Q3 2022 First Industrial Realty Trust Inc Earnings Call
Good morning, and welcome to the first Industrial Realty Trust, Inc. Third quarter results Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. They're asking question. Please press Star then one. Please note. This event is being recorded.
I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and marketing. Please go ahead Sir.
Thank you Colin and Hello, everybody and welcome to our call before we discuss our third quarter 2022 results and our updated guidance for the year, 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.
These statements may be time sensitive and accurate only as of today's date October 22022, 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.
Metal report earnings release, and our 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 that 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 markets and asset management now, let me turn the call over to Peter.
Thank you art and thank you all for joining us today.
Our team delivered another strong quarter highlighted by continued leasing success in our portfolio, including the exceptional rental rate growth. We are capturing on lease signings related to 2023 explorations, which I will discuss in more detail shortly.
We also started several new developments, including three buildings at our Phoenix joint venture, where we continue to build upon our success in the three <unk> logistics corridor.
Due to our strong operating results, we're increasing the midpoint of our full year <unk> per share guidance for the third consecutive quarter.
Scott will walk you through the details during his remarks.
Fundamentals in the industrial real estate market continued to support further market rent growth.
According to CBRE industrial vacancy was just two 9% at the end of the third quarter.
Third quarter net absorption was 81 million square feet versus completions of $101 million.
For the first nine months of 2022 net absorption was 319 million square feet exceeding completion of 255 million square feet.
In our core portfolio, we finished the quarter with an occupancy rate of 98, 3% and cash same store NOI growth of eight 5%.
We continued to achieve strong overall rental rate increases on our new and renewal leasing.
Through yesterday, we have taken care of approximately 98% of our 2022 rollovers and when combined with our new leases signed with 2022 commencement our overall cash rental rate change is 25%.
With just a handful of 2022 rollovers remaining we are set to achieve an annual company rental rate growth record for the third time in four years.
Given the strong fundamentals in our business our regional teams continue to push rental rates on new and renewal leasing for 2023 explorations.
As of last night, we have taken care of 38% of next year's lease explorations at a cash rental rate increase of 28%.
Our current outlook for the remainder of the 2023 rollovers is even better.
For the remaining 2023 lease explorations approximately 36% of net rent is from southern California versus a 24% net rent waiting for socal and our overall portfolio.
Well give you an updated view of our projected 2023 cash rental rate change on our fourth quarter call. When we have completed our budget review.
We have also been successful in pushing contractual rental rate escalators in our leases are new and renewal leases with 2023 commencement our average annual escalator is three 6%.
With respect to new development leasing our tenant at the 219000 square foot building one at first park Miami is doubling their space and will occupy the entire building, which will deliver in the first quarter.
We also pre leased 43000 square feet at one of the four buildings at our 344000 square foot first loop logistics Park in Orlando.
Moving to our new development investments in.
In the inland Empire, we started the 155000 square foot first Wilson Logistics center, too, which is adjacent to our first development. There that we successfully leased in advance of completion.
Our estimated investment for the sister building is $29 million with a projected cash yield of 10, 5%.
Reflecting our attractive basis, and the extraordinary rent growth in southern California, since we sourced this site.
Including this dart our developments in process totaled $3 7 million square feet.
And then an investment of $571 million.
The projected cash yield for these investments and seven 4%, which represents an expected overall development margin of approximately 78%.
The margin calculation now reflects a cap rate adjustment of approximately 100 basis points relative to our assumptions prior to the end of Q1.
As I mentioned in my opening remarks, we are launching a new project in our camelback three of three joint venture in Phoenix.
This follows the land sale, we completed last quarter that netted us north of 100 million in gain and promote.
The JV is developing three speculative distribution facilities totaling 1.8 million square feet.
The total projected GAAP cost of all three buildings is approximately $210 million and the targeted cash yield is approximately five 7%.
The venture is using construction financing for a portion of the total project cost so our share of incremental cash out of pocket spend for these developments is only about $20 million.
On the acquisition side in the third quarter, we acquired a relatively even proportion of land sites in existing buildings totaling $84 million.
We're in coastal markets, including Southern California, Miami and Seattle.
With these new development site additions, we continue to be well positioned to support future growth with land holdings that can accommodate an additional 14 million square feet.
This represents approximately $2 billion of potential new investments based on today's estimated construction cost and the land at our book basis.
Lastly, consistent with our strategic objective to derive 95% of rental income from 15 key logistics markets by the end of 2023, we sold the remainder of our holdings in Cleveland.
The sale price was $107 million, which equates to approximately a six 4% in place cap rate on the sale.
With that I'll turn it over to Scott to provide additional details on third quarter performance and update you on guidance. Thanks, Peter Let me recap our results for the quarter NAREIT funds from operations were <unk> 60 per fully diluted share compared to <unk> 51 per share in Q.
2021.
As Peter noted we finished the quarter with in service occupancy of 98, 3%, which is up 120 basis points compared to the year ago quarter.
Our cash same store NOI growth for the quarter, excluding termination fees was eight 5% primarily driven by higher average occupancy increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases.
Summarizing our leasing activity during the quarter, approximately $3 3 million square feet of leases commenced.
Of these 700000 were new $1 2 million were renewals and $1 5 million were for developments and acquisitions with lease up.
Tenant retention by square footage was 65%.
Moving on to the capital side.
In August we announced the closing of a new $300 million delayed draw term loan with a tenor of three years plus two one year extensions the proceeds from which will approximate the remaining cost to complete our current developments the.
The delayed draw feature allows us to borrow on this facility for up to one year from the date of closing.
The new term loan has an interest rate of sofa, plus a credit spread of 85 basis points, plus a sofa adjustment of 10 or 15 basis points, depending on the tenor of the interest period.
As of today, we have not drawn down any funds from this facility.
Moving on to our updated 2022 guidance per our earnings release last evening.
Our guidance range for NAREIT <unk> per share was now $2 21.
To $2 25.
With the midpoint of $2 23.
This is an increase of <unk> <unk> per share at the midpoint compared to our prior guidance.
The increase was primarily due to better portfolio performance and an increase in capitalized interest due to our developments.
Key assumptions for guidance are as follows.
In service occupancy at year end of 98% and 98, 5%.
This implies a full year quarter end average in service occupancy of 98, 2% to 98, 3%.
Our occupancy guidance now reflects our 644000 square foot all post road building in Baltimore will be occupied in the first quarter of 2023 based on the conversations we're having with our leasing prospects.
Fourth quarter same store NOI growth on a cash basis before termination fees of 5% to six 5%.
This implies a quarterly average same store NOI growth for the full year 2022 of nine 3% to nine 7% an increase of 75 basis points at the midpoint compared to our prior earnings call.
Guidance includes the anticipated 2022 costs related to our completed and under construction developments at September 30 for.
For the full year 2022, we expect to capitalize about <unk> 12 per share of interest to <unk> higher than our prior guidance.
And our G&A expense guidance remains unchanged at $34 million to $35 million.
Other than previously discussed our guidance does not reflect the impact of any other future sales acquisitions or new development starts the impact of any future debt issuances debt repurchases or repayments and guidance also excludes the potential issuance of equity let me now turn it back over to <unk>.
Peter.
Thanks Scott.
Industrial fundamentals remains strong supporting high occupancy and rent growth, even while the financial market sorts of rising interest rates high inflation and extreme volatility.
Our team is working day and night to serve continuing tenant demand with new best in class projects and drive long term cash flow growth and value for shareholders.
Operator with that please open it up for questions.
Thank you and we will now begin the question and answer session.
I ask you a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily for the question.
And our first question today will come from Keybanc Kim with true.
Go ahead.
Good morning.
Scott can you talk about the guidance.
Guidance and the implied <unk> guidance you gave.
US bridge the gap between the 50%.
$60 you reported before.
That's expensive.
Hey, Keith I hope, you're doing well absolutely I'll provide that.
There are three main areas that are impacting the drop of our <unk> per share from <unk> to <unk>.
One penny of that is due to onetime items that we recognized in the third quarter.
Related to NOI, so that could be tax true ups tax.
Tax rebates, we received or our easement income. So <unk> has a penny of onetime items that we are not recognizing in for Q.
<unk> has to do with the third quarter property sales those happened in late September .
And then another two sets of that has to do with an increase in interest expense primarily on our line of credit. So those are the three main drivers for the drop of our <unk> from <unk> to <unk>.
Okay great.
And a macro question for you guys.
We've seen some major banks, especially the bulge bracket.
Pull back from commercial real estate lending.
He has led to some chopping of.
Participating in some.
Some of the credit facility.
So it's one of those might be due to the government's perhaps patent how CRE loans are accretive.
So I'm just curious from your take especially like Scott <unk> CFO at bar for a longtime and Peter you had a great interesting background in banking at Jpmorgan.
I'm curious about your take on all of the what you're seeing and how that might all play out.
Maybe I'll go first.
I would say that the bank term loan market is drying up I think our deal that we inked in the middle of August is probably one of the last deals that youre going to see for a while I think youre right. A lot of it has to do with stress test the banks are undergoing in the third or fourth quarter. So.
My guess is that market is going to be close probably for the next couple of quarters, maybe it opens up in early 2023.
I have a feeling if I was a bank I would probably increase the spreads a bit though compared to what our deal was that we closed in August . So Peter do you have anything on a macro level. If you were to ask the Ceos of these big banks. They would expressed significant frustration with how how high the capital requirements are.
Secondly takes them out of the market at a time when.
Our customers need them, most and so that's I know that's a point of frustration after some conversations I've had.
With some of those people Bob do you want to talk about the availability of construction finance to yeah, I would say.
Availability frankly is kind of the key right now.
We're seeing a lot of banks are clearly pulled back keep it as you alluded to through at least year end, even looking at new business and heard a lot of stories of people of banks pulling term sheets.
They had outstanding so availability for construction financing is key in.
Very difficult right now.
Got it thanks, I'll jump back in the queue.
And our next question will come from Rob Stevenson with Janney.
Hey.
Hi, good morning, guys.
Given those comments how would you characterize the market for dispositions today, presumably the asset you sold the assets you sold in third quarter, where market a while back what's.
What's the sort of pricing today, and what's your appetite to do more dispositions over the next few quarters in the current environment.
Sure.
Yeah, I mean, we're very pleased with the execution, we got on our Cleveland and the team did a great job and what obviously is a rapidly changing investment sales market. We do have appetite for additional dispositions. It just depends on what we find when we go out with assets in terms of pricing. This is good real estate.
Stayed at the end of the day is very solid it's by and large 100% leased.
So we're not going to be letting this stuff go cheap.
We'll see where the markets are we do know that there are literally billions of dollars of new funds coming into the space looking to.
To gain exposure funds are forming as we speak for this purpose I'm not sure if they're farming because they think there's going to be distressed or not but given the size of the dollars involved I have to believe that they expect regular way what I would call regular way purchases. So yes.
Yes, we have appetite for sales and we think theres going to be a lot of capital out there, we'll just have to see what the pricing looks like.
Okay, and then I guess the alternative here.
The expected stabilized cap rate on the current development pipeline is 74, when you factor in land cost today current development costs and current rents where do you think the projects that youre going to start in the next six to 12 months are going to average out about the same a little bit skinnier on the yields a little bit better on the yields how is that likely to.
Cash out.
Do you want to comment on that.
Thanks for reporting the number we're very very pleased about the <unk>.
<unk> ability and the margins and accretive Miss on those projects because they clearly are.
Great site as well.
So.
The function of that is rising rates and our real good basis, we actually have not done.
We havent done mark to market kind of.
Compensation of that while we report is what we as a company and shareholder tend to get again based on our.
Our basis.
Got it.
I mean.
Are the fair market values of our Atlanta they are.
<unk> are higher than our basis, so the cap rates.
It's going to be lowered as having four but you know what we haven't done that math.
Okay and for stuff that Youre going to start I mean is it I mean, if we're sitting here a year from now is the cap rate.
The stabilized cap rate on that development pipeline.
About the same a little bit less a little bit more how do you characterize that when youre looking at where development costs are going and your ability to lock in pricing on materials and labor today, as well as what whether or not there's been any.
Increased softness on land or whether or not land is still.
A very expensive et cetera, how does that sort of play out.
Well, it's really hard to forecast yields so we'll.
We'll report to you once we are ready to starting development of our projected yields are I think that's a more accurate way because you know there is various variables. Thank you mentioned.
Building cost.
Rents are.
But one thing I will tell you that if you look at our land holdings in almost every market rents have increased and are increasing faster than construction cost and so you know.
It actually stays the same then the yields would be a very attractive but again.
<unk> will give you a sense was when we start new projects, Yeah don't forget Rob We've got we've got about $2 billion of.
Investment opportunity in our current landholdings. So the yield is Joe Joe pointed out are difficult to project right now, but with rents growing the way they are.
We certainly like our prospects.
Okay, and then one last one for Scott the term loan basically removes the need for you to access the debt markets in the foreseeable future or.
Are you going to be looking to do anything over.
Over the next six months until things sort of calmed down.
Well I would say a couple of things.
From a debt maturity point of view, we have nothing coming due to 2026, assuming you'd give us credit for the options.
And options, we have in our line.
The development spend that we need to complete our developments is about $350 million.
And when you look at the liquidity, we have in our line of credit and the term loan which is $300 million on drawn in cash flow.
Next year, it's about $700 million. So it's about double of what the requirements are needed to complete the developments and that doesn't even include any sales proceeds. So I think we're in very good shape from a liquidity point of view.
Okay, so more than enough to fund any sort of first half of 'twenty three development starts.
Okay. Thanks.
Thanks, guys I appreciate the time.
And our next question will come from Dave Rodgers with Baird.
Go ahead.
Yes, good morning, everybody I wanted to follow up Peter on your comment in your opening remarks about just kind of a financial market sorting out inflation and higher interest rates I guess I wanted to get your thoughts maybe on just the overall economic environment and positioning potentially for any type of recession.
We have the speculative leasing cap, which is good or the investment cap, but can you talk about kind of how you want to position the company for a potential slowdown in activity.
Whether that cap gets reduced further or whether you might want to just have more slack in that.
Or even taking that to the next step are you seeing any reasons to be more cautious as you look forward.
Right now all of the markets that we're targeting are pretty tight there is unmet demand. So the fundamentals remained strong.
Clearly, we're keeping a close eye on what's going on with the rest of the economy.
So we're juggling like everyone else, what we think is coming in the way of consumption on the consumer side as well as the volatility in the capital markets with respect to our cap.
We're really not focused on the cap remember the cap is just that a cap and not a target our geographic functionality and risk adjusted return requirements drive our investment decisions not the level of the cap so.
We're very pleased that we have this great growth opportunity on the balance sheet today, but of course, we're going to be driven primarily by that risk adjusted return opportunity and what happens in the broader market in terms of positioning the company. We have a rock solid balance sheet, we're going to maintain that rock solid balance sheet.
And we're going to fund ourselves properly and adjust our growth as.
As the market requires.
Maybe to the second point of that or are you seeing any reasons that you would want to slow down development or be more cautious whether that's kind of gestation time of leases or just fewer people showing up for further leasing negotiations than maybe a year ago.
Well the number of prospects that we have.
Looking at our new opportunities is significant.
Comparing it to say six or nine months ago would clearly be a tough comp that was really the best days probably in the history of this business, but we don't really see any reason right now to slow down per se.
We're excited about what we have in the way of prospects and the opportunities that are out there to capture this tremendous rent growth in the coastal markets and the value creation that comes from it.
Great and then maybe just last for me in going back to old Post road looks like it was delayed to the first quarter.
More clarity around the first quarter or is that just not happening in the fourth quarter.
Sure Dave It's Peter Schultz good morning, So our discussions with our prospects continue.
As we've talked about on our last call our expectation was occupancy what happened in the fourth quarter.
So the primary prospects are both third party logistics providers and their discussions with their customers are simply taking longer there.
Certainly the possibility that it happens in this quarter, but we think it's more likely at this point that it's the first quarter or so.
Our estimation was prudent too.
To make that adjustment, having said all that the buildings positioned for immediate occupancy and tenants continue to have very few choices in that sub market. So it's on us to get this done and the team is very focused on.
Thanks, everybody.
Thanks.
And our next question will come from Nick <unk> with Scotiabank. Please go ahead.
Hey, Good morning, this is Greg mcginniss on with Nick.
Just looking at the dispositions there was a 60 basis point increase in cap rates in Q3 versus 2021 how much of this increase reflects Cleveland.
Just general market rate increases and if you could also comment on potential cap rate expansion more broadly that'd be appreciated.
Okay.
I'll start this and Joe John Peter can jump in in terms of cap rate movement more broadly as we mentioned in the opening remarks, we for our own purposes in terms of looking at margins have increased our cap rate assumption by about 100 basis points.
When it comes to a discussion of cap rates, it's really.
A submarket by Submarket conversation certainly in the fastest growing submarkets I E fastest growing rents and steakhouse in southern California.
Rates haven't moved a whole lot and in other markets they moved more.
Joe you want to.
It's a different mix. So it's really nice Peter said, you can't really compare quarter to quarter, because there is a mix of different products and different ways.
Weighted average lease terms different occupancies in different submarkets. So.
I wouldn't compare cloud part of Florida, because you can in fact is that we view that it shouldn't but.
Again, we're very pleased with the execution of it and Cleveland.
And we'll be able to reallocate that do high rent growth markets.
Okay. Thanks.
And then just touching on those margins in the development pipeline.
Underwriting been adjusted in any other way besides that.
Hundred basis point increase that you spoke about.
And then also if you could just touch on what cap rates you're actually using.
I'm, especially thinking inland empire versus elsewhere that'd be appreciated.
Our underwriting Hasnt really changed we're still using the same conservative or at least what we think is conservative inputs in terms of 12 month leasing downtime and.
And moderated rent growth versus what we're seeing in the markets.
Cap rates, yes, basically so absolutely the same underwriting if you just do the math I mean is there right. There in terms of our investment in our reported margin imputes to a low four cap rate and I just wanted to emphasize and you probably know this already because it's right there above 62 to 63.
Percent of development pipe Youre, seeing is Florida, and Socal, which has both.
The lowest cap rates and in Asia. So we're very pleased with this pipeline.
We've not had this high of a concentration and tools the most active markets in the U S.
And just just to make sure I understand so you're basically saying that like that I think are calculated for two cap rate would be the exit cap rate and kind of Florida.
Alright, Southern Florida in inland Empire, Yeah, it would be it would be lower because that's the only comprised 62% so the 62% and in Florida, and Socal as a component of that low 4415 cap rate and so.
Socal, Florida would be lower and the risks of the.
32%, 33% would be a little bit higher.
Oh, okay.
It seems a bit low based on that cost, but I'm sure you guys know the market much much better than I do.
Yes.
Yes, a couple of points in that a lot of investors, especially in the most active ones today are the low leverage a lower leverage.
Investors and Theyre looking at total return.
They're looking Mike is looking for a total return of maybe six five to seven and a half and clearly given the rent growth in these markets that I mentioned, you can exceed those with those cap rates.
Great. Thank you.
Okay.
And our next question will come from Todd Thomas with Keybanc capital markets.
Go ahead.
Hi, Thanks, Good morning, I, just wanted to touch on the 23 explorations, where you've made significant progress and mentioned that the cash rent spreads bumped up to 28% from 20% on the last update last quarter for what's been signed.
And you indicated that the spreads would actually get better.
Any sense of what you're projecting for the balance of the explorations, what youre seeing in the southern California.
<unk> portfolio, there and sort of what you're projecting for the year in terms of rent change if you could maybe sort of bookend that a little bit.
The potential uplift there is pretty significant we haven't finished our budgets and that's why we're not going to put numbers out there, but I think what we would do.
Give you a pretty good indication is for Joe Joe to talk about the last few leases that we sign so that you can see what we're achieving.
Yeah, Thanks, Peter so.
The most.
Recent leases in La County that we've done three leases.
Two in South Bay, and one in I E.
And the square footage range from 40000 feet to 140000 feet and their rent change on those leases.
Or from the range was 90% to over 200%.
Rent change cash.
Okay and is that sort of indicative of what we should think about for that portion of the explorations, which I think you said southern California represents about 36% is that is that right.
Well, we're not giving you three examples you'll have to.
Come up with your own thoughts on what it's going to look like we can't really.
Got it okay.
Got it and then and then Scott so tenant recoveries were up meaningfully in the quarter your expense reimbursement ratio.
It was up almost I think five or 600 basis points around 89% I think you mentioned there were some tax true ups in the quarter.
<unk> was that it was the increase solely related to those true ups or is that going to revert back to call. It 80, 384% or is some of that increase perhaps sustainable.
Yes, when you looked at three months.
Three months and nine months same store expenses were up.
What I would what I would say Todd is due to the fact that were highly occupied at over 98% pretty much almost dollar per dollar we recovered back so there hasn't been much leakage on that is.
Far as next year is concerned you are probably going to see some pressure on real estate taxes like we had in the last couple of years and the way up.
But well have a better idea of that in our fourth quarter call, but I think the one point you want to take away is that the increase in expenses again was pretty much recovered dollar for dollar from our tenants because of the net lease structure.
Okay got it and then just sticking with NOI.
Same store NOI growth you know I realize you have a difficult comp in the fourth quarter, you have a couple of difficult comps coming up but.
Can you talk about that a little bit and.
Realize you're not providing 23 guidance, but maybe some insight around the trajectory.
Same store NOI growth here as we sort of think about the next few quarters and sort of how the year starts out maybe.
I guess, they're all post road.
Maybe a factor, but really curious just given the volatility in that metric for you and sort of what youre seeing potentially.
Yes. This is Chris I think your first referring to cause a deceleration from <unk> to <unk>. If you look at <unk>, our midpoint is 575%, which represents about 275 basis point decrease it's really due to a 150 basis points is due to some free rent burn.
Some free.
<unk> given us some larger new leases and then the other 100 basis points is really a swing on Scott mentioned about some real estate real estate tax refunds and true ups that happen in the third quarter, so that swing from <unk> to <unk>.
About 100 basis points difference and then Todd when you look at 2023. This is not guidance because we're getting still both of our budgets but.
I'm not going to comment about occupancy. So we still have to go through that we talked about the old post road that we at.
It will be set up by the first quarter free rent will have to see how that burn out works out, but if you look at the other two main components of rental rate bumps and rental rate increases on new and renewal leases and I'm, just using roughly a 30% increase.
Next year cash rental rates, which we talked about in our script. We think it is going to be higher than that you are at least going to have a six handle just from those two components for same store and again, we will update you on a fuller number that takes into account occupancy and free rent burn off on our fourth quarter call.
Okay, Great. That's helpful. Thank you.
And once again, if you would like to ask a question. Please press Star then one.
Our next question will come from Rich Anderson with Pepco D C.
Hey.
Okay.
Alright.
Okay.
Oh, sorry about that because my headphones not working can you hear me now.
Okay. Thank you.
So it gets back to the capital raising question.
So you did the the delay draw and I know you ran through the math the debt maturities are minimal or nonexistent for a while and you went through the development spend but are you are you sort of.
Lining up some options say six to 12 months from now assuming the world does indeed come to an end.
And you know that.
These these are these.
<unk> of capital start to.
Become.
Lesser elements to the story.
As joint venture partnerships is more in the way of dispositions sort of on the horizon at least thinking about it now to be prepared for whatever might come our way 612 months from now.
Certainly we're going to be opportunistic and consider all forms of.
Potential capital raising.
Across the spectrum, obviously, if the world comes to an end and we won't be investing anyway.
We have liquidity.
But.
Thinking about a darker scenario, we have spent the last dozen years, creating a rock solid portfolio from a credit standpoint.
I think 2020 was reflective of how strong that is in terms of the fact that we collected all of our rents during COVID-19 that COVID-19 year than I am.
Not sure anybody else did.
And we've got this rock solid balance sheet with plenty of debt service coverage and access to all forms of capital for us trying to arbitrage those forms of capital to make sure. We're funding ourselves as cheaply as possible, that's really the Gainesville and <unk>.
Slowing down the development starts business, obviously would be correct the option.
We don't feel that the case now, but certainly that would happen if as.
As you pointed out a darker days come right.
Second question I think it's <unk>.
So Joe you mentioned something like 100% rent change on you know.
Some areas of the country, which is great.
But also a vestige of what has happened over the past few years I mean, how are you monitoring. This in terms of just kind of flushing itself out of the system with each passing.
Renegotiation releasing event.
Do you see that you have multiple years ahead of you of a well ahead of trend type of cash releasing spreads or or is this something that maybe has a shorter sort of shelf life to it at this point in may.
Start to think about guiding the communication down a little bit so that people arent over their skis from an expectation standpoint.
I think Jack run rate increase asthma cash rental rate increases in 'twenty four 'twenty five.
Our job is to drive.
There are quality properties.
Get the best economics for each deal.
A lot of the cost is really a function of.
Supply and demand and so for example, if you go to the inland Empire MLA demand is very very strong and continues to be forecast to be dropped and then you have that and you then just oppose that with the lowest vacancy rate in the <unk>.
The U S and.
5% in some markets to percent of 1%.
What you have is tenants don't have options really enter known they have to pay the rent and also remember long term.
Real estate is really only comprises anywhere from 5% to 6% of total logistics costs. So.
A third party logistics provider E Commerce company all of the other users need the service.
We are of course pale in comparison to transportation costs and labor, but they still need a real estate. So.
Of course that varies market by market, but thats what were charged to do we always monitor and keep an eye on our supply demand and don't forget where we start today is completely different from where we started as an industry say before the great recession. We're at two 9% vacant back then we were closer to eight.
Everybody's portfolio today is much better than their portfolios were back then we have recurring cash flow, which back then it was really cash flow and quotes from the sales of assets.
So.
We're in a much better position right now to weather any kind of a storm.
And as George pointed out tenants don't have alternatives still today and there is unmet demand, especially in the coastal markets and Thats, where were focused well I mean, I guess I would say you know using that history lesson. There is the option or are these the potential that vacancy rates can go up substantially.
As they as you just pointed out you know eight versus three.
Using that history.
Are you stress testing the model at all about obviously things were different there was much more spec development back then.
But do you look at how fr performed.
10, 12 years ago, and tried to sort of draw some conclusions of where things could go now or is it just apples to oranges in Europe in your opinion.
It is apples to oranges, but a couple of thoughts on that one of the things that we saw back then so <unk> nine is that the vacancy rate had to get pretty high before the balance of power. If you will between landlord and tenant changed and Thats kind of low nineties.
And that would be in in a specific portfolio.
So we're obviously a long way from that so that gives us.
Confidence that this rent growth that we're seeing is going to continue for some time don't forget E. Commerce today is a much much bigger component of the equation than it was back then and that is a bit of a.
And the economy within the economy, if you will.
Yes fair.
Fair enough thanks very much.
Yes.
Yes.
And our next question will come from Anthony Powell with Barclays Go ahead.
Ed.
Hi, Good morning, I had a couple of questions on the on the developments that are completed but not in service gas in Colorado tenancies that aren't released yet.
Are your conversations with tenants around those assets and generally.
And development pipeline should we expect a bit more downtime between completion and leasing given kind of the environment here.
So this is Peter so I would first say that overall demand continues to be.
Very good across our development pipeline both.
<unk> and under construction as Jojo commented earlier multiple prospects on most of our spaces to your specific questions.
On the buildings that are completed.
In Nashville.
We're trading paper with a prospect there.
In Denver that's.
In our park.
And our experience in Denver as activity picks up as the building is completed and we've seen exactly that.
A couple of fresh Rfps and proposals out there and then lastly in Miami at our first Park Miami we.
We have only 66000 square feet remaining.
And once completed and we have a lease out on that space as well. So do you want to talk about Seattle sure yes.
Yes.
Sure.
Responding to proposals back and forth with multiple prospects.
And just in your comment on downtime.
<unk> not changed our underwriting to one year on average.
Beating that.
Well well inside of one year closer to half of that.
And first of all adjust adjusting.
We will not forecast.
End up but we have offered in terms of our underwriting of giving it a year, but I will mention to you in terms of the development pipeline you'll see.
About 64% of that.
And dollar volume is not scheduled to be completed until 2023. So we have plenty of time and already we're getting inquiries on that and remember again like I've mentioned, we've mentioned our team I've mentioned above.
About 62% of that pipeline is in a tight market so Florida.
Thanks for that and maybe just generally obviously.
We are pretty positive on the demand outlook and anything changed over the past three months in terms of tenant demand.
Tore just commentary around the tenants it seems like things had it but yeah maybe.
A broader discussion about that and how you think that may evolve in next several weeks I know you can put in the future, 100%, but it sounds like things are still pretty pretty good.
Youre getting into pretty micro.
Timeframe given.
Welcome.
That we have here.
I know what youre trying to get at the mood of the tone Hasnt changed.
By the way Big companies take a long time to make decisions. That's just the way it is.
So that hasn't changed either and.
But we haven't seen a change in the tone of the mood.
There is still a sense of urgency on the part of anyone who didn't grow in 2020 one to grow now I mean to grow the supply chain and their footprint now and.
So.
The conversations are robust.
The thing I would add to that Anthony is as you think about tenants that have moved out of our portfolio in many cases, because they need more space.
We're not able to accommodate given our high occupancy level and we've for the most part backfill those spaces very very quickly at much higher rents.
Alright, thank you.
Okay.
And our next question will come from Michael Mueller with Jpmorgan. Please go ahead.
Yeah, Hi, Thank you mentioned you were getting about three 6% rent bumps on the 2023 lease signings how does that compare to what you achieved on your 2022 signings and then where does that put the overall portfolio kind of today.
Yes, if you compare 2022, we get three 3%. So that's up about 30 basis points to 2023, if you look at the in place on the overall portfolio right now at about two 9%.
So obviously those numbers are definitely increasing and going up.
Okay.
That was it thank you.
And our next question will come from Bill Crow with Raymond James Go ahead, Okay.
Thanks, Good morning, I guess.
Any changes to the watch list tenants.
Thoughts about bad debt reserve for next year.
Hey, Bill it's Scott the bad debt expense for third quarter was $188000. So very low year to date its $25000 that was aided by a $250000 payment for our prior reserve balance no material tenants on the watch list as.
As far as next year is concerned we're going through our plans and our budgets all depends on the economy, but.
Where we stand today no material issues of credit concern.
Thanks.
You've talked a lot in the for good reason about southern California, Florida, some of those markets Seattle.
But what about markets like Phoenix, and Texas as we look to next year until the supply demand balance how do you see those markets playing out.
Joe you want to take that sure Bill I still would go.
In terms of.
Dallas and Phoenix, they've actually performed really really well this year.
They brought in their ICD the top four and five markets in terms so year to date net absorption Dallas 19 million square feet net absorption year to date Phoenix $21 million vacancy is Dallas is record low.
In my 30 years of being in the business that we've been this low three 8%.
And in the last 30 years Phoenix never below this slower at vacancy rates of two 7% Phoenix. Okay. So you have two markets right now that have robust.
In migration and with low vacancy rates so.
That's the reason why Dallas and Phoenix have continued to.
Have robust rent growth there is supply.
Coming in and.
One note on our building we are building in Phoenix, We think we have the best product out there bar none the most active market is 303 quarter and if you go out there and as everyone who has the best project out there is the three buildings for industrials building. So we were very proud of it from a high.
Highway exposure point of view from a.
Space plan point of view and access to how close it is to 10 and 303 interchange so by and large we will be keeping an eye on the supply, but right now the demand is supply and a vacancy rate are all favorable for Dallas and Phoenix.
Great. Thanks for the comments.
Mike.
And there are no further questions at this time I would like to turn the properties back over to Peter.
Closing remark.
Thank you operator, and thanks to everyone for participating on our call today, we look forward to connecting with many of you in person in the coming months.
Well.
Yes.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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Yeah.