Q4 2020 First Industrial Realty Trust Inc Earnings Call
Good morning, My name is Sia and I will be the conference operator today at this time I would like to welcome everyone to the first industrial for Q and full year 'twenty results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If he would like to.
To ask a question during that time simply press Star and then number one on your telephone keypad to withdraw the question press the pound key. Thank you at this time I would like to turn the conference over to Art Harmon. Please go ahead.
Hello, everybody and welcome to our call before we discuss our fourth quarter and full year 2020 results as well as 2021 guidance, let me remind everyone that our call may include forward looking statements as defined by federal Securities laws.
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 day Thursday February 11 2021.
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 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 earnings release, the supplemental report earnings release and our.
SEC filings are available at first industrial Dot com under the investors day.
Our call will begin with remarks by Peter <unk>, Our President and Chief Executive Officer, and Scott Musil, Our Chief Financial Officer, After which we'll open it up for your questions.
So 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.
We hope youre doing well and staying healthy.
'twenty was a year, unlike any other and one which we would each liked to put in a very distant memory.
Notwithstanding the turmoil fear and uncertain operating environment. The fr team remained focused and executed the plan and performed admirably generating outstanding results for shareholders.
Our portfolio performance was strong we maintained high occupancy levels grew cash rents and collected over 99% of billed rents more on that in a moment.
We capped off 2020 with an excellent fourth quarter, we delivered year end occupancy of 95, 7% up 70 basis points from the guidance midpoint provided on our third quarter call.
This was driven primarily by leasing at our development and one of our replacement tenants in southern California, taking occupancy earlier than anticipated.
For the full year, we grew cash rental rate 13, 5%, which is the second highest in our company's history just behind the 13, 9% growth we achieved in 2019.
These metrics reflect consistently strong tenant demand for high quality logistics space.
In our markets, we're seeing well located and highly functional space being absorbed by E commerce and other traditional users and their efforts to optimize supply chain.
The positive fourth quarter leasing statistics nationally are consistent with our own experience as CBRE preliminary figures for net absorption is 104 million square feet. The highest quarterly result in the last four years.
And exceeding the 69 million square feet of <unk> completions.
For the full year net absorption was 224 million square feet, 15% higher than 2019 completions were 265 million square feet, an increase of 10% over 2019.
In 2021, we expect to capitalize on our current landholdings as well as new acquisitions to generate more growth and value creation.
We're also focused on making progress in realizing the three year cash flow growth opportunity, we laid out for you at our Investor Day. This past November.
I'm pleased to say we're off to a strong start as we signed leases for approximately 54% of our 'twenty 'twenty, one rollovers at a cash rental rate increase of approximately 13%.
This early performance is consistent with the 10% to 14% increase we expect on our new and renewal leasing for the full year 2021.
Our expirations for the balance of 'twenty 'twenty, one are fairly granular with our largest remaining rollover now of 400000 square footer, where the tenant is expected to vacate in may.
I'd like to highlight several big leasing wins on some of our developments as evidence of the strength of the South Florida market. We're pleased to announce we have signed a long term lease for 100% of the three building first Cypress Creek Commerce Center with a single E Commerce tenant this.
Project totaled 377000 square feet and the lease commenced right at completion on February 1st.
Our total investment is $37 1 million in our first year stabilized cash yield is six 6%.
In the inland Empire at our first Redwood project, we signed and commenced leases for both the 358000 in the 72000 square foot facilities in the fourth quarter.
And just this week, we fully leased the remaining 44000 square foot building.
Given our own experience and the strong market dynamics reflected in CBRE fourth quarter update report, which shows the inland Empire vacancy rate at 1.9%. We're excited to be readying. Our next start in that market, which I will discuss shortly.
Also in the fourth quarter in Dallas, We signed two leases at first park 121 to bring a pair of buildings there to 100% occupancy.
The first was for the remaining 101000 square feet at the 434000 square foot building E and the second was a 25000 square foot expansion at building B.
Each of these leases is a reflection of the continued strong demand for high quality logistics space and the effort and talent of our leasing teams across the country.
Turning to new development starts we've broken ground on PV 303 building C in Phoenix on our wholly owned site.
This 548000 square foot Cross dock facility is our fourth speculative development in this highly sought after size range since 2017.
Each of our prior projects in this market was fully leased at or near completion.
Total investment for this new development is approximately $42 6 million with a targeted cash yield of 6.6%.
Turning now to the new project in the inland Empire I referenced we are planning to bake break ground in the coming weeks on first Wilson, one or 303000 square foot facility and the I 215 corridor of the inland Empire.
This is a $30.2 million development with a targeted completion at the end of December and a projected cash yield of six 3%.
Lastly, we will be starting a 500000 square foot development in Nashville, known as first Rockdale for.
The site is located within a park, where we have successfully developed buildings over the years.
Tennessee was among the fastest growing states in the U S. During 2020, and Nashville is its largest city.
We've seen increased absorptions and leasing activity for large distribution centers in this submarket and are excited about this opportunity.
Total investment is approximately $26 8 million with a targeted cash yield of 7.2%.
Summing up our development activity in 'twenty 'twenty, we placed in service 10 buildings totaling two and a half million square feet with an estimated investment of $222 million day.
These assets are 79% leased at an estimated cash yield of 7.2% upon full lease up.
This represents an expected overall margin of 58% to 68%, which is about one dollar per share of N a Z.
One additional item of note regarding our highly successful JV in Phoenix.
As we discussed on our third quarter call. We successfully leased the 644000 square foot spec building at PV 303 to a single tenant.
Upon completion in the fourth quarter, we negotiated the acquisition of our partner's interest in the building, reflecting a total purchase price of $42 6 million, which is net of our 5.2 million share of the joint ventures gain on sale and incentive fee.
Moving now to dispositions during the quarter, we sold 15 properties for $97 1 million and an in place cap rate of approximately 6.4%.
In 2020, excluding the previously reported purchase option related sale in Phoenix, We sold one 9 million square feet for a total of $153 4 million essentially at the midpoint of our target sales guidance range for the year.
For 'twenty 'twenty, one our guidance for sales is $100 million to $150 million.
In the coming week, we anticipate selling a 664000 square foot building in Houston at a sales price of approximately $42 million.
Given its very high probability of closing we are including the impact of this sale.
In 2021 guidance.
Aside from the first quarter sale I just mentioned, we expect the majority of the remaining 2021 sales to be backend loaded.
Based upon our strong 'twenty 'twenty performance and 'twenty 'twenty one outlook.
Scott will discuss shortly our board of directors has declared a dividend of 27 cents per share for the first quarter of 'twenty 'twenty one.
This is a dollar eight per share annualized which equates to an 8% increase from 2020.
This dividend level represents a payout ratio of approximately 69% of our anticipated <unk> for 'twenty and 'twenty, one as defined in our supplemental.
To wrap it up we had an excellent quarter to end the year on a high note.
We're very excited about the strength of our platform and our future development pipeline, both of which position us well to benefit from continued strong fundamentals in the industrial market and to take advantage of the growth opportunities that are to come in 'twenty and 'twenty one.
With that let me turn it over to Scott.
Thanks Peter.
Let me recap our results NAREIT funds from operations were <unk> 44 cents per fully diluted share compared to 45 cents per share in <unk> 2019.
For the full year NAREIT <unk> per share was $1.84 versus $1.74 in 2019.
I remind you that our full year 2020 includes income related to the final settlement of two insurance claims for damaged properties recognized in prior quarters.
This was partially offset by a restructuring charge and costs related to the accelerated vesting of equity awards for retirement eligible employees.
<unk> the impact of approximately four cents per share related to these items 2020 <unk> per share was $1 80.
Now a quick update on our collection experience, we have collected 99% of the 2020 months monthly rental billings every month since April and effectively it would be 100% if we factored in reserves.
We are also pleased to announce all tenants with deferral agreements had paid back those obligations in full and we currently have no other agreements outstanding.
In another bit of good news, we have closure on one of our last tenants on the watch list that we discussed in our last call.
This tenant occupied a 137000 square foot building in the Chino Submarket of the England Empire West and vacate at December 31st.
Due to the great work of our southern California team, we were able to lease 100 per cent of the building on a long term basis with only one month of downtime at a cash rental rate increase of 28%.
In the fourth quarter. We also wrote off the 1.1 million dollar cash and straight line rent receivable related to this tenant.
In doing so we have taken care of the last material accounts receivable exposure related to our Covid related watch list.
Summarizing our outstanding leasing volume during the quarter, we commenced approximately 4.4 million square feet of leases.
Of these 700000 were new one.
One six were renewals and $2 1 billion were for developments and acquisitions with lease up.
Tenant retention by square footage was 86%.
For the quarter same store NOI growth on a cash basis, excluding termination fees was one 3% helped by an increase in rental rates on new and renewal leasing and rental rate bumps embedded in our leases.
Partially offset by lower average occupancy and an increase in free rent.
For the full year 2020 cash same store NOI growth before lease termination fees was four 4%.
Cash rental rates for the quarter were up 10.4% overall with renewals up eight 6% and new leasing 12, 8%.
On a straight line basis overall rental rates were up 25, 5%.
With renewals, increasing 25, 9%.
And new leasing up 25, 1%.
For the year cash rental rates were up 13.5%, which as Peter mentioned is the second highest in the company's history.
On a straight line basis, they were up 29, 7%.
Now onto a few balance sheet metrics.
At December 31st our net debt plus preferred stock to adjusted EBITDA is four eight times and the weighted average maturity of our unsecured notes term loans and secured financings was six three years with a weighted average interest rate of three 7%.
Moving onto our 2021 initial guidance per our earnings release last evening.
Our guidance range for NAREIT <unk> is $1 85 to $1.95 per share with a midpoint of $1 90.
Key assumptions for guidance are as follows quarter.
Quarter end average in service occupancy for the year of 95, 5% to 96, 5%.
Our cash bad debt expense assumption for 2021 is $2 billion consistent with last year's pre pandemic assumption.
Same store NOI growth on a cash basis before termination fees of 3% to 4%.
We expect our G&A expense to approximate $33 million to $34 million.
Guidance includes the anticipated 2021 costs related to our completed and under construction developments at December 31st.
Plus the expected first quarter Groundbreakings first park PV 303 building C. First rockdale four and first Wilson won.
In total for the full year 2021, we expect to capitalize about five cents per share of interest related to these developments.
Guidance reflects the impact from the $42 million sale in Houston expected to close in the first quarter that Peter discussed, which could be as much as two cents per share of that that Boe impact in 2021, depending on redeployment of the anticipated proceeds.
Guidance also reflects the expected pay off of $58 million of secured debt in the third quarter with an interest rate of 485%.
Other than previously discussed our guidance does not reflect the.
The impact of any other future sales acquisitions or new development starts.
The impact of any future debt issuances debt repurchases or repayments.
And guidance also excludes the potential issuance of equity, let me turn it back over to Peter.
Thanks Scott.
Before we open it up to questions, let me congratulate our team for their outstanding performance in 2020.
It was the kind of year that is impossible to prepare for Theres no training for how to manage a business through a pandemic.
Especially one accompanied by social and political unrest not seen in decades.
The true leaders emerge during a crisis and when they have managed well in the crisis has passed to most it may not it felt like a crisis at all.
This is what we experienced within our company across every role in every region.
So thank you team fr for your commitment and dedication.
I couldnt be more proud to work with such a talented group of people nor more excited about the opportunities ahead.
With that we will now move to the question and answer portion of our call. We ask that you. Please limit your questions to one plus a follow up and then you're welcome to get back in the queue.
So operator, please open it up for questions. Thank you Sir at this time I would like to remind everyone that if you would like to ask a question. Please press star and the number one on your telephone keypad again, Thats star one for any questions well pause for just a moment.
The first question will come from Craig Melman with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Nice job on the development leasing.
And to date and I'm, just kind of curious as you guys Derisk the pipeline here.
I know you don't necessarily put numbers on starts but as Youre looking at you know the land bank and demand across your markets. What do you think a decent bogey could be on where you could be from a development start.
Level this year.
Hey, Craig its Peter.
As you pointed out we don't give guidance on starts.
But as you know we can with the land that we own build about 13 million square feet.
We can build a lot more also on our JV land.
And.
There is no reason that you would you should think that our development volumes won't go back to pre pandemic levels, obviously last year, we had a.
I had a.
Downtime of about six months, where we suspended new starts.
Got the laid out another project located in Philadelphia. So we're.
We're excited about the markets right now there's a lot of demand.
Broad based we also think that 2021.
You know youre going to see a lot more capital expenditure into the business environment and work.
We're a very pro.
We're very positive on 2021 outlook.
Okay. That's helpful and just you know Scott from a capital perspective.
You know the just with the cadence of potential spend here in the development pipeline and disposition proceeds coming in I mean do you guys feel good about where you are I know you have no equity in the plan, but would you prefer to kind of use debt here in the near term.
To bridge any gap or would you guys you know with where the stock's trading could equity be ultimately in the plan Yeah, Craig It's Scott equity could be in the plan, but we're sitting on about $135 million of cash as we stand today.
Line of credit is Undrawn. So we have a full $725 million and we are leverages at about four eight times. So we're in pretty good shape.
But as you know we've had had issued equity in past, if we see future investments that we really like and.
And we like the stock price equity is on the table for something like that and if you looked at the equity we've issued probably since 2015, which was more for growth spec development, we're really happy about the development margins, we earn on those investments.
Even though we look good.
In good shape as we stand today equity as a possibility just depends on what our investment growth is.
And first slip one more in there just on the the loans you have common coming due this year kind of whats timing expected on.
Potentially the $200 million kind of what would the plan be from a refinancing yes.
Yes, the $200 million was a term loan debt refinance last July during the pandemic the spread popped up to 150 basis points that comes due this July.
Bank market has gotten a lot better since then we probably could shave off about 50 basis points in total spread on that so we are looking at the bank market to refinance debt then Craig. We also have our line of credit coming due in October of this year and if we did something with the term loan we would package them together on the $58 million of secured debt.
Net debt, we can pay off in July we will probably use excess cash or line of credit borrowings to pay that off.
Great. Thanks.
The next question will come from Rob Stevenson with Janney. Please go ahead.
Hi, good morning, guys can.
Can you talk a little bit about any stent that the issues surrounding the shipping container capacity issues.
Impacted your tenants and where the demand for increased SAR expansion space and pork markets like southern Cal.
Sure.
This is jojo.
Yes, there is congestion in the port of L. A port of long Beach, a lot of it has to do with the amount of goods coming into port, but also because of the.
In.
<unk> and the Port right now given labor issues, and then Covid related process I would put that number one because of the COVID-19 practices has been extending.
Slowing down the throughput from the container now the.
Actual amount that has come into the port has increase year over year, but not meaningful enough to really significantly affect the market. The market itself is already good positive absorption in socal and the marginal impact with debt year over year. If you look at the port container throughput.
It's about 5% now it's lagged.
First of the year in the second quarter. It was negative but then the second half of the year caught up as much as 15% to 20%. So net net year over year, we're about 5%.
So overall, our view is debt.
When this when COVID-19.
Reduces I think the flow will come in quicker.
And you know it will be back to normal with slightly more debt inflationary adjusted growth year over year in terms of container volume.
And how is that impacting your desire to develop and the inland Empire land parcels et cetera in the near term share. It has actually increased because of what's happening now is that the pickup of debt that tenants want is actually increasing because they cannot accurately estimate the amount of <unk>.
They're getting because of the delay there they're actually ordering more.
So rather than adjusted in time inventories really.
A severe cases just in case, so that's why we actually in the last six months spaces says when leasing a little bit quicker because of debt just in case.
Our mentality of the tenants they don't want to lose debt sale or stop.
Mark.
Okay and then the other one from me is.
How significant.
Is the are the land purchase.
Machine today for you guys I mean, you guys did a decent.
Job at increasing your usable land.
Position year over year and over the last couple of years.
Assuming it's getting harder and harder to find developable land at prices that make sense for you guys, but you know how is that process going and what's the pipeline look like for you guys.
Yes, the pipelines up actually pretty robust, we're making a great. Many unsolicited offers on a weekly basis across the country.
And the higher barrier markets, which are which is where we're focusing our new investments, it's definitely getting more difficult land values. As you know have gone up significantly and continued to rise.
The good news is in those markets, where land is appreciating the most rapidly the rents are growing the quickest as well so.
It justifies the timetable for getting entitlements is not shortening for sure. So basically what that means is we got to have a lot more balls in the air to keep that volume going because we've kind of win a lower percentage of those opportunities, but right now the team is doing a great job fielding a lot of new opportunities.
Okay. Thanks, guys I appreciate it.
The next question will come from Dave Rodgers with Baird. Please go ahead.
Yes, good morning, guys.
It's something in the press release I think it was based on the same store NOI comments for the fourth quarter I talked about higher free rent.
Maybe just expand upon the leasing economics that you were seeing that drove that comment and maybe whether youre seeing any of that in the development pipeline and driving some of this activity.
Yes, Dave This is Chris in general on the lease free rent concessions seem really changes there we're still usually given about a half from a free rent for Europe term and the lease so the changes in the free rent from quarter to quarter had to do just really with the free rent burning off on some deals development deals, but as far as.
Overall concessions were has seen much change in net.
Okay fair enough on those development deals.
To that or when did those all commands I mean, those all commence essentially with signing or do you have from delayed start from that activity.
Which development.
Are you day were you asking.
Asking that 100 million debt we've announced.
Yeah, the 1.2 million square feet or so that you've had in the press release last night, most of which I think was what's fourth quarter signings I guess I was just kind of make sure that those work findings or would they immediate starts or how do those stagger.
Yes, yes, they're immediate starts.
Because theres not a significant amount of the ice and this all of them were taken out of this.
Yes. So most of them are in 2020 that first Cypress Creek Commerce Center. That's February of this year.
Okay. Thanks for that Scott.
On the bad debt side, I think you gave guidance and maybe it was part of the same store up $2 million for bad debt, which was I think consistent with the expectation for 'twenty or what you delivered in 2000.
Why did you not expect that number to come down is that just kind of an overly cautious number or is there something more specific than that.
Nothing more specific our assumption on bad debt, Dave is basically we look at the 26 year history of the company, which is about 50 basis points of total revenues and that's how we get the $2 million last year, we incurred about $1 $8 million of cash bad debt expense. So.
We're hoping we can beat that $2 million number that's in our guidance.
That's helpful. Lastly.
Are you guys seeing more short term lease activity.
A little bit about that early in the earnings season, but during the same kind of what your experience has been with that.
David This is Chris again, not really if you look at.
What was in place at 12 31 between our month to month tenants in our short term debt is about 200000 square feet.
Pretty low.
Okay, great. Thank you.
And once again, ladies and gentlemen, if you would like to ask a question. Please press star one again that store one for any questions. Our next one will come from Keybanc Kim with Jewish. Please go ahead.
Thanks, Tom Good afternoon, everyone.
Can you just talk about how some of your conversations with your tenants have evolved over time and what are their biggest pain points today and things being asked for.
Peter and Jojo.
Stephen I couldn't it's Peter I Couldnt hear the last part of your question.
Oh, so their biggest pain points and things that they're asking for today, if thats changed at all over the past couple of quarters.
I wouldn't say substantially we continue to see an increased level of confidence from our tenants.
A lot of the deals that we're seeing continued to be expansions and as Joe real remarked a couple of minutes ago.
Shift from just in time to just in case in terms of inventory.
We're seeing lease terms lengthen as you saw in some of our.
Information and the soft so I would say in general continues to be positive Jojo.
No not much change.
Again, you know over so been happening already even for a year or two and you know the <unk>.
<unk> related companies are are.
More active medical related or more active the whole related also are more active in the <unk> and E. Commerce has always been active so I guess you know if there's a change it's a little bit more of a broader type more industries are actually coming into because of the changes or supply chain, but in terms of your ask in terms of the lease.
Leasing and <unk>.
And functionality building slow change.
Got it.
And can you just talk about the R&D Flex segment of your business there was a little bit about occupancy decline I'm not sure if that's fair.
Transitory.
And some of the pockets of vacancy that theres not much strength.
I'm talking from making them feel like in markets like Seattle or Baltimore.
Yeah, Kevin I'll take the first part of this is Chris.
The R&D flex pretty small part of our portfolio I think it's about 2% in net rents. The one the drop in occupancy is really just one space. So it's absolutely a market in that space, but that's what that is from.
Kevin It's Peter relative to Baltimore, the occupancy level, there is really a function of our vacancy at the former pier one space.
Leasing that space will take occupancy in that market to 98, 4%.
And we're seeing some activity.
On that space now, but nothing to report and then Jojo can touch on Seattle Seattle.
Currently there's only one space and about 64000 square feet in our portfolio is slightly over 4000. So it's really only one vacancy and it kind of skews the numbers there to the occupancy is a good space. We just havent found rate tenants for it yet.
Got it thank you guys.
The next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yeah. Thanks, I guess Peter in your comments I think you make a comment that there's a large lease exploration may about 400000 square feet, where you expect the tenant will move out can you provide some details on that maybe what their current rental rate is.
And where that assets located.
Joe you want to take that.
Yes, so it's a in and its in Kansas City are very good quality profit property dependent.
Based store visit they will leave and.
So again, you know good comparable to our competition, but we.
In terms of income we've factored our downtime of 12 months. So it does it affect the numbers for this year.
Okay, and then worst rents on that asset relative to the market.
We don't disclose for competitive reasons, we will report to you what happens there when we lease it.
Okay, Great and then I guess last question I know that last call. They were true challenge tenants that were highlighted and I believe that you announced the resolution of the one of those did I Miss the resolution to the second tenant I guess what was going on there.
Hey, Mike It's Scott Yeah. The one tenant is a funding 45000 square feet in the South Bay market is southern California that tenant is paid up in current at this point in time. So we're in good shape.
Okay, great. Thanks, Scott.
The next question will come from Vince <unk> with Green Street. Please go ahead.
Hi, good morning.
As you think about potential dispositions for the year could you could you see an opportunity for a portfolio deal or the way you accelerate your target market mix given the desire of many institutions to increase their industrial exposure and scale.
Hey, Vince, Yes, we've looked at that and what you.
We've seen in the marketplace as we're able to maximize value by.
By selling literally one off assets the buyers of these assets tend to be about 30% go to users and as you know users are a little less price sensitive. So we were able to maximize value there.
Another group of buyers would be the 10 31 buyers who are also more focused on time than may be paying that extra bucks a foot. So we like those buyers.
Theyre also being acquired by local and semi regional.
You know.
Money managers and the high net worth families and given the debt buyer group is really focused on the smaller transaction there.
They are not really going to be interested in a few hundred million dollars portfolio and they are really the ones that are going to pay the highest value than what we've experienced so far. So that's why we really haven't gone out with portfolios.
Makes sense. Thank you for that and one more from me and in 2020, I'm curious how much did leafing spreads and market rent growth differ between bulk light industrial and flex properties in our portfolio.
Yes. This is Chris if you look at <unk>, it's pretty broad based across all the different types I would say that the only actually R&D flex was a little bit higher as far as the spreads, but it was pretty broad based across all the property types.
Okay. Thank you.
The next question will come from Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi, good morning, Ken.
Tenant retention on renewal.
81% in the fourth quarter, which is similar to the full year level. So I was wondering if you could just talk about how you think about what the right level and then also when tenants choose not to renew what are some of the reason does it come down to rent or is it just.
Expanding our decreasing the amount of space that they need.
Hey, Caitlin well typically when we have a tenant that doesn't renew its because they need additional space and given our high occupancy levels. We don't have any more space to give them. So clearly it's in our interest to retain tenants. It costs about four times as much to re lease the space as it does to roller space.
And obviously that factors into our desire to push rents.
As much as we can.
I would say this in a really good market like we have now retention is almost more of an outcome than a target obviously in a very weak market you want to retain and so retention is more of your target than the than you'd want that to happen you want that to be the outcome. So.
We're really working all the spaces as vigorously as we can to maximize value and that's a combination of a lot of factors as I've said, including rent growth.
And the cost to release.
Got it and then maybe on the dividend.
You guys talked about how you raise a percentage in the quarter, which is higher than both the assets.
Growth in 2020, and the guidance for 2021, and I know that you've also talked about there was some acceleration of capex.
2020 that pulled forward.
So I guess, what drove the decision to increase the payout ratio rather than retain more cash to reinvest.
Hey, Caitlin, it's Scott we did we grew the dividend by 8% as we said in the in the press release, we grow our dividend as we grow our cash flow as we laid out at the Investor Day in November we think we have an opportunity to grow cash flow of 9% a year for the next three years. So that that's in line with that as far as the payout payout ratio.
Is concerned it went up a couple percentage points so nothing material.
And we're still in the 60% level, which we're very happy with it.
Okay.
And once again, if you would like to ask a question. Please quest star one again Thats star one for any questions. Your next response is from Mike Mueller with Jpmorgan. Please go ahead.
Thanks.
How does the 54%.
2021 leases that you've addressed compare to the progress that you had last year.
Yeah. This is Chris actually last year, I think we're right about 59% historically last two or three years, we've been right around that 50% to 60% as far as the.
Once taken over by the you know the earnings call so pretty consistent.
Got it Okay, and then looking at the developments that were placed into service from a couple of assets in Texas that had fairly low reaching levels, which just curious in terms of can you give us some color on progress there.
Sure Hi, this is jojo.
Start with Dallas First Park 121, so we build three buildings there.
We almost be at least the largest building and then we compete at least the second building. So we're left with one rough occupancy of the parks about <unk>, a little bit over 70% and so that's a multi tenant building we're getting inquiries that's in the northwest part of Dallas, one of the best Peter.
Pieces of real estate there in terms of that size range. So while we're getting inquiries and we're pretty optimistic we can get at least the rest, but overall, we're very pleased with the performance of depart.
Now moving on to Houston.
Grand Parkway now that's been a slower project in Houston.
Last year Houston had.
Very good absorption of about 11, net absorption of 11 million square feet, but it also had about 16 plus million.
New deliveries if you look at Houston.
Most delivered part or mobile market Submarket.
Sub market with the most supply was the north part in northwest was second now our project is in Katy is part of the northwest Submarket a little bit the west. So you know there is a little bit more space there.
But that our tenants can choose from so you know, we're competing with sub space, but again you know that project is as freeway frontage just off state Highway 99, really nice projects. So over time, we will lease it slowly but surely.
Got it okay. Thank you.
The next question is from Sumit Sharma with Scotiabank. Please go ahead.
Hey, good morning, guys.
Great quarter.
<unk>.
Had a follow up actually on a bad debt question that was asked a few minutes ago I think Rob had asked this around.
The level of bad debt I think I think that calculates to around 40 basis points or 25 basis points based on 2020 reps and I'm wondering and I understand the point.
Point about the 26 year average, but I'm trying to understand whether your higher end or lower end contemplate different levels of bad debt.
Or is it consistent across.
Both the SS NOI ranges.
Got it.
I'm, sorry could you repeat the last half of it is to me that didn't get that kind of broke up a little bit.
Oh, I'm, so sorry, what I was asking was.
The bad debt is.
Is that is that the same level that's contemplated in both your higher end and lower end of the range is so because that 45, 40% to 50 basis points of bad debt does that change between.
Up to like 30 basis points or is it just consistent across your.
Your SS NOI range.
That will impact the same store NOI range, so to the extent debt our bad debt expense comes in lower and I'll give you an as an example, if you look from 2015 to 2019, our bad debt expense on average was $500000 a year that was pre pandemic. So if we were able.
To achieve that same level of bad debt expense in 2021, we would pick up another 50 basis points on our same store all other things being equal so that would increase our midpoint from three 5% up to 4%.
That's what you've got assets, yes, yes, that's what I was asking I was wondering whether the 4% range.
Includes that.
We called out debt assumption or not and I think.
I think I think the bottom line bias was that does that 4% become core and a half because of the bad debt are or is that already reflected in Arizona I think I think you address debt.
We do better than the 2 million Bucks, we should do better than the midpoint of our same store guidance, all things being equal correct.
Got it thank you so much.
Appreciate the response to the Wonky question I know.
Let me ask you something more funds.
One one of your peers has has mentioned that they are able to drive rent growth.
200 basis points in markets.
Above the market and Submarkets, where they have density which is defined as 20 or more assets in a five mile radius I'm not saying this day said this.
So I thought it'd be worth asking you given your density I think you guys are pretty pretty concentrated in the Riverside Submarket in the inland Empire and then in the South West our Arlington area in Dallas.
Two spots in my work had sort of showed me. So just trying to understand whether you you've seen the ability to push rents higher than the.
The market in <unk>.
Hey, guys have high density of your own assets.
I'll start out with this and then pass it over to Joe Joe for his thoughts.
First of all remember Theres 17 billion or so square feet of industrial in the United States. If you look at what each.
Sponsor owner entity owns nobody owns a an overwhelming percentage of that so it's not like the major mall business, where if you own the.
The two best malls in each town you can effectively dictate to tenants.
Our markets arent really like that so.
We think that the overall demand is.
So strong whether it's from E commerce or more traditional users that were going to be able to continue to grow rents.
Very high rate and it's the offering to that matters significantly the functionality and the quality of the functionality of the asset the location of the asset more so than who might own how many assets within a five or 10 mile radius Jojo.
Not much more to add to what Peter said, except debt.
That's why as a company we focus we prioritize 40 unfilled progress because when you have more infill.
Properties that you have less supply and then.
You can raise rents higher than your than the average market. If you've made a certain market and I can confirm sumit that the Arlington.
In a general great southwest market its a good market and we like Arlington in fact, we have product in Arlington and and the reason we invested there too is because it's quite it Phil and.
We feel that the overall in Arlington.
Maybe this is your question that you can raise rents higher than if you were in south Dallas and the reason is south Dallas, not infill and you'll get more product there so confirming your thesis.
Well, it's not in the thesis that the hypothesis.
Thanks for that data I think it's more of a I think I think your points about market control and not being like malls is that Tony.
No more.
Agile.
What I can do it but your income point I get and I. Appreciate I guess, one one last one.
Really quick contractual escalators and Andy says, what it'd be averaging at and are you seeing any creep above the 3% range.
Yes.
All of this is Chris our overall portfolio, it's about two 8% that's on an annualized basis.
That's about a 98 per cent of all of our long term leases certainly some of the actual.
Increases were seeing 3% plus we are seeing that Peter and Jojo comment a little bit more what youre seeing here, we are seeing the opportunity to push those rental increases on leases that are generally in the three year plus or minus range.
Whereas five or seven or 10, three is probably the upper limit.
Alright. Thank you. Thank you gentlemen, Jamie thank.
Thank you.
Next question is from Jay Kornreich with F&B C. Please go ahead.
Alright, Thanks for taking the question I guess, how did you guys consider the risk that major cities may take a long time to return to pre pandemic levels does this inform your from a geographic perspective to consider future investments more in sunbelt unless gateway markets.
We certainly true.
Rack.
Movements of people that's one of the reasons, we're very intrigued by Nashville, right, now and Tennessee being the sixth fastest growing state in the country.
When you look around.
When you look around and see how certain municipalities are being managed.
We pay attention to that debt that will matter over the long term.
And <unk>.
People talk about California, losing population I think.
You have to remember that not only do people move out but they move in so looking at the net numbers you'd find that the population reduction isn't huge relative to their nearly 40 million person population. So.
Really what we're focused on is consumption zones and movements that might change or alter or move those consumption zones, and you're really not seeing any big trends that would cause us to shift our focus away from the markets that we're focused on today.
Okay I appreciate that that's it from me.
The next question is a follow up from Keybanc Kim with Trust. Please go ahead.
Thanks.
And back to the balance sheet I think I missed some of the color you gave Scott, but what would the kind of all in rate and duration would be for the debt that you're looking to raise debt here.
So the so let me go over the explorations, we have a $200 million term loan debt comes due in July we have an option to extend it but the spread on that loan is pretty high as 150 basis points, because we entered into that loan during COVID-19. We think in today's market, we can refinance it 50 base.
This points inside of that rate, so 50 bps inside of that $200 million and then the line of credit. We currently pay a 110 basis points on that we think we can knock another 10 bps off the line of credit. So those are the those are the basically the two expirations. We have this year that again, we've got the $58 million mortgage law.
We're paying off but we've got plenty of excess cash we have line of line of credit we can use to pay that off and that's at a rate of 485%.
Okay got it.
Now is there something that that investors are looking for or asking for you guys to perhaps moving to a different bracket.
Credit spreads, whether that'd be issuing more unsecured bonds or from you already grown your portfolio over time, so I'm not sure emphasizes a factor or not but is there something is there things that are.
That you can do or debt that investors are asking for it that can maybe help you save on interest costs going forward.
So keep it I would say a couple of things one is if we get a rating upgrade to triple B plus or beat our boule, one that definitely impacts our spread and our.
Our credit statistics are off the charts. Good I think when you when you read the rating agency reports they want to see a larger scale size of the company.
They don't give us exactly what that number is but it's probably over $1 billion or more of growth in the total value of the company. So that would definitely help I would say.
From a public mark so unsecured bond issuance point of view, we've historically been private placement issuers, because the spreads in that market, where inside the public market debt.
Flop in the middle of this year in July. So we think we can get even more competitive spreads in the bond market than we were able to get in the in.
In the private placement market so.
All things being equal if we did a bond deal today.
Fred would definitely be inside of what we executed back.
Earlier in 2020.
And is the debt refinancing cost savings and your 'twenty 'twenty one guidance.
The term loan one is not so that assumes it's 150 basis points for the rest of the year. So if we do this.
Give a hypothetical if we're able to renew that on July 1st that would save us about a half million bucks for that half of the year on an annualized basis that would be 1 million Bucks.
So the payoff of the mortgage debt to $58 million were getting six months of the benefit of interest savings there and I'd like to pivot back to the Investor Day, where we said, we'd get $7 million of savings from refinancing higher cost debt in the next couple of years, we're not seeing.
That's going to come more in 2020. After 2021, so we're really not seeing a lot of debt $7 million savings flowing through 2021.
Okay. Thank you.
And at this time there are no further questions I would like to turn the conference over to Peter first silly for any closing comments.
Thank you operator, and thanks to everyone for participating on the call today.
And as always feel free to reach out to me Scott or art with any follow up questions. We look forward to connecting with many of you virtually and hopefully in person in 2021. Thank.
Thank you and have a great day.
Ladies and gentlemen, thank you for participating in today's conference you may all disconnect.
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