STAG Industrial - Q2 2023

Transcript

Operator (participant)

Greetings, welcome to the STAG Industrial Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Xiarhos, Associate Investor Relations. Thank you, sir. You may begin.

Steve Xiarhos (SVP, Head of Capital Markets, and Investor Relations)

Thank you. Welcome to STAG Industrial's Conference call covering the Second Quarter of 2023 Results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at www.stagindustrial.com, under the Investor Relations section. On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include forecasts of Core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends, and other matters.

We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC, and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you will hear from Bill Crooker, our Chief Executive Officer, and Matt Pinard, our Chief Financial Officer. With us here today is Mike Chase, our Chief Investment Officer, and Steve Kimball, EVP of Real Estate Operations, who are available to answer questions specific to their area of focus. I'll now turn the call over to Bill.

Bill Crooker (CEO)

Thank you, Steve. Good morning, everybody. Welcome to the Second Quarter Earnings Call for STAG Industrial. We're happy to have you with us today as we discuss our results for the quarter. Our portfolio continues to produce exceptional results, as seen by our record leasing spreads this quarter. The industrial sector is benefiting from the secular tailwinds unique to our industry, including the nearshoring and onshoring, and the continued penetration of e-commerce as a method of consumption. Vacancy rates have crept up to approximately 3.7% nationally. While demand for industrial real estate remains historically strong, it has come off pandemic highs as we enter the new normal. Tenants are taking more time to evaluate their space needs. There are more examples of tenants weighing their supply chain footprint against the associated corporate finance cost of outfitting space.

These are large cash outlays, which include items such as material handling equipment and automation systems. 9-12 months ago, there was strong demand for recently constructed buildings with large footprints, generally buildings north of 500,000 sq ft. In today's environment, the $50 million to $100 million investments by tenants to outfit large new spaces is being avoided by contracting with third-party logistics firms to manage supply chains. On the supply side, deliveries are expected to be approximately 3% of the overall industrial stock this year, with nearly half of those deliveries classified as big box buildings, with sizes at or above 500,000 sq ft. These deliveries are expected to result in a national vacancy rate of 4.2% by year-end. This level of vacancy is still indicative of strong conditions.

We continue to expect market rent growth in our portfolio to be in the mid to high single digits this year. Development starts, however, are down approximately 30% since the end of 2022. This lower level of development starts, coupled with continued strong demand, should push vacancy rates lower in the back half of 2024. Moving to our portfolio, we are proud to report cash and GAAP leasing spreads at high water marks for STAG. As of July 25th, we have achieved 94.2% of the leasing we expect to accomplish in 2023, at cash spreads of 30.6%. After the slow start to the year, we have recently seen an uptick in development and acquisition opportunities as the capital markets slowly normalize. One area where this has been evident is on the de-development side.

There's been a growing number of opportunities as developers look to de-risk their positions. Financing, supply, and leasing risks are pushing some developers to lock in profits today, thereby foregoing a portion of potential upside in exchange for certainty. We see opportunities ranging from the purchase of full entitled land sites with approval and negotiated construction contracts to completed vacant spec buildings. These projects present very limited construction risk, with favorable upside in exchange for capital funding and leasing exposure. STAG can be selective, focusing on developments that demise to smaller spaces that align with leasing demand. On the acquisition side, deal activity has restarted. The bid-ask spread between sellers and buyers has begun to narrow towards levels where transactions can begin to clear. Buyers have greater clarity into their cost of capital.

Sellers now understand that prices previously achievable in 2021 are not available to them in the current interest rate and macro environment. The ongoing attractiveness of industrial real estate, given the strength in the underlying fundamentals, further supports the case for capital to be placed in our sector. This has resulted in an uptick in deal flow during Q2 and an expectation of increased transaction activity in the back half of 2023, although unlikely to reach levels seen pre-pandemic this calendar year. This thawing in the acquisition market can be seen by recent marketing and closing of several large portfolios of industrial real estate, something that was absent during the recent period of volatile capital markets. Our acquisition volume for the second quarter totaled $40.7 million.

This consisted of two buildings with stabilized cash and straight-line cap rates of 6.2% and 6.3%, respectively. In April, STAG acquired a 100,000 sq ft warehouse distribution facility located in the I-287 Exit Ten submarket of Central New Jersey for $26.7 million. This acquisition represented an opportunity to acquire a low coverage, functional asset in one of the nation's top markets. In May, STAG acquired a fully occupied 134,000 sq ft facility in the airport submarket of Greensboro, North Carolina, for $14 million. As of closing, this building is leased for 1.8 years to a tenant who is moving to a larger facility at the end of their term. STAG will have the opportunity to realize a 50% or greater roll-up upon the release of the building.

With the recent openings in the market of a Toyota EV battery plant and an aerospace manufacturing plant, the building's modern specs and airport-adjacent location leave it well-suited to capture the growing tenant base supporting these plants. Subsequent to quarter-end, we acquired six buildings for $70.7 million. On the disposition side, we sold five buildings this quarter for aggregate proceeds of $33.8 million. Three of these buildings were non-core assets. The other two buildings were located in Louisville, Kentucky, sold as a portfolio, resulting in proceeds of $26.8 million and reflecting a 6.2% cash cap rate. Year to date, the aggregate cash cap rate on the company's opportunistic dispositions was 5.5%. Finally, I'm excited to announce that STAG Industrial was added to the S&P Mid Cap 400 in May of this year.

This is a testament to how the markets have begun to recognize the growth of the company and the evolution of the platform. With that, I will turn it over to Matt, who will cover our remaining results and updates to guidance.

Matt Pinard (CFO)

Thank you, Bill. Good morning, everyone. Core portfolio per share was $0.56 for the quarter, equal to the second quarter of last year. Cash Available for Distribution for the second quarter totaled $87.2 million. We have retained $42.5 million of cash flow after dividends paid this year through June 30th. Leverage is near the low end of our guidance range, with net debt to annualized run rate adjusted EBITDA go to 4.9x. Liquidity stands at $794 million. During the quarter, we commenced 29 leases totaling 3.6 million sq ft, which generated record cash and straight line leasing spreads of 28% and 42.6% respectively. We expect cash leasing spreads of approximately 30% for the year.

Retention was 79.6% for the quarter and 97.4% when adjusted for immediate backfills. We achieved cash same-store NOI growth of 4.5% for the quarter and 5.3% year-to-date. Year-to-date, we have experienced 2 basis points of credit loss, with none incurred during the second quarter. Moving to capital market activity, we issued approximately 2 million shares under our ATM program at a gross average share price of $35.86, resulting in gross proceeds of $70.5 million. As of today, we have $61.1 million of forward equity proceeds available to fund at our discretion. The equity will be used to match fund our acquisitions and development path pipeline. In terms of guidance, we made the following updates.

We increased our cash same-store guidance to a range of 5%-5.25% for the year, or 12.5 basis points at the midpoint. This change was driven by improved retention and a modest reduction in expected credit loss from 40 basis points to 20 basis points. We increased our disposition guidance to a range of $100 million to $200 million, driven by our progress through today, an increase to the midpoint of $25 million. We updated our retention to a range of 70%-75% based on leases signed to date. We still expect net debt to annualized run rate adjusted EBITDA to be between 5x and 5.5x. I will now turn it back over to Bill.

Bill Crooker (CEO)

Thank you, Matt. I'm excited about where the company sits today and the road ahead. I must express my gratitude to our team for their effort and dedication in achieving our goals this quarter. We continue to have extremely strong operational results and forecasts for 2023. We are also benefiting from a conservative balance sheet with ample liquidity. These factors will allow us to take advantage of the opportunities that present themselves through the remainder of 2023 and beyond. We'll now turn it back over to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that analysts limit themselves to one question and a follow-up so that others may have a chance to also ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we pull for questions. Our first question comes from Craig Mailman. Please proceed with your question.

Craig Mailman (Managing Director, Equity Research)

Good morning, guys. Just kind of curious, you guys have a kind of a broader portfolio than maybe some of your peers. You know, more recently, rent growth and sequential rent growth have been sort of top of mind for investors, especially in L.A. and some of the other coastal markets. I'm just kind of curious, as you guys look at your portfolio, your footprint, what are you seeing on that front from a sequential market rent growth, fundamental kind of stable conditions that kind of maybe differentiate your portfolio, your growth rate from people that are a little bit more exposed to some of the markets that, you know, maybe really benefited during COVID and are now kind of coming back a little bit to reality?

Bill Crooker (CEO)

Hey, Craig, thanks for the question. Our market rent growth forecast at the beginning of this year were mid to high single digits for the portfolio. We affirmed that last quarter and affirmed it again this quarter. Market rent growth has been pretty stable in our portfolio. Last quarter, we mentioned benefiting from some of the nearshoring in our El Paso markets. We're seeing those mega site investments start to go up in pockets in the U.S., the Southeast, Texas, some Midwest markets. We think, you know, that will be a demand driver for some of our markets as well. We're seeing also some demand coming from logistics tenants continuing to build up a supply chain in our markets. For all those reasons, we've seen pretty stable and strong market rent growth in our markets.

Craig Mailman (Managing Director, Equity Research)

Do you feel like you kind of mentioned the hesitancy of tenants to make big cap outlays, and so maybe they're using 3PLs in the near term? I mean, do you feel like there's a substantial amount of pent-up demand in your markets that if, you know, maybe the Fed pivots or something else gives people more assurances on the economy, that you could see almost a reacceleration of absorption and potentially kind of an upper pressure on rents in your market? Or is it just, you know, just it would be incremental on the margin?

Bill Crooker (CEO)

Yeah, I mean, certainly that's a scenario that could play out. I mean, there's a lot of, you know, factors that would contribute to that, and we need to figure that out, but that certainly could be an outcome. Right now, as I mentioned in the prepared remarks, big box demand is still very slow. We're seeing a lot of demand from 3PLs, as which is consistent with last quarter. Overall, I mean, we're really happy where the supply-demand dynamic is for our portfolio and our markets and our box sizes. As a reminder, our average lease size is 140,000 sq ft, and the supply that's coming online today, about half of that supply is big box supply, 500,000 sq ft or above.

Craig Mailman (Managing Director, Equity Research)

If I could slip one more in. You guys talked about your, the acquisitions that you made in the quarter, kind of what the $70 million is at post-quarter end versus the dispos, and kind of your, your equity availability. I mean, if you guys hit your guidance, what does the accretion on a net basis look like from all the, the capital recycling activity, you know, within earnings, maybe for 2023, and what that kind of translates to on an annualized basis for a run rate?

Bill Crooker (CEO)

I mean, for earnings this year, our acquisition guidance is back-end weighted, we're not factoring in a large contribution to Core FFO from acquisitions. Dispositions are happening a little quicker in the year. We increased our disposition guidance, for this year, not a major contributor to Core FFO. The acquisition this year, it should benefit significantly 2024 Core FFO. We'll, you know, we'll obviously speak about that on our later call.

Operator (participant)

Our next question comes from Eric Borden with BMO Capital Markets. Please proceed with your question.

Eric Borden (VP, Equity Research - US Real Estate)

Hey, guys. Good morning. Appreciate the color on the potential development acquisition opportunities, and just hoping that you could kind of expand on that, maybe quantify what you're seeing today in the pipeline, and, you know, what you expect to close in the back half of the year. Then just a clarifier, are those opportunities included in acquisition guidance, or are they separate too?

Bill Crooker (CEO)

Yeah, good question, Eric. Thank you. The development opportunities we're seeing, we're really excited about. We've had really great success on our past developments. The developments are not in our acquisition guidance. Any incremental developments would be incremental to that. They do take time, anywhere from 12-15, sometimes 18 months to develop. The deployment of capital for those will be over a period of time. We're seeing opportunities, as I said, from newly constructed buildings that are vacant to entitled land sites that will run the development, to partnering with a developer and providing capital to that developer in return for taking the risk for upside and downside in the transaction. We're seeing a lot of opportunities now.

As we close on those opportunities, we'll be sure to let everyone know. At this point, there's not enough certainty in the pipeline for us to give guidance on that. As that happens, we will be sure to give guidance and lay out a schedule, noting the deployment of capital, when those developments will be completed, the yields, the profit margins, et cetera.

Eric Borden (VP, Equity Research - US Real Estate)

Okay, that's helpful. Then maybe on the funding side, just how are you thinking about the funding for the remainder of the year? Just given your share price today, you have $60 million of forward left versus cost of debt and mix of dispositions. You know, what's the most attractive source of capital today? How should we think about the mix kind of through the remainder of the year?

Matt Pinard (CFO)

Hey, good morning, Eric. This is Matt. You're right. We have unfunded proceeds on the forward, roughly $61 million. We're going to use those to fund acquisitions in the future ongoing developments that Bill just mentioned. As we've talked about, our initial guidance ranges were set at the beginning of the year to allow us to operate in our target leverage band. Granted, if, you know, if we hit the midpoints of our net acquisition volume, issued no equity, we'd likely be at the high end of that leverage range. With this modest amount of equity funding, it's more likely we're going to operate closer to the middle part of our range. The concept of being able to operate without any additional equity is still in place.

As Bill mentioned, we slightly increased the bottom end range of our disposition guidance. You know, we'd expect from a funding source, you can see it, I'd say incrementally more disposition proceeds.

Operator (participant)

Our next question comes from Vince Tabone with Green Street. Please proceed with your question.

Vince Tabone (Managing Director)

Hi, good morning. I just wanted to clarify the cash cap rates on the acquisitions in the quarter. Just given these are shorter WALT deals, does that 6.2% cap rate reflect, you know, run rate current NOI, or does this incorporate this kind of big mark to market you highlighted, especially in the Carolina property?

Bill Crooker (CEO)

Yeah, it depends on if it's a known vacate, Vince. If one of the deals is a known vacate, so that would be a stabilized, and the other one is not a known vacate, so that would be the in place.

Vince Tabone (Managing Director)

Got it. Basically, the year 1 yield on these is going to be a little lower than the 6.2%, just to clarify.

Bill Crooker (CEO)

Yeah, slightly lower. Yep.

Vince Tabone (Managing Director)

Got it. Just another kind of question on the development opportunities and kind of just really how leasing risk is being priced today. If you were going to buy a completed development that's vacant, you know, how much additional yield do you think you could achieve by leasing that building versus just buying a, a stabilized core property today?

Bill Crooker (CEO)

It depends on the market, depends on suite size, demand, the supply, but anywhere, you know, call it circa 75 basis points, depending, again, depending on the suite sizes. The opportunities we're looking at on the development side is, call it smaller boxes, generally, medium-sized boxes, and a lot of times we're building those. We're planning to build those to demise them into 2-3 suites, so really, meets the teeth of the demand.

Operator (participant)

Our next question comes from Samir Khanal with Evercore ISI. Please proceed with your question.

Samir Khanal (Equity Research)

Hey, good morning, everyone. Matt, I mean, there's a lot of positivity around the comments here, but you kept the guidance unchanged. I'm just trying to figure out, as you kind of still pretty wide gap considering you're, you're in August here. Wondering, what's sort of holding you back here? Maybe talk about the factors, maybe to get you to the low end of guidance here. Thanks.

Matt Pinard (CFO)

Yeah. Just to talk about the no change in Core FFO. You know, to your point, we did have a modest increase in our same-store guidance. Look, you know, there's still macro uncertainty as we sit here in July. That definitely influences our view on guidance. You know, we did increase our disposition volume expectations for the year. Look, there can be a timing mismatch between selling an asset and redeploying those proceeds. As Bill Crooker mentioned, you know, external growth is really not a material driver to earnings this year. You know, the acquisitions are expected to be back-end weighted. In terms of the low end of guidance, you know, to the extent something on the macro front really kind of tipped the capital market picture and that flowed into the share price.

You know, we're very confident with the midpoint, and to the extent, you know, credit loss comes in lower, et cetera, we would drift towards the higher end.

Bill Crooker (CEO)

Yeah, just to add on to that, I mean, I think you'd have to have some, you know, a real material macro event to, to push us to the low end of guidance, some, you know, significant credit issues in the portfolio, which we're not, you know, we're not anticipating, but we certainly don't want to put a guidance range out there, that doesn't factor some of that uncertainty into it.

Operator (participant)

Our next question comes from Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck (Executive Director, Senior Equity Research Analyst)

Great, thanks. Just following up on some of the earlier questions, can you just talk about how you're thinking about your overall cost of capital today and the spread between your cost of debt and equity and the required return on investment? I guess, you know, what's that spread on the deals you've executed year to date, and is there a spread that you guys target that we should be thinking about over the longer term?

Matt Pinard (CFO)

Hey, Blaine, this is Matt. I can start with the cost of our capital. Let's start with debt. If we were to go out and originate long-term debt, it'd be in the private placement market. We've been very successful there. We would likely issue something between a 7- and 10-year tenor, probably mix both of those. If we were to go to market today, we're in the 5.75% area, you know, notably below the cap rates that we just discussed in a couple of questions ago. In terms of the equity, you know, we're comfortable with where we issued equity because we had accretive uses for those proceeds. As we sit here today, we would need, you know, appropriate uses for additional equity, right?

There has been modest increases in the acquisition activity. I really want to emphasize modest, particularly compared to what we look like in 2019. You know, we sit here today, we like where the balance sheet is. We're looking at the opportunities. We're hoping the opportunities increase. You know, we're very cognizant of the stabilized yield versus the cost of debt, I think that's flowing through.

Bill Crooker (CEO)

Just on the opportunity side, Blaine, I mean, this quarter, we're really excited about the two acquisitions we executed on in the low six cash cap range. We can add a lot of value to those assets as well. When you look at what we closed subsequently, those six buildings, 3-ish, call it, WALT, 3-year WALT on those opportunities we can add value to as well. When you think about some of these development opportunities that we're very close to, we're close to closing on a few of these, those are gonna generate even higher returns, and we feel like in markets that are some of our stronger markets. Great opportunities and certainly accretive uses for where we can raise incremental capital today.

Blaine Heck (Executive Director, Senior Equity Research Analyst)

All right. That's really helpful. Second question. Just are there any common themes or traits in the properties you guys have sold or those that you guys are targeting for sale in the rest of the year? Any specific markets you might be looking to exit or tenant industries that you're trying to avoid, or is it just more opportunistic?

Bill Crooker (CEO)

Yeah. On the industries, not really, right? We really focus on the real estate. If it's a good piece of real estate, you know, we'll deal with the tenants. With respect to the dispositions, there was a couple opportunistic dispositions. I think, year to date, we're in the mid-fives for a disposition cap rate, which in this environment was pretty good. A lot of those properties, Blaine, are either on the cusp of our CBRE Tier 1 markets or just locations that we feel like long term are not maybe the best for us. One example of a sale was to the tenant itself, who just wanted to own the building.

It was a great opportunity for us to realize a pretty good yield while improving the overall quality of the portfolio.

Blaine Heck (Executive Director, Senior Equity Research Analyst)

Thanks, guys.

Bill Crooker (CEO)

Thanks.

Operator (participant)

Our next question comes from Camille Bonnel with Bank of America. Please proceed with your question.

Camille Bonnel (Director Equity Research)

Hello. Can you talk up to the downtime trends in your portfolio? Clearly, you've made significant progress on leasing this year, and even factoring in lower retention, your occupancy looks to improve. Just trying to get a sense if anything can detract from this trajectory in the second half of the year.

Bill Crooker (CEO)

From a downtime perspective, we're not seeing material changes. I mean, it's basically flat or up just a little bit, but not. We're not seeing any material changes there. You know, what we're seeing changes in is just tenants taking a little bit longer to make decisions. Leasing space well in advance, a year in advance, like they were last year, versus now they're taking a little bit more time making those decisions. Part of that's just due to their outlook on the economy. Part of that's due to, you know, putting capital in the building and making a long-term commitment to the space and, you know, weighing the decision to either, you know, go in the space themselves or utilize the 3PL network. From a downtime perspective, from a concessions perspective, nothing material.

From a TIs, those are pretty flat, on a free rent. We're hearing rumblings in the market that free rent's up a little bit. We're not seeing that in our portfolio. We're not seeing that in our lease proposals. Overall, it's pretty consistent with what it has been.

Camille Bonnel (Director Equity Research)

That's very helpful. Just a bigger picture question on the transaction market, given it looks like you're starting to get more active. What's your view on what's driving deals across the line now, despite no real changes around interest rate and questions around the economy? Have you seen any changes in appetite from sellers and buyers in the recent weeks?

Bill Crooker (CEO)

You know what? I think time has been helpful in that respect. I think the volatility of interest rates coming down has helped. Say it another way, the stabilization of interest rates. Now sellers really understand where their cost of capital is. When they know that, that generates where they're willing to trade their assets. You're seeing that bid-ask spread between sellers and buyers come down, that's really what's starting to fuel the transaction market. A couple big portfolio deals got done. You know, there's one or two on the market today as well. Those just give a little more confidence to both sides of the equation of, you know, what's the right market.

When you have a rapid rise in interest rates, like we had over the past couple of years, sellers don't know what their properties are valued at. Now that we've had stabilization, I think people are more comfortable with the value of the properties, and that's why you're seeing deals get done.

Operator (participant)

Our next question comes from Nick Thillman with Baird. Please proceed with your question.

Nick Thillman (Senior Research Analyst - Real Estate, Office, Industrial, and Healthcare REITs)

Hey, good morning, guys. Maybe touching a little on leasing now, with 94% of 2023 kind of in the books here, I mean, as we're looking out into 2024, do you have any, like, early indication on kind of where those spreads are coming in? Just trying to get a sense of we have a sustainable, like, same-store performance here going forward.

Bill Crooker (CEO)

Nick Thillman I'm not going to answer the 2024 leasing spreads. I will say the supply-demand dynamic in our markets continues to be pretty balanced. We really like how our portfolio sits and how it fits our submarkets. We said this on the last call, we had some El Paso assets roll this year. We had a couple of buildings roll in Southern New Jersey. We don't have those same markets rolling next year. With that being said, development supply starts are down pretty significantly year-over-year. That's going to impact likely the back half of 2024. How much of an impact that's going to have? It's hard to measure that today. Overall, we're really comfortable with the portfolio sits.

I think if you look at same store last year we had some occupancy gains in the same store, and you had half the leasing spreads. We had no credit loss. This year, we're still budgeting some credit loss, and we were 5% same store last year. This year, we're still budgeting credit loss. We had double the leasing spreads. We had 50 basis points of average occupancy loss, and we're still in that 5%+ range in same store. I think you're back-of-the-envelope this, it's hard to think we're not kind of in a sustainable same-store range for a period of time.

Nick Thillman (Senior Research Analyst - Real Estate, Office, Industrial, and Healthcare REITs)

That's helpful. Then maybe looking at the 3rd quarter acquisitions thus far, it seems as though a little bit more smaller builds, maybe around like 80,000 sq ft. Is this more of a shift into just meet that demand? Is this kind of what you're seeing transact on the market today?

Bill Crooker (CEO)

Part of what we're seeing transact in the market, and we're certainly willing to buy bigger buildings. If it has a shorter wall on that bigger building, it's going to result in us paying less for it because of the way the market is today. I think you're seeing sellers not put those large buildings with shorter walls on the market because they know they won't transact at the appropriate yield they're looking for. I think part of it's a mix change in terms of what's on the market, and part of it's just pricing, given market dynamics.

Operator (participant)

Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.

Michael Carroll (Managing Director and Head of US Real Estate Research)

Thanks. I wanted to follow up on the 2024 lease expirations. I know, Bill, in your earlier comments, you're talking about some slowdown in the larger blocks of space. If you're looking out at 2024, I mean, is there a number of large blocks expiring next year, or how's that mix compared to this year or the past few years?

Bill Crooker (CEO)

Yeah, what we're seeing in the slowdown demand, and you can put a pin in what number you want to use as large, 500,000 sq ft and above is what we use. In terms of next year, we have nothing, 500,000 or sq ft or above this rolling. We don't have anything, even 400,000 sq ft or above that's rolling next year. For us, what's rolling meets the demand in our submarkets, so there's nothing abnormal that's happening next year. Just to remind you, our average lease size is 140,000 sq ft, so it meets a lot of the demand that's in the market.

Michael Carroll (Managing Director and Head of US Real Estate Research)

Okay, great. That's all I got. Thanks.

Bill Crooker (CEO)

Great. Thanks, Mike.

Operator (participant)

Our next question comes from Mike Mueller with JPMorgan. Please proceed with your question.

Mike Mueller (Senior Equity Analyst - REITs)

Hi. I'm curious, on the development pipeline, can you give us a sense as to how large you want that program to be, either, say, relative to annual dollars deployed versus acquisitions or relative to your total market cap? Just some guidelines there.

Bill Crooker (CEO)

It's still early days, Mike. As we get you know, more of these under contract or we start to close on more of these, we'll lay out a schedule and give some thresholds there, but we've got a ways to go before we're putting out thresholds. I know some of the others in the sector have a 10% of enterprise value cap or a little bit north of that. For us, it'll be lower than that, just given it's a newer endeavor for us. As we close more of these, we'll certainly provide some of that guidance.

Mike Mueller (Senior Equity Analyst - REITs)

Okay. Thank you.

Bill Crooker (CEO)

Thank you.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Bill Crow with Raymond James. Please proceed with your question.

Bill Crow (Managing Director, Real Estate Research)

Hey, good morning, guys.

Bill Crooker (CEO)

Hey, Bill, you quoted development starts down 30%. I think others have talked about down 40%. I'm just curious whether you're seeing evidence that the development reduction might be longer duration in nature, or is this just really a pause? I mean, you're seeing any merchant builders cutting headcount or selling entitled land at a faster pace. It's unique in that fundamentals are really, really strong, and we're seeing development slowing dramatically. Everybody just on the sidelines, and they're going to jump in as soon as the financial markets, the lending markets recover, or what's your take on that? It's a really good question. We're seeing a lot of different things in the market today. We're certainly partnering with some developers.

As I mentioned, we are seeing some entitled land sites come on the market. The merchant developers that can sit on land are sitting on land. You know, what starts the wave of supply again? You're going to need a pretty significant decrease in interest rates for that to happen. I think that's really been the big issue for the merchant developers. The markets are great, the fundamentals are great, but it's really the interest rates and the debt capital markets that's putting them on the sidelines. I haven't seen I guess I'm not close to it to see how much, if they're cutting headcount or whatnot there.

I think what they're trying to do is de-risk their portfolio as much as they can, and that's where we're looking to partner with some of these folks.

Bill Crow (Managing Director, Real Estate Research)

Yeah. Okay. I think it's a, it's a really interesting time from a development perspective.

Bill Crooker (CEO)

I would agree with-

Bill Crow (Managing Director, Real Estate Research)

Yeah. Thanks, Bill.

Bill Crooker (CEO)

Yeah. Thanks, Bill.

Mike Mueller (Senior Equity Analyst - REITs)

Thanks, Bill.

Operator (participant)

There are no further questions at this time. I would now like to turn the floor back over to Bill Crooker for closing comments.

Bill Crooker (CEO)

Thank you all for attending the call this morning. I appreciate the questions and appreciate your support. We look forward to talking to you all soon. Thank you.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.