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Lexington Realty Trust (LXP) Q4 2020 Earnings Call Transcript

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LXP earnings call for the period ending December 31, 2020.

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Lexington Realty Trust (LXP 1.56%)
Q4 2020 Earnings Call
Feb 18, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Lexington Realty Trust Fourth Quarter 2020 Earnings Call and Webcast. [Operators Instructions] I would now like to turn the conference over to Heather Gentry. Please go ahead.

Heather Gentry -- Senior Vice President, Investor Relations

Thank you, operator. Welcome to Lexington Realty Trust's fourth quarter 2020 conference call and webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website in the Investors section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Lexington believes that these statements are based on reasonable assumptions. However, certain factors and risks, including those included in today's earnings press release and those described in reports that Lexington files with the SEC from time to time could cause Lexington's actual results to differ materially from those expressed or implied by such statements.

Except as required by law, Lexington does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, Lexington has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refers to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis, operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington's historical or future financial performance, financial position or cash flows.

On today's call Will Eglin, Chairman and CEO; Beth Boulerice CFO; and Brendan Mullinix, CIO will provide a recent business update and commentary on fourth quarter results. Executive Vice Presidents Lara Johnson and James Dudley will be available during the Q&A portion of our call. I will now turn the call over to Will.

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Thanks, Heather. Good morning, everyone. 2020 was an outstanding year for Lexington and our fourth quarter results were excellent across all our business lines. In the fourth quarter, we generated adjusted company funds from operations of $0.19 per diluted common share to end the year at $0.76 per diluted common share, the high end of our guidance range. Following a robust quarter of $182 million of industrial purchases and $292 million of sales, our industrial exposure increased to 91% of our gross real estate assets excluding held for sale assets. Portfolio operations have been very strong during the pandemic with fourth quarter cash base rent collections averaging 99.8%. Also during the quarter, leasing volume was healthy at 1.7 million square feet, consolidated same-store NOI was up 1.6% and industrial cash renewal rents increased 3.4% with overall fourth quarter cash renewal rents down roughly 2.5%, due to office lease renewal roll downs.

We recently announced a dividend increase of 2.4%, supported by our positive results throughout the year, which equates to an annualized dividend of $0.43 per common share. Our plan is to continue growing our dividend annually. Our company has evolved considerably over the last five years and we have mostly transitioned out of the office sector into the industrial sector, an asset class that we believe, continues to have strong fundamentals and an expanding opportunity set. Along the way, we disposed of 127 consolidated non-industrial assets for $2.5 billion and purchased 60 industrial assets for approximately the same amount. Throughout this transition, our investment strategy has targeted purchases, build-to-suits and select development opportunities in primarily warehouse and distribution assets in markets across the Sunbelt and lower Midwest.

We had an active year on the investment side, purchasing $612 million of primarily Class A industrial assets and investing $60 million into development projects. As we near completion of our portfolio transition, we will continue to focus on acquiring and developing primarily single-tenant Class-A warehouse and distribution properties in our target markets. While we expect to be active in the purchase market, we intend to allocate more capital to development opportunities in 2021 relative to 2020. In our view, this is the best way to achieve higher returns without compromising on quality when it comes to building characteristics, markets and locations.

Just to highlight a couple of recent successes on the development side, during the fourth quarter, we had value creation events in our first two development projects located in the Columbus, Ohio market. These included selling a land position in one of our Etna parcels to Kohl's department stores and executing a full-building lease on our Rickenbacker project, these are two great outcomes for us and we're excited about the opportunities in our development pipeline going forward, which Brandan will discuss in more detail later in the call.

Moving to sales, 2020 volume totaled $433 million of predominantly non-core assets at average GAAP and cash-cap rates of 5.8% and 5% respectively. An excellent result that was consistent with our prior disposition plan forecast. We were particularly pleased with the sale outcome of our Dow Chemical office building in the fourth quarter as we retired a substantial amount of secured debt and de-leveraged the balance sheet. Additionally, we sold two office properties in January for approximately $20 million, while the office sales market continues to be impacted by the pandemic, we remain committed to selling our remaining office properties in an orderly manner and we'll continue to give regular updates on our progress in the forecasted sales results.

The remaining office and other asset portfolio consists of 18 properties, which generated 2020 NOI of approximately $33.5 million. We expect to market for sale most of this portfolio in 2021, which we currently value at around $300 million. Turning to leasing, we leased over 5.2 million feet during 2020 and at year-end, our portfolio was 98.3% leased, representing a slight decline compared to the previous quarter, primarily as a result of a year-end lease expiration in our Statesville in North Carolina, industrial facility. We were very pleased with industrial cash base renewal rents in 2020, which increased 17.5%. At year-end we had 3.7 million square feet of space expiring in our single-tenant industrial portfolio in 2021, of which we expect at least a third to be renewed with the expiring rents below market, on average.

Of the remaining leases, the two most significant expirations are our Olive Branch Mississippi facility occupied by Hamilton Beach through June 2021 and our lower-end South Carolina facility occupied by Michelin through November 2021. The Laurens location has multiple prospects interested in the property for either lease or sale, including the potential for further extension with Michelin. Additionally, the Olive Branch location is experiencing significant leasing interest from full building users, which could result in minimal downtime.

Our balance sheet remains in excellent shape, with leverage at 4.8 times net debt to adjusted EBITDA at year-end. Our strong cash position forward ATM contracts, retained cash flow and proceeds from dispositions provide us considerable capacity to fund future growth initiatives. In 2020, we began building-out an ESG platform for our operations. We understand the importance in doing so and have begun to establish a program that is appropriate for our portfolio given the limited control we have over many of our properties due to their net lease single-tenant nature.

Our 10-K and website will contain a summary of our initiatives, goals and performance and we expect to report on ESG matters going forward, as our platform evolves. To conclude, we were very pleased with our fourth quarter and 2020 results. We have succeeded in monetizing much of our office portfolio while constructing a high quality industrial platform. Our focus remains on acquiring and developing well-located warehouse and distribution assets and disposing of our remaining non-core assets. While we will continue to experience some near-term dilution as we sell these assets, we believe that industrial property is demonstrably superior in terms of long-term cash flow growth.

With that, I'll turn the call over to Brendan to discuss recent investments and our forward pipeline.

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Thanks, Will. We had another active year on the investment front, acquiring 16 industrial properties totaling 6.6 million square feet or $612 million at average GAAP and cash cap rates of 5.4% and 5% respectively. These assets have an average age of two years and an attractive weighted average lease term of 8.3 years, with average annual rental escalations to 2.3%. Our overall industrial portfolio continues to be shaped with a focus on building quality, age and user versatility, and targeted growing industrial logistics markets in the Sunbelt and lower Midwest.

Fourth-quarter purchase activity was consistent with these attributes end markets and comprised of four warehouse distribution properties totaling 1.4 million square feet and two Dallas-Fort Worth logistics submarkets, as well as submarket in Phoenix and Greenville, Spartanburg. These properties all feature modern specs, good highway access and ample trailer parking, with an average lease term of 9.4 years and annual rental escalations of 2% or higher. During the quarter we also closed on and began funding a build-to-suit industrial project in Phoenix, which we expect to be completed in the third quarter of 2021. Subsequent to year-end, we purchased three recently constructed Class A warehouse distribution facilities for approximately $51 million, totaling 520,000 square feet, further adding to our holdings in the Indianapolis and Central Florida markets.

We are currently reviewing over $600 million of existing deals in the market. Pricing continues to be very competitive. And as evidenced by our 2020 purchases, cap rates have compressed from a year ago. While the industrial market opportunity is vast, we are unlikely to compromise on asset quality and save our current return.

Our increased development focus with long-standing development partners will allow for potentially greater value creation compared to purchases and complements our existing industrial portfolio. Will mentioned earlier, that we have secured a full-building lease at our 320,000 square foot Rickenbacker project in Columbus late in the fourth quarter with a subsidiary of PepsiCo for three years.

The base building was substantially completed this quarter. Our expected development cost basis in the fully completed project is estimated to be about $20 million. We were pleased that pre-lease for full building prior to completion at an attractive development yield, with anticipated stabilized GAAP and cash cap rates of 7.8% and 7.6% respectively. Also in the fourth quarter at our ETNA West development site in Columbus, we sold the ground position under the 1.2 million square foot e-commerce distribution center leased to Kohl's department stores, which exercised its two-year purchase option for $10.6 million. This transaction resulted in a gain on sale of $5.9 million.

Our Shugart Farms development projects, a Class A 910,000 square foot distribution center in the I-85 South submarket of Atlanta, is slated for substantial completion around the end of the first quarter of 2021 and is currently available for lease. Market absorption in the Atlanta industrial market in 2020 exceeded total absorption in both 2018 and 2019 and remains market with high user demand.

Lastly, our future pipeline includes three development projects in which we are in late-stage negotiations and due diligence. These projects are in Indianapolis, Central Florida and Phoenix, target markets where we intend to continue building a larger presence.

With that, I'll turn the call over to Beth to discuss financial results.

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Brendan. Adjusted company FFO for the fourth quarter was approximately $55 million or $0.19 per diluted common share. We achieved the high-end range of our 2020 adjusted company FFO guidance at $0.76 per diluted common share. Our 2020 adjusted company FFO payout ratio was 55.6% and continues to provide us ample retained cash flow. This morning, we announced 2021 adjusted company FFO guidance in the range of $0.72 to $0.76 per diluted common share. This range incorporates our commentary on dispositions, investments and leasings, we have made on this call. We generated revenues of approximately $83.3 million in the fourth quarter, which represented a slight increase compared to the same-time period in 2019.

Overall, in 2020, gross revenues increased $4.5 million year-over-year. This increase was primarily attributable to new acquisitions, partially offset by sales. Property operating expenses was relatively flat year-over-year. However, tenant reimbursements increased to 84% for 2020, compared to 72% for 2019. Our 2020 G&A of $30.4 million was in line with our revised target range of $30 million to $31 million, and we expect 2021 G&A to be within a range of $31 million to $33 million.

Same-store NOI increased 1.6%, primarily as a result of a 2% increase in same-store industrial NOI. Year-over-year, our consolidated same-store leased portfolio decreased 140 basis points to 97.6%, primarily due to the year-end lease expiration of our Statesville, North Carolina property. At year-end approximately 86% of our industrial portfolio had escalations with an average rate of 2.1%.

Our 2020 rent collections were among the best in the REIT sector. We collected 99.8% of cash base rents throughout the year, and as of the end of 2020, we'd only granted two rent relief requests in our consolidated portfolio, which we have discussed on previous calls. Bad debt expense was minimal during the fourth quarter, with only $212,000 of bad debt expense incurred. Capital markets activity during the quarter included the sale of an additional 1.1 million common shares under the forward delivery feature of our ATM program. These shares increased our forward sales contracts to 5 million common shares for the year, with an aggregate settlement price of $55 million as of year-end 2020.

Our balance sheet remains exceptionally strong with leverage at a low 4.8 times net debt to adjusted EBITDA at year-end. We had substantial cash of $179 million on the balance sheet at year-end and nothing outstanding on our unsecured revolving credit facility. In connection with the sale of the Dow Chemical office building, we satisfied $178.7 million of secured debt with an interest rate of 4%. This contributed to an increase to our unencumbered NOI to over 89% at year-end. At year-end, our consolidated debt outstanding was approximately $1.4 billion with a weighted average interest rate of approximately 3.3% and a weighted average term of 6.9 years.

With that, I'll turn the call back over to Will.

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Thanks, Beth. I will now turn the call over to the operator, who will conduct the question-and-answer portion of this call.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Anthony Paolone with J. P. Morgan. Please go ahead.

Anthony Paolone -- J.P. Morgan Securities Inc. -- Analyst

Yeah, thanks. Good morning. First question is on the development activity that you expect for '21. I think you had mentioned, either in the release or in your comments about spending more on development versus acquisitions. Can you just may be a bit more specific on what you think the activity will now to this year?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Sure, Tony. Brendan mentioned there is a few projects that we're working on and if those come to fruition, we could have roughly $200 million of funding for development activities in addition to whatever we're purchasing in the acquisition market.

Anthony Paolone -- J.P. Morgan Securities Inc. -- Analyst

Okay. And you had mentioned I think the yield on Columbus was up in the high 7s. What do you think the pipeline that you're teaming up now looks like?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Brendan, you have thoughts on that?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Yeah, sure. The yields would vary depending on the project, but generally targeting development yields in the range of between 5.25% and 6%, and hopefully there is some conservatism there. Our base underwriting includes 12 months of downtime, which can really enhance yields when you lease more quickly as we did in the Columbus development projects were released immediately.

Anthony Paolone -- J.P. Morgan Securities Inc. -- Analyst

Okay. So, I mean if we step back, if we spend a couple of hundred million dollars on development, it sounds like that might be a bit more than what you think you'll do on the acquisition side, but then you talked about these other assets that could be pretty high cap rate sales, I mean how should we think about that as you look out over the next couple of years? Is that going to be a pressure point, do you think there is enough on the development and acquisition side to offset sort of the remaining dilution to clean out the non-core stuff or what happens there?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Well, implied in our comments is that what's left to sell in the office, other asset portfolio is likely a low double-digit GAAP rate outcome. So we won't offset that entirely in a leverage neutral context, but our leverage is low. We would be comfortable with it going up a little bit if there's good opportunity in the acquisition market. From our perspective, we need to execute on the sale planned this year, but we're comfortable with a $500 million or $600 million investment plan, we can still keep our leverage sort of in the midpoint of what we've indicated is a comfortable range. So, we do have a fair amount of balance sheet capacity to take advantage of opportunity, but it's -- at the same time, it's a competitive marketplace. So we want to be careful and pick our spots versus being predictive about acquisition volume.

Operator

Okay. And Brendan mentioned just the competitiveness in the market and cap rate compression. Is there any sort of premium to be gained going either shorter duration or anything like that at this point?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Yes, I mean I would say that certainly the most aggressive cap rates that you're seeing would be attributable to longer leases in the more primary markets. So in our tenure, Amazon in a more primary market, for example. So being able to underwrite range of lease durations, including some sort of expirations is helpful to take advantage of the opportunity to get slightly more yields when you can appropriately underwrite leasing outcomes.

Anthony Paolone -- J.P. Morgan Securities Inc. -- Analyst

Okay. And just one final detail item is going to make sure that I think the $50 million in forward equity, that's still out there that's not been brought in yet. Is that right?

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, that's right.

Anthony Paolone -- J.P. Morgan Securities Inc. -- Analyst

Okay, great. Thank you.

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Thanks, Tony.

Operator

Our next question comes from Sheila McGrath with Evercore. Please go ahead.

Sheila McGrath -- Evercore Partners -- Analyst

Hi guys, good morning. On the Ohio Rickenbacker development, the yields are much higher than you're targeting on other projects. If you could just talk about what's driving that, was that low land basis are doing better on rent? And can you remind us if there -- I think there were other development opportunities at that site?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Hi, it's Brendan again. There are a couple of aspects to the Rickenbacker leasing outcome. One is we did have an attractive basis in that property for sure. And in addition, we were able to lease the property prior to completion or that-- and just around substantial completion. So we were able to take out a year of carry, which is, which is built into our other forward underwriting. So there is a good yield benefit there.

In addition and this project the PepsiCo lease is actually a little bit shorter, it's a three-year lease, but that was offset by having -- we had PepsiCo fund, the bulk of the tenant improvement build out, which also clearly enhance our yields there. We have that Rickenbacker project with a single building project. We additionally have two land parcel the classroom from each other and at Etna, and those are multi-building sides that we've been building out, infrastructure at for the last couple of years. The project at the outset was set up to focus primarily on build-to-suit opportunities as the market over the particularly the last couple years has shifted away from built-to-suit, and it's really been dominated by Spec Development and when you're talking about generic bulk distribution product, we're evaluating potentially moving forward, the Spec projects on either our East or West sites there and at that we have already developed a pad on the website for an 800,000 square foot.

Sheila McGrath -- Evercore Partners -- Analyst

Okay, great. And then, and I think either Will's remarks or yours Brendan. I'm not sure who mentioned that you're has a stable of development partners. Can you just explain to us how deals are structured with these development partners? Do they get a fee or just explain to us, how it works?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Yes. Well first addressing the sale. We -- as you're aware Lexington has been very active over its history and build-to-suit and frequently partner its merchant builders on build-to-suit investments. And as far as our purchase market activity of existing facilities, that's really again dominated, the sellers are very much for those our merchant builder sellers. So we have a lot of great relationships with merchant builders all over the country, and many of them are very long-term relationships and that's been the focus of looking at the partnerships moving forward to develop these speculative projects.

For competitive reasons, I'm not going to get into a lot of detail about the way that the expenses are structured, but they are typically anywhere between, they're typically around a 90-10 joint venture split between capital partners and operating partners. Typically a base development fee, it's around 4% and there is a promote structure based on success and that's where I won't be too specific, but these are structures that are very common in the merchant building world and allows Lexington to get a little closer to the development yields are a lot closer I should say than what we're buying in -- in the purchase market.

Sheila McGrath -- Evercore Partners -- Analyst

Okay. And last question for me, just on the part of the appeal. I think going forward is lowering your capital expenditure outlook by shifting to industrial. If you could just give us some insight on how much capital expenditures you're budgeting this year and either how that compared to the recent past or going forward, how much you expect that to ramp the lower?

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

Hey Sheila, it's Beth. Good morning.

Sheila McGrath -- Evercore Partners -- Analyst

Hi Beth.

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, it's a function of course of the potential leasing outcomes for the year and the timing of the TI work that's being done of course. In -- we are going to be coming down as we transition away from the office products into the industrial product. So from now at the beginning of the year, I would say somewhere between $15 million and $25 million for 2021. We'll have a better handle on the exact amount as we go through the year. And in general on the capex, we look at $0.10 to $0.11 per square foot on average. But if you look back in our history, you'll see that we were spending with $50 million a year on TIs and capex and LC. So we are looking forward to a new era of lower capex.

Sheila McGrath -- Evercore Partners -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Craig Mailman -- KeyBanc -- Analyst

Hey, good morning. Will, just on the '21 expirations, the bigger ones in Mississippi and South Carolina. I mean, what are the potential mark to markets there?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Good morning, Craig. James wanted to jump in and give you a perspective. Thanks.

James Dudley -- EXECUTIVE VICE PRESIDENT, DIRECTOR OF ASSET MANAGEMENT

Sure. So on the -- we're in a pretty competitive situation right now. On the one in Memphis, I don't want to get into too much detail as to where we're at but there should not be a negative mark to market there. Our expectation is depending on the outcome that they should go up. And then the Lawrence facility is also kind of dependent on the outcome as well. We've got a couple of different opportunities there that we're pursuing including the potential renewal with the incumbent tenant. If it's a renewal, it should be flat to a little bit of an increase. If it ends up being multi-tenant, it could be flat to a minor decrease and if we replace them with with a large single-tenant, then it probably is a slight decrease to what they're currently paying.

Craig Mailman -- KeyBanc -- Analyst

All right. That is -- that's helpful. And then maybe for Brendan. I mean you're throwing out there 5.25%, 6% development yields you guys are -- there could be upside depending on downtime and other things in your underwriting. But as you guys are expanding in markets that are seeing more construction overall. I mean, is that an appropriate risk-adjusted return when you guys are trading your equity is slightly above the six cap, at least on my numbers. Is that -- do you feel like you're getting paid for any of that risk?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

We do, Craig. As an alternative to being in the purchase market, it's in our mind a much better capital allocation. So we're allocating more capital to development than we did last year, but we're being very patient as we accumulate success in that space. Now, our first two projects worked out very well. We're very optimistic about the Atlanta project and then there is a few more, whether we commit more capital to development beyond that pipeline remains to be seen. But to us, it's an important part of our business. It's an opportunity to enhance our returns without chasing either weaker credits or all the real estate with obsolescence risk.

Craig Mailman -- KeyBanc -- Analyst

And then just maybe like a bigger picture question, maybe like those dovetail to my last one, but as I look at what you guys have done on the execution side, it's kind of -- you guys have hit what you said you're going to do right bringing industrial to 91%. The stock has clearly benefited here. And when I look at valuation, right, you guys at least from a multiple perspective or are in the ballpark of where kind of a more focused industrial guys are. But when you kind of take a step back your a FFO growth, your same-store growth kind of trades at a discount or is not as a premium relative to peers.

So I'm just kind of curious as you guys look forward in order to continue to chip your equity cost down toward some of those peers. I mean, what are you guys planning if anything on the investment side to be able to boost that growth profile going forward to kind of justify continued multiple expansion, to kind of better compete for capital with some of your peers?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Well, I think there is several things that that we're focused on. We still view it as a priority to finish the transition to, right, the 100% industrial and trade out of what's left of the office portfolio. I think that's a key factor for us. We want to add selectively to our investment pipeline in the developed of because we think that there is a better chance for us to capture value there versus purchases in many cases. And then the other big thing is we have to prove the point about having the opportunity to mark our rents to market better than we have historically. And that will prove the shift in our underwriting over the last few years toward modern Class A warehouse and distribution properties in our target markets.

We know we have to prove that, we've made good progress in terms of positioning the portfolio so that it has good organic growth as reflected by the amount of revenue that we have subject to lease escalations. But we have to prove the point where our leasing spreads are positive when we come off lease. And I think we're very optimistic on how well we can do in 2021. We did very well last year. But we understand that given that a portion of our portfolio is older and is in manufacturing assets, you know that some of our mark-to-market opportunities over the next few years won't be as robust as some of the peer companies.

Craig Mailman -- KeyBanc -- Analyst

Right. And I guess going to your commentary about the rent spreads like the Hamilton Beach and Michelin, maybe you're going to get a slight uptick there and that's 3% of your kind of industrial rents in aggregate. I mean is there any discussion about maybe going smaller from an asset perspective in terms of square footage or what have you going mixing in a bucket of assets with much shorter lease duration than what you normally have, so that you guys can capture that rent upside with maybe a little bit of a less of a risk profile to having these million square foot plus binary outcomes in some instances and as a way to better compete with some of your peers and drive that internal growth higher?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Yeah, absolutely, Craig. We've been adding smaller facilities to the portfolio and we would add assets with two or three tenants in them. So there is a multi-tenant opportunity in our target markets that we're aware of that could make sense for us. And we're not averse to buying buildings that aren't fully leased either if there is an opportunity to capture greater yield from leasing and otherwise working in asset.

Craig Mailman -- KeyBanc -- Analyst

Okay, great. Thanks.

Operator

Our next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

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

Great. Thank you and good morning. I was hoping to just get some more color around the guidance assumptions. So I apologize if I missed it, did you say what your -- what acquisition and disposition volumes were included in your outlook?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

We didn't. We try not to be predictive about acquisition volume. But I think on the disposition side, if you were modeling $200 million to $300 million of completed sales that would be a number that we were comfortable with. And if we can execute on those sales given the way our balance sheet is positioned, we certainly have the capacity to invest sort of $500 million to $600 million and still stay within a comfortable range from a leverage standpoint.

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

Okay, thank you. And then the right way to think about the sales as you said high-single-digit or high-double -- sorry, low-double-digit cap rates versus?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Yeah, overall. Yeah, overall. And the outcomes are lumpy though in that portfolio, so it won't be at the same cap rate on everything obviously.

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

Okay. And then on the investment side, it sounds like kind of 6-ish percent yields make sense?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

That would be high. On development initiatives, that could be achievable. But in the purchase market, most of the things that we see that are of interest or more in the 4.5% to 5% area on a cash basis and obviously the GAAP cap rate would be higher.

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

How much higher?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

It depends on term and escalations.

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

So of the 5% to 6%, how much of that you think could be development versus acquisitions?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Well, we could see at the moment committing as much as $200 million to development projects this year with the balance of activity in the purchase market.

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

Okay, that's helpful. And then you had mentioned a third of the expirations you think will be renewals. And then you mentioned two big leases, but it looks like there's actually 43 expirations in '21, if you add up the office and industrial. I mean, how do we think about the rest of that group. Or are they so small that they actually included in the one-third. And the two you mentioned are two-thirds, I just want to make sure we kind of see the full picture here?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

I think the majority of those are -- yeah in Hawaii if you want to take it again.

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I was just going to say same, there is a small tenants and mainly our Hawaii property and then some smaller tenants and anti-active.

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

All right sir, there are 6 primary industrial leases that are rolling in '21 and then there is really only one of any size left on the office side, there are a couple of small ones, one retail tenant in the Philadelphia office building. And then one small tenant in our Arlington office building are primarily at six investor leases.

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

Okay. That's helpful and then you had mentioned 2.4% distribution growth in '20, it sounds like with portfolio repositioning maybe there's a little bit of a drag in '21? How do you think about the potential for growth, especially given your comments before and capex -- less capex this year, is 2.4% something that seems high or low? Do you think about kind of annual dividend growth going forward?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Yeah, I mean our thought is to increase the dividend $0.01 a year until taxable income gets to the point where it's pushing against that in favor of more growth, so we're very comfortable with continuing to grow the dividend at that rate for the foreseeable future, we think the dividend will be among the best covered in the space and if you think about it, if the model is retaining $50 million or $60 million a year of free cash flow. Just for reinvesting that capital that in and of itself droves dividend growth.

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

Okay, that's helpful. And then finally, I guess you mentioned Sunbelt lower Midwest states. I mean what -- what's limiting you to that those regions and as you think about those regions, are you seeing a pickup from reassuring that seems to be a target area where maybe we'd see that?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Yeah, I think generally speaking we want to be more targeted in our market focus, so that we get more concentrated positions, we think that helps us both in terms of accessing and underwriting new investments and enhancing our opportunities in those places versus being much more broadly geographically diversified. And with respect to on-shoring I'll say whether maybe Brendan or James, you have a perspective on that in terms of what you're seeing?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

This is Brendan. Maybe I'll start, and I think one of the dynamics that has really been demonstrated across the markets in 2020 and then it was, particularly seen in the fourth quarter is the dominance of bulk leasing and there is clearly much reported to level of activity by Amazon and Amazon is a very significant piece of that, but if you look at the breakdown and tenancy in that bulk space, at the same time, it's really broadly distributed in a number of different other industries and I think that really speaks to companies seeking to secure their supply chain resiliency.

On the the on-shoring and near-shoring, that -- that factor will lag, right, because that will require some more manufacturing to on-shore into the U.S. So that has been less of a factor, but we were there so many arguments for that to happen. I think if you look at where you might expect that to happen in the U.S., I think that our geographies are very well suited for our manufacturing in terms of affordable labor base, skilled labor base, whether that's in the Mid-west, or across the Sunbelt, so very favorable business climate. And so I think that in terms of our geographic focus its very well-positioned to benefit from those increases in near-shoring and on-shoring. James, I don't know if you have anything to add to that.

James Dudley -- EXECUTIVE VICE PRESIDENT, DIRECTOR OF ASSET MANAGEMENT

No, I think you covered it.

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

Okay, thank you. I appreciate your thoughts.

Operator

Our next question comes from John Massocca with Landenburg Thalmann. Please go ahead.

John Massocca -- Landenburg Thalmann -- Analyst

Good morning.

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Hey, John.

John Massocca -- Landenburg Thalmann -- Analyst

So, I know there is still some work to do on the office disposition side of things, but as we think of longer-term about the next leg of the capital recycling strategy, is this new to sell assets out of the heavy and light manufacturing bucket? And I guess if that's the case, how much premium is there to selling those assets, what kind of sizable term left on the lease?

James Dudley -- EXECUTIVE VICE PRESIDENT, DIRECTOR OF ASSET MANAGEMENT

Good morning would be opportunistic about about harvesting value there, if we're shrinking that portfolio. I'm not saying that there wouldn't be some disposition activity. But those assets have long lease duration and they throw off a lot of free cash flow and that's right, providing an opportunity for us to reinvest a lot of that cash flow to support our growth plan. So we're not interested in parting with them at anything that's not a very full evaluation.

John Massocca -- Landenburg Thalmann -- Analyst

But I guess as you kind of talk about that being potentially the area where you have risk of a kind of mark-to-market down and there is kind of this bid out there in the market for things that just kind of headlined industrial, maybe is there any kind of incentives to kind of clear that out of the portfolios that people have real confidence and kind of the run rate NOI in the portfolio today -- or is it -- we really want this cash flows, but also kind of help support the dividend another kind of positive things leverage-wise and stuff like that?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

I think either way it's fine for us. We understand that industrial as an asset classes is extremely hot and we're not averse to doing something more significant in that space if it's good for the company. Yeah, so there is nothing imminent, but I do think the value there is probably under-appreciated in the context of our current share price, often tenant retention is extremely high there for long periods of time. It's very difficult to move manufacturing facilities and often occupancy, as I said is sticky for a long period of time and in a rent negotiation with the tenant that doesn't have upgrade option. That's often a good outcome for landlord. So, I don't want to sort of overemphasize the risk around leasing outcomes. It's been a very, very good business for us.

John Massocca -- Landenburg Thalmann -- Analyst

Okay. And then maybe talking about the office itself, understanding a lot of kind of moves in interest rates have happened very recently. Have you seen any change in demand from potential office buyers given some of the interest rate volatility? I mean is it boxing some people out of the market or maybe pulling them into the market as they get worried the window for attractive funding is potentially closing?

Lara S. Johnson -- Executive Vice President

Hi, this is Lara, I think the latter is certainly true. And when you have a high quality tenancy long duration lease and fairly strong market. So the activity for assets with those characteristics has been intense and and buyer seem as eager as ever to put capital out for assets like that it continues to be kind of a tale to world and that buyers continue to struggle to underwrite impending vacancy and rollover. So for assets that have that profile the market is more challenging.

John Massocca -- Landenburg Thalmann -- Analyst

Okay. And then one last one maybe kind of retenanting outlook for Statesville. No, sorry if I missed that earlier in the call. And then any changes in some of the other lease expirations that weren't talked about some of the smaller ones like Kalamazoo and Millington, etc.?

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Sure. So on Statesville, we've had some activity both from full building users and from multi-tenant prospects, but there's nothing imminent at this point. No, it's been off of exploration for less than two months. It's a functional building in Charlotte and we expect to have positive leasing outcomes and they just take a little bit of time.

So Kalamazoo, Dana is moving out. We're in the process of retenant to get with the subtenants that they put in place. It's still kind of up in the air right now. We haven't solidified the terms on those yet because there's still quite a bit of term left with the Dana lease. Millington, where we're right at the finish line to try to get a renewal done with them, which will be an increase in rent, let's see. And then the other 2021 is a smaller building in Rockford, which the suburb of Chicago and it's too soon to tell there, but the tenant is fully utilizing the facility and our expectation is they'll renew.

John Massocca -- Landenburg Thalmann -- Analyst

That's very helpful. And that's it for me. Thank you very much.

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Thanks, John.

Operator

[Operator Instructions] Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo Securities LLC -- Analyst

Hi, thanks. Just back to the PepsiCo lease at Rickenbacker project. Is there anything you can share about what they do with the facility? How they're utilizing it? And is it bottling or manufacturing? I know they put some TI dollars in, but just kind of maybe some color to why they only signed a three-year lease? Thanks.

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

It's a fairly generic distribution use for Gatorade this now specialized bottling or anything on that. I think that the shorter lease is just a -- I guess the other strategy that PepsiCo is using it across their markets, were they are trying to match up lease expirations with other lease expirations they have in gaining markets, which gives them more flexibility. From our perspective, in this case, we were comfortable mitigating that risk by having them fund to also the TI package and obviously the development yields were very attractive as well.

Todd Stender -- Wells Fargo Securities LLC -- Analyst

That's helpful. Thanks, Brendan. Maybe just to stick with you. Just looking at the 10-year treasury yield moving higher as of late, is that impacting -- have you seen any impact in market pricing both on acquisitions and also dispositions of office?

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

So why don't I start with acquisitions. And I think Lara sort of spoke to it on the disposition side and I'm going to go that. In terms of investments, now typically when you see moves in interest rates, moves on the acquisition side tend to lag, we haven't seen any noticeable change in cap rates, yeah corresponding to those moves and interest rates. I think that for those leveraged buyers there are -- I think they are also benefiting from some spread pressure on the lending side to that's offsetting some of the base rate changes. But that will remain to be seen how that may play out.

Todd Stender -- Wells Fargo Securities LLC -- Analyst

Got it. And then maybe for Beth, just looking at from a modeling perspective, is it fair to assume that the forward equity contracts are settled in the back half of the year? You still have some disposition proceeds to redeploy, maybe just a timing comment on that?

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

Sure, Todd. Yeah, we do have some cash now so it will be later. We do have to settle the contracts between August and November, so it will be by then.

Todd Stender -- Wells Fargo Securities LLC -- Analyst

Got it. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Will Eglin for any closing remarks.

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Thanks, operator. We appreciate everyone joining us this morning and I hope you'll visit our website or contact Heather Gentry if you would like to receive our quarterly materials. And in addition, as always, you may contact me or the other members of our senior management team with any questions. Thanks again for joining the call today.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Heather Gentry -- Senior Vice President, Investor Relations

T. Wilson Eglin -- Chairman, Chief Executive Officer and President

Brendan P. Mullinix -- EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER

Beth Boulerice -- Executive Vice President, Chief Financial Officer and Treasurer

James Dudley -- EXECUTIVE VICE PRESIDENT, DIRECTOR OF ASSET MANAGEMENT

Lara S. Johnson -- Executive Vice President

Anthony Paolone -- J.P. Morgan Securities Inc. -- Analyst

Sheila McGrath -- Evercore Partners -- Analyst

Craig Mailman -- KeyBanc -- Analyst

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

John Massocca -- Landenburg Thalmann -- Analyst

Todd Stender -- Wells Fargo Securities LLC -- Analyst

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