First Industrial Realty Trust Inc (FR) 2017 Q3 法說會逐字稿

Good morning. My name is Jesse, and I'll be your conference operator today. At this time, I'll like to welcome everyone to the First Industrial Third Quarter Results Call. (Operator Instructions)

Art Harmon, Vice President of Investor Relations, you may begin your conference.

Thanks a lot, Jesse. Hello, everyone, and welcome to our call. Before we discuss our third quarter 2017 results, 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, October 26, 2017. 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 could cause this 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 CFO, 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.

Thanks, Art, and thank you all for joining us today. The first industrial team delivered an excellent third quarter. We grew occupancy to 97.2%, up 150 basis points compared to the second quarter. Cash rental rates were up 9.5% overall and cash same-store NOI growth for the quarter was 3.7%. Scott will discuss these metrics in more detail shortly.

I'd like to thank all of my teammates around the country for their continuing contributions to our strong results.

Looking at the overall market environment, the supply demand equation continues to strongly favor the landlord. Demand exceeded new supply in the third quarter, bringing year-to-date net absorption to 157 million square feet versus 144 million square feet of completions according to CBRE Econometric Advisors. It is interesting to note that net absorption has already reached the volume they forecasted for the entire year. This environment suits our strategy of primarily investing through targeted speculative development, and we're excited to discuss several new projects we have started since our last call.

Following our successful building and ground lease to UPS in Phoenix at First Park at PV 303, we've now broken ground on our second building. It will be 640,000 square feet and feature 40 foot clear heights. Completion is slated for the second quarter of 2018. Total estimated investment is $35.8 million and our expected GAAP yield is 7.9%.

In Pennsylvania, we commenced development of First Logistics Center at I-78, 81 on a site we acquired during the quarter. There we are building a 739,000 square foot cross-dock distribution center with 40-foot clear that we expect to complete in the fourth quarter of 2018. Total investment for this building is expected to be $48.9 million and our projected GAAP yield a 6.8%. The site plan allows for a second building of 250,000 square feet, or we can provide access trailer and car parking as an amenity for a prospective tenant at building 1.

In the I-80 market of Chicago, we launched development of First Joliet Logistics Center, a 355,000 square feet facility, that we expect to complete in the second quarter of '18. Total investment is $21.2 million, with an estimated GAAP yield of 7.1%.

As of today, our completed and in process speculative developments total $242 million, comprising 3.5 mil square feet, with a targeted weighted average GAAP yield of 7.1%.

Also on the new investment front, we acquired 3 high-quality buildings, totaling 471,000 square feet for $52 million. Let me briefly describe these assets.

In the third quarter, we acquired Pompano Business Center, a 172,000 square foot facility in the Miami market, for $22.7 million. The building is 89% occupied by 3 tenants. We project a stabilized cap rate of 7.4%.

Also in the third quarter, in New Jersey, we acquired a recently completed 213,000 square foot distribution center at Exit 7 for $20.9 million, at an in-place cap rate of 5%. It's 100% leased on a long-term basis to a Fortune 500 company, and is located near First Florence Logistic Center that we developed and leased up last year.

In the fourth quarter-to-date, we acquired an 86,000 square-foot facility in Orlando for $8.2 million, which is located just across the street from the building we acquired in the second quarter. The asset is fully leased to 2 tenants, and the in-place cap rate was 5.6%.

Lastly, we bought a development site in northwest Houston for $1.3 million during the third quarter that can accommodate 126,000 square-foot building.

Moving on to dispositions. In the third quarter, we sold 10 buildings totaling 900,000 square feet for $40.1 million. These dispositions included 6 buildings in Detroit, our lone building in San Antonio as well as properties in Cincinnati, Atlanta and Phoenix. The weighted average in-place cap rate was 6.7% and the expected stabilized cap rate was 7.6%.

Fourth quarter-to-date, we have sold 9 buildings for $54.1 million, totaling 1.2 million square feet. The largest sale was of a 5 building portfolio in Minneapolis, totaling 846,000 square feet for $38.4 million.

We also sold properties in Indianapolis, Salt Lake, Chicago and our sole asset in Alabama. These were 99%-plus occupied at sale. Year-to-date, we've completed $153.4 million of sales relative to our goal of $150 million to $200 million for the year.

So again, we had an excellent quarter. We have several new growth opportunities that we're excited about and a continuing favorable environment.

With that, let me turn it over to Scott.

Thanks, Peter. Let me start with the overall results for the quarter. EPS was $0.36 versus $0.27 one year ago. NAREIT funds from operations were $0.41 per diluted share compared to the $0.37 per share in 3Q 2016. Funds from operations in 3Q '17 included approximately $0.015 per share of gain related to the mark-to-market of an interest rate protection agreement, which I will discuss shortly. Excluding this item, funds from operations would have been $0.39 per share. As Peter noted, we finished the quarter at 97.2% occupancy, up 150 basis points from the prior quarter and 180 basis points from a year ago. Sales helped occupancy by 14 basis points compared to 2Q 2017.

Regarding leasing volume, approximately 1.9 million square feet of long-term leases commenced during the quarter. Of these, 765,000 square feet were new, 639,000 were renewals and 536,000 square feet where for developments or acquisitions with lease up.

Tenant retention by square footage was 68.8%. Same-store NOI growth on a cash basis, excluding termination fees, was 3.7%, primarily reflecting in-place rental rate bumps, rental rate growth on leasing, and a decrease in free rent.

These were partially offset by an increase in real estate taxes due to rising property values in a few markets in which taxes are paid in arrears. This impacted our same-store results by 140 basis points. Lease termination fees totaled $336,000 and including termination fees, cash same-store NOI growth was 4.2%. Cash rental rates were up 9.5% overall, with renewals up 5.8%, and new leasing up 14.1%. On a GAAP basis, overall rents -- rental rates were up 21.3%, with renewals increasing 16.4% and new leasing up 27.2%.

Moving now to the capital side. At the end of 3Q, our net debt-plus-preferred-stock to adjusted EBITDA is 5.3x. Adjusted EBITDA excludes the mark-to-market gain on an interest rate protection agreement. The mark-to-market gain relates to a treasury lock we put in place during the third quarter. It has a notional value of $100 million and locks the 10-year treasury rate at approximately 2.18%, which needs to be cash settled by March 2, 2018. We entered into with this instrument with the anticipation of a future issuance of unsecured debt.

At September 30, the weighted average maturity of our unsecured notes, term loans and secured financings was 4.7 years, with a weighted average interest rate of 4.71%. These figures exclude our credit facility. Our credit line balance today is $205 million, and our cash position is approximately $24 million. Now moving onto our updated guidance for our press release last evening. We narrowed our narrow FFO range to $1.52 to $1.56 per share, an increase of a $0.01 at the midpoint, primarily due to the mark-to-market gain on the treasury lock I just discussed.

Before the previously disclosed loss related to the early prepayment of secure debt, the tax expense related to a property sale from our taxable REIT subsidiary in 2Q and the mark-to-market gain of the treasury lock, our FFO guidance range is now $1.53 to $1.57 per share, a narrowing of the range with no change in the midpoint.

The key assumptions for guidance are as follows: ending occupancy for the fourth quarter of 96.25% to 97.25%. This implies an in-service occupancy of 96.25% to 96.5% for the full year based on quarter end results, which is a slight increase at the midpoint compared to our last earnings call.

Fourth quarter same-store NOI growth on a cash basis of 2.75% to 4.25%. This implies a quarterly average same-store NOI range of approximately 4.1% to 4.5%. Our G&A guidance range is now $27 million to $28 million, an increase of $1 million at the midpoint related to an increase in our expected performance-based compensation costs. The guidance includes the anticipated 2017 costs related to our completed and under construction developments at September 30. In total, for the full year 2017, we expect to capitalize about $0.03 per share of interest related to our developments. Our guidance does not reflect the impact of any future sales, acquisitions or developments after this earnings call, the impact of any future debt issuances, debt repurchases or repayments other than our $55 million 7.5% unsecured notes maturity that we will pay off in early December. The impact of any future mark-to-market gain or loss in the treasury lock previously discussed. Guidance also excludes any future NAREIT compliant gains or losses, the impact of impairments and the potential issuance of equity.

With that, let me turn it back over to Peter.

Thanks, Scott. Before we open it up for questions, I would like to remind you about our upcoming Investor Day on November 8 in New York City. There we will dive a little deeper into the strength of our platform and current portfolio and our vision of growth for the next few years. We will look forward to seeing many of you there. If you have yet to RSVP and would like to attend please reach out to Art Harmon.

Now let's get on to the business of answering your questions. Operator, would you please open up the line.

(Operator Instructions) Your first question comes from the line of Craig Mailman from KeyBanc.

May be, Scott, I know you guys aren't giving '18 guidance till next year, but just curious as you guys look at sort of the expiration schedule, you do have some bigger leases rolling next year. Just curious, what your expectations is on some of those. And also, just looking at the '18 roll, maybe, what your expected mark-to-market is on that?

I would say, Craig, the biggest lease expiration we have next year is the Quincy lease in Easton, Pennsylvania, for about 1.3 million square feet. I'll turn it over to Peter in a little bit to give some color on where we stand on that. Craig, as far as rental rates are concerned, I'll tell you what we're going to do, we're going to give a little bit of a plug here for our Investor Day -- at our Investor Day in November, we're going to give you a little idea of what the renewals are looking like for 2018. There, obviously, going to be a positive percentage, but we'll give you more information on that on the Investor Day.

And Craig, it's Peter Schultz. So on the Quincy, Amazon lease in North East PA, which expires at the end of March of '18. Our discussions are continuing with them. We expect to get that done. We can't tell you anything about the terms, as you know that has a tight confidentiality as to all the Amazon leases. So we can't talk about that. But as I said, we expect to get that done, and we'll update you on that on the next call.

Do you guys have any other Top 20 leases expiring next year?

No, Craig. The biggest one is the one that Peter just mentioned.

Okay. And then Scott, on same-store, you guys had the tax drag this quarter. It sounded like it was a catch up with some in arrears. I mean, how should we think about the impact of -- I guess, that, and as we look forward to '18, are you going to be able to fight the increased taxes? Are you guys -- what are you guys preparing for on that front as you head into next year as values continue to move higher?

Yes, Craig, it's Scott. We will appeal those taxes. Unfortunately, that process sometimes takes a long time. It could take over a year, but what we want to reiterate, Craig, on the tax issue is that, it's really a timing issue between fiscal year 2017 and 2018. So one of these things under GAAP accounting, where we had to provide for the increase in taxes in '17, but when we pay the taxes in 2018, we will fully recover them from our tenants. So that's the same-store issue that we discussed.

It could actually be a little bit of a tailwind then, as you guys actually get the tax bills and pass it through?

Well, the expense is being fully expensed this year, we're going to collect the money next year. So really, the impact next year, Craig, is going to be whether or not we have any other increases in taxes in arrears. But keep in mind that this 1.4% increase that we took a hit on in the third quarter, on an annualized basis it's only 0.35% Again, we want to reiterate, it's really a timing difference from a cash basis point of view.

Your next question come from the line of Ki Bin Kim from SunTrust.

So if I look at your capital allocation, I just see here, you guys bought a couple million -- sort of couple million, built 4 million square feet. You're improving your quality of portfolio, which -- that over time which may be not getting fully appreciated by the market. But when I look at your disposition activity today, you -- still seems like you have like $45 a square-foot type of industrial assets for sale or sold. How much more do you have in the lower tier bucket? And by the way, I know just, because it's $45 a square-foot, doesn't make it a bad real estate. But how much more do you have that you want to sell?

Ki Bin, I'll comment on that, and then Jojo can add his thoughts as well. Working the portfolio asset management is going to be an ongoing thing. Every year we're going to have assets that we own, that we think that where the rental growth opportunity is less and we're going to want to redeploy the capital out of those assets into other assets where we're seeing the opportunity to push rents higher. So that's going to continue, definitely. The amount's -- obviously, we're not going to give guidance today on what that number or that range might be for next year, but I think that, generally speaking, the gross magnitude of the sales is going to be within the range that you've seen in the last few years here. Jo, do you want to?

Sure, yes. So Ki Bin, I mean the pricing is really a function of projected cash flows. And at this point, I mean, the stabilized yields from this assets that we sold at 7.6%. And -- but the cash flow yields after tenant improvements, leasing commissions and the CapEx is lower, because our strategy of being for the last multiple, multiple years is to push out properties that were in 2 things we can't do. We can't -- we don't think we can raise the rents as much as we can raise rents for the rest of the portfolio. Plus it's actually needs more CapEx to maintain. So we're pleased with the 7.6% stabilized yield. And we'll continue to do so, when we find assets that do not meet our high-growth long-term cash flow growth aspirations.

Okay. And -- but for me -- I understand the pruning part and the ongoing asset management. But is there still in certain markets whether it be just a quality standpoint -- longer-term quality standpoint or just age of assets or something of that nature that you still need to or want to sell off?

Well, again, like you pointed out, pruning is part of our strategy. We're 97.2% leased today. I mean, we're getting good income from our portfolio. And so we're pleased with what our portfolio is delivering. But now we need to continue to make sure we push out the low cash flow growth assets. And also -- well again, at Investor Day we will go into a deeper dive into -- in terms of what our cash flow growth prospects are of our portfolio.

Ki Bin, it's really an asset-by-asset look, not a market-by-market look.

Okay, and just last question. You guys typically segment out your assets in 4 different buckets, both regional and R&D flags. Is there any type of noticeable difference where you're getting more incremental demands than others or is that kind of just broad-based?

Ki Bin, it's Peter Schultz. So I would say that demand continues to be pretty broad across the country, geographies and space sizes. Certainly there's been a lot of demand for logistics buildings in the larger square footage. But if you look at our occupancy, pretty much all segments have contributed to that. But certainly, there's better demand for larger buildings today in general.

And then the -- our statistics is also result primarily because of our infill portfolio Ki Bin.

(Operator Instructions) The next question comes from Eric Frankel with Green Street Advisors.

Scott, can you just explain the real estate tax in arrears again. One, isn't -- aren't these expenses just reimbursed by tenants generally?

Yes. I mean the real estate taxes are recovered from our tenants, Eric, on a cash basis, okay? So whatever we pay in that fiscal year, we recover from the tenants. When you pay taxes on arrears, there's basically a year difference in that timing. So what we have to do in 2017 is estimate what the taxes are going to be paid in 2018, and we had 2 markets, where there was a sizable increase in those real estate taxes. But again, I think the key point on it is, when we pay those taxes next year, those increases, we're going to fully recover those increases from our tenants. So this is really a timing between 2017 and 2018.

Okay, that's helpful. And then just to clarify guidance, I think it’s based on same store NOI growth guidance for the year, I think it implies low-3% growth in the fourth quarter. I don't want to say, you might be living up to your nickname, but there's a possibility of it just based on the fact that rent growth seems to be pretty good given the portfolio.

It's the legacy that Bruce left behind. We're going to be -- if you look at midpoint fourth quarter, it's 3.5%. And again, bad debt expense, we've got $625,000 in there for the fourth quarter. We had about $50,000 in this third quarter of '17. So if we have the same results, we should be able to pick up 90 basis points. So that would push us to about 4.4%. But again, bad debt is hard to forecast because things happen as time goes on. But that could be a potential upside for us, Eric.

Is there any consideration of modifying your bad debt assumptions as your portfolio evolves?

So what we've done on that is -- our methodology is, we look at the history of bad debt expense as a percentage of revenue, and we've got these statistics going back to 1994, 1995. And we basically use that average basis point implied against revenue. So my guess is, is as we continue to have lower bad debt expense, that percentage will go down, and as a result of our assumption will go down. But we're trying to make a macro assumption on it. When we give guidance for fourth quarter in the first quarter, it's hard to see what could happen with your tenants at that point.

Your next question comes from Dave Rogers with Baird.

Scott, just a follow-up on the same-store NOI. You pulled the top end of the guidance down 50 basis point or so. Seems like a lot of that was taxes. Was there any other reason to pull that -- the top end down?

I think, David, it just has to do with the fact that we only have one quarter left at this point in time. So there really -- you can't really have that much fluctuation at this point.

Okay, got you. And then either Scott or Peter, on the leasing costs this quarter, they were kind of above trend. I don't know if there's anything unique or interesting in there. Are you just seeing general push higher? Or is there something worth discussing?

Dave, this is Chris. Really it has to do with just the mix of the new versus renewal leasing. So the new leasing was a higher percentage. Typically on new leasing, we're right around $5 per a square foot. And the renewal deals were about $1.25 a square foot. So it's really the mix. If you look at overall year-to-date, our blended costs are below $2 a square foot at $1.84. So it really gets back to that mix.

Are you seeing a meaningful difference if you took those 2 separately, new versus renewals?

Yes. Again, kind of -- my comment there is, new deals we're close to like $5 a square foot. And renewal deals about $1.25. So again, if you have a higher percentage of renewal, your -- those -- that blended cost is going to be down.

Sorry. Maybe I'll ask a different way. Are those moving dramatically higher, those leasing costs?

No, not really. I mean we -- the -- it actually -- in this market -- it's a landlord market and we can kind of push back on the allowances that we're giving. So if anything's there, the costs are going down.

Okay, that's helpful. And then maybe for Peter or maybe for Jojo. Acquisition yields continue to come down. You guys continue to be pretty aggressive buyers, I think. What's your feeling about kind of where returns are? I don't know, you're still achieving kind of the returns you want to get, and you've got more aggressive. So what's gotten you more comfortable in putting that money to work this year versus last at lower yield?

Sure, Dave. I mean acquisitions has been -- the yield's been coming down because the markets have been more competitive. And so that's no news to anyone. So again, we are pleased with our acquisitions. The Orlando deal was a bolt on. Miami is severely land constrained. So we like the higher rate of -- growth rate of those rents there and absolutely, X 7, quality, quality, crossed up. In South Jersey close to our First Lawrence, that's a great one-off. So but, as you still see though, Dave, our -- the majority of our investments continues to be development and there we're very, very pleased with the overall 7.1% expected return. If you put in developments place in service, developments under construction, and basically, all of that, and -- because that will provide a lot of the shareholder return. We're not sellers of those, but values of those properties should be high 4s to 5s, and so you can just compete the margin on those development. So we're pleased for that. Going forward, you know we'll continue our -- we have a platform out there. We're going to continue to look for areas where we can serve unmet demand and build. And so -- but when we get to those projects we'll let you know.

Your next question comes from John Guinee with Stifel.

Looks like you're buying about $60 million worth of land a year, and you maybe got $100 million historic inventory. Are you able to monetize any of your historic inventory, land? And how should we think of that value? And then, how quickly are you putting your recent land purchases into development?

Sure. Yes, John, this is Jojo. Yes we have historically -- we've always been in the $100 million, $120 million range of land. We've been recycling those. As a most recent example of how we put recent land acquisitions to service, about roughly -- if you took the square footage of total investment of what we've bought and what we put in service just this quarter, it's about 70%. And that's basically the first I-78, 81 Logistic Center plus the First Joliet Logistic Center. So we basically put into production 71%. Of course, a number of our sites that we buy need continuous design and then work to be done in order to put it into production. But we're kind of pleased on how we've produced this amount of development and have not really significantly inflated our land bank. And our goal still is to not -- John, is not to just acquire long-term land. Our preference really is to buy immediately-developable land.

Most of the land that we have, John, we acquired in the last 2 plus or minus years. So we are really trying to stick to putting this land to good use in a short period of time.

And also this is -- the only other thing that I want to add is that, historically, when we find land of higher and better use of a potentially lower returns, so we can monetize and take opportunistically, we did that. So if you look at from 2011, 2010, we sold about $76 million of our land.

Okay. And then, if you think about land cost and the cost to get it entitled and the propers and all that sort of thing. If you look at 2 or 3 years ago to today, what do you think's happened to land pricing in various markets?

Certainly it's increased in various market-by-market. 2 to 3 years is kind of long time, but I would tell you that year-over-year, we've seen land increases maybe 15% to 20%. Some are basically, of course, lower. But if you look at the coasts, especially Jersey, SoCal, Miami, land prices have increased maybe even over 20% year-over-year. The communal entitlement is getting more difficult, and it's getting longer. I mean, if compared to 2 to 3 years ago. But that's our job to do. We use our platform to identify -- and our relationships with the municipalities to get things through. But it is tougher. It takes longer. A bit more expensive. But when we do our underwriting, we factor all that in terms of the timing, cost to entitle land, when we buy land.

(Operator Instructions) The next question comes from Michael Mueller with J.P. Morgan.

Couple of questions. First of all, I was just wondering, how are you thinking about using equity versus asset sales at this point to fund growth?

I'll take it.

I'll make a comment there, and then, Scott can jump in. We're finding a lot of success on the asset sale front. We like the pricing we're getting. There's some good aggressive bidding from users, and 10/31 buyers in particular. And so as long as that continues, we're going to continue to, again, recycle capital growth assets. We do like the way the balance sheet looks today. We like the debt-to-EBITDA ratio. We're going to continue to manage the balance sheet to be strong through this cycle. And so when our sources and uses get out of whack, we'll certainly issue some equity to balance it back up. Scott, you want to?

Yes. And Mike, the other thing I would say is, in 2017, this is after we paid about $10 million of principal repayments on mortgage loans, we're retaining about $40 million of cash as well. So we're using that toward new investment, whether it's acquisition or development.

Got it, okay. And then, just one other question for you, Scott. On CapEx for 2017, can you remind us what that number was in terms of guidance? And has it changed at all?

It's about plus or minus $38 million is where we think that TI's, leasing commission's capital improvements, and give yourself a range of a couple of million bucks on either side. That hasn't changed from what we discussed on our prior calls for 2017.

Your next question comes from Jon Peterson with Jefferies.

Let me get a touch on e-commerce a little bit. We're hearing from people that looked at it that Amazon's been accelerating warehouse openings. Walmart talked about focusing more on their online business versus brick-and-mortar. And then we've seen a lot of the 3PLs like XPO be a lot more aggressive in e-commerce space. I'm just kind of curious -- a little more color on what you guys are seeing on the ground today? And then, maybe specifically, how you think the First Industrial portfolio is positioned to take advantage of it?

Jon, this is Peter Schultz. So we continue to see very broad-based demand across the country. And you are correct, Amazon seems to be accelerating their growth. We're seeing them in a lot of markets. Same with Walmart.com, and some pure play e-commerce players. But we're also seeing, and continuing to see is, we've talked about now on many calls, pretty broad-based demand that includes the 3PL and logistics companies, the parcel carriers, we're seeing consumer products, we're seeing food and beverage, we're seeing apparel, we're seeing automotive and on down the line. So it continues to be pretty broad-based. And then the markets, particularly that we're developing in, we continue to see high levels of interest from a variety of tenants in those markets. So think, Pennsylvania, think Southern California as 2 prime examples. Jojo, you want to add to that?

Sure, yes. Peter, really gave a good breath of the type of customers and the type of businesses that use e-commerce. One thing I just want to add is that, the type of facilities really bodes well for us, because the type of facilities being built for e-commerce is pretty broad too. Fulfillment centers, they're for sortable products. Your fulfillment center is for nonsortable heavy goods products. You've got delivery stations. Delivery station is just, you know, really are satisfying the last leg of the delivery. You got return centers where almost like 1/3 to 1/2 of being -- what's bought needs to be returned, and that's a different facility. So if you add all of that and you then basically add all of that to what Peter is talking about the subset of demand. That's a lot of type of buildings that the industrial developer and owner like us can fulfill. That's just what I wanted to add.

(Operator Instructions) Your next question comes from Eric Frankel with Green Street Advisors.

Can you share whether your thoughts have changed regarding your development cap? And where you guys are at now?

So the self-imposed cap limit today is $325 million. We have about $93 million of capacity available under that. Certainly, we are consistently evaluating the risk profile of the company and the opportunities in the market place, and we've discussed through with the board and discussing the cap level as part of that conversation. But today, it's $325 million, and we'll let you know if that changes.

Okay. I guess some would relate to that cap level and the appetite you have for kind of extending your platform. There seems to be a couple of larger U.S. industrial portfolios coming in the market of varying quality, but some of it seems pretty decent. What are your thoughts in terms of what would it take for you guys to ever consider buying one of those portfolios?

Well I think, as you would expect, we certainly intend to evaluate assets as they come to market on a regular basis. I think it would be -- it's unnecessary and inappropriate for us to speculate on any particular offering that might be out there. But certainly, we're always going to be looking for ways to add shareholder value, and as such, we'll be evaluating offerings as they come.

Your next question comes from Bill Crow with Raymond James.

The question really is, I was curious if you could quantify the change in the amount of capital that your tenants are putting into the buildings over the past few years. I assume, with the evolution of e-commerce they're putting more and more money into the systems. But is there a way to quantify that? And does that create what you view as a barrier to exit from your tenant base?

Sure, Bill. It's Peter Schultz. Certainly, we've seen an increase in the CapEx spent by tenants in spaces, particularly around automation. A couple of examples would be the deals we did with UPS in the last couple of years, heavily automated. The building that we just bought in New Jersey is leased long-term to Owens & Minor, which is an existing tenant of ours, in a couple of other markets. And they have outfitted the building heavily with automation at their cost to service the hospital systems in the New York metro area. So we're seeing that more and more. Particularly as labor gets tighter, you're seeing more companies automate, and that certainly requires a different caliber of labor to operate all that. But we continue to see that as a trend. But I would say it's hard to quantify what the dollars are. But certainly we like that, because it makes the tenant stickier on our assets.

There are no further questions at this time. So I'd like to turn the call back over to Peter Baccile. Actually we did get one more question.

All right.

So the next question is from Stephen Kim with SunTrust.

This is Ki Bin. Just a couple of quick ones here. What is your market rent growth forecast for -- well I guess, what have you seen this year? And what do you think you'll probably see next year? And I don't know if I am stealing a little thunder from your Investor Day, but curious if you have any thoughts there -- but not leased price, market rent growth.

Market rent growth.

We don't give guidance on market rent growth, Ki Bin, as you know. But it varies by market-by-market. But I mean, it has to be positive given the fundamentals we're seeing. I mean, so high occupancy in all markets. There are a number of markets where you even have sub -- whenever it's like 6%, 7% and below that, landlords have pricing power like us, and you're seeing that in our portfolio. And we expect to continue to see that. I mean, there will be -- our feeling here is that there has to be a lot to happen before we don't have market rent growth. Supply has to exceed demand by a significant amount for multiple years before we -- we have to get back to like, maybe, market 10% vacancy. So I mean overall, we cannot give you guidance on exactly what market rent growth is. It would vary market-by-market. But the fundamentals out there looks really good for continued growth.

Large contiguous blocks of space is just unavailable. Tenants don't have a lot of options. That's obviously a good thing if you're a landlord, and that's going to translate into pretty significant rent growth. But pegging numbers, we don't have a crystal ball that's any better than anybody else has Ki Bin.

All right. And where are you trending in terms of taxable income per share? And how does that compare to your like your dividend rate right now?

Yes. Ki Bin, it's Scott. When you look at the first 3 quarters of '17, we're in good shape on taxable income. The big wildcard is gains on sale. We've been doing a pretty good job doing 10/31 exchanges on the sales that have big tax gains for the first 9 months. Fourth quarter, that's the wildcard. Again, we can do 10/31 exchanges. But again, keep in mind, we still have $60 million of NOLs that we can use to offset those gains. So we have the ability to use those to help us manage taxable income.

So that was our last question for today. So I'll turn the call back over to Peter Baccile.

Thank you, operator, and thank you, all, for participating on our call today. Again, we look forward to seeing many of you in New York for our Investor Day, and in Dallas for the NAREIT Conference. As always, please feel free to reach out to Scott, Art or me with any follow-up questions.

Thank you.

This concludes today's conference call. You may now disconnect.