STAG Industrial, Inc. (STAG) Q1 2023 Earnings Call Transcript

STAG Industrial, Inc. (NYSE:STAG) Q1 2023 Earnings Conference Call April 27, 2023 10:00 AM ET

Company Participants

Steve Xiarhos - Associate, Capital Markets and Investor Relations

William Crooker - President and Chief Executive Officer

Matts Pinard - Executive Vice President and Chief Financial Officer

Conference Call Participants

Craig Mailman - Citigroup Inc.

Michael Carroll - RBC Capital Markets

Eric Borden - BMO Capital Markets

Camille Bonnel - Bank of America Merrill Lynch

Blaine Heck - Wells Fargo Securities, LLC

Michael Mueller - JPMorgan Chase & Co.

Nicholas Thillman - Robert W. Baird & Co.

Stephen Sakwa - Evercore ISI

Operator

Greeting, and welcome to the STAG Industrial First 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. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Xiarhos. Please go ahead.

Steve Xiarhos

Thank you. Welcome to STAG Industrial's conference call covering the first quarter 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 forecast 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 Matts Pinard, our Chief Financial Officer. Also here with us 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 areas of focus.

I'll now turn the call over to Bill.

William Crooker

Thank you, Steve. Good morning, everybody, and welcome to the first quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to telling you about the first quarter 2023 results. Before we get started, I want to welcome Steve Kimball to the call. Steve joined us about a month ago and brings with him many years of experience in the industrial sector. Steve's primary role will be to maintain our focus on same-store operations and help us unlock further value in our portfolio. Steve will also oversee growing our development platform over time.

Our first quarter results clearly reflect [indiscernible] between the strength of our portfolio and the persisting volatility seen in the capital markets. The industrial market continues to benefit from strong demand driven by multiple secular tailwinds. E-commerce and supply chain reconfiguration have been consistent demand drivers with a diversified mix of industries buying for space across our portfolio. We are experiencing healthy demand from food and beverage tenants, the automobile sector and third-party logistics providers.

The uncertainty in the economy is naturally having some impact on industrial fundamentals currently isolated to leasing of big box spaces. Large tenants are rationalized in their real estate footprint and commitment to large blocks of spaces. This dynamic is not impacting our portfolio as our average lease size is approximately 150,000 square feet.

We have discussed the benefits expected to accrue to industrial demand due to the projected near and onshoring of manufacturing operations from overseas at a high level. Recently, we have been able to provide real life examples of this incremental demand driver. We have seen very strong demand in our markets bordering Mexico, particularly El Paso, which is our ninth largest market consisting of 2.5% of our portfolio ABR. The near-shoring in Mexico has provided significant incremental demand in the market, resulting in vacancy rates close to zero. We have had three leases roll in El Paso in the past three months, resulting in almost no downtime and 59% cash releasing spreads.

With respect to onshoring, projects announced include the $3.5 billion Honda electric vehicle plant in Columbus, Ohio and the $2.5 billion solar panel manufacturing plant in Georgia. Market prognosticators have identified states like Georgia, Michigan, and the Carolinas as a likely dominant states for electrical vehicle and battery manufacturing. What is important to note is that these instances of onshoring are occurring in non- coastal non-gateway markets. They are landing in markets where STAG has traditionally had a footprint and we expect to benefit as this trend takes shape.

Our current 2023 leasing results have surpassed our initial expectation. As of this week, we have leased 10 million square feet or 78% of the new and renewal leasing we expect to commence in 2023, achieving cash leasing spreads of 30.6%. The progress in lease volume addresses in line with historical cadence at this time in previous years.

Based on this execution, we expect our cash releasing spreads to be closer to 30% for the year. The foundation of sustainable cash same-store growth is the average contractual annual rent escalation embedded in the portfolio, which continues to increase. Our average rental escalators in the portfolio are north of 2.5%. There is upward pressure on that number as the average annual rental escalator on our 2023 leasing activity achieved to date is 3.4%. Approximately 28% of those leases have rental escalators of 4% or higher.

On the development front, our 715,000 square foot development in Greer, South Carolina is proceeding on schedule with expected delivery in early July. We expect the two building project to outperform our original underwriting. We have funded $54 million of the $68 million project and have seen strong leasing interest from tenants in the market to date. Not surprisingly, the acquisition market remains quiet with the market searching for price equilibrium.

Nevertheless, we have identified several interesting opportunities. We closed on one building subsequent to quarter-end and currently have another building under contract. Both opportunities have remaining lease terms less than two years and on high velocity industrial markets with strong mark-to-market opportunities.

On the disposition side, we sold two buildings this quarter. One building was a non-core asset and the second was a facility sold to the current tenant. In the aggregate, these transactions resulted in proceeds of $37 million, reflecting a 5.2 cash cap rate.

With that, I will turn it over to Matts, who will cover our remaining results and updates to guidance.

Matts Pinard

Thank you, Bill, and good morning, everyone. Core FFO per share was $0.55 for the quarter, an increase of 3.8% as compared to the first quarter of last year. Cash available for distribution totaled $90.1 million, an increase of 9.3% as compared to the prior period. Leverage remains at the low end of our guide range with net debt to annualized run rate adjusted EBITDA equal to 5x with $779 million liquidity at quarter end.

During the quarter, we commenced 41 leases totaling 4.8 million square feet, which generate record cash and straight line leasing spreads of 25.3% and 35.3%, respectively. Retention was 74% and we achieved record same-store cash NOI growth of 5.9% for the quarter. The increase in the same-store cash NOI is primarily attributable to the record high leasing spreads and the increase in average occupancy as compared to the prior year.

In terms of the capital market activity, we fully repaid our $100 million private placement note F, which matured on January 5. There are minimal debt maturities for the next two years with only $53.3 million maturing in 2024. As a reminder, our debt is fixed rate through maturity with the exception of our revolving credit facility.

In terms of guidance, we have made the following updates. We have increased our same-store guidance to be between 4.75% and 5.25% for the year, an increase to the midpoint of 25 basis points. This increase is driven by accelerating leasing spreads and a modest reduction in expected credit loss. Our core FFO per share guidance has increased to a range of $2.23 to $2.27 per share, an increase of midpoint of 1 penny. We still expect net debt per run rate adjusted EBITDA to be between 5x and 5.5x.

I will now turn it back over to Bill.

William Crooker

Thank you, Matts. I'm very pleased where the company sits today. We have extremely strong operational results and forecast for the remainder of 2023. We are also benefiting from a conservative balance sheet with ample liquidity. These factors will allow us to take advantage of opportunities that present themselves throughout the year.

We'll now turn it back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Craig Mailman with Citi. Please go ahead.

Craig Mailman

Hey. Good morning, guys. Bill, maybe just starting on the acquisition environment, as you know, that it's been a little bit slower here. But the pipeline kind of grew almost 25% sequentially. Could you just give us a sense of what is driving that uptick? Is it anything from sellers becoming more realistic on pricing or whatever situation and just kind of curious because that just seems like a big jump sequentially. And then also maybe just give us a sense of what the yield expectations have done or trended in that pipeline.

William Crooker

Yes. Thanks, Craig. Yes, the pipeline jumped from Q4. When looking at the pipeline in Q4 versus today, portfolio size in the pipeline is consistent. We are seeing a little bit of an uptick of development deals within the pipeline. But most of the increase is just due to our standard deals. Some value add deals, some stabilized deals. The mix of the pipeline is half of its unsolicited opportunities, deals that we're approaching, owners to potentially sell the building and the other half is lightly marketed or fully marketed.

In terms of the acquisition environment, there is still a decent bid-ask spread between buyers and sellers. We are seeing that narrowing a bit. We closed a deal subsequent to quarter end as we noted, and as I noted in the prepared remarks have another deal under contract. The yields are within our guidance range. So we still right now expect to operate within our cap rate range given the current market conditions. But overall feels like the acquisition market is improving slightly.

Craig Mailman

And then on the fully marketed deals, do you have a sense of from the brokers kind of depth of the buyer pool that you're going up against maybe make up? And then also just kind of curious of the deals that you've seen transacted sort of the taking price versus the asking price, what that differential has been.

William Crooker

Yes. I mean, some deals they're asking a price and we'll be in the mix and often times we're seeing those deals not close. We are seeing more deals closed than we have in the past six months. In terms of where the asking price is and where the deal ultimately closes, it really depends on a deal-by-deal basis and the sellers. So when you have a more sophisticated seller with a good brokerage team, I think they have a decent handle on where it can clear. Oftentimes what we're seeing, we saw at the end of last year and a little bit this year is some sellers that have not transacted in the real estate market in years have expectations that are a little bit too high. So it really depends on the deal.

Craig Mailman

And then just – I know we've talked about this in the past, but you guys operate in, I think 30 states and so there's a wide mix of kind of primary, secondary and tertiary markets. Are you seeing any differentiation in what's happening on pricing between the primary markets that you guys operate in versus the secondary and tertiary markets?

William Crooker

Yes. When we look at our markets and the definitions we've been using for the past year or so the CBRE Tier 1 markets, which is a sized-based definition, but also a capital flow definition. So when you think about that, almost all of our portfolio, close to 90% of our portfolios in the CBRE Tier 1 markets. We've done a really good job over the past five or so years to dispose of our non-core assets in the tertiary market. So overall, really happy with where our portfolio sits today.

In terms of pricing mix between the higher end Tier 1 markets and the lower end Tier 1 markets. Really, I think the bigger price disconnect relates to the weighted average lease term. So the longer term leases are still pricing call it 50 basis points-ish, maybe a little bit more depending on bumps wider than your shorter term deals. And then in terms of just the apples-to-apples market, when looking at a higher Tier 1 market versus a lower Tier 1 market, you're probably seeing something in that 25 to 50 basis points depending on what the mark-to-market opportunity is.

Craig Mailman

Okay. Then just one last quick one. On the developments that you guys walked away from and basically, gave up the deposit there. Could you just talk about, what that yield had been expected to be versus where it was trending some of the color around that?

William Crooker

Yes. I can do that. You got to start saving some questions for the rest of the folks here, Craig, but…

Craig Mailman

My last one, I promise.

William Crooker

Okay. Yes. That deal, we put that deal under contract in 2021. It was a forward takeout. And then as the market moved and as our cost of capital increased, it was a deal that just didn't make sense for us anymore given the environment. It was a deal that was in the very low-5s. And for us at that point, we did not feel like we were getting the appropriate return even with the loss of that incremental capital. So very unique situation, but something that we thought was in our best interest to walk away from.

Craig Mailman

Great. Thanks guys.

William Crooker

All right. Thanks, Craig.

Operator

Next question Michael Carroll with RBC. Please go ahead.

Michael Carroll

Yes. Thanks. Bill, can you talk a little bit about the cash lease spreads that you achieved in 2023 so far and what's the expectation for the remainder of the year? I know last quarter you were kind of targeting your 2023 spreads to be between 25% and 30%. I'm not sure if you mentioned this in the prepared remarks, but did you update that just given that you're already above 30% and already satisfyingly about 70 plus percent of those leases?

William Crooker

Yes. So we're close – close to 80% of our expected leasing we've executed already to-date and as you said the 30.6%. Right now just given how much we've leased, we've increased our expectation for the year to be closer to 30% for the year. There is some uncertainty in the back half of the year, so which is why we've increased – we've signed 80%, but there's still 20% left to sign.

Michael Carroll

Is there any mix difference between that last 20% versus what you've already completed?

William Crooker

No. Not materially so, which is why we've increased the guidance for the year closer to 30%.

Michael Carroll

Okay, great. And then as you look into 2024, I guess, was there anything unique in the 2023 spreads in terms of geography or I guess the term of the leases that we're rolling that you would – versus what you're going through in 2024?

William Crooker

Yes. I mean, this year, what we've signed to-date is 10 million square feet, so it's a pretty big sample size. We're seeing really strong demand across our markets. Supply that's coming online nationally is not impacting our markets as much as some other markets. So we feel really good about the leasing spreads we've had this year and the dynamics in the market. I mean, one thing that's been talked about a lot is the development starts and what the new supply is going to be in 2024. Right now, development starts are pretty low, so that should bode well for the supply/demand dynamics in 2024, but I try to stay away from 2024 guidance in the first quarter 2023 call Mike.

Michael Carroll

Yes. No that makes sense. And then just last one, I know you had a few large, I guess, lease spreads that you achieved in Northern New Jersey. I mean, is that mix similar in 2024 versus 2023? That's not going to like distort those numbers or the comparison of those numbers too much, right?

William Crooker

Yes. I mean, when you think about some of the larger roles, I mean, I mentioned some of the ones we signed in El Paso at 59%. That's not Northern Jersey. We signed our Amazon building in Northern Jersey, I think that was, call it, 80%-ish. But that's a 250,000 square foot building. So when you think about 10 million square feet, you need a lot of that to really distort the number. So it's a pretty good mix. And if you exclude one or two or three leases, it really doesn't change the number materially.

Michael Carroll

Okay. Perfect. Thanks.

William Crooker

Thanks, Mike.

Operator

Next question, Eric Borden with BMO Capital Markets. Please go ahead.

Eric Borden

Hey guys. Good morning. Kind of going back to the pipeline a little bit, I just want to talk about specifically on the developments and the deals and the types of assets that you're seeing come to market. Are they more greenfield, brownfield, fully entitled, and where on the risk spectrum would you be willing to transact today?

William Crooker

Yes. What's in the pipeline today is, is fully entitled deals, but it's entitled land sites that haven't started and as well as some that have gone a little bit further through the process. So it really is a mix. We're bidding to cap rates or returns where we're getting excess returns over a stabilized transaction and we feel it's in markets where we feel really comfortable with the leasing prospects. So when I talked about operating in the top 60 CBRE 1 markets, it's probably in the top 30 CBRE 1 markets.

Eric Borden

That's helpful. And then over time, how should we think about the total amount of capital being allocated towards development?

William Crooker

Yes. I mean, right now, we're in the early stages. So [I think we're going to] get through this [indiscernible] development, hopefully put some more on the contract. And as we do more of this stuff, we'll enhance our disclosure and certainly enhance our guidance as to percentage of capital being deployed during the year for developments.

Eric Borden

That's helpful. Thank you. And then last one for me, just on general tenant demand. Are tenants looking to renew ahead of expirations today? And then if so, what are they giving up in the negotiation in order to execute on a quicker term?

William Crooker

Yes. I mean the fundamentals continue to be really strong. So tenants are leasing space ahead of lease expiration, but not materially longer more in advance than they have in the past. So it's a similar cadence to what it was last year. So with that, there's not – we're not giving – they're not giving much up, we're not giving much up. So we're marking leases as close to market as we can for these lease expirations. Tenants really like the way we operate our buildings. We've got great relationships with their tenants. We work really hard at that, so they want to stay in a STAG building. So very similar cadence to last year in terms of how far in advance they're leasing their buildings.

Eric Borden

Thanks, guys.

William Crooker

Thank you.

Operator

Next question, Camille Bonnel with Bank of America. Please go ahead.

Camille Bonnel

Good morning.

William Crooker

Good morning.

Camille Bonnel

Can you comment on what you're seeing in terms of rent growth in your markets in the first quarter and if this changes your view on the outlook for 2023?

William Crooker

Yes. Rent growth in the first quarter was depending on the market mid-to-high single digits. We're still expecting that, that was our initial forecast in February that we're still projecting that for this year across the portfolio. Last year, I think we ended up high-single digits really across the portfolio. So a slight deceleration we're projecting. But we'll see if that comes to fruition.

Camille Bonnel

And it looks like in Philadelphia your ABR fell from 7% in your second largest market to 2% this quarter. Can you speak to what's driving this decline?

William Crooker

Yes. That was more of a definitional change. So we instead of using CoStar markets, which has a bigger circle, what we did was really focused on the CBRE definitions of markets, which we think is more relevant for us. When they look at markets, it's size of market, but I think as important as that is capital flow into markets. So you could have a big market, but if you don't have institutional capital flow, it won't qualify as a CBRE Tier 1 market. So that was really – if you were to do apples-to-apples a Philadelphia exposure, quarter-over-quarter is the same.

Camille Bonnel

Okay. So from a geographic perspective, this market's still core to your strategy, no changes there?

William Crooker

Absolutely. Yes.

Camille Bonnel

Perfect. Thank you. And final question, your portfolio occupancies remain quite healthy, but sequentially declined nearly a 100 basis points. Was there any tenant driving this change or any comments around changes in your tenant credit watchlist?

William Crooker

I'll let Matts talk about the tenant credit. But in terms of sequential occupancy, Q1 2023, we had about 5.5 million square feet expiring. In this quarter, we renewed 74% of that. When you adjust it for immediate backfills, it's about 80%. So we had, call it, 20% of that 5.5 million being effectively non-renewed in Q1. Q1 is usually our highest quarter for lease expirations. This one just had to be – happened to be a little bit higher. If you look over the prior Q1 2022, there was some pretty healthy average occupancy gains, which as Matts mentioned in his prepared remarks was a driver to the 5.9% cash same-store NOI growth in Q1. Matts, do you want to talk about tenant credit?

Matts Pinard

Yes. Hey. Good morning, Camille. So in terms of tenant credit, quite simply our watchlist is very similar to what it was 90 days ago. For the quarter, we did experience approximately $125,000 of credit loss. This is significantly less than what we were budgeting. So therefore we have reduced our full-year credit loss assumption from 50 basis points to 40 basis points. The 40 basis points is an acknowledgement of the volatile macro backdrop, but similar to last quarter, none of this is specifically associated with individual tenants. It's more of a broad-based view of potential credit loss. We'll continue to monitor and update the market, but we're very pleased with our rental collections in the first quarter. We generally have large and more sophisticated tenants. Almost 60% of our tenants have revenues north of a $1 billion. Over 80% of our tenants have revenues north of a $100 million. So while not a credit proxy, it's a pretty good indication of the size and sophistication of the tendency.

Camille Bonnel

Thank you for taking my questions.

Operator

Thank you. Next question, Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck

Okay. Thanks. Good morning. Bill, appreciate the commentary on onshoring. I guess can you just walk us through how the increased manufacturing activity impacts your portfolio directly? I'm assuming you guys aren't necessarily housing the manufacturing activities within your building, so what are the some of the ancillary functions or tenants that are maybe relocating to those markets and driving demand in your warehouses in those situations?

William Crooker

Yes. I mean the simple answer there Blaine is it's really suppliers to the manufacturing. So we are not housing the manufacturing warehousing the – we expect to be housing more of the suppliers and 3PL servicing those manufacturing sites. So as I noted, we're seeing real life examples in the El Paso market. The past three months, we signed three leases. I think it was 59% cash rollups. I mentioned just a couple of examples of some onshoring. There's a lot of other examples. I know I think Rivian is opening up a $5 billion manufacturing plant East of Atlanta. And there is a bunch of other examples and Toyota is opening a $4 billion electrical battery plant outside of Greensboro. So a lot of the markets that we're operating in is where these plants are going. We have not seen immediate impacts to our portfolio because these plants are not up and running yet, but when they are, we expect demand for our warehouses from 3PLs and other suppliers to those manufacturing sites.

Blaine Heck

Great. That's helpful. You guys talked about this a little bit, but I think the development has been one area of the business. I think you guys are looking to do a little more of. Can you just talk about how land pricing has trended recently and whether that would make you more willing to go out and start building a more substantial land bank for future development, like some of your kind of re-counterparts?

William Crooker

Yes. We are – it's something that we're looking into Blaine right now, more on the entitled land side of the equation. But certainly over time and with Steve's help, start to identify and maybe put some raw land on the books. From peak pricing, we're seeing land come down 20% to 30%. We feel like given the market fundamentals, our outlook for the next few years and beyond, industrial is a very strong sector and we think this is an opportune time to start to make our way into the development side of the business.

Blaine Heck

Great. Very helpful. Last one for me. You guys are right at the low end of your stated leverage target range at 5x, which seems like acquisitions could ramp up as we progressed throughout the year. Your pipeline increased pretty substantially. Can you just talk about potential funding sources? Do dispositions still make the most sense here? Or would you look at other sources like equity even where the stock is trading?

Matts Pinard

Hey Blaine, it's Matts. Thank you for the question. Very similar to when we laid out our initial guidance last call. We're running our business plan this year, assuming this macro backdrop with no incremental capital. We haven't issued equity since January of last year. We have no need for incremental debt. We're pretty successful in the capital recycling front. We actually were a net seller this quarter, leverages a 5x. We can run the midpoints of our guidance and stay within our band of 5x to 5.5x. So I guess short answer here, Blaine is, we're prepared to operate this year without incremental capital.

Blaine Heck

Great. Thank you, guys.

Matts Pinard

Thanks, Blaine.

Operator

[Operator Instructions] Your next question comes from Mike Mueller with JPMorgan. Please go ahead.

Michael Mueller

Yes. Hi. Just sticking with development for a second. I guess if you do end up expanding that, should we be thinking a little bit more of full traditional ground up or that in a mix of stepping into projects that were recently developed, but are not yet leased and just taking on the leasing risk. I mean, how are you thinking about that?

William Crooker

All along the spectrum there, Mike, so we'll step into projects that are almost complete and take on the leasing risk. We want it to get a better return than if that building was stabilized all the way to buying an entitled land site today and taking on the development risk and the leasing risk and the market risk. So we're evaluating all those opportunities. We've executed on all of those opportunities to-date or in the process of executing on, I guess the last one. So it will be a mix as we get into this more. And we do more of this will certainly enhance our disclosure and our guidance on it, but right now we're evaluating a lot of these opportunities.

Michael Mueller

Yes. And how is the staffing, I guess in-house in terms of if you're thinking about expanding the actual ground up components, like doing it off from scratch, I mean, how staffed are you for that to do more than a handful of projects?

William Crooker

Yes. We're very well staffed today. I mean, it all depends on how much. I mean, our approach to this will be using general contractors so we can flex up and down without having all those staff in-house. I think that's very similar to some of our peers and some of the private shops. So for us, right now, we're staffed appropriately and it all depends on how big this opportunity is.

Michael Mueller

Got it. Okay. Thank you.

William Crooker

Thanks, Mike.

Operator

Next question comes from Nick Thillman with Baird. Please go ahead.

Nicholas Thillman

Hey guys. Just one quick question for me. On the acquisition pipeline, you kind of said 50% lightly marketed. How does that compare relatively to the historical pipeline?

William Crooker

It's about the same. It was from a lightly marketed, when you start factoring in fully marketed. The pipelines moved a little bit more to unsolicited transactions now than it was before. And so with that you'd expect our hit rate to be lower because we're not sure in all these cases that there's a willing seller at a market price. So it's moved more to the unsolicited than it has in the past.

Nicholas Thillman

Very helpful. Thanks.

William Crooker

Thank you.

Operator

Next question, Steve Sakwa with Evercore ISI. Please go ahead.

Stephen Sakwa

Yes. Thanks. Just one question, I guess broadly, I know cap rates going to vary by marketing and growth rates vary by market. But I guess one way to normalize all that is to maybe think about unlevered IRRs on the things that you're buying or selling. So I guess the question is, where do you think unlevered IRRs are today for kind of your core markets and maybe how has that changed or how have you changed the unlevered IRR hurdles that you're willing to invest?

William Crooker

Yes. It's probably high-single digits Steve today. We've – obviously those numbers have gone up a bit with our cost of capital. When we evaluate a transaction, it needs to be accretive so as our cost of capital increases, our unlevered IRR requirements increase as well.

Stephen Sakwa

So high-single digits meaning 7, 8, 9, 10, maybe not 10, but like where in that range of high-single digits would you say?

William Crooker

Well, it's probably in the 7.5 to 9 range, I would say.

Stephen Sakwa

And I guess the – would the 9s be sort of the smaller markets and the 7.5s kind of the – maybe the Tier 1 CBRE markets, you think about along those kind of lines?

William Crooker

Yes. I mean it's a mix. It really depends on what we can get for a going in cap rate and then factoring in the growth rates that we're projecting. Some of the – as I said, most of the portfolio – I think 90% of the portfolio is in CBRE Tier 1 markets, but cap rates and returns vary across those markets. So it just depends. And it also depends on the opportunity and who we're competing with on the opportunity. So a lot of times we're buying from local private equity where the competition is only a couple other bidders in this market. So we feel like we can extract some value on the acquisition buy side. And so sometimes those can – even if they're in the bottom half of the CBRE Tier 1 markets and sometimes yield a significantly higher result than some of the higher Tier 1 markets.

Stephen Sakwa

Great. Thank you.

William Crooker

Thank you.

Operator

Thank you. I would like to turn the floor over to Bill Crooker for closing remarks.

William Crooker

Thank you, everyone for joining us today. Really appreciate the questions. Very happy with where we are today, as I mentioned in the outlook for 2023. And we look forward to seeing many of you at the upcoming conferences. Thank you.

Operator

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