STAG - NYSE

Greetings, and welcome to the STAG Industrial Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Steve Xiarhos, Vice President, Investor Relations. Thank you. You may begin.

Thank you. Welcome to STAG Industrial's conference call covering the third quarter 2025 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'll hear from Bill Crooker, our Chief Executive Officer; and Matts Pinard, our Chief Financial Officer. Also here with us today are Mike Chase, our Chief Investment Officer; and Steve Kimball, our Chief Operating Officer, who are available to answer questions specific to their areas of focus. I'll now turn the call over to Bill.

Thank you, Steve. Good morning, everybody, and welcome to the third quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about the third quarter 2025 results. Our year-to-date results continue to exceed internal projections. The outperformance year-to-date has allowed us to increase our core FFO guidance for the year to a range of $2.52 to $2.54 per share, a $0.03 increase at the midpoint. Industrial fundamentals remain stable and are improving. Leasing demand is improving with increased tours and RFPs. However, lease gestation periods remain elongated. Supply pipeline continues to decrease, and we are forecasting further decreases next year. While we expect national vacancy rates to be in and around 7% for the next 2 to 3 quarters, we anticipate those will improve materially in the back half of next year. Based on this, we believe our market rent growth for next year to be similar to the 2% market rent growth expected for 2025. We have accomplished 99% of our forecasted leasing for 2025 at levels consistent with our initial guidance, including cash leasing spreads of approximately 24%. Turning to next year, 2026 represents a record amount of square footage expiring in a calendar year for our company. I'm pleased to report that we've addressed approximately 52% of the operating portfolio square feet we expect to lease in 2026. This compares to 38% at the same time last year. We expect cash leasing spreads to be between 18% and 20% for 2026. This leasing success is a testament to the quality of our portfolio and a welcome sign of tenant engagement and commitment to their space. We've seen an increase in acquisition opportunities in the market, specifically with sellers eager to close by year-end. Acquisition volume for the third quarter totaled $101.5 million. This consisted of 2 buildings with cash and straight-line cap rates of 6.6% and 7.2%, respectively. Subsequent to quarter end, we acquired one building for $49.2 million with a 6.5% cash cap rate. In addition to the $212 million of stabilized acquisitions we have closed so far this year, we have $153 million more under agreement and slated to close before year-end. In terms of our development platform, we have 3.4 million square feet of development activity or recent completions across 13 buildings as of the end of Q3. 52% of this 3.4 million square feet are completed developments. These completed developments are 83% leased as of September 30. This includes a full building lease totaling 244,000 square feet, which commenced in Greer, South Carolina on September 1, with 3.75% annual rent escalations. Subsequent to quarter end, we leased the remaining 91,000 square feet in our Nashville development. This project is now 100% leased with a cash stabilized yield of 9.3%. We stabilized this transaction 210 basis points higher than our initial underwriting and 6 months ahead of schedule. Including this transaction, our completed developments are currently 88% leased. I'm happy to announce a recently signed build-to-suit project on a fully entitled 40-acre parcel of land located in Union Ohio. We'll develop a Class A 349,000 square foot warehouse with our development partner. The building is scheduled to be completed in Q3 2026. Upon completion, the building will be fully leased for 10 years with 3.25% annual lease escalations to a strong credit tenant. The project is estimated to cost $34.6 million and is expected to have a stabilized yield of 7%. With that, I will turn it over to Matts who will cover our remaining results and updates to guidance.

Thank you, Bill, and good morning, everyone. Core FFO per share was $0.65 for the quarter, an increase of 8.3% as compared to last year. During the quarter, we commenced 22 leases totaling 2.2 million square feet, which generated cash and straight-line leasing spreads of 27.2% and 40.6%, respectively. Additionally, executed leasing activity accelerated from 4.1 million square feet leased in the second quarter to 5.9 million square feet leased in the third quarter. 2025 is on track to be a record year in terms of leasing volume. Retention for the quarter was 63.4% and 78% for the year through September 30. We have accomplished 98.7% of the operating portfolio square feet we expected -- we currently expect to lease in 2025, achieving 23.9% cash leasing spreads, demonstrating the strength of our portfolio. As mentioned by Bill, we have accomplished 52% of the square feet we currently expect to lease in 2026, achieving 21.8% cash leasing spreads. Same-store cash NOI grew 3.9% for the quarter and has grown 3.5% year-to-date. Included in the same-store cash NOI is 23 basis points of cash credit loss incurred this year as of yesterday. Moving to capital market activity. On September 15, we refinanced the $300 million Term Loan G, which was scheduled to mature in February 2026. It now matures March 15, 2030, with one 1-year extension option. The term loan bears an aggregate fixed interest rate, inclusive of interest rate swaps of 1.7% until February 5, 2026, and will then bear an aggregate fixed interest rate, inclusive of interest rate swaps of 3.94% from February 5, 2026, through initial maturity. Leverage remains low with net debt to annualized run rate adjusted EBITDA equal to 5.1x with liquidity of $904 million at quarter end. As for guidance, we have made the following updates. We have decreased and narrowed the range of expected acquisition volume to a range to $350 million to $500 million. As a reminder, the impact of external acquisition volume has always been heavily weighted to the end of the year and has a minimal impact on our core FFO guidance. G&A expectations for the year have been reduced to a range of $51 million to $52 million, a decrease of $1 million at the midpoint. Cash same-store guidance has been increased to a range of 4% to 4.25% for the year, an increase of 25 basis points at the midpoint. These guidance changes contributed to a revised core FFO guidance range of $2.52 to $2.54 per share, an increase of $0.03 at the midpoint. I will now turn it back over to Bill.

Thank you, Matts, and thank you to our team for their continued hard work and achievement towards our 2025 goals. We're excited about the opportunities that are in front of us here at STAG. Activity is improving across all aspects of our platform, including acquisitions, operations and development. These areas will all be key contributors to the future growth at STAG. We will now turn it back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Craig Mailman with Citi.

Bill, the progress on '26 here is really good, puts you guys in a good spot for next year. I'm just kind of curious, is it tenants coming to you -- could you just talk about what is driving that, I guess? Is there a higher weighting of those maturities kind of skewed towards the first half, and so you're just in that window of tenants kind of looking to get that done? Or are people coming to you early? I just kind of want a little bit more color on what's driving that. Is it -- like what's the breakout of renewals versus kind of new leasing or backfills of vacated lease expirations?

Yes. Thanks, Craig. I'll just answer the second part first. The breakout between renewals and, call it, new leasing, about 95% of that number is renewals, which makes sense just given where we are in the calendar, so 5% is renewals. And then with respect to, are they coming to us, are we going to them? It really is -- it's a blend, right? We've been a little bit more proactive with our tenants, just given the larger than normal lease expirations we have in 2026. So we've been proactive. Our team has been proactive. But then also, we've had our larger sophisticated tenants reach out to us and engage earlier than normal because I think a couple of factors. One, they like their space. They view themselves in their space for long term and they wanted to lock it up because in some instances, they have a large investment in that space. And that skews a little bit more to the bigger suite sizes. So next year, we have 5 or 6 large lease expirations, so call it anything over 400,000 square feet. So of those, we've addressed all of them except for one, which we're in active negotiations with. So that was a little bit of a different dynamic in '26 than we've had in previous years. So that also impacted the 52% versus prior years, circa 38%.

And you guys -- you talked about the build-to-suit in Ohio. You guys got Greenville done, you got Nashville done. I mean is this -- I know that everyone and you guys included have been talking about sort of a thawing of the tenant decision-making. I mean is it people just feeling more comfortable putting capital out the door? Or is there a bit of FOMO in some of your markets where you don't have as much new supply as kind of where it's top-heavy in a couple of markets in the U.S. and so some things have been taken off the table and now people are rushing to make sure they secure a spot? Like could you talk a little bit about the dynamics across some of your markets and maybe point out some of the really -- kind of your best and maybe still slowest markets in terms of activity?

You're good, Craig. I think that was 6 questions in one. But I'll do my best to try to address all of them. I'll try to address as much as I can there. With respect to our markets and developments, we haven't had the volatility that they call it the top 5 markets in the U.S. have with respect to vacancy. So our vacancy rates have held in there. Our occupancy rates in those markets have held in there a little bit better than others. So that's been beneficial to us and you can collaborate that through any third-party industry report. Is there FOMO for developing in our markets? I think to some degree, you could say that. We're certainly having a lot of success in our development platform. I've said in the past several quarters, our best use of capital than was incremental deployment of capital was developments. Really happy with the way that initiative is playing out. And then if you think about what our messaging has been in the last 2 quarters, it's been this degree of uncertainty in the market. And our messaging now is the stability in the market. So it really has been a pretty big shift as we move into the last quarter of the year here. And that's a great thing. And we knew this was going to start to come. Now we say stability, but as I mentioned in the prepared remarks, you look at industry reports, vacancy rates nationally around 7%. I think our number is maybe high 6s. When does that really start to tick down and you can drive some additional market rent growth? It's probably another 2, 3 quarters. But overall, we feel really good about where our portfolio sits with respect to the markets they're in. Maybe I got 4 out of 6 there. I tried, Craig.

Our next question comes from the line of Nick Thillman with Baird.

Maybe talking on the '26 leasing and the progress there, just the sustainability of these spreads in the mid-20 is a little bit higher. You mentioned sort of the 4 large renewals. If we just look at the expiration schedule, it looks like the rents expiring here around 15% below where they were at the beginning of this year. So just curious on what we're thinking for spreads for the remainder of the expirations?

Yes. Thanks, Nick. As I said in my prepared remarks, we're guiding to 18% to 20% cash leasing spreads for next year. And if you look at where they were a few years ago, were I think 30% and then went to 24% this year, and 18% to 20% next year. And if you look at where our mark-to-market has been in those years, it's similar to what our escalators have been. So you haven't been driving additional mark-to-market opportunities. So naturally, that similar type of degradation and spreads will happen. And then with respect to next year and those large tenants, what we've done, those tenants early renewed, as I mentioned earlier to Craig, much ahead of time. But when you think about the spreads, what we've signed to date and what we're guiding to next year, there's a little bit of a difference there. And we usually don't get too much into the fixed renewal options, but they're part of our portfolio every year. So the remaining 48% of incremental leasing next year, almost all of our fixed renewals are in that number, which is why the spreads are a little bit lower for the remaining non-leased asset plan for next year.

No, that's very helpful. And then just on maybe Matts on occupancy, you had a little bit of a headwind this year. As we think of building blocks for '26, good progress on the leasing. How are we feeling about sort of portfolio occupancy or potentially even growing that in the same-store pool next year?

Yes. Nick, I think as we sit here in October, we're going to provide 2026 guidance in February. So I don't think that we're prepared to start walking down the list of what guidance is going to be next year. I think Bill gave a lot of the color in terms of the change from maybe a little bit of instability in the first half of the year into the third quarter to a much more stable environment now. Again, I just pointed the fact that we did the 52% of what we expected to do last year, which is north of 10% higher than what we normally are at this point during the calendar year.

I had to try my best, Matts...

It was very obvious...

Our next question comes from the line of Eric Borden with BMO Capital Markets.

Bill, can you just talk a little bit about your appetite to lean into developments here, just given the improving demand environment and the potential for a vacancy inflection in the back half of '26? Is there -- how are you feeling about potentially leaning into developments to get ahead or time up the deliveries with the improving landscape?

Yes. We're bullish on development. We're trying to sign up the right developments. We obviously are very careful with our underwriting, and we still want to achieve at least that 7% going in yield. We're really happy with the Ohio deal -- Ohio build-to-suit deal we signed up and that we signed up at a 7% yield to a very strong credit. So happy there. There's -- we're working on some others. We're trying to get more internal developments done as well as some additional partner developments. And as we sign those up, we'll announce those. So it's certainly a great use of our capital. The market is stable now and looks to be improving and certainly in the back half of next year. But what -- one other change in terms of deploying capital, we're seeing a great opportunity to deploy capital on acquisitions right now, which is not what we saw earlier this year. So if you look at where we are from an acquisition, we did lower the top end of our guidance. But we've closed $212 million to date. We've got another $150 million under contract and LOI. So to get to our midpoint, we need to sign up another, call it, $60 million between now and Thanksgiving. And we're underwriting a lot of deals. We're evaluating a lot of deals on a weekly basis. So we're hopeful that we can get to that midpoint this year. So that's been a pretty nice change that we've seen over the past couple of quarters.

I appreciate that. Just one on the guidance. You raised guidance $0.03 at the midpoint, but it implies a sequential deceleration from the third quarter to the fourth quarter. Maybe could you just talk about some of the offsetting factors in the fourth quarter that are driving that sequential drag?

Yes, absolutely. I'd say the easiest thing to point to here is credit loss. We've been outperforming our credit loss guidance, but we're not through the rest of the year. So we do have some credit loss baked in on a speculative basis for the remainder of the year. To the extent we outperform that, and again, these are unforeseen, just call it, more of a modeling number, we would be at the higher end.

Yes. So your math is at the midpoint, I assume, right?

Yes, that's right.

I think it depends on where we fall within that core flow range.

Our next question comes from the line of Blaine Heck with Wells Fargo.

Just following up on acquisitions, Bill, can you talk about what might have changed over the last 90 days to kind of pull back on your forecast, if there was anything specific that you noticed? And then this is probably difficult to forecast now, but given the trends you're seeing today that you just alluded to, how do you feel about your ability to make up for this 2025 decrease in 2026 and show a more significant increase in activity year-over-year?

That's a good one, Blaine. As Matts said, I think we'll handle all the remaining 2026 guidance in February. But certainly, if you look at the cadence throughout this year, it has been accelerating into year-end. What dynamics have changed? You've got a couple of things. You've got interest rates that have been stable. I think just a macroeconomic environment that's a little bit more stable. And you've got some seller -- call it, seller pent-up demand. So I think the ask prices are -- the ask price is a little bit more reasonable. If you look at what happened last year, there was not a lot of transactions trading in the market compared to historical norms. This year, you had all the uncertainty as you move through the year. And then lastly, with this stability that's in the market, you have a lot of sellers that want to get their deals done by year-end. So when you look at somebody like us who have a really strong reputation in closing deals and closing deals in a pretty short period of time, we're the preferred buyer in a lot of these instances and some of them were not the high bidder. There's a preference to close by year-end. So that's another driver in terms of giving us some confidence with our Q4 transactions. But I don't know if there's -- Mike, I don't know if there's anything else that you're seeing.

No. I mean, I think you hit on it. The end of Q3, we started seeing a significant increase in deals coming to the market, particularly ones that wanted to close year-end. And as you said, Bill, on those deals, surety of closure is almost as important as pricing and STAG has a great reputation for surety of closure. So we're seeing a lot of deals, and we're cautiously optimistic that we'll have a good Q4 here.

Yes. And we expected a lot of deals to come to market post Labor Day after the summer slowdown and the other uncertainty to happen this year. And that's exactly what we saw.

Okay. That's helpful and makes a lot of sense. Just shifting gears to leasing. Can you talk about any leases you've signed that are directly or indirectly related to manufacturing projects or nearshoring and onshoring? And any markets that you think are particularly well positioned in your portfolio to benefit from some of those trends?

Yes. I mean from the markets that are going to benefit from those trends, it's a lot of the markets we operate, right? It's what we've said before. It's Midwest, it's Southeast, and we signed that lease last year or it was earlier this year. Everything is kind of blending together. But that was a direct onshoring lease. It was a building that was a local distribution -- regional distribution building that ultimately became a supplier building to a wood flooring manufacturing company that brought their operations onshore to be closer to the consumer. So we're certainly benefiting from that. There's a couple of leases that we've signed this year that are related to solar manufacturing plants. There's some leases that we've signed that they -- one lease we've signed, actually manufacturers generators for data centers, so not just staging for data centers, but generators for that. So that was a lease that we're benefiting from in our markets that maybe does not have the same demand drivers in other markets.

Our next question comes from the line of Vince Tibone with Green Street.

For the near-term acquisitions you're looking at, are you considering any value-add deals that will require lease-up or focus more on stabilized assets? Just curious kind of where you find the best opportunity today and if there's any greater opportunities from some forced sellers with some spec projects that have not gone according to their underwriting, kind of hitting the market and allowing for any interesting opportunities for yourself?

Yes. We're seeing some of them. I would say we're not seeing a lot of value-add deals come to market or at least the ones that we have a desktop review. We're not penciling the pricing out. So we don't -- they don't even make it to the full underwriting stage. But we will absolutely evaluate those transactions, right? I mean it's what we do, right? We build buildings, we buy buildings, we lease buildings. So if there is a developer that wants to take some chips off the table and has a vacant asset that they don't want to try to lease or that's not their core business, we'll absolutely take a look at that transaction and put a bid in to price that. But we're not seeing a lot of those. I think what we're seeing now is probably a little bit more skewed to 3, 5 and kind of longer lease term transactions. And part of it is the ones we are seeing, like I said, just don't pass that even initial desktop review with respect to where we would price those assets.

No, that's helpful color. Maybe just switching gears for a second. Just on the updated same-store guide for the year, it looks like it's implying decent acceleration in the fourth quarter. If you could just talk about kind of what's driving that? Are you expecting any sequential occupancy gains in the fourth quarter kind of what else may be at play that kind of gets. I think like the mid- to high 5s is what it implies for the fourth quarter, the updated same-store guide? Can you just touch on that, that would be helpful.

Yes, absolutely, Vince. Thank you for the question. So I'm going to walk you through, it's related to a tenant and some cash basis accounting. So number one, we've executed virtually all the leasing we expect for this year. In the third quarter, the metrics include the impact of moving one tenant to cash basis accounting and obviously, the associated impact of writing off AR balance. Well, after September and quite recently, we executed a repayment agreement that requires the tenant to come current during this quarter and also make the required rental payments. So a performed pursuant to the agreement through today. And to the extent they become current by year-end, we'd expect to be near at the high end of our same-store guidance. So this is what I think is going to help here. Had we not written off the AR balance, the Q3 same-store would have been approximately 5% as opposed to where it is. And year-to-date, it would have been approximately 4%, right in line with our updated guidance. So it's -- basically, it's a matter of timing. The tenants catching up on past due payments in the fourth quarter. Q3 is lower due to the write-off and the fourth quarter will benefit from the payments being made by the tenant as they become current. Just a little background, this customer is a supplier to the automotive industry and has an incredibly strong customer roster and is profitable. So it really is timing, Vince.

No, that's super helpful. And is there any color on occupancy. I mean, should we expect same-store occupancy to be around 97% as well in the fourth quarter, given it sounds like most of the leasing is done?

Yes. I mean our guidance, which we didn't change is roughly 75 basis points of occupancy loss in the same-store for the full year. So we didn't change that.

Our next question comes from the line of Jon Petersen with Jefferies.

The $153 million of acquisitions that you have under agreement, can you give us a sense of the cap rates on those properties that we should be thinking about?

Yes, it's pretty consistent with what we've closed in the third quarter.

Okay. And then the new land that you bought in Union, Ohio, I believe that's near Dayton. Can you just talk about that market a little bit? It's maybe not one I'm super familiar with. So just what are you seeing from a demand and supply perspective that gives you confidence in doing a development there?

Yes. And just that land that we bought, that's that build-to-suit that I've mentioned in the prepared remarks to a strong credit for 10 years. But I don't know, Mike or Steve, who wants to take the -- Mike, why don't you take that?

Yes. I mean, Dayton is kind of, I would say, a market that is up and coming and emerging. It's 104 million square feet. It's about 4% vacant. They have less than 1 million square feet of construction going on right now. So -- but all that said, we were very comfortable with acquiring that land and developing as we had a long-term build-to-suit lease signed up with a strong credit tenant. So that was an easy one for us to kind of take a look at.

And in this property is near the airport.

Yes, this property is located right next to Dayton International Airport and a couple of miles away from the main interstate there, I'd say.

If not the best submarket in the market, one of the best submarkets, right? And the building fits the market really well. So to the extent after the 10 years, the tenant does renew, we feel very comfortable with the leasability of that asset.

Okay. And then I know we're all trying to tease out 2026 same-store. So maybe I'll ask it one more way. Is there any known move-outs that we should be thinking about as we look into '26?

All right. I'll answer that one just because you're so direct with it. Nothing material. There was -- we call out the large known move-outs, call it, anything over 400. As I said, I think there was 5 of them. We addressed 4 of them were in active negotiations with the last. So nothing to call out.

Our next question comes from the line of Michael Griffin with Evercore ISI.

Bill, I want to go back to your comment in your prepared remarks about lease gestation time frame remaining longer and maybe marrying that up to the execution you've had in your '26 leasing plan already, I mean, whether it's new leases or renewals? Like can you give us a sense, are tenants shopping around for a deal? Or does it seem like they're getting closer and closer and ready to sign on the dotted line, given the maybe greater clarity and certainty that's out in the market?

Yes. And that's -- it's a good question. Just to clarify, it's, call it, a couple of months for the negotiations that go on, maybe a little bit longer for normal negotiations with the lease. Historically, those are the numbers, maybe we're a little bit longer this year. But for example, in our Nashville lease that we got done, that was done from start to finish in weeks, right? So we -- I do expect those to remain elongated for a period of time, similar to tracking with vacancy rates, right? As I mentioned, in and around that 7% or high 6s mark for the next couple of 3 quarters. And as those vacancy rates comes down, naturally the lease gestation periods get reduced, right, because there's less options, you need to make decisions a little quicker. In Nashville, a great example, really strong industrial market, not a ton of options, tenant needed our space. We got the deal done start to finish in a matter of weeks. So I think it's just a period of time for these to stay relatively, call it, elongated and then those will start to shorten as vacancy rates come down.

Appreciate the color there. And then maybe you could just give us some insights into the demand of the 4 development projects that are going to be completed in the fourth quarter? I know there's probably some time until those stabilize, but what's the traction sort of looking like on that space? And would you be willing to give on concessions in order to get the projects leased up?

Yes. I'll let Steve answer the details there. And just as a reminder, we underwrite 12 months of lease-up for our development projects, but Steve can walk through the demand that we're seeing for the ones that are going to be completed soon.

Yes, Michael, I appreciate the question. We've made good progress on the existing, but the stuff coming that we still have left to lease. I'll just walk you through the 5 markets. That's probably the easiest way to do it. We have a small amount of vacancy in Greenville, Spartanburg, just 70,000 square feet. As you probably know, the activity in that market has been very good with a lot of absorption in the last couple of quarters, and we do have activity on that 70,000. So we feel pretty good about that space. It's built out. The office is there. It's ready to go, and we have users looking at it. The next -- and that market has dropped to below 7% vacancy. And on these calls, we've talked about it being double digit for some time. So a big improvement in that market. The next market where we have vacancy would be in Tampa. If you recall, we had the 2 buildings there. We leased one of them relatively quickly to a single user. We have one remaining at 140,000 square feet. That market as a whole is about 6.5% vacant and our submarket is below 5%. So -- and there, again, we have activity for that building. And so we feel good about the Tampa market and prospects for that building. The next market where we'll be delivering here in the fourth quarter is two 200,000 square foot buildings into the Charlotte market. That market is about 8% vacancy with a lot of positive momentum, particularly in the larger bulk that's brought that vacancy down. So as it was alluded to earlier, one of the questions about developing into improving markets, I think Charlotte should be one of those stories where that market is starting to improve, and we're delivering product. In the submarket that we're out in Concorde, that's about a 5% vacancy market. And in that project, you'll recall when we've talked about it, we have some benefits on users relative to some of the peers because there are some zoning issues with sewer availability in the market. So we can do distribution and manufacturing tenants when some of our competition can't do the distribution. Next market would be Reno where we have 2 buildings delivering, a 285,000 and a 76,000 square footer. Both of those buildings fit the North Valley submarket that we're in. That market has been slower absorption in the last probably 6 quarters. And so that -- a little bit of headwinds there, but we expect absorption will pick up as we deliver these buildings. And we do have activity and have had activity on both buildings, but nothing to report yet. And then the last market is Louisville, probably the one I'm personally the most bullish about. It's a 4% vacancy market. We are in a Class A park just south of the market and a very established park. We have strong activity in our building and there's very limited supply that we'll be competing with in that market. That takes you through kind of the 5 markets where we have future exposure.

Appreciate the detailed analysis there.

Our next question comes from the line of Nikita Bely with JPMorgan.

It looks like you are pretty bullish on both acquisitions and developments. Can you talk a little bit about how you rank them on a relative basis, one versus another? And as you start to ramp both of them up, it appears in 2026, how do you plan to fund it? And are we close enough to issue equity at these prices?

Nikita, it's Bill. With respect to ranking, it's hard. I mean, that was good -- I guess, I'll still say the joke, it's like ranking your children, right? They're different. I would say we evaluate opportunities for development and acquisitions. And depending on the returns, the market, et cetera, we may choose to look at one or the other. But the reality is we've got a balance sheet and liquidity to -- if we like both opportunities, we can deploy capital to both opportunities. So it's not an either/or for us. And we certainly have the process, the people and the systems internally to evaluate all those opportunities. So for us, it's not an either/or. So we don't have to force rank those 2 opportunities. But as I said, development was -- the favorite choice of deployment of capital earlier this year, and I think acquisitions is catching up, which is great to see. In terms of capitalizing those and financing those, I'll turn it over to Matts to talk about that.

Yes. Nikita, so as we sit here today, we're retaining north of $100 million of free cash flow. Our balance sheet is at the low end of our balance -- of our leverage target. So those are probably the 2 first sources. We have $47 million of unfunded forward equity, which would be the next source. We don't anticipate any deviation from our normal leverage gains, generally operating in the low 5x.

Our next question comes from the line of Brendan Lynch with Barclays.

You mentioned the fixed renewal options that are in place for some of the leases that are going to roll in 2026. Do you have a lot more of these? And are they mostly reflecting acquisitions that you've made and the contracts that were put in place by the prior owners?

Yes, they're almost all based on assuming leases. And I would say they're not higher -- materially higher or lower than other years. They just happen to be in the remaining portion of the unleased space for next year. Generally, those renewal options have some sort of notice period. It could be as short as 3 months. So some of those are to the back end of next year.

Okay. That's helpful. And then maybe kind of a strategy question. You seem to have an improving view on how the market is trending. And I think there's a lot of third-party data out there to support that. When you think about the acquisitions that you have made versus the ones that you passed on, do you get the sense that you could have been more aggressive in the past to make more acquisitions? And is that changing your calculus now as the market seems to be improving?

One of the things we look at for acquisitions is we're deploying capital accretively, right? And that was part of the issue that we were seeing earlier was that we weren't able to do that with all of them. You can always Monday morning quarterback decisions. We try to evaluate decisions with the information that we have on hand at that point in time and make the best informed decision at that point in time. So I think we've made a lot of good decisions this year. Really, I'm happy with the acquisitions that we've made this year, and really happy with the development decisions we've made this year. So we'll continue to evaluate acquisitions and development opportunities with the information that we know and try to make the best decision we can.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Crooker for any final comments.

I just want to thank everybody for joining the call and as always, the thoughtful questions. And we look forward to seeing you all soon at the upcoming conferences. Take care.