compensation plan, the compensation committee put in place in 2020, which is more tilted toward total stock return than the prior-plan.

Guidance also includes the anticipated 2020 costs related to our completed and under construction developments at December 31st, plus the planned start of First Park Miami. In total, for the full year of 2020, we expect to capitalize about $0.03 per share of interest related to our developments.

Our guidance does not reflect the impact that any other future sales, acquisitions, or new development starts after this call other than the Phoenix sale and the expected start-up at First Park Miami we just discussed, the impact of any future debt issuances, debt repurchases or repayments, except the payoff of $15 million of secured debt in the second quarter at an interest rate of 6.5%. The impact of any future gains related to the final settlement, two insurance claims from damaged properties and guidance also excludes the potential issuance of equity.

Let me turn it back over to Peter.

Peter E. Baccile -- President and Chief Executive Officer

Thanks, Scott. Before we open it up to questions, let me thank the entire First Industrial team for their tremendous efforts in 2019, delivering outstanding results and positioning us for growth in 2020 and beyond. We're excited about our new developments through which we can serve the logistics needs of our customers while expanding our portfolio in key markets and creating value for shareholders.

With that, operator, would you please open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question will come from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Scott, I think I heard you say $2.5 million of FFO for Pier 1 from March to December. Is there any reason why you excluded 1Q?

Scott Musil -- Chief Financial Officer

We already collected January and February's payments, Craig. So we basically still need to collect March through December.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Got you. Okay. So it's pro rata that right if we just wanted to gross up for the other two months.

Scott Musil -- Chief Financial Officer

Yeah, you can take $2.5 million divided by 10. And that's your monthly amount. You can extrapolate it any way you want for the year.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, perfect. And then have they given you any indications I know, I think in the past you told us that they now fulfilled the Canada out of that warehouse? I mean are they using all the space kind of what's your conversations been with them?

Peter Schultz -- Executive Vice President of East Region

Craig, good morning, it's Peter Schultz. They continue to fully occupy the building. And it's apparent to us that they've consolidated more operations in there. So they're quite busy. They also have been hiring additional people.

Operator

Your next question will come from Rob Stevenson with Janney. Please proceed with your question.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys. Cash rent growth on the 275 lease as you did in 2019 was close to 14% versus 7%, 8% over the prior three years, anything abnormal at the end of the day about the 2019 leases or is that just reflect the strength of the market today? And are you expecting 2020 to be more in the 7%, 8% range of the previous three years or is this 2019 level something that can be replicated again in 2020?

Christopher Schneider -- Senior Vice President of Operations and Chief Information Officer

This is Chris. If you look at 2019, yeah, it was very strong. We're looking at rental rate increases of 10% and 14%. So you're down a tip from 2019, we're expecting some very, very strong rental increases still continue in 2020.

Scott Musil -- Chief Financial Officer

Yeah, that 10% to 14% is for 2020. And that's what we just mentioned in the script. So as Chris mentioned, down two percentage points from 2019 levels but still very strong in double-digit.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay, so there's nothing abnormal about '19 though, in that number that sort of pulls you down, where that's just where the market is today.

Scott Musil -- Chief Financial Officer

That's where the market is today. Markets are strong.

Christopher Schneider -- Senior Vice President of Operations and Chief Information Officer

And the mix of 5% year.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then you guys have done a good job of backfilling your land back again in 2019, another $200 million or so after closer to $300 million in 2018, can you talk about how you see the land market today versus last few years in terms of pricing and availability in your target markets and how willing are you today to buy land that may take significant time to get through these entitlement process?

Peter E. Baccile -- President and Chief Executive Officer

So I'll start with that and then take it over to Jojo. Right now, we have about $200 million at book of land, there's no question land pricing is going up certainly in the higher barrier markets, it's going up significantly. So far, rent growth is mitigating some of the pain from the higher land costs. And we are especially in California really focused on unentitled land. Jojo, do you want to talk about?

Johannson Yap -- Chief Investment Officer

Sure. In terms of so Peter answered, the land price appreciation question in terms of our willingness, yeah, we have a local team of boots on the ground. We're always looking for additional land opportunity, for future growth. Of course, when we look at these deals, we got to have to maintain our spreads and that's the financial criteria that we will stick to. And that's basically we compare where the rents are going plus our land pricing.

In terms of taking time that we've done that for the last 10 years, in some markets it takes 18 months to 24 months entitled, our hit ratio in entitlement has been 100%. And of course before we take on any site for those areas where an entitlement process is pretty significant, we do pre-outprocess, we meet with the municipalities, we meet with our consultants to increase the certainty of those entitlements.

Rich Anderson -- SMBC -- Analyst

Okay. Thanks, guys.

Operator

Your next question will come from John Guinee with Stifel. Please proceed with your question.

John Guinee -- Stifel -- Analyst

Good quarter, good guidance. Looks to me like you're trading at a 4-4 implied cap and over 110 a square. Why on earth wouldn't you raise equity?

Scott Musil -- Chief Financial Officer

Hey John, it's Scott. When you look at our sources and uses in our leverage levels, we're in very good shape. So let me walk through where we stand today. We're projecting in 2020 about $170 million of development spend. That's just for developments and process at December 31. And the First Park Miami start that we mentioned in the script.

And our sales proceeds that we're expecting this year, our mid-point guidance is about $150 million. But then John also remember we expect to close the Phoenix sale in the third quarter, which is another $55 million. So our sales proceeds are in excess of what we need for development, we're going to retain about $70 million of excess cash flow after dividends in capex this year. And our leverage is at 4.6 times, so we're in very good shape from leverage liquidity point of view.

But John, what we're saying, we've been consistent with this for the last several years. We would consider raising equity if we had an excess of investments that we're going to be able to cover by those sources I just mentioned. And we raised equity back in 2018, 2017, and 2016. They were used to fund investment primarily spec development. And we walked a lot of folks on this call through our pitch glyphs. We thought it was a very good use of capital because of the yields we were getting in the development margin. So long story short in good shape now as we stand today, John, if something happens, where a pipeline blows to a level where we need equity we will consider at that point in time.

John Guinee -- Stifel -- Analyst

Well done. Okay. Just curiosity. It looks like...

Scott Musil -- Chief Financial Officer

Thank you, John.

John Guinee -- Stifel -- Analyst

You're welcome. Bravo, it looks like you sold Indianapolis at about $36 a foot and St. Louis at $53 a foot, if I'm doing my math correctly. What do those assets look like at $36 and $53 a square foot?

Peter Schultz -- Executive Vice President of East Region

So John, its Peter Schultz. In Indy, all but two of those assets were in two parts. And the price per pound is largely a function of the rents in that market, which, you know, is a tax, abated market. So the growth rate there is somewhat minimal, but these were older, lower cash flow growth, multi-tenant mix of ceiling heights, and functionality. And our team did a great job, getting the occupancy to as high as it's ever been and securing leases for term and as Peter said in his remarks, we thought it was a good time to sell.

Peter E. Baccile -- President and Chief Executive Officer

And those assets in particular had been occupancy challenged for a long time; the team got them up over 99%. So that was a big help.

John Guinee -- Stifel -- Analyst

Were those rents below $2 net?

Peter Schultz -- Executive Vice President of East Region

In one of the buildings, yes.

John Guinee -- Stifel -- Analyst

Wow. Okay. Thanks a lot.

Operator

[Operator Instructions] Our next question will come from Eric Frankel with Green Street Advisors. Please proceed with your question.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. I just want to circle back on your investment decisions this quarter. So maybe just walk me through just your thought process on exiting St. Louis in Indianapolis in more detail and how you're thinking about other market, potential market exits over the next year or two? And then Northeast, South Florida obviously, I know you want to have a little bit more coastal market exposure, but you're kind of making a pretty big bet on South Florida. So maybe you could just walk us through what you're thinking?

Peter E. Baccile -- President and Chief Executive Officer

Okay. So the first question, Eric, our program is always to manage the portfolio and to divest of lower growing assets and redeploy that capital into higher growth opportunities and naturally in some markets over time, that means our footprint is going to shrink and in some cases go to zero like it just did in Indianapolis, St. Louis, and Tampa. So I wouldn't say that the commentary on the markets as much as it is, those were the assets that we felt were time to dispose of, because of certain leasing status that we achieved and then the future outlook for rent growth.

With respect to Miami, that is a fantastic site, very infill; rents are growing very rapidly in Miami and in the Medley market and land is very, very difficult to come by. So we're excited about that opportunity. I don't know Jojo, if you got anything else.

Johannson Yap -- Chief Investment Officer

Sure. I mean, yeah, I would just like to add our view on Miami markets, long-term above average population growth which we think will drive higher than average employment growth and would drive a little bit higher consumption growth, which all grades for distribution. And we think that where we're at, at the mid-5 yields, that's a good margin over what products would sell for. So all in all for a financial basis from a sub-market, long-term view basis we like that, we'd like to invest in a lot.

Peter E. Baccile -- President and Chief Executive Officer

Now that's a 4 cap-ish market. So that's a 35% plus margin and that market is very strong.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. And maybe just circling -- also circling back to what John Guinee said is about in terms of how you think about raising equity, which I think you've explained before, it's good to hear it again. When you talk about your dispositions, obviously, that also funds your investment activity, but that seems to be more opportunistic in terms of disposition. Is that correct? So if you have a really good leasing year and some -- and again in some markets, where maybe some of the assets are lower growth, it could be likely that your disposition targets to be high again, if we can grow really successful.

Peter E. Baccile -- President and Chief Executive Officer

Well, we're 97.6% leased overall. So generally speaking, the assets that we're looking to dispose of this year are well leased.

Scott Musil -- Chief Financial Officer

Yeah, I would say, Eric. I think you're right if we do see other opportunities, and we're able to get great pricing and other sales, we might sell more than our $150 million mid-point, we're just have to figure it out.

Peter E. Baccile -- President and Chief Executive Officer

We'll get proposals from users that we didn't expect that are really strong and we take them. In fact many of the sales that we do are to users to 1031 buyers and to local high net worth individuals. So in programs.

Johannson Yap -- Chief Investment Officer

Yeah, it's an asset-by-asset portfolio management something that we do every year Eric as you know we talked about this and we will continue to do this and when we see, we can sell lower gross capital assets and reinvest on higher growth we will do that.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. Thanks for the input.

Operator

Our next question is from Rich Anderson with SMBC. Please proceed with your question.

Rich Anderson -- SMBC -- Analyst

Thank you and good morning. Great quarter. I was particularly impressed with the same-store guidance for 2020, a significant acceleration off of 2019. I'm curious where that's coming from how much of it is a free rent burn function. And how much of it is sort of just real, real good rent growth coming off of, as you mentioned, very high occupancy?

Scott Musil -- Chief Financial Officer

Hey Rich, it's Scott. Same-store is a little bit easier this year than it was last year. So in general, the construct is going to be a little over 2% is from rental rate bumps. A little over 2% has to do with increase in rental rates on new and renewal leasing, a little over 1% of that has to do with free rent burn off. A big piece of that is our First Nandina Logistics Center development that we placed in-service at the end of 2018. And then a slight offset to that of about 50 basis points is an increase in our projected amount of bad debt expense. So that gets you around the 4.75% mid-point. And then keep in mind, I want to reiterate it again, that assumes that Pier 1 stays in pace until the end of 2020 in the space that we discussed in our script.

Rich Anderson -- SMBC -- Analyst

Okay, great. In terms of dispositions, one thing that's true about you guys is the concentration in Southern California. And you're now budding interest in Miami. I'm wondering if Southern California, despite its strengths becomes an interesting place to monetize to sort of balance out the portfolio a little bit, because that concentration is sort of somewhat striking relative to the rest of your markets?

Johannson Yap -- Chief Investment Officer

Yeah. Our view first of all, we're very, very excited about our allocation to California. One of the things, SoCal is the largest market in the US right now, in terms of homogeneous industrial product. It also boasts the highest rent growth and one of the largest consumption zones in the US. We think that will continue. And one of the things that will allow that continue is that California has the hardest entitlement process in the US. And so if you put that together, we will continue to see constraint apply and continued higher rent growth. We like Miami a lot because it does not share as much as a land constraint or entitlement as Southern California, but it's getting close. And the demographics in Miami is very, very good.

So overall, we like our exposure in California and again, but we will continue to look at it asset-by-asset, we want to make sure we have the margin in every additional investment we make.

Rich Anderson -- SMBC -- Analyst

Hey great. Last question for me. What are your thoughts in 2020 about turnover? How does it? How does it compare to 2019? If you can -- if I can guess get a recollection there. And also, what's the sort of the mindset of investors, I'm sorry of tenants that do choose to leave? Is it driven by rising rents? Or is that sort of a rounding our issue to them and that's not necessarily the reason why they go someplace else more about just growth in their own businesses?

Christopher Schneider -- Senior Vice President of Operations and Chief Information Officer

Yeah, it's Chris. I'll just touch on the retention. We've been averaging right around 80% to 85% in the last three or four years, we're expecting something similar in 2020, 70% to 80%. And so that's very consistent we've done in the past. So I will turn it over to Jojo comments about the retention.

Johannson Yap -- Chief Investment Officer

In terms of our overall the cost structure rent, still comprises a very small amount of any businesses logistics costs. So they still range 5% to 7%. Despite rising rents, trucking costs, transportation costs and labor costs eventually increased as well. So as a proportion real estate has not moved significantly higher as a percentage. So when they move it's usually because of -- in today's market is usually because of a supply chain change because of their methods of distribution and fulfillment and or growth.

Rich Anderson -- SMBC -- Analyst

Okay, great. Thanks very much.

Operator

Our next question is from Dave Rodgers with Baird. Please proceed with your question.

Dave Rodgers -- Robert W. Baird -- Analyst

Personally, I think you should have ended the call after John Guinee said well done, but that's just me.

Peter E. Baccile -- President and Chief Executive Officer

Hey Dave, we think we can cut off right now if you want, as you take more questions.

Dave Rodgers -- Robert W. Baird -- Analyst

With the 10% to 14% cash spread that you guys gave guidance to, can you talk about that by size, range. And when you talk about kind of the credit loss that you build in which you really have an experience, are you seeing that more on the large tenant side or the small tenant side? And how do you feel about kind of that breakdown?

Peter E. Baccile -- President and Chief Executive Officer

If you look at on the rent increases overall by size, last year we're about 14%, if you look at the tenants under 200,000 square feet, we saw about 200 basis points higher, so we're seeing a little bit higher rental rate increases in that smaller, little bit smaller size.

Scott Musil -- Chief Financial Officer

And then, Dave, on the bad debt expense; it's been think about $0.5 million bucks on average the last several years per year. And it's mostly the smaller tenants that's causing that bad debt expense. So I'd say 100,000 square foot or less, and it might even be smaller than that.

Dave Rodgers -- Robert W. Baird -- Analyst

Thanks for that. And then I guess acquisitions obviously, I didn't see any in the guidance and cap rates have really compressed. Is there anywhere where acquisitions don't make sense for you? I think Peter you detailed a quite small acquisition about $4 million in the East Bay just to enter that market. But is there anywhere where you see acquisitions and the potential use of capital in that direction? Or will everything just be funded into land and development?

Peter Schultz -- Executive Vice President of East Region

Acquisitions are definitely part of the opportunity set for us, but not in huge numbers, you'll still continue to see the bulk of our new investment go into new development. But we do have our boots on the ground across the country. And we do from time-to-time faired out some great acquisition opportunities where they haven't for one reason or another, the owner isn't looking to eBay the asset. So we're typically not going to be competitive in a really broadly option situation but from time-to-time, we can find good acquisitions that are broadly marketed.

Dave Rodgers -- Robert W. Baird -- Analyst

I know you guys don't typically talk in terms of margin, but in terms of that spread, where are you comfortable kind of buying versus that development spread today?

Peter Schultz -- Executive Vice President of East Region

On the development spread, we're still targeting 100 to 150 basis points. We've been achieving it and certainly in some markets is tougher, but on a portfolio basis, or should I say on an annual basis, we invest capital, we're achieving it on average. And on acquisitions it really just depends on the package. It depends on the opportunity for rent growth, what land values are doing in that market because we're looking not only at the initial profitability, but the total return.

Dave Rodgers -- Robert W. Baird -- Analyst

Got you. Then two cleanups for me, one severance in the first quarter? And then the second one was First Joliet did you guys comment on leasing activity there? May be I missed it? Thanks.

Scott Musil -- Chief Financial Officer

Severance is the first quarter, Dave, and I'll turn it over to...

Christopher Schneider -- Senior Vice President of Operations and Chief Information Officer

In Joliet we've got 148,000 feet remaining out of that 355,000 square foot building. We have showings and activity but we don't have anything to report yet.

Johannson Yap -- Chief Investment Officer

Yeah, it's basically 60% leased today. And I just want to highlight that leasing came in early as you know in a development. We usually budget one-year downtime. So that 60% leasing there came in pretty early.

Dave Rodgers -- Robert W. Baird -- Analyst

Thanks, guys.

Johannson Yap -- Chief Investment Officer

Thanks, Dave.

Operator

We do have a follow-up question from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys, just looking at the sales activity over last three years. I think you're about $725 million in average cap rate of about 7 cap. Just curious how much more of those higher cap rate assets do you have in the portfolio that you're going to need to get rid of over the next couple of years?

Johannson Yap -- Chief Investment Officer

Well, Craig, hi this is Jojo. I mean, all our assets are performing well. If you look at occupancy and rent growth and we project rent growth in all the markets that we're in, these are portfolio pre infill. But you'll find us continue to do what we've been doing this for the last 10 years is that we portfolio management is part of our business, so every year, we will look at every asset, we will project cash flow growth and we will see, hey, what it is something that we can sell at a great value and reinvest and use that as source of proceeds to fund our new investments. So we will always have sales. I mean, that's part of the portfolio management we have committed to do.

Peter E. Baccile -- President and Chief Executive Officer

So we take a new investment decision on our assets every year, and that's how we come up with the bucket that we're going to dispose of.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great. But I guess I'm just trying to get at it if we're looking kind of that at what you guys have done from a portfolio transition kind of standpoint, how much of these kind of older vintage, higher cap rate assets are left, because these are primarily used to finance development in some cases. If you're building Miami to 5.5 cap and selling at a seven cap, there's some initial dilution, right.

Peter E. Baccile -- President and Chief Executive Officer

I would say -- keep, first of all obviously in our supplemental, you can see where we own real estate but as important the higher cap rate assets tend to be more capital intensive. And so the AFFO or the cash flow from those assets is in this -- in the fourth quarter, for example, in the mid-4s, and we're taking that capital and we're putting it into new developments at 5, 5.5 plus and new developments don't require capital for a long time. So it's actually cash flow accretive enough and value accretive to make that exchange.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. Great. Thank you.

Operator

[Operator Instructions] You do have a follow-up question from John Guinee with Stifel. Please proceed with your question.

John Guinee -- Stifel -- Analyst

Great. Tactical question of in this day and age, do you think you can 1031 exchange your dispositions into development or do you have to do it into income producing assets? And then the second what's the status on your land up at Park 94 North of Chicago?

Scott Musil -- Chief Financial Officer

Hey John, it's Scott. I'll take the first part of it; you can 1031 your sales into the land piece of it. So you definitely can do that, if you wanted to, you can also set up a reverse exchange where you title the land with an intermediary and start developing it, you can get more full value doing it that way. But when we've done 1031s in the past, we've just done operating properties in land to offset the gains from sales.

Peter E. Baccile -- President and Chief Executive Officer

And at First Park 94, as you know, we have two buildings that are 100% leased. The basis in that land is about a buck a foot and we're entertaining discussions up there on a regular basis about build to suit etc., we just don't have anything to report right now.

John Guinee -- Stifel -- Analyst

Is that a sub market you would go spec? Or is that something you'd only do a build to suit?

Peter E. Baccile -- President and Chief Executive Officer

We would consider both.

John Guinee -- Stifel -- Analyst

Great. Thank you.

Operator

Our next question is from Bill Crow with Raymond James. Please proceed with your question.

Bill Crow -- Raymond James -- Analyst

Good morning, guys. Peter is there a point at which the absolute stabilized development deals would become more important than the spread to existing assets. I say that because you're talking about developing the mid low fives and is there just a point at which the risk is too great?

Peter E. Baccile -- President and Chief Executive Officer

Well the biggest risk in development in our space is obviously leasing because typically, we don't have the same risk that you do building an office building or a shopping center in a close-in. So and we do get certainly environmental challenges on the risk side, but it's mostly leasing. If what you're asking is gee, if you're trading at a three something capital, you build at a high three cap, that that's I don't know the answer to that question. It's...

Bill Crow -- Raymond James -- Analyst

Well I mean is in the risk also the second lease, I mean as we as we think about how e-commerce, everything else could evolve, risk could change a little bit, right?

Peter E. Baccile -- President and Chief Executive Officer

Well, certainly you're making a bet on rent growth. Absolutely and that's where we spend a lot of time. And we have different views in some cases than other players on rent growth in terms of how much of a bet we're willing to take. So yes, you build on a really low yield, you don't get the rent growth that you expected that the total return is not going to be there. So that's definitely a risk.

Peter Schultz -- Executive Vice President of East Region

Well Bill, the other thing I'd add, this is Peter Schultz. Aside from the rent growth as a long-term owner, we're very focused on the flexibility and the features and attributes that we're including in these buildings. So if you compare those to some existing buildings, we feel that this is a superior product for the longer-term. So while yields may fluctuate and rents go up and down, right, year-in, year-out, these are assets they're going to lease and perform.

Johannson Yap -- Chief Investment Officer

And in a lot of situation, what we're building is in high barrier into markets. Again, we have a long-term view that you try your best to increase allocation to land constraint heavy entitlement markets that supply to be constraint. And overall, I mean at the end of the day supply is really the one that drives rents lower. But in our situation, we look to invest in the markets, where the supply/demand fundamentals are much better than the national average.

Bill Crow -- Raymond James -- Analyst

Yes, OK. That's helpful. Any other tenants besides Pier 1 on your watch list?

Peter E. Baccile -- President and Chief Executive Officer

No, we're pretty granular and everybody seems to be in good shape other than the smaller tenants that Scott referenced.

Scott Musil -- Chief Financial Officer

And we went through our January bad debt review and I think we recognized $60,000, so still very low of bad debt expense.

Bill Crow -- Raymond James -- Analyst

Yeah. And finally from me, how many more markets are left that you could exit in their entirety?

Peter E. Baccile -- President and Chief Executive Officer

Again, this is an asset-by-asset decision. You've seen where we've been selling. And you can tell by what we own in the supplemental. And it's again; it's all about rent growth and all about future opportunity, which relates back to your last question. So it depends on our view on rent growth. If we don't really look at it, market-by-market, we look at it asset-by-asset.

Bill Crow -- Raymond James -- Analyst

There's no advantage, economic advantage, margin advantage from exiting the markets entirely as opposed to maybe keeping one asset in one market.

Peter E. Baccile -- President and Chief Executive Officer

Not really, no. I mean 20% of our real estate is in California, I suppose there would be a difference there. But we're not looking to exit California. So...

Bill Crow -- Raymond James -- Analyst

Yeah. Okay. All appreciate it. Thank you.

Operator

And our final question will come from Sam Shamie with Shamie Development Companies. Please proceed with your question.

Sam Shamie -- Shamie Development Companies -- Analyst

Thank you for the opportunity. You mentioned Orlando and South Florida, but what about Tampa Bay any development going on in that region and why?

Peter Schultz -- Executive Vice President of East Region

Not for us. We're not focused on Tampa right now. We like the rent, growth characteristics of the Orlando and the South Florida market better. Jojo, do you have anything to add to that?

Johannson Yap -- Chief Investment Officer

No, that would be -- that's our choice of sub-market at this point.

Operator

And at this time, there are no further questions in queue. We will now turn it back over to Peter Baccile for any closing remarks at this time.

Peter E. Baccile -- President and Chief Executive Officer

Thank you, operator and thanks to everyone for participating on our call today. Please feel free to reach out to Scott or to me with any follow-up questions and we look forward to seeing some of you in South Florida in a few weeks.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Art Harmon -- Vice President of Investor Relations and Marketing

Peter E. Baccile -- President and Chief Executive Officer

Scott Musil -- Chief Financial Officer

Peter Schultz -- Executive Vice President of East Region

Christopher Schneider -- Senior Vice President of Operations and Chief Information Officer

Johannson Yap -- Chief Investment Officer

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Rich Anderson -- SMBC -- Analyst

John Guinee -- Stifel -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

Dave Rodgers -- Robert W. Baird -- Analyst

Bill Crow -- Raymond James -- Analyst

Sam Shamie -- Shamie Development Companies -- Analyst

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