Q3 2021 First Industrial Realty Trust Inc Earnings Call
Okay.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily.
Until that time your lines will again be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the first industrial three Q21 results conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
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If you require any further assistance please press star zero.
I would now like to hand, the conference over to Art Harmon, Vice President of Investor Relations and marketing. Thank you. Please.
Go ahead.
Thank you Shelby Hello, everybody and welcome to our call.
When we discuss our third quarter 2021 results as well as updated guidance, let me remind everyone that our call may include forward looking statements as defined by Federal Securities laws. These statements are based on management's expectations plans and estimates of our prospects.
Today's statements may be time sensitive and accurate only as of today's date Thursday October 21, 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.
This are described in our 10-K and other SEC filings you can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release, the supplemental report earnings release, and our SEC filings are available at first industrial Dot com under the investors tab.
Our call will begin.
<unk> 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 also on the call today are Jojo Yap, our Chief investment Officer, Peter Schultz Executive Vice President, Chris Schneider Senior Vice President of operations, and Bob Walter Senior Vice President of capital.
Capital markets and asset management.
Now, let me turn the call over to Peter.
Thanks Art and thank you all for joining us.
Our team continued its strong performance in 2021 by delivering another great quarter highlighted by increased in service occupancy new development leasing and continued strong growth.
<unk> and rental rates on new and renewal leasing.
As importantly, we were also successful in readying land for new development starts and replenishing our pipeline with strategic land acquisitions.
I'll discuss those successes in more detail shortly but let me first update you on the overall.
The strength of the U S industrial market.
Per CBRE EEA net absorption was a healthy 120 million square feet in the third quarter, while completions came in at 79 million square feet.
Through the first three quarters of this year net absorption was 292 million square feet.
<unk> significantly outpacing new supply of $193 million.
And our portfolio, we grew occupancy 50 basis points to finished the third quarter at 97, 1%.
Cash same store NOI increased six 9% and cash rental rates for new and.
Our renewal leases were up 22, 8%.
Looking at rental rate growth for the full year as of today, we have signed roughly 98% of the 2021 exploration and including new leasing our overall cash rental rate increase is 15, 3%, which.
It's on pace to top of our previous company record of 13, 9% in 2019.
With respect to 2022 explorations, we're off to a great start with 29% of renewal side at a cash rental rate increase of 19%.
Let me move now to the primary driver of our external growth our development program as most of you know as part of our underwriting process and risk management discipline, we operate with a self imposed speculative leasing cap.
Due to continued robust fundamentals in the industrial market.
Puts a strength of our balance sheet and growth in our portfolio and the significant opportunities we have to create shareholder value through new investments, we have increased our speculative leasing cap by $175 million, bringing the total to $800 million.
Now, let me walk you through our recent land.
Physicians as well as three exciting new development starts that will put some of the incremental cap capacity to good use.
During the third quarter, we closed on three development sites totaling 122 acres for $59 million to our in the inland Empire East and the third.
And at Denver.
In total these sites can accommodate up to $2 1 million square feet of new development.
At one of the new inland Empire East sites, we're starting our first pioneer Logistics Center, a 461000 square foot Cross dock facility our total.
Projected investment of $73 million with a.
<unk> cash yield of six 8%.
The inland Empire continues to be one of the strongest logistics real estate markets in the U S helped by significant net absorption from activity related to the two largest ports in North America.
Market.
<unk> vacancy in the inland Empire is sub 2% and market rents have grown more than 80% since we went under contract on this site in early 2020.
We look forward to adding this prime asset to our southern California portfolio, which represents approximately 23%.
Of our rental income as of the end of the third quarter.
Moving to the East Coast, we're starting another development in South Florida to serve the strong tenant demand we have experienced there with our recent leasing successes at first park, Miami and first 95 distribution center.
First gate.
Commerce Center will be a 132000 square foot class a distribution facility and the infill Coral Springs Submarket.
Market rents in Broward County have grown 15% to 20% since the end of 2019, our total estimated investment is $24 million and our targeted.
Cash yield is five 5%.
In the fourth quarter, we acquired a site in Borden County, New Jersey, just off of exit seven on the <unk>.
<unk> turnpike for $8 million.
We immediately started construction of first board in town Logistics Center a 208.
Your foot facility.
We look to build upon our past successes in this location, where our two prior developments were least near construction completion.
The Central New Jersey market has been exceptionally strong with asking rents up 34% versus last year. According to a recent market report.
Score from CBRE.
Our total projected investment of $33 million with an estimated cash yield of five 8%.
In summary, these three planned fourth quarter starts totaled approximately 800000 square feet with an estimated investment of $130 million.
On a cash yield of six 3%.
Including these plants starts our developments in process totaled $6 4 million square feet with a total investment of approximately $725 million.
At a cash yield of 6%.
<unk> overall development margin on these projects is approximately 65%.
With development as our primary driver of external growth. We're also focused on replenishing our land holdings.
In the fourth quarter to date in addition to the New Jersey side I just discussed.
We also acquired a total of 10 acres in the inland Empire in Northern California for a total of $10 million.
As of today adjusted for our planned fourth quarter starts and the aforementioned land acquisition, our balance sheet land can support approximately 12.
Our 5 million square feet of new development.
Our share of the Phoenix Camelback joint venture as an additional $3 8 million square feet.
In total that's north of 16 million square feet and represents approximately $1 $7 billion of potential new investment activity.
<unk>.
Now let me update you on our recent development leasing successes.
We just leased the entire 548000 square footer at first park at PV 303 in Phoenix at completion to a leading omnichannel retailer.
As part of this lease.
We are also expanding the building another 254000 square feet for a total of 802000 square feet.
The total estimated investment for the project, including the expansion is $72 million and the estimated cash yield is 6%.
The tenant.
<unk> is expected to take occupancy of the just completed space by year end with the expansion ready for use in the second quarter of 2020.
We also.
Also leased 100% of our 303000 square foot first Wilson Logistics center in the inland Empire that will be completed in the first quarter.
Quarter of 2022.
With a cash yield of eight 7%, we substantially outperformed our underwritten yield.
This lease further showcases the rapid rental rate growth in the inland Empire that I discussed earlier.
We are pleased that we have land sites in this high.
Market that can support another two 8 million square feet of development.
As another example of the strength of the southern California market and our platform. We just leased our Laurel Park redevelopment project in the South Bay.
This property is very well suited.
Growth from our port centric warehouse distribution users given its great location and highly sought after yard for surface use.
Our first year yield is seven 5% on our $21 million investment, which represents a margin of around 150%.
<unk>.
Moving on to sales.
During the quarter, we sold six properties and four units for $14 million and in the fourth quarter. We have sold four additional buildings in Detroit totaling $7 million, bringing our year to date total to $126 million.
Given.
Current visibility on our disposition pipeline, we now expect sales for the year to total 175 million to $225 million, a $75 million increase from the prior midpoint of $125 million.
With that let me turn it over.
Given back to walk through additional details on the quarter and updated guidance. Thanks, Peter Let me start by summarizing our results and leasing stats for the third quarter.
NAREIT funds from operations were 51 per fully diluted share compared to <unk> 49 per share in <unk> 2000.
20.
Excluding approximately <unk> <unk> per share of income related to the final settlement of an insurance claim three Q2 thousand 20, <unk> was <unk> 45 per share.
Our cash basis same store NOI growth for the quarter, excluding termination fees was six nine.
9%, primarily due to higher average occupancy and.
An increase in rental rates on new and renewal leasing.
Rental rate bumps and lower bad debt expense slightly offset by an increase in free rent.
We commenced approximately two 4 million square feet of leases.
Of these 500000, where new one 4 million were renewals and 500000 work for developments and acquisitions with lease up.
Tenant retention by square footage was 85%.
Cash rental rates for the quarter were up 22, 8% overall.
Raul with renewals up 21% and new leasing up 27, 5%.
And on a straight line basis overall rental rates were up 36, 2%.
With renewals, increasing 34, 9% and.
And new leasing up 39, 5%.
Moving on to some capital markets activity.
As previously announced in early July we closed on two financing transactions.
First we expanded our line of credit to $750 million and improved our pricing to LIBOR plus 77 five basis points a reduction.
32, five basis points compared to our prior facility.
The maturity is now pushed out five years, including our two six month extension options.
We also refinanced our $200 million term loan.
The new term loan matures in July 2026, and has an interest rate.
Rate of LIBOR, plus 85 basis points.
Reduction of 65 basis points in the spread compared to our prior facility.
With our interest rate swaps in place the new fixed interest rate on the term loan is 184%.
On the equity side through our ATM.
We issued $1 1 million common shares at a weighted average price of $55 35 per share for total net proceeds of $59 million to help fund new investments Peter spoke about.
Moving on to our updated 2021 guidance per.
Our earnings release last evening.
Our guidance range for NAREIT <unk> is now $1 93 to $1 97 per share, which is a <unk> <unk> per share increase at the midpoint, reflecting our third quarter performance and an increase in capitalized interest due to our announced development starts.
Key assumptions for guidance are as follows.
In service occupancy at year end of 90, 675% to 90, 775%.
This implies a full year quarter end average in service occupancy of 96, 5%.
To 96, 8% an increase of 15 basis points at the midpoint.
Fourth quarter same store NOI growth on a cash basis before termination fees of 6% to seven 5%. This.
This implies a quarterly average same store NOI growth for the <unk>.
Full year 2021, a four 3% to four 7% an increase of 25 basis points at the midpoint due to our third quarter performance.
Please note that our full year same store NOI guidance excludes the impact of approximately $1 million from.
The gain from an insurance settlement.
Our G&A expense guidance is now $34 million to $35 million, an increase of $1 million at the midpoint.
And guidance includes the anticipated 2021 costs related to our completed and under construct destruction.
<unk> developments at September 30, plus.
Plus the expected fourth quarter starts of first pioneer logistics center.
First Gate Commerce Center and first born in town Logistics Center in.
In total for the full year 2021, we expect to capitalize about <unk> <unk> per share of interest.
Other than previously discussed our guidance does not reflect the impact of any future sales acquisitions or new development starts. After this call the impact of any future debt issuances debt repurchases or repayments. After this call and guidance also excludes the potential.
<unk> of equity, let me turn it back over to Peter.
Thanks, Scott before.
Before we take your questions. Let me thank our team for another great quarter.
Excited about our growth prospects as we continue to put into production our land holdings that can currently support more than 16 million square feet of value creating development.
Issue.
We are also focused on replenishing our pipeline with new sites in higher barrier markets.
We continue to benefit from robust second sector fundamentals that are reflected in strong net absorption high occupancy levels and increasing rents.
With that operator would you please open it up for questions.
Development.
As a reminder, if you would like to ask a question you may do so by pressing Star then the number one on your telephone keypad.
Again that is star one if you would like to ask a question.
Your first question is from Craig Mailman of Keybanc capital markets.
Hey, good morning, guys.
Scott maybe this one's for you just look at the year to date <unk> kind of implies a.
D cell in the fourth quarter to get to the midpoint of your range.
Could you just walk through that.
Sure Craig I would say the two drivers there are one as we forecasted.
$500000 of bad debt expense in the fourth quarter, our actual in the third quarter was 25000, hopefully we can do better in the fourth quarter, then that are $500000 and also the fourth quarter is being.
Hit with a full quarter dilution related to the equity issuance, where the third quarter.
As only parcels so I would say those are the two drivers.
Okay.
And did you say that there is equity more equity included in the guidance going forward or did I mishear, you no no future equity, but what I'm, saying is that the equity issued in the third quarter was more back end on the third quarter.
<unk>.
So the fourth quarter, it's in for the entire quarter. So you have a higher share count fourth quarter compared to the third quarter.
Gotcha and then just.
Separately, Peter you noted your spec cap is up $175 million kind of what.
Could you just walk through as you the balance sheet gets.
Gets bigger over time, how we can kind of maybe track the upside to this like what's the most important metric you guys used to set that cap.
Sure. So we put the cap in place back in 2012, and a little history here, we will give more context to the answer because he answered pretty straightforward.
We put in place in 2012, obviously, we had a very very different portfolio and a very different balance sheet.
And back then the Formula was 9% of the total market cap of the company.
As time has passed we have adjusted the cap based on that Formula. So we adjusted it in 15.
<unk> and <unk> and then again at the beginning of this year.
We have not changed the multiplier, it's still 9% notwithstanding the dramatically improved portfolio and balance sheet. So you can say, it's even more conservative today than it was.
In 2012, so it's pretty simple Craig it's just 9% of the.
The total traded value plus debt of the company.
Gotcha. Thank you.
Your next question is from Keybanc Kim of Truest.
Thanks, Good morning thinking.
Sticking with the same line of questioning I wasn't sure how you calculated the how.
<unk> have eaten into that speculative cap because you also considered a vacancy in the portfolio.
So I guess first question how much have you eaten into the cap.
And do you I can't remember if you use like book value for your assets or market value to get to that calculation. So so committed dollars so any new.
I meant that we start that has less than 90% leasing those dollars go in on a on a pro rata basis. If we were to do a forward with no tenants those dollars go in.
And that is how we then cap works, we have $279 million of capacity today largely.
<unk> is a great leasing on our new developments that we've just completed so of the $802 79 is available.
That answer your question Covid and it's based on book value to keep it.
Also keeping it as acquisition vacancy so if we acquire an empty building it goes into the spec cap we.
Treat that risk the same as development and so when we leased any acquisition vacancy it comes off.
It comes off the list and finally once an asset is 90% leased it all comes out.
Got it.
So when you think about that.
Amount of could be from that you've done.
They do.
Portfolio.
What is it.
A practical range.
Our development starts on a ongoing annual basis I know you guys don't typically provide guidance just looking for some type of ballpark figure.
Right.
So.
Sure.
In Europe, given the strength.
And scale of our current land position the spec cap and the pace at which we leased new developments ultimately are going to determine the development volume going forward of course subject to profitability as we always say where we're.
We're a profit shop, not a volume shop, so you should see.
But development levels going forward are going to be at higher levels than in the past several years again, assuming fundamentals hold.
Okay.
As you think about funding that development pipeline that's growing.
Should we expect.
Kind of on the studies.
Contribution from dispositions.
$200 million that should ratchet up as the pipeline growth.
Or where different forces.
With respect to dispositions I think the volumes that we've guided to the last few years are going to be similar going forward. Obviously, we just increased.
And that has a lot to do with <unk>.
Quite often we will get unsolicited offers on assets.
Or in markets, where we wanted to dispose of more assets and we will take those offers.
That's really what you see when we pop up from our original guidance. So I think the guidance volumes going forward will be similar EBIT.
So what we've we've been giving.
Okay. That's it for me, thanks, and obviously as we get bigger that has a much lower percentage.
<unk> percentage of the overall size of the company.
Great. Thank you.
Your next question is from Rob Stevenson of Janney.
<unk>.
Good morning, guys, just a follow up on <unk> question.
The fourth quarter disposition guidance is now roughly I guess $60 million to $100 million given the full year guidance are you seeing any meaningful change in the asset pricing there or is that increase more of a reflection of the increases to the development pipeline and the need to fund that.
And the attractiveness of dispositions as a funding source.
No I mean, I think the bottom line is we're getting really good pricing.
And again in these markets and you know all know that the markets that are outside of our <unk> target markets are the markets, where we find lower growth and we're gonna be disposing of more of those assets.
And.
It's for asset the market for assets in those Submarkets is very very strong that's really what drives it we're really not looking to sell real estate to fund development.
Not the key driver, obviously, it's a benefit but it's not the key driver.
And would you be with.
These $60 million to $100 million in the fourth quarter youre going to be exiting any markets as a result of that.
Wholesale exit.
I don't think so okay.
Okay.
And then Peter Theres been a lot of press on the continued supply chain issues in the cargo ships sitting off the coast.
Mark what impact is that having on your tenants and then their incremental demand for industrial space. These days and if this continues through 2022 as many expect what's the impact down to your business you think.
I'm going to give that to Joe Zhou and Peter to give their thoughts on that sure sure basically the net impact.
Is that a lot of the tenants in our business who need imported products.
Is really having a hard time getting brought up and they cannot ascertain the availability nor the timing. So the net effect is that they order more they have to stop more they have to put more inventory because.
<unk> coal hard the bigger launches the sale of that product and if you. If they don't really know the timing that creates a lot of issues.
Issues surgeons. So they are going out the net effect was they're getting wanting to take more space and what's been happening is that we now have less space than the start of the year and so what happens is that now our rents have.
Been rising because of that.
In terms of 2022, we don't know Theres. So many issues in the supply chain right now and there is strong demand so.
We hope that this level so for our tenancy, but the reality is is I don't think it will level off I think you'd look at the supply chain issues will continue and the.
This pressure will continue because of the lack of space and increased demand Hey, Rob It's Peter Schultz. The other thing I would add to that is.
We're seeing a marked increase of activity from a third party logistics companies.
Looking for space to help.
Help with the capacity constraints that are a lot of our tenancy.
And companies have so they are very very active looking for as Jojo said.
Finite and declining amount of space today.
Should we be thinking about this time period.
Elevated rental rates.
Increased demand is a pull forward and then at some point, whether it's 2020.
Randy 2024, who knows that there will be some sort of lull.
As the catch up that actually happens or is this you think that this sort of elevated level winds up of demand winds up sticking around for a prolonged period of time as people are reluctant to go back to previous just in time inventory procedures.
<unk>.
That's a very very good question in order to answer that question, we have to predict where e-commerce as a percentage of total sales will be in the market and in e-commerce in the mix.
Five six years I don't know goes to 50% then that's even going to be.
A bigger driver businesses supply chain issues, so the supply chain issues will be.
Very very minimal compared to that long term driver so now.
That's the first thing the second thing is that in terms of supply chain, it's hard to predict really when it's going to be good you have offshore issues you have ensure issues ship shipper issues.
We have labor issues, you have truckload driver issues, you have COVID-19 still a little bit it's lessening related efficiency issues at the ports. So.
We don't know and that's all going to get fixed.
The primary catalyst to this the supply chain issues with Covid.
We're everything shut down and then it opened up all at once and so if anything youre catching up more than you are selling forward.
You follow me.
Okay.
Thanks, guys I appreciate it.
As a reminder, if you'd like to ask a question. Please press star one.
Issues or one of you would like to ask a question.
Your next question is from Anthony Powell of Barclays.
Hi, good morning.
Question on the spec cap you you said that it's at 9% of the total I guess market value, Matt Conservative relative to where you used to be at the company given the.
Okay.
Pretty similar quality of the portfolio.
Given the strong fundamentals why not be more aggressive and increase that spent cap a bit more and just kind of what youre seeing in the market.
Yes.
One thing that we're very focused on is making sure that we have a business strategy and a portfolio thats going to outperform through the cycle and while it is tempting in times like.
Company to do what you just said.
We think going forward, we're going to be a lot better off if we just stick to the fundamental business plan that we've always had and we are working hard as you can see in terms of replenishing our pipeline not only for land, but new developments and creating great margins, there and where.
This mindful that trees don't grow to the sky.
Trust Me, we've discussed what you've said and at the end of the day, we really like the discipline for new leasing that the current cap structure demands.
Got it thanks.
On the land side, how you said you're replenishing our land bank right now what are you seeing in terms.
Terms and pricing on land the competitive environment.
Competitive players for for industrial land out there.
Very competitive.
And that price has continued to increase.
Increasing a lot more on the coasts than the middle part of the country.
The reason for it.
Bigger.
Increased coastal markets because the rent growth there has been.
Higher as well so we project that our land prices will continue to increase.
Alright, thank you.
Okay.
Your next question is from Rich Anderson of F N B C.
Hey, Thanks, good morning so.
Just a follow up on the supply chain question that got started with Rob.
Gary.
Now did you say.
That the issues that we're talking about are very.
Kind of small in terms of rent pressure upward versus the broader commentary about E. Commerce demand is that what you said.
Said.
So what I was saying is that when you look at the supply chain issues today.
Really know what the long term impact is if you don't know where e-commerce as a percentage of total sales will go and what I said was that if E. Commerce is it presents a whole sales will go to 50 the.
That will actually make the supply chain issues kind of minimum minimal I think is a big it today, that's for 2025 and it goes to 50, that's a bigger driver than anything else that we're seeing and that's why it.
Okay I understand thank you for that so.
But would you I don't know if it is.
If you're able to quantify this but would you be able to say if there's a.
<unk>.
$50 of rent.
How much of that.
And probably impossible question to answer, but how much of that is supply chain related how much of that is just basic demand related is it is there any way to answer that question.
No.
There is no way to answer it but I would say that the demand side of that is vastly exceeds the current.
Pressure from the supply chain challenge, there just isn't enough space for the demand anyway.
Lot of that has to do with the fact that everybody stopped building last.
Last year for seven or eight months.
A lot of it has to do with the fact that it's difficult.
Now and this is a supply chain challenge, but it's difficult to get some commodity inputs.
But the demand is just very very strong you saw that you've heard the net absorption numbers earlier relative to new deliveries.
And that's really was the primary driver of the very very strong rent growth that we're experiencing and Richard Peters. So the other thing I would add to that is remember occupancy costs early in the 456, 7% range.
Our company's operation so while rents are going up we're seeing.
Sure.
Transportation go up even more so.
The occupancy cost is still a very small percentage of the total gotcha.
You mentioned that as a way to counter some of these stresses that they're stockpiling more but how does that play into the the shortage of truck.
Being laser drivers and moving things around I mean, it just sounds like something is going to first year.
And I don't know if that's good or bad for your business, but.
But can you can you talk about how the shortage of truck drivers is impacting those types of decisions.
No Joe.
<unk>.
But when you look at one of the more successful operators right now there would be LPL lessened truckload because they are very very busy and they are actually raising rates and they are very profitable.
And so a lot of businesses a lot of businesses in the transportation industry are.
Their price and they are getting their bids and theyre getting their prices. So I mean, a lot of people in the fulfillment business are doing really well, so and a lot of them are our customers too. So I guess the question is that how is it going to affect the industry I think my feeling is that some.
The costs are going to be passed to consumers is that increased cost by businesses and so.
Well those aren't going to affect their margins and but some of them aren't going to be the best way is to the consumers. So but the thing is it's not going to change they are wanting to store more cars.
They want to make the sales and right now there's already talk of.
Some.
Some importing for next few season, so that's how bad it is.
Great. Thanks for that and lastly for me.
Since of capitalized interest I think is within your and your numbers how has that trended and how do you see it trending into 2022.
With all the development activity that you've got.
Tina.
I would say over the last several years, it's trended higher just because of the development pipeline today is larger.
I would say next year I guess, it's hard to say because we got to look at our starts and what gets leased up my best guess at this point in time, its going to be at least a sense if not more.
Okay.
Okay. Thanks very much.
Your next question is from Michael Carroll of RBC capital markets.
Okay.
Yes. Thanks, So how do you guys currently view your land Bank I mean, right now it's fairly sizable.
I know that you indicated that you are still looking for some attractive sites.
To buy to kind of add to that I mean, what's kind of the reasoning behind that is that there you're short of land in some of these higher end markets that you want to be in and that's going to be a short term hold if you do buy that land you can start it right away can you talk a little bit about that.
Sure we're always.
Looking for new land opportunities.
Is that a near term developable.
The definition of near term has certainly changed over the last few years entitlement periods are more like 18 months now and we talked a little bit earlier about some of the delays with respect to getting some of the commodity inputs in particular steel.
But our current our current landholdings.
<unk>.
We estimate would take about three to five years to build out but remember again, our land positions are never static we're always sourcing entitling new sites and we'll always have some land sales to users such as some of the land in our JV.
Phoenix.
<unk>.
Are there any markets that you're short on land that you are trying to aggressively acquire I guess is there any markets that you're focused on more than others right now.
While we're focused on new investment focuses on the 15 markets that we talked about at our investment Investor day about a year ago.
And.
Of course, we're always interested in new opportunities in the higher barrier markets those are the coastal markets.
Okay.
Okay, Great and then can you provide an update on the former pier one space I don't remember if we talked about that on this call or not.
Leasing expectations is pushed out to 2022, but as the leasing activity.
Activity similar to what it has been or how has that changed at all Peter.
Peter So you're referring to our 644000 square foot Cross dock building at all post road, along I 95 north of Baltimore.
With our portfolio occupancy over 97%.
We continue to look for.
Fifth on a long term basis for a single tune for the building.
Two buildings that are available in that sub market.
There being an 860000 square foot building.
Building that was delivered earlier this year.
And we continue to see rent growth in the market.
Right and the upside that that building provides but we have no further update today.
Okay, great. Thank you.
Your next question is from Dave Rodgers of Baird.
Yeah. Good morning, everybody addressed a lot already but I guess I just wanted to ask about the margins on your developments.
<unk> starts I think last year.
Your 2020 stabilization, we're around 100% margin Youre starts for the fourth quarter of this year about 100% margin, but whats in pipeline is about half of that that we want us needs at a 50% to 60% margin, but maybe more curious on kind of what the driver is are you having differences in land utilization.
<unk> is it just entirely rent growth that would be the first question and then I guess the second question is if you guys are able to buy land and put it into service quickly and a development at 100% margin.
I mean, despite the fact that youre seeing land prices are up how inefficiently as land price today, I mean, what are land prices going to do in the next round of purchases.
Yeah.
I'll start off with that and Joe Jim and Peter can add their thoughts as far as I mean land prices are going up rapidly, especially where we want to buy it but.
But rents are so far growing a little bit quicker.
We're looking at land prices on a per square foot basis that we never thought we would see.
And in terms of the margin impact again rents are growing quicker than the cost of land.
And cap rates, obviously have continued to come down and that contributes to the big margins that youre, referring to Joe Joe. So, yes, I would just David just for me, it's the trifecta of higher yields.
<unk>.
I would say is really kudos to the platform for fr. One is that we work really hard on the basis, we don't bid on highly marketed deals. It's all of the land. We bought is off market and direct field and a result of Assemblagist. So we hit the basis, we basically buy below market. So.
It just helps the yield the second thing is that in.
In almost every.
Deals that we did we underwrote conservatively so their rent projections actually rent grew more than we projected so that helps our yields as well and then lastly.
Dave as you know this year alone there has been cap.
Rate compression up to 50 basis points. So if you put those three together that's a formula for high returns.
When you look at the in process right here at the end of the third quarter, the relative lower margins on that.
Is that a function of when you bought that land is that.
A function of just location.
When you look at when you look at the developments under construction you do have some markets like Seattle market, you're correct. It is a function of a reasonably kind of acquired site that's lower than our average.
So that would be one example, and then the other example would be a large development central Ta that's a function of a recent land pricing too yes.
And that project, we button started immediately.
Yes.
Some of these projects like the big the big margin pricing.
And we spoke about in our remarks, we tied that land up in 2020 and the rents in that market grew tremendously and cap rates compressed. So that's why you saw the huge margin there yes.
That's helpful land as we've been told are running about 30% to 35% of total building construction cost is that is that holding pretty consistent.
It sounds like from what Youre, saying.
Overall is higher now Dave.
I would add about 10 percentage points of that.
Great. That's helpful. Thank you.
Thank you.
Your next question is from Nick <unk> of Scotia.
Yeah.
Hey, this is Greg mcginniss on with Nick All my questions have been answered actually I think very much.
Your next question is from Conor Seversky, a barren Berg.
Hey, al Thanks for having me.
Although 2022 leases already signed can you comment.
Shebang, what markets, where you're seeing particular strength and maybe what are the upper and lower bounds of what I assume to be a weighted average on that 19% spread figure.
Well I'll comment on the.
The 29% net signed it's pretty representative of the entire portfolio of the company and when you look.
It all have explorations in 2022, it's pretty representative of the overall portfolio as well, but the markets that we've that we've been talking about in Q&A. We mentioned in the script. Those are the markets that we've been seeing some really strong rental rate growth.
Okay that helps and then what kind of escalators are baked into the new leases is there has there.
In all a meaningful change from what you would have signed in 2020 or 2019.
We're definitely seeing the escalators across all our markets and that 3% to 4% range. So youre definitely going to see those.
Square is going up in the next in the next year or two.
Okay and last.
And for me and sorry, if you guys already commented on this but I noticed there was a pretty big Delta in the price per acre on the parcels are acquired in the inland Empire. During the quarter can you provide any color as to what explains the difference.
Sure sure.
Well you know a different submarkets has different risks and therefore different basis.
Last one.
But theyre all increased from <unk>.
Last year.
<unk>.
We project profitability and those of course, we still have entitled does that.
We think we.
We are well below market.
And destiny below well below.
Yes.
This element.
Okay that helps thank you.
Your next question is from Bill Crow of Raymond James.
Hey, good morning, Peter and team.
We're now almost a year passenger in November 2020 Investor day.
<unk>.
2023 expectations.
But were really well received so im.
I'm just wondering how the passengers actualized results.
Fundamentals kind of impact your view towards 2020.
And maybe specifically the $260 million a Boe.
Throughout there.
Sure Scott.
Hey, Bill It's got first thing I'll mention is rental rate growth.
The increase in rental rates on new and renewal leasing you remember I had a question about it in Investor day.
I assume 12% this year, 8%.
In 'twenty, two and I think 6% in 'twenty, three and I said at the time I think we're going to be in just conservative.
I really really believe that's the case today case in point, the 12% projection is going to be we think plus or minus 15%. This year. So I think there is upside in that as far as progress on the <unk> goal.
This year, we will think would be of around 207.
<unk> dollars, plus or minus $2 <unk> our goal keep in mind that two of the drivers that we spoke about lease up of development and refinancing higher cost debt. The impact of that is going to be more 2022, 2023. So I would say, we're definitely on track and I would say theres going to be some upside.
Million.
Investor day on growth in rental rates due to new and renewal leasing.
Perfect. Thanks for the color.
Okay.
Your next question is from Mike Mueller of Jpmorgan.
Yes, Hi, just couple of quick ones here.
<unk> fourth quarter develop.
Syed and starts are they all expect it to be completed in 2022.
Yes, yes.
Yes, okay.
Okay. So it looks like youre going to have quite a bit of deliveries in 2022, if we're thinking out. The next few years beyond that should we think of 2022 is kind.
Being this anomaly on the big side or do you think you can kind of replicate.
Deliveries.
Some some something close to that.
Should we see yes.
Okay. So the run rate if you will has been.
Truncated.
Or changed because.
Because we all stopped new projects last year for many months and so you do see this phenomenon, where we have a lot of starts and a lot of completions kind of delivering all at once.
Over time, you want to.
See completions our deliveries.
That are more consistent as we quote earn into the new development volumes over time.
Yeah.
So is that.
Yes, I think you kind of answered it without putting numbers out there.
That was it thank you.
Okay.
Your next question is from Caitlin Burrows of Goldman Sachs.
Okay.
Hi, Good morning, just one I think earlier you mentioned when somebody asked about dispositions that you werent looking to sell real estate to fund development. So I was just wondering as you think about that development activity going forward is it that you would get.
Fund it with retained cash and then incremental equity where needed or how are you thinking about that.
What I was what I was really saying is that our decisions to sell particular assets.
Or groups of assets or volume.
Late only to maximizing the value of that decision and not to how we fund our development pipeline. It will be the case that as we execute sales.
Going forward, we have the added benefit of using those proceeds to fund development, but we don't sit here and say Oh, we better go to sell $500 million, because we have a huge development pipeline.
Because when you do that you might tend to take lower prices. Then you should just just to raise the proceeds.
That.
And so I guess would it be reasonable to assume I know you mentioned in the beginning that equity issuance is in assumed in your 2021 guidance going forward, but that going forward equity will be one of the options for how you ended up funding development certainly based on the volumes that we're looking at today that will be.
One of the options on the table.
Great that's all thanks.
Your final question is from Tayo Okusanya of credit Suisse.
Hi, Yes, good morning, everyone, a great solid quarter questions still.
Makes around the supply chain issues again still not 100% clear to me exactly how is that impacting.
The demand curve for industrial real estate I mean, it sounds like a lot of the <unk>.
Occupancy increases you guys have seen has really been driven by not a lot.
Our development in the past year, or so or two pretty good demand and maybe to an extent there's some formal out there from all of these companies, saying I need space because everyone's running out.
Is that really the way, we should kind of think about it versus you know the whole kind of collapse of the supply chain actually did.
Yeah.
Is causing some type of increase demand that probably could still be around until the supply chain issues are fixed.
So.
I guess for me.
The way to think about it is that companies do is try to our best try to operate in just in time.
No.
Meaning.
They get the product and they are in order to ship the product to minimize warehouse inventory because.
Awareness inventory has a capital carrying costs and today. They can operate that way. So everybody is operating and adjusted in case why just in case.
And basically they don't know enterprise company and Theyre not assured the projects coming in and some they don't know what causes coming so they'd rather frontload and order more because also remember due to the increased demand the inventory to sales ratio has dropped.
So now they're just trying to go back to inventory they call now and just in case to basically increase their inventory and on the simplest.
Impact that requires more space when you're carrying more inventory so that is.
By the way the simplest way of looking at what's happening.
Industry in the U S today, and Thats, creating demand for more warehouse space.
Add to Joe's point, though we're seeing a lot of demand not only for just in case, but just net growth.
Across a variety of industries around the country demand is really good.
It is particularly from the larger companies.
Food and beverage in the transportation logistics field as we've said earlier consumer products companies traditional retailers. They are all growing in addition to trying to increase the rumored for inventories as Jojo said.
Gotcha.
Alright.
I guess that's helpful. It's just again a lot of companies are planning to saying they don't have inventory at all so.
It's just interesting to me that I, just kind of wonder sometimes at this call.
Issue is kind of.
Overblown in this space.
And it's kind of many other things that are really driving the increase in demand not necessarily this one factor.
Primarily as I mentioned earlier the primary driver is just good solid demand the consumption that is happening in this country is higher than it's ever been.
Largely due to COVID-19.
Household savings are the highest they've been household debt levels are low and so you've got all the right fundamentals for people to go out and of course try to celebrate life. After a year off but also they have the capital to do it.
No.
That's what you are seeing it flat out strong.
<unk> demand in all of the wrinkles in the supply chain.
Have a lot to do with that exploding demand when we are fully back to work and a lot of these delivery chain.
Although just to finish up with what Peter said, we expect our customers were fairly.
Capitalized and really will yield in the industry because we've got very good customers, we expect them to be marginally more competitive the small users and getting supply because you know they've got capital to spend they got bigger relationships and you will notice that the larger.
Supplier seller, there arent getting your goods give example.
Amazon is the order for Amazon today, Youll, probably get it quicker than from a small.
Shipment company, so I mean.
Having good customers and tenants like.
Ours is.
Meanwhile, in the industry today and as far as your concern is whether people have inventory or not.
We can tell you just from our portfolio that all of our spaces are fully being utilized.
Got it that's helpful. Thank you.
There are no other questions in queue I'd like to turn the call back over to Peter Pistelli for any closing comments.
Thank you operator.
And thank you all for joining us today as always please feel free to reach out to meet Scott or art with any follow up questions. We look forward to talking with many of you during the NAREIT virtual conference in a few weeks b well.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
And now disconnect.
Okay.
Yes.
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You may now.
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Ladies and gentlemen, thank you for standing by and welcome to the first industrial three huge 'twenty one results conference call.
At this.
All participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to Art Harmon, Vice President of Investor Relations and marketing. Thank you. Please go ahead.
Thank you Shelby Hello, everybody and welcome to our call.
Before we discuss our third quarter 2021 results as well as updated guidance, let me remind everyone that our call may include forward looking statements as defined.
The federal Securities laws. These statements are based on management's expectations plans and estimates of our prospects today's statements may be time sensitive and accurate only as of today's date Thursday October 21, 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. This are described in our 10-K and other SEC filings you can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release, the supplemental report earnings.
<unk> SEC filings are available at first industrial dot com under the investors tab.
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 also on the call today are Jojo Yap, our Chief investment Officer, Peter Schultz exactly.
<unk> 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.
Our team continued its strong performance in 2021 by delivering another great quarter.
Highlighted by increased in service occupancy new development leasing and continued strong growth in rental rates on new and renewal leasing.
As importantly, we were also successful in readying land for new development starts and replenishing our pipeline with strategic land acquisitions.
Executive.
I'll discuss those successes in more detail shortly but let me first update you on the overall strength of the U S industrial market.
Per CBRE EEA net absorption was a healthy 120 million square feet in the third quarter, while completions came in at 79 million.
Okay.
Through the first three quarters of this year net absorption was 292 million square feet significantly outpacing new supply of $193 million.
And our portfolio, we grew occupancy 50 basis points to finished the third quarter at 97, 1%.
Square cash same store NOI increased six 9% and cash rental rates for new and renewal leases are up 22, 8%.
Looking at rental rate growth for the full year as of today, we have signed roughly 98% of the 2021 exploration and including.
Including new leasing our overall cash rental rate increase is 15, 3%, which puts us on pace to top our previous company record of 13, 9% in 2019.
With respect to 2022 explorations are off to a great start with 20.
<unk>, 10% of renewal side at a cash rental rate increase of 19%.
Let me move now to the primary driver of our external growth our development program.
As most of you know as part of our underwriting process and risk management discipline, we operate with a self imposed.
No speculative leasing cap.
Due to continued robust fundamentals in the industrial market the strength of our balance sheet and growth in our portfolio and the significant opportunities we have to create shareholder value through new investments, we have increased our speculative leasing cap by 175 million.
<unk>, bringing the total to $800 million.
Now, let me walk you through our recent land acquisitions as well as three exciting new development starts that will put some of the incremental cap capacity to good use.
During the third quarter, we closed on three development sites totaling.
122 acres for $59 million.
Two are in the inland Empire East and the third is in Denver.
In total these sites can accommodate up to $2 1 million square feet of new development.
And one of the new inland Empire East sites, we are starting our first.
First pioneer Logistics Center, a 461000 square foot Cross dock facility, our total projected investment of $73 million with a targeted cash yield of six 8%.
The inland Empire continues to be one of the strongest logistics real estate markets in the U S helped by significant.
Inefficient net absorption from activity related to the two largest ports in North America.
Market vacancy in the inland Empire is sub 2% and market rents have grown more than 80% since we went under contract on this site in early 2020.
We look forward to adding.
Prime asset to our southern California portfolio, which represents approximately 23% of our rental income as of the end of the third quarter.
Moving to the East Coast, we're starting another development in South Florida to serve the strong tenant demand we have experienced there with our recent leasing.
<unk> successes at first Park, Miami, and first 95 distribution center.
First gate Commerce Center will be a 132000 square foot class a distribution facility and the infill Coral Springs Submarket.
Market rents in Broward County have grown 15% to 20%.
Adding the end of 2019, our total estimated investment is $24 million and our targeted cash yield is five 5%.
In the fourth quarter, we acquired a site in Borden County, New Jersey, just off of exit seven.
Jersey Turnpike for 8 million.
We immediately started construction are first board in town Logistics Center, a 208000 square foot facility.
We look to build upon our past successes in this location, where our two prior developments where at least near construction completion.
The Central New Jersey market has been exceptionally strong.
Cynthia with asking rents up 34% versus last year. According to a recent market report from CBRE.
Our total projected investment of $33 million with an estimated cash yield of five 8%.
In summary, these three planned fourth quarter starts.
<unk> approximately 800000 square feet with an estimated investment of $130 million and a cash yield of six 3%.
Including these plants starts our developments in process totaled $6 4 million square feet with a total investment of approximately.
<unk> $725 million.
At a cash yield of 6% our expected overall development margin on these projects is approximately 65%.
With development as our primary driver of external growth. We're also focused on replenishing.
<unk> our land holdings.
In the fourth quarter to date in addition to the New Jersey side I. Just discussed we also acquired a total of 10 acres in the inland Empire in Northern California for a total of $10 million.
As of today adjusted for our plan.
Carter starts and the aforementioned land acquisition, our balance sheet land can support approximately $12 5 million square feet of new development, our share of the Phoenix Camelback joint venture is an additional $3 8 million square feet.
In total that's north of 16 million square.
Square feet and represents approximately $1 $7 billion of potential new investment activity.
Now let me update you on our recent development leasing successes.
We just leased the entire 548000 square footer at first park at PV 303.
Fourth clinic at completion to a leading omnichannel retailer.
As part of this lease we are also expanding the building another 254000 square feet for a total of 802000 square feet.
The total estimated investment for the project, including the expansion.
<unk> is $72 million and the estimated cash yield is 6%.
The tenant is expected to take occupancy of the just completed space by year end with the expansion ready for use in the second quarter of 2020.
We also leased 100% of our three.
303000 square foot first Wilson logistics center in the inland Empire that will be completed in the first quarter of 2022.
With a cash yield of eight 7%, we substantially outperformed our underwritten yield.
This lease further showcases the rapid rental.
Rate growth in the inland Empire that I discussed earlier.
We are pleased that we have land sites in this high growth market that can support another $2 8 million square feet of development.
As another.
Other example of the strength of the southern California market and our platform we.
At least our Laurel Park redevelopment project in the South Bay.
This property is very well suited for port centric warehouse distribution users given its great location and highly sought after yard for surface use.
Our first year yield is seven 5% on our.
Jeff $1 million investment, which represents a margin of around 150%.
Moving on to sales.
During the quarter, we sold six properties and four units for $14 million and in the fourth quarter. We have sold four additional buildings in Detroit.
20, <unk> $7 million, bringing our year to date total to $126 million.
Given current visibility on our disposition pipeline, we now expect sales for the year to total $175 million to $225 million a $75 million increase.
<unk> from the prior midpoint of $125 million.
With that let me turn it over to Scott to walk through additional details on the quarter and updated guidance. Thanks, Peter Let me start by summarizing our results and leasing stats for the third quarter.
NAREIT funds from operations.
Total <unk> 51 per fully diluted share compared to <unk> 49 per share in <unk> 2020.
Excluding approximately <unk> <unk> per share of income related to the final settlement of an insurance claim three Q2 thousand 20, <unk> was <unk> 45 per share.
<unk>, our cash basis same store NOI growth for the quarter, excluding termination fees was six 9% primarily due to higher average occupancy.
An increase in rental rates on new and renewal leasing.
Rental rate bumps and lower bad debt expense slightly offset by.
The increase in free rent.
We commenced approximately two 4 million square feet of leases.
Of these 500000 were new one 4 million were renewals and 500000 were for developments and acquisitions with lease up.
Tenant retention by square footage.
Footage was 85%.
Cash rental rates for the quarter were up 22, 8% overall with renewals up 21% and new leasing up 27, 5%.
And on a straight line basis overall rental rates were up 36, 2%.
With renewals.
Newell's, increasing 34, 9%.
And new leasing up 39, 5% moving.
Moving onto some capital markets activity.
As previously announced in early July we closed on two financing transactions first we expanded our line of credit to 750.
$1 and improved our pricing to LIBOR, plus 77, five basis points, a reduction of 32 five basis points compared to our prior facility.
The maturity is now pushed out five years, including our two six month extension options.
We also refinanced our two.
$50 million term loan.
The new term loan matures in July 2026, and has an interest rate of LIBOR, plus 85 basis points.
A reduction of 65 basis points in the spread compared to our prior facility.
With our interest rate swaps in place the new fixed.
200 rate on the term loan is $1 84%.
On the equity side through our ATM, we issued $1 1 million common shares at a weighted average price of $55 35 per share for total net proceeds of $59 million to help fund.
Interest investments Peter spoke about.
Moving on to our updated 2021 guidance per our earnings release last evening.
Our guidance range for NAREIT <unk> is now $1 93 to $1 97 per share, which is a <unk> <unk> per share increase at the midpoint.
The new reflecting our third quarter performance and an increase in capitalized interest due to our announced development starts.
Key assumptions for guidance are as follows.
In service occupancy at year end of 90, 675% to 90, 775%.
This.
Is a full year quarter end average in service occupancy of 96, 5% to 96, 8% an increase of 15 basis points at the midpoint.
Fourth quarter same store NOI growth on a cash basis before termination fees of 6%.
It's important to seven 5%.
This implies a quarterly average same store NOI growth for the full year of 2021, a four 3% to four 7% an increase of 25 basis points at the midpoint due to our third quarter performance.
Please.
<unk> that our full year same store NOI guidance excludes the impact of approximately $1 million from the gain from an insurance settlement.
Our G&A expense guidance is now $34 million to $35 million, an increase of $1 million at the midpoint.
And guidance.
<unk> <unk> the anticipated 2021 costs related to our completed and under construct Struction developments at September 30.
But once the expected fourth quarter starts of first pioneer Logistics Center first Gate Commerce Center and first born in town Logistics Center in.
In total for the full year 2021, we expect to capitalize about <unk> <unk> per share of interest.
Other than previously discussed our guidance does not reflect the impact of any future sales acquisitions or new development starts. After this call the impact of any future debt.
Issuances debt repurchases or repayments. After this call and guidance also excludes the potential issuance of equity, let me turn it back over to Peter.
Thanks, Scott before.
Before we take your questions. Let me thank our team for another great quarter.
We're excited about our growth prospects.
We continue to put into production our land holdings that can currently support more than 16 million square feet of value creating development.
We are also focused on replenishing our pipeline with new sites in higher barrier markets.
We continue to benefit from robust segment sector fundamentals that are reflected in strong net absorption higher.
High occupancy level and increasing rents.
With that operator would you please open it up for questions.
As a reminder, if you would like to ask a question you may do so by pressing Star then the number one on your telephone keypad.
Again that is star one if you would like to ask a question.
Your first question is from Craig Mailman of Keybanc capital markets.
Hey, good morning, guys.
Scott maybe this one's for you just look at the year to date <unk> kind of implies.
T cell in the fourth quarter to get to the midpoint of your range.
Could you just walk through that.
Sure Craig I would say the two drivers there are one as we forecasted $500000 of bad debt expense in the fourth quarter. Our actual in the third quarter was 25000, hopefully we can do better in the fourth quarter, then that are $500000 and also the fourth quarter.
Being hit with a full quarter dilution related to the equity issuance, where the third quarter was only parcels. So I would say those are the two drivers.
Okay and.
And did you say that there is equity more equity included in the guidance going forward or did I mishear you no no fewer.
There is equity, but what im saying is that the equity issued in the third quarter was more back end on the third quarter.
So the fourth quarter, it's in for the entire quarter. So you have a higher share count fourth quarter compared to the third quarter.
Gotcha and then just.
Separately, Peter you noted.
Your spec cap.
<unk> is up $175 million kind of what.
Could you just walk through is as you the balance sheet gets bigger over time, how we can kind of maybe track the upside to this like what's the most important metric you guys used to set that cap.
Sure. So we put the cap in place.
Back in 2012, and a little history here, we will give more context to the answer because the answer is pretty straightforward. We put in place in 2012, obviously, we had a very very different portfolio and a very different balance sheet.
And that's been the Formula was 9% of the total market cap of the company.
<unk>.
As time has passed we have adjusted the cap based on that Formula. So we adjusted it in 15 and 18 and then again at the beginning of this year.
We have not changed the multiplier, it's still 9% notwithstanding the dramatically improved portfolio and balance sheet. So you can say it even more conservative today.
Because.
Back in 2012, so it's pretty simple Craig it's just 9% of the total traded value plus debt of the company.
Gotcha. Thank you.
Yes.
Uh huh.
Your next question is from keeping Kim of truest.
Hum.
Thanks, Good morning sticking.
Sticking with the same line of questioning I wasn't sure how you calculated the how.
How much you've eaten into that speculative cap because you also considered a vacancy in your existing portfolio.
So I guess first question like how much have you eaten into the cap.
And do you I can't remember if you use like book value.
<unk> for your assets or market value to get to that calculation. So so committed dollars. So any new development that we start that.
It has less than 90% leasing those dollars go in on a on a pro rata basis. If we were to do a forward with no tenant those dollars go in.
And that is how we then cap works, we have $279 million of capacity today, largely due to the great leasing on our new developments that we've just completed so of the $802 79 is available.
Does that answer your question Kevin.
Book value came at all.
Also keep.
And it adds acquisition vacancy so if we acquire an empty building it goes into the spec cap, we treat that risk the same as development and so when we leased any acquisition vacancy it comes off.
It comes off the list and finally once an asset is 90% leased it all comes out.
Got it.
So when you think about that and the amount of good leasing that you've done in your.
Portfolio.
What is it.
It practical range for development start an ongoing annual basis I know you guys don't typically provide guidance just looking for some type of ball.
Ballpark figure.
Right.
No.
Given the strength.
And scale of our current land position the spec cap and the pace at which we leased new developments ultimately are going to determine the development volume going forward of course subject.
Get to profitability as we always say where.
We're a profit shop, not a volume shop, so you should see.
<unk> levels going forward are going to be at higher levels than in the past several years again, assuming fundamentals hold.
Okay.
As you think about funding that development.
Pipeline that's growing.
We expect a kind of on a steady state contribution from dispositions.
For like $200 million that should ratchet up as the pipeline growth or four.
Different forces.
With respect to dispositions.
The volumes that we've guided to the last few years are going to be similar going forward. Obviously, we just increased and that has a lot to do with <unk>.
Quite often we will get unsolicited offers on assets.
Or in markets, where we wanted to dispose of more assets and we will take those offers.
That's.
I think you see when we pop up from our original guidance. So I think the guidance volumes going forward will be similar keybanc to what we've we've been giving.
Okay. That's it for me. Thanks, obviously as we get bigger that has a much lower percentage dwindling percentage of the overall size of the company.
Right. Thank you.
It's really.
Your next question is from Rob Stevenson of Janney.
Good morning, guys, just a follow up on <unk> question.
The fourth quarter disposition guidance is now roughly I guess $60 million to $100 million given the full year guidance are you seeing any meaningful change in the asset pricing there.
Or is that increase more of a reflection of the increases to the development pipeline and the need to fund that.
And the attractiveness of dispositions as a funding source.
No I mean, I think the bottom line is we're getting really good pricing.
And again in these markets.
Now that the markets that are outside of our <unk> target.
Markets are the markets, where we find lower growth and we're going to be disposing of more of those assets.
And the markets for asset the market for assets in those Submarkets is very very strong.
That's really what drives it we're really not looking to sell real estate to fund development.
That's not the key driver.
River, obviously, it's a benefit but it's not the key driver.
And would you be with these $60 million to $100 million in the fourth quarter youre going to be exiting any markets as a result of that.
Wholesale exit.
I don't think so.
Okay.
Sure.
And then Peter Theres been a lot of press on the continued supply chain issues in the cargo ships sitting off the coast what impact is that having on your tenants and then their incremental demand for industrial space. These days and if this continues through 2022 as many expect what's the impact down to your business you think.
I'm going to give that to Joe Zhou and Peter to give their thoughts on that sure sure basically the net impact is that a lot of the tenants in our business who need imported products have is.
Is really having a hard time getting brought up and they cannot ascertain the availability nor the timing so the.
The net effect is that they order more they have to stop more disciplined more inventory because it's so hard.
Bigger losses, the sale of that product.
If they don't really know the timing issues.
Issues starting to so they are going out the net effect was there getting wanting to take more space and what's.
Been happening is that we now have less space than the start of the year and so what happens is that now our rents have been rising because of that.
In terms of 2022, we don't know Theres. So many issues in the supply chain right now and there is strong demand so.
We hope that this levels off for our tenants sake, but.
Is it I don't think it will level off I think you'd look at the supply chain issues will continue and the rent pressure will continue because of the lack of space and increased demand Hey, Rob It's Peter Schultz. The other thing I would add to that is.
We're seeing a marked increase of activity from a third party logistics companies.
Looking.
Reality space to help.
Help with the capacity constraints that are a lot of our tenants and companies have so they are very very active looking for as Jojo said.
Finite and declining amount of space today.
Should we be thinking about this time period.
Elevated rental.
<unk> fleet and increased demand as a pull forward and then at some point, whether it's 2023 2024, who knows that there will be some sort of lull.
As the catch up actually happens or is this you think that this sort of elevated level winds up of demand winds up sticking.
<unk> around for a prolonged period of time as people are reluctant to go back to previous just in time inventory procedures.
That's a very very good question in order to answer that question, we have to predict where e-commerce as a percentage of total sales will be in the market and in E Commerce in the next.
Yes.
Five six years I don't know it goes to 50% then that's even going to be a bigger driver than supply chain issues. So the supply chain issues will be.
Very very minimal compared to that long term driver. So now that's the that's the first thing the second thing is that in terms of supply.
It's hard to predict when it's going to be good you have offshore issues. You have ensure issues you have shipper issues you have labor issues you have a truck driver issues you have COVID-19 still a little bit it's lessening related efficiency issues at the ports. So.
We don't know and that's all going to get fixed.
Okay.
<unk> catalyst to these supply chain issues was COVID-19, where everything shut down.
And then it opened up all at once and so if anything youre catching up more than you are selling forward.
If you follow me.
Okay, Alright, thanks, guys I appreciate it.
As a reminder, if you'd like to ask a question. Please press star one now.
It is star one if you would like to ask a question.
Our next question is from Anthony Powell of Barclays.
Hi, good morning.
A question on the spec cap you you said that it's at 9% of the total I.
Market value on that conservative relative to where you used to be at the company given that.
The increase of the fact, the company in a pretty sort of quality.
Quality of the portfolio.
Given the strong fundamentals why not be more aggressive and increase that spent cap a bit more just given what you're seeing in the market.
Yes.
One thing that we're very focused on is making sure that we have a business.
Strategy and a portfolio thats going to outperform through the cycle and while it is tempting in times like this to do what you just said.
Going forward, we're going to be a lot better off if we just stick to the fundamental business plan that we've always had and we are working hard as you can see in terms of replenishing our.
Our pipeline not only for land, but new developments and creating great margins, there and we're mindful that trees don't grow to the sky.
Trust Me, we've discussed what you've said and at the end of the day, we really like the discipline for new leasing that the current cap structure demands.
Got it thanks.
The land side, how you said you're replenishing our land bank right now what are you seeing in terms of pricing on land the competitive environment and.
Just competitive players for for industrial land out there.
So Joe very competitive.
And that prices continue to increase.
They are increasing a lot more.
And of course in the middle part of the country as you know the reason for it.
Bigger increase the coastal markets because the rent growth there has been.
They've been higher as well so we project that our land prices will continue to increase.
Alright, thank you.
Question is from Rich Anderson of S. M B C.
Hey, Thanks. Good morning, So just a follow up on the supply chain question that you got to start with Rob.
Inquiry.
Now did you say that.
That the issues that we're talking about are very.
Your name is small in terms of rent pressure upwards versus the broader commentary about E. Commerce demand is that what you said.
So what I was saying is that when you look at the supply chain issues. Today, you don't really know what the long term impact is if you don't know where e-commerce as a percentage of total.
Carlos will go and what I said was that if E. Commerce is it presents a whole sales will go to 50 that that will actually make the supply chain issues kind of minimum minimal I think is a big it today, that's 2025 and it goes to 50, that's a bigger driver than anything else that we're seeing and that's why.
Okay I understand thank you for that so.
But when you I don't know if it's if you're able to quantify this but would you be able to say if there's a.
$50 of rent how.
How much of that.
Probably impossible question to answer, but how much of that is supply chain related how much of that is.
Basic demand related.
Any way to answer that question.
No. There is no way to answer it but I would say that the demand side of that is vastly exceeds the current.
Pressure from the supply chain challenge there just.
Enough space for the demand anyway.
A lot of that has to do with the fact that everybody stopped building last year for seven or eight months.
A lot of it has to do with the fact that it's difficult now and this is a supply chain challenge, but it's difficult to get some commodity inputs.
But.
Is it and is just very very strong you saw that you've heard the net absorption numbers earlier relative to new deliveries.
And Thats really whats the primary driver of the very very strong rent growth that we're experiencing and Richard Peter So the other thing I would add to that is remember occupancy costs early in the $45.
The demand 7% range.
Our company's operation so while rents are going up were seeing labor and <unk>.
Transportation go up even more so.
The occupancy cost is still a very small percentage of the total.
Sure.
You mentioned that.
Way to counter some of these stress.
Six out there.
<unk> piling more but.
How does that play into the shortage of truck drivers and moving things around I mean, it just sounds like something is going to first year.
And I don't know if that's good or bad for your business, but.
But can you can you talk about how the shortage of truck.
The drivers is impacting those types of decisions.
Jojo.
When you look at one of the more successful operators right now there would be LPL less than truckload, because they're very very busy and they are actually raising rates and they are very profitable.
And so.
A lot of businesses a lot of businesses in the transportation industry are naming their price and they are getting their bid and they are getting their prices. So I mean, a lot of people in the fulfillment business are doing really well so.
And a lot of them are our customers too so.
I guess the question is that how is it going to affect the industry. I think my feeling is that some of the costs are going to be passed to consumers.
Increased cost by businesses and in some of those aren't going to affect their margins and but some are going to be the best way to the consumers. So but the thing is I'm not going to change.
I need to store more casino they wanted to make the sales and right now there's already talk of some some importing for next few season. So that's how bad it is.
Great. Thanks for that and lastly for me.
Since of capitalized interest I think in your in your numbers, how has that trended and how.
Do you see it trending into 2022.
With all the development activity that you've got.
Tina.
I would say over the last several years, it's trended higher just because of the development pipeline today is larger.
I would say next year I guess, it's hard to say because we got to look at our starts.
They're once leased up my best guess at this point in time, its going to be at least eight cents if not more.
Okay. Thanks very much.
Your next question is from Michael Carroll of RBC capital markets.
Yes. Thanks, So how do you guys currently view your.
Your land Bank I mean, right now it's fairly sizable.
I know that you indicated that youre still looking for some attractive sites to buy to kind of add to that.
Kind of the reasoning behind that is that there you're short of land in some of these higher end markets that you want to be in and that's going to be a short term hold if you do buy that land you can start it right away can you talk.
Talk a little bit about that.
Sure we're always looking for new land opportunities that are near term developable.
Definition of near term has certainly changed over the last few years entitlement periods are more like 18 months now and we talked a little bit earlier about some of the delays with respect.
Some of the commodity inputs in particular steel, but our current our current landholdings.
We estimate would take about three to five years to build out but remember again, our land positions are never static we're always sourcing entitling new sites and we'll always have some land sales to.
To getting such as some of the land in our JV in Phoenix.
Are there any markets that you're short on land that you are trying to aggressively acquire I guess is there any markets that you're focused on more than others right now.
While we're focused on new investment focus is on the 15th.
He used in markets that we talked about in our Investor Investor Day.
A year ago.
And of course, we're always interested in new opportunities in the higher barrier markets those are the coastal markets.
Okay, Great and then can you provide an update on the former pier one space I don't remember if we.
We talked about that on this call or not.
The leasing expectations is pushed out to 2022, but the leasing activity similar to what it has been or how has that changed at all.
Peter So you're referring to our 644000 square foot Cross dock building at all post road, along I 95 north of Baltimore.
With our portfolio occupancy over 97%.
We continue to look for the right fit on a long term basis for single tuned for the building.
One or two buildings that are available in that sub market.
The other being at 860000 square foot.
Building that was delivered earlier this year.
And we continue to see rent growth in the market and.
And the upside that that building provides but we have no further update today.
Okay, great. Thank you.
Your next question is from Dave Rodgers of Baird.
Yes, good morning, everybody.
A lot already but I guess I just wanted to ask about the margins on your development starts I think last year.
What your 2020 stabilization, we're around 100% margin Youre starts for the fourth quarter of this year about 100% margin, but whats in pipeline is about half of that.
If needed a $50 to.
60% margin, but maybe more curious on kind of what the driver is are you having differences in land utilization is it just entirely rent growth that would be the first question and then I guess the second question is if you guys are able to buy land and put it into service quickly and a development at 100% margin how despite the fact that youre seeing land prices are up how inefficiently.
<unk> land price today, I mean, what are land prices going to do in the next round of purchases.
<unk>.
I'll start off with that and Joe Joe and Peter can add their thoughts as far as I mean land prices are going up rapidly, especially where we want to buy it.
But rents are so far growing a little bit.
Quicker.
We're looking at land prices on a per square foot basis that we never thought we would see.
And in terms of the margin impact again rents are growing quicker than the cost of land.
And cap rates, obviously have continued to come down and that contributes to the big margins.
<unk> that youre, referring to Joe Joe So, yes, I would just David just for me as the trifecta of higher yields in the I would say is really kudos to the platform for fr. One is that we work really hard on the basis, we don't bid on highly marketed deals with all of the land that we bought is off market and direct field in.
A result of Assemblagist. So we hit the basis, we basically buy below market. So the basis helps the yield the second thing is that.
In almost every.
Deals that we did we underwrote conservatively so the rent projection actually rent grew more than we projected.
So that helps our yields as well and then lastly.
Dave as you know this year alone there has been cap rate compression up to 50 basis points. So if you put those three together that's a formula for high returns.
When you look at the in process right here at the end of the third quarter.
Order the relative lower margins on that.
Is that a function of when you bought that land is that a function of just location.
When you look at when you look at the developments under construction you do have some markets like Seattle market Youre correct.
It is a function of a reasonably kind of acquired site this lowered than our average.
So that would be one example, and then the other example would be a large development central Ta that's a function of a recent land pricing too yes.
And on that project, we button.
Started immediately.
Yes.
Some of these projects like the big the big margin pricing that we spoke about in our remarks, we tied that land up in 2020 and the rents in that market grew tremendously and cap rates compressed. So that's why you saw the huge margin there.
That's helpful land as we've been told are running.
About 30% to 35% of total building construction cost is that is that holding pretty consistent it sounds like from what youre, saying.
Overall is higher now.
I would add about 10 percentage points of that.
Great. That's helpful. Thank you.
Thank you.
Your next question is from Nick <unk> of Scotiabank.
Hey, this is Greg mcginniss on with Nick All my questions have been answered actually I think very much.
Your next question is from Conor Seversky Bahrenburg.
Hi, all thanks for having me.
Although 2022 leases already signed can you comment at all on what markets, where you're seeing particular strength and maybe what are the upper and lower bounds of what I assume to be a weighted average on that 19% spread figure.
Well I'll comment on the.
The 29% debt side, it's pretty representative of the entire portfolio of the company and when you look at all of explorations in 2022, it's pretty representative of the overall portfolio as well, but the markets that we've been talking about in Q&A. We mentioned in the script. Those are the markets that we've been seeing some really strong rental rate growth.
Okay.
And then what kind of escalators are baked into the new leases have there has there been any meaningful change from what you would have signed in 2020 or 2019.
We're definitely seeing the escalators across all our markets and that 3% to 4% range, So you're definitely going to see those.
Escalators going up in the next the next year or two.
Okay and last one for me and sorry, if you guys already commented on this but I noticed there was a pretty big Delta in the price per acre on the parcels are acquired to the inland Empire. During the quarter can you provide any color as to what explains the difference.
Sure sure.
Well different submarkets has different risks and therefore different basis.
But theyre all increased.
Last year.
<unk>.
We project profitability and those of course, we still have to entitle dose that we.
We think.
We are well below market.
And destiny below well below market both entitlement.
Okay that helps thank you.
Your next question is from Bill Crow with Raymond James.
Okay.
Peter and team, where we're now almost a year passenger in November 2020, Investor Day, and you offered some 2023 expectations.
But were really well received so im.
I'm just wondering how the past year's actualized results in the <unk>.
Current fundamentals kind of impact your view towards 2023 and maybe specific.
Typically the $260 million <unk> target throughout there.
Sure Scott.
Hey, Bill It's Scott first thing I'll mention is rental rate growth.
The increase in rental rates on new and renewal leasing you remember I had asked a question about at Investor Day, I assume 12% this year, 8%.
<unk>.
In 'twenty, two and I think 6% in 'twenty, three and I said at the time I think we're going to beat and just conservative.
We really believe that's the case today case in point, the 12% projection is going to be we think plus or minus 15%. This year. So I think there is upside in that.
As far as progress.
On the asset Vogel.
This year, we will think will be of around $207 million plus or minus $2 <unk>. Our goal keep in mind that two of the drivers that we spoke about lease up development and refinancing higher cost debt the impact of that is going to be more 2000.
<unk> 2023, so I would say, we're definitely on track and I would say theres going to be some upside.
In <unk>.
Investor day on growth in rental rates due to new and renewal leasing.
Perfect. Thanks for the color.
Your next question is from Mike Mueller of Jpmorgan.
20.
Yes.
Couple of quick ones here.
Three fourth quarter development starts are they all expect it to be completed in 2022.
Yes, yes.
Yes, okay.
Okay, yes, so it looks like youre going to have quite a bit of deliveries from 2000.
22 for thinking out the next few years beyond that should we think of 2022 is kind of being this anomaly on the big side or do you think you can kind of replicate.
Deliveries.
Some some something close to that.
We should hit when you see.
Okay.
Morgan the run rate if you will has been <unk>.
<unk>.
Or changed because we all stopped new projects last year for many months and so you do see this phenomenon, where we have a lot of starts and a lot of completions kind of delivering all at once.
Over time, you want to see completions.
So liveries.
That are more consistent as we earn into the new development volumes over time.
So does that.
Yes, I think you kind of answered it without putting numbers out there so.
That was it thank you okay.
Your next question is from Caitlin Burrows of Goldman Sachs.
Hi, Good morning, just one I think earlier you mentioned when somebody asked about dispositions that you werent looking to sell real estate to fund development. So I was just wondering as you think about that development activity going forward.
Or do you just.
Fund it with retained cash and then incremental equity where needed or how you're thinking about that.
What I was what I was really saying is that our decision to sell particular assets.
Or groups of assets or volume.
<unk> only to maximizing the value of that decision.
Is it and not to how we fund our development pipeline. It will be the case that as we execute sales going forward. We have the added benefit of using those proceeds to fund development, but we don't sit here and say Oh, we better go sell $500 million, because we have a huge development pipeline.
Because when you do that you might.
Tend to take lower prices then you should just just to raise the proceeds.
That makes sense so.
I guess would it be reasonable to assume I know you mentioned in the beginning that.
Equity issuances and I assumed in your 2021 guidance going forward, but that going forward equity will be one of the option.
<unk> for how you end up funding development certainly based on the volumes that we're looking at today that will be one of the options on the table.
Great.
Thanks.
Okay.
Your final question is from Tayo Okusanya of credit Suisse.
Hi.
Yes, good morning, everyone.
Solid quarter.
Question I'm still around the supply chain issues again still not 100% clear to me exactly how that's impacting.
The demand curve for industrial real estate I mean, it sounds like a lot.
<unk>.
Occupancy increases you guys have seen has really been driven by not a lot of development in the past year or so in two pretty good demand and maybe to an extent theres. Some formal out there from all of these companies, saying I need space because everyone's running out.
Is that really the way, we should kind of think.
About it versus the.
The whole kind of collapse of the supply chain actually did.
It's causing some type of increased demands I, probably could still be around until the supply chain issues are fixed.
So.
I guess for me the simplest way to think about.
Companies do is try to our best try to operate in just in time.
Meaning.
They get the product and they are in order to ship the product to minimize warehouse inventory because the awareness inventory has a capital carrying costs and.
It is a they can operate that way so everybody is operating and adjusted case why just in case and basically they don't know when the products coming and they are not assured products coming and.
They don't know what causes coming so they'd rather frontload and order more because.
Today remember due to the increased demand.
Inventory to sales ratio has dropped so now they're just trying to go back to inventories they call now and just in case to basically increase their inventory and on the simplest.
Impact that requires more space when you're carrying more.
Also dori so that is.
By the way the simplest way of looking at what's happening in the industry in the U S today, and thats, creating demand for more warehouse space to add to George's point, though we're seeing a lot of demand not only for just in case, but just.
And the growth.
Across a variety of industries around the country demand is really good.
Particularly from the larger companies in food and beverage in the transportation logistics field as we've said earlier consumer products companies with traditional retailers. They are all growing in addition to.
Net to <unk>.
<unk> rumored for inventories as Jojo said.
Gotcha.
Alright.
I guess that's helpful. It's just again a lot of companies just planning to saying they don't have inventory at all so.
It's just interesting to me that I, just kind of wondering.
Wonder sometimes if this whole.
Issue is kind of.
Overblown in the space and it's kind of many other things that are really driving the increase in demand not necessarily this one factor the.
Primarily as I mentioned earlier the primary driver is just good solid demand the consumption.
Try it and that is happening in this country is higher than it's ever been.
Largely due to Covid household savings are the highest they've been household debt levels are low and so you've got all the right fundamentals for people to go out and of course try to celebrate life. After a year off but also they have the.
<unk>.
<unk>.
So.
That's what you are seeing it flat out strong demand in all of the wrinkles in the supply chain.
Have a lot to do with that exploding demand when we are fully back to work and a lot of these delivery chain.
Okay.
So just to finish up with what Peter said, we expect our customers were fairly capitalize and really will yield in the industry. Because we've got very good customers, we expect them to be marginally more competitive the small users and getting supply because you know they've got capital to spend they got bigger relationships.
You will notice that the larger.
Suppliers out there aren't getting your goods give example, Amazon has the order for Amazon today, Youll probably get it.
Quaker than from a small.
Shipment company, so I mean.
Having good customers incentives like ours.
Or this.
Meanwhile, in the industry today as far as your concern is whether people have inventory or not we can tell you just from our portfolio that all of our spaces are fully being utilized.
Got it that's helpful. Thank you.
There are no other questions in queue I'd.
Is it turn the call back over to Peter <unk> for any closing comments.
Thank you operator, and thank you all for joining US today as always please feel free to reach out to me Scott art with any follow up questions. We look forward to talking with many of you during the NAREIT virtual conference in a few weeks well.
I'd like to turn.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.