Q1 2023 First Industrial Realty Trust Inc Earnings Call
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Speaker 2: Hello, everyone. This is Marlise, your operator for today's call. We are going to start this call in just a few minutes. And we ask you and thank you for your patience.
Speaker 2: Thank you very much.
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Speaker 1: The.
Speaker 2: Welcome to First Industrial Realty Trust's First Quarter Results Conference Call.
Speaker 2: to First Industrial Realty Trust's first quarter results conference call. All participants will be in listen-only mode.
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Speaker 2: I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead.
Speaker 3: Thank you, Marlise.
Speaker 3: Hello everybody and welcome to our call. Before we discuss our first quarter of 2023 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's statements may be time sensitive and accurate only as of today's date.
Speaker 3: financial measures discussed in today's call in our supplemental report and our earnings release.
Speaker 3: The supplemental report, earnings release, and our SEC filings are available at FirstIndustrial.com under the investors tab.
Speaker 3: Our call will begin with remarks by Peter Basile, our President and Chief Executive Officer, and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yaffe, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Scott Musil.
Speaker 3: and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me hand the call over to Peter.
Speaker 4: Thank you, Art, and thank you all for joining us today.
Speaker 4: 2023 is off to an excellent start. Our team continues its strong track record of leasing success.
Speaker 4: maintaining high occupancy, capturing increasing rents on new and renewal leasing, and securing tenants for our new developments.
Speaker 4: As a result of our performance, we are raising our estimate for our 2023 cash rental rate and our full year FFO guidance.
Speaker 4: Moving now to the broader U.S. industrial market, fundamentals continue to drive high rates of occupancy both nationally and within our target markets.
Speaker 4: There's a fair amount of new supply coming online this year as developers ramped up in 2022 to capture incremental demand.
Speaker 4: However, we expect new starts to decline throughout 2023 compared to last year due to higher capital costs, a constrained lending environment, and lower land acquisition volumes. This is our primary focus on land constrained coastal markets for our new developments.
Speaker 4: We continue to feel good about the positioning of our current projects as well as our land holdings, most of which are ready to go as market conditions warrant.
Speaker 4: Our portfolio performance continues to outpace the national market.
Speaker 4: We finished the first quarter with an occupancy rate of 98.7% and our cash rental rate change for leases commencing in the first quarter was 58.3%.
Speaker 4: A new quarterly record for our company.
Speaker 4: On a straight line basis, rents were up 85% in the quarter.
Speaker 4: As of yesterday, approximately 63% of our 2023 lease expirations are in the books at a cash round rate increase of 56%.
Speaker 4: given our releases signed to date and our expectations for the remaining 2023 expirations.
Speaker 4: We anticipate that our increase on rental rates on new and renewal leasing will now be in the range of 45 to 55 percent.
Speaker 4: This new midpoint is five percentage points higher than the midpoint we provided on our February call.
Speaker 4: Moving on to development activity. Since our last earnings call, we signed full building leases for the 198,000 square foot First Park Miami building 10 and the 105,000 square foot First Lehigh Logistics Center in the Lehigh Valley Market of Pennsylvania.
Speaker 4: We leased 50% of our 128,000 square foot first steel building in Seattle.
Speaker 4: We also aimed a 27,000 square foot lease at our four building, 347,000 square foot first loop logistics park in Orlando.
Speaker 4: That newly completed project is now 56 percent leased. Given our development leasing progress and the favorable supply-demand dynamics in its submarket, we broke ground on first state crossing in the infill Philadelphia metro market.
Speaker 4: The site is located just 12 miles from the Philadelphia airport with great access to both I-95 and I-495.
Speaker 4: First State Crossing will be a 358,000 square foot facility with a total estimated investment of $61 million and a projected cash yield of 6.8%.
Speaker 4: Including the first quarter development start, our developments in process total 3.6 million square feet with an investment of 569 million which are currently 12% leased.
Speaker 4: The projected cash yield for these investments is 7.3 percent.
Speaker 4: which represents an expected overall development margin of approximately 65%.
Speaker 4: In total, our balance sheet land today can support an additional 13.8 million square feet.
Speaker 4: This represents approximately $2.1 billion of potential new investment based on today's estimated construction costs and the land at our book basis. These figures exclude our remaining share of the land and our Phoenix joint venture.
Speaker 4: Speaking of that venture, in the first quarter we sold 31 acres to a data center user for a sales price of $50 million.
Speaker 4: Our share of the gain in incentive fee before tax was approximately $24 million.
Speaker 4: In conjunction with this sale, the venture entered into an agreement with the buyer which provides them an option to purchase an additional 71 acres within the next two years.
Speaker 4: As part of this agreement, the buyer is required to lease the ground for up to two years, and our share of the ground lease rent is approximately $200,000 a month.
Speaker 4: As you can see, with a little over two months time elapsed from our fourth quarter call, we've had some great results and activity across our entire platform.
Speaker 3: With that, I'll turn it over to Scott for his comments. Thanks, Peter. Let me recap our results for the quarter. NAIRIC funds from operations were $0.59 per fully diluted share, compared to $0.53 per share in 1 Q2 022.
Speaker 3: Our first quarter results included income of two cents per share related to the accelerated recognition of a tenant improvement reimbursement associated with a departing tenant in Dallas.
Speaker 3: Excluding this 2 cent per share impact, first quarter 2023 FFO per share was 57 cents.
Speaker 3: As an aside, we were successful in back-filling the Dallas space with no downtime for a gross cash rental rate increase of 54%.
Speaker 3: Our cash saved St. Cyranoi growth for the quarter, excluding termination fees, was 8.1%.
Speaker 3: The results in the quarter were driven by increases in rental rates, a new and renewal leasing,
Speaker 3: Renter rate bumps embedded in our leases and higher average occupancy, partially offset by higher free rent and increase in real estate taxes.
Speaker 3: As Peter noted, we finished the quarter with in-service occupancy of 98.7%, down 10 basis points compared to year-end, and up 70 basis points compared to 1 Q2 022. Our tenant retention by square footage was 63%.
Speaker 3: So, maintaining our high occupancy level quarter to quarter demonstrates the great job by our team of back-filling move outs.
Speaker 3: Summarizing our leasing activity during the quarter, approximately 4 million square feet of leases commenced. Of these, 1.2 million were new, 2.4 million were renewals, and 300,000 were for developments and acquisitions with Lease-Up.
Speaker 3: release last evening. Our guidance range for NAIRIT FFO is now $2.35 to $2.45 per share. Excluding the $0.02 per share income item I discussed earlier, our guidance range is $2.33 to $2.43 per share with a midpoint of $2.38.
Speaker 3: This is a four cent per share increase at the midpoint, primarily due to our leasing performance and our share of the monthly ground lease rent we expect to receive from our joint venture that Peter mentioned.
Speaker 3: Key assumptions for guidance are as follows. Quarter-end average and service occupancy of 97.75% to 98.75%. Same store NOI growth on a cash basis before termination fees of 7.75% to 8.75%.
Speaker 3: an increase of 25 basis points at the midpoint compared to our prior earnings call.
Speaker 3: Note that the same store calculation excludes $1.4 million of income related to insurance claim settlements recognized in the fourth quarter of 2022. Guidance includes two cents per share of FFO from Joint Ventures primarily related to our share of the ground rent discussed earlier.
Speaker 3: Guidance includes the anticipated 2023 costs related to our completed and under construction developments at March 31st.
Speaker 3: For the full year 2023, we expect to capitalize about 9 cents per share of interest.
Speaker 3: Energy and expense guidance range is unchanged at $34 million to $35 million.
Speaker 3: Guidance does not reflect the impact of any future sales, acquisitions,
Speaker 3: the impact of any future sales, acquisitions, new development starts.
Speaker 3: Debt issuance is debt repurchases or repayments, nor the potential issuance of equity after this call. Let me turn it back over to Peter.
Speaker 4: Thanks, Scott. 2023 is off to a great start. Our portfolio results were outstanding and the FR team continues to drive long-term cash flow growth and value creation. We're also well positioned to take advantage of new opportunities with a strong capital base and no debt maturities until 2026 assuming extension options.
Speaker 4: As a team, we are laser focused on executing on our rent growth and development opportunities. So with that, we are ready to open up for questions.
Speaker 2: Marlise? Yes. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. And then press star 1 on your touchtone phone.
Speaker 2: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker 2: At this time, we will pause momentarily to assemble our roster. Thank you.
Speaker 2: And our first question comes from Kee Bin Kim from Truist.
Speaker 5: Key, please go ahead. Thanks, good morning. Can you guys talk about the prospect activity that you're seeing in your development pipeline and how that might have changed over the past couple quarters?
Speaker 6: Good morning, it's Peter. You know, generally activity continues to be broad-based across all of the projects and sectors. We continue to see strong demand from 3PLs, from retailers, from food and beverage, automotive, e-commerce, medical, and that has been pretty consistent. I would say it's gotten broader.
Speaker 6: over the last several months. In terms of our completed buildings, not yet leased in Denver, Nashville, and Florida, we continue to see interest from full and partial building prospects on those assets.
Speaker 6: And I would say the activity has been pretty consistent, not better or worse than it's been since the beginning of the year. Jojo? Sure. And just to add more detail in the activity, that includes responding to RFPs, request for proposals, inquiries and tours, including shelving.
Speaker 6: on either existing product that's completed or other construction.
Speaker 4: Yeah, overall, Keith, the activity is characteristic of 2018-2019. We mentioned on the last call we see demand normalizing and, you know, you'll recall those were very, very good years. So we're coming off the kind of bubble created by COVID and prospect activity is pretty good.
Speaker 5: Okay, and you guys mentioned on the opening remarks that you do see, I guess everyone sees it, a
Speaker 5: Okay, and you guys mentioned on the opening remarks that you do see, I guess everyone sees it, a
Speaker 5: decent amount of supply coming in, at least in the near term, although the future supply might be a little bit less, right, given the start volumes. But as we are trying to absorb the amount of supply coming in, how do you think about potentially throttling your development pipeline as we enter potentially a little bit of a soft patch in the economy?
Speaker 4: Yeah, you know, there is significant space coming. We see in our 18 markets, and that includes the three that we're not investing in right now, about four to 450 million square feet.
Speaker 4: coming this year. About 20-25% of that is pre-leased, so it's not all spec.
Speaker 4: But we also see keep it. So that'll bump vacancies up a little bit. But we also see a pretty big slowdown in starts.
Speaker 4: probably down in the first quarter 40 to 50 percent this year so far and we think it's going to continue to decline. And so probably toward the end of next year you'll see vacancies kind of come back to where they are now, maybe even a little bit lower. So the market, we think the dynamic is going to remain where it's a landlord's market. We'll see a tick up in vacancy in the short term.
but we don't see that changing the leasing dynamic at all. And again, we're obviously going to keep an eye on it. It will impact, the health of the markets will clearly impact what and when we decide to build. You'll note that if you look at our development pipeline, we have several projects that are ready to go.
And they are primarily in California and Florida, two of the strongest markets right now in the country.
Okay, thank you. And our next question comes from Rob Stevenson from Jenny. Rob, please go ahead.
Rob?
Fourth quarter on average was about 77% and 64% this quarter at the midpoint. Given that there's a good deal of overlapping projects, what's the difference there? Is that really high margins on the stuff that you completed? Lower margins on the first state crossing project? Any sort of read through on rent or construction cost pressures that you're seeing overall? How should we be...
high 70s last quarter, given that there's a bunch of overlapping projects between fourth quarter and first quarter here, what's the difference there? Is that high margins on the stuff that you just completed, lower margins on the Philly project? Is it read through on rent or construction cost pressures? How are you sort of framing that and how should we be thinking about that? Well, I'll tell you the crack of that and Jojo can jump in. That 65% relates to Philly.
margin calculations a little bit over 125 basis points. So that will obviously have an impact on the margins that we're talking about today. Yes, so that is the primary reason for the movement in the profit margins. It's roughly a 25 basis point increase.
from Q4 cap rate-wise, from Q4 2020 to date. There were slight tweaks, Rob, in terms of, of course we keep all the construction costs accurate, but that was so slight and there was no movement in rents really, and so the major contributor to that difference in margin is the up.
self-imposed cap rate increase.
increase for the next location.
And are you seeing any real relief in construction, in material or labor costs on the construction side these days or is it still relatively where it's been over the last few quarters?
Okay, good question. The total construction cost adds to your flat to a slight decrease when you compare Q4 to Q1 2022. Steel prices actually came down, but there were some components that also came up. Concrete, electrical, and duct doors.
came up a little bit. We think it's going to moderate. We already see the moderation. But for 2023, our internal underwriting criteria will use a 5% cost escalation. We think there is some.
downside trend of that depending upon the number of construction starts. If construction starts to continue to be at a low level, we should feel a little bit more moderate increase.
Does that answer your question? Absolutely, that's great. Thank you. And then Scott, what are you seeing today in terms of availability and pricing on debt financing? Where's your best cost of debt?
I would break it into two pieces. One, I would look at the bank loan, term loan market, and as everyone knows, we closed on a $300 million term loan in August of last year. That market has changed quite a bit. Our maturity was a five-year deal, and I would say what you're seeing in the market, if you have strong relationships with the banks, is probably two to three years of term.
The pricing grid has not changed, but the upfront fees have increased considerably. So August compared to where we're at today at the bank terminal market, maturities aren't as long and the total cost including fees is up. I would say the other option that we have is doing a public bond deal or a private placement.
And if you were to look at spreads on a 10-year deal, I would say we're probably 2 to 210 basis points. Okay, that's helpful. And then one last one for me. The Camelback 303 purchase option, is that at a fairly similar price to the 1.6 million an acre you did here in the first quarter? Is there anything different in terms of the quality or use of the land?
between the first 50 acres and the last 70.
Rob, cannot comment on the pricing on the rest of the 71 acres for confidentiality and comparative reasons. I will tell you that it's land that the buyer wants and so we have disclosed to you the ground lease numbers and in terms of use.
I would say it would be a similar use with a...and the lot that they bought has frontage on two of their corners and this one has frontage on the freeway. So maybe one less street frontage, but that's about it. It's the same use.
Okay, perfect. Thanks guys, appreciate the time. And we have a question from Todd Thomas from KeyBank Capital Markets. Todd, please go ahead.
Yeah, hi, thanks. Good morning. I just wanted to follow up a little bit on some of the development leasing. I think the guidance continues to assume 12 months of downtime from completion of the lease off. Is that right? I know you've been running closer to six months on average.
But, you know, how should we think about the pace from here? And do you see any risk, you know, that any of the projects delivered in 22 might not be leased before that 12-month mark? So, yeah, you're right. We do continue to use a 12-month assumed downtime for lease-up on new completions. You know, the last couple of years it's been shorter. I would characterize the...
That's the assumption there with respect to leasing on the existing development pipeline and some of the projects that are completed. Peter and Jojo, you guys want to talk about the projects in your region? Sure, Todd. I commented on some of the projects before, but I would say two things to add to Peter's comments. One is we deliver all of our buildings move-in ready, so there's not a long lead to the
smaller midsize tenants, we continue to see as better. The larger tenants are a little bit slower as they continue to assess the macro environment and the capital market environment, particularly given some of their investments that they would make in the building.
In general, I would say we continue to feel good about leasing all of these within 12 months and we'll see how some of the decision making goes with some of the bigger tenants. Jojo, anything else you want to add? Yes, yeah. I just want to add that we're really excited about the projects that you see are under construction in Oroadow and over the past 20 years we've made our way through to across
projects, I would say they're top tier, and not only top tier, but then they're very constrained markets. So we're really very happy with this pipeline. And so of course, our job is to beat that 12 month downtime.
Okay, that's helpful. And then in terms of rent change going forward, you know, you previously had highlighted the opportunity that you had in Southern California this year with sort of an outsize percentage of roll during the year. Are you through that now with this quarter's results or is there still some role in SoCal to be worked through in that?
So actually if you look at our three largest remaining rollovers, they range from 225,000 square feet up to 300,000 square feet. All those rollovers are in the Inland Empire market. Okay. And then just last question around the guidance. And um...
I guess the occupancy assumption. Does the guidance still assume that Old Post Road is leased up? That you have an executed lease in the third quarter? Yeah, Todd, this is Scott. That's correct.
Okay, so in terms of the occupancy assumption underlying guidance, I guess that would add a little over 100 basis points of occupancy by year end, I guess. In terms of the occupancy assumption then, what sort of...
That would imply, I guess, an even greater decrease in occupancy throughout the balance of the portfolio. Was that the right way to think about the trajectory for occupancy outside of that?
Well, we gave a range of occupancy quarter-end average and that was 98.25 percent. You know, so we're higher than that as we stand today. So yes, as the quarters go on, we see a slight decline in quarter-end occupancy, but we're still very, very happy with having an occupancy rate.
above 98%. Okay, and the guidance though assumes that 100 basis points are a little over 100 basis points. It assumes that Old Post gets leased up in third quarter. It only impacts the quarter and average by 50 basis points because it's only in place for two quarters.
But yes, it's assumed in our occupancy guidance to lease up in 3Q, Todd. Got it.
it's assumed in our occupancy guidance to lease up in 3Q, Todd. Got it. All right, that's helpful. Thank you.
Thank you.
And we will follow with a question from Rick Anderson from SMBC. Rich, just hang on a second while I unmute you.
Hello, can you hear me? Okay Rich, go ahead please. Can you hear me? Yeah Rich. Oh my goodness, it works.
Okay, so the it's nearly 60%
cash releasing spread is, you know, is...
bananas and congratulations to you. To what degree is the sort of second generation or even first generation CapEx influencing that? In other words like if you did nothing what would the number be? I'm just I'm just curious what what are the
the building blocks to get you to that 58% number in terms of the money you spend to attract tenants into the space.
I want to go over the average, go over that, Chris, the leasing costs on average. They really haven't.
change materially. Yeah, you know, one statistic we really look at is kind of our percentage of TI and leasing costs is a percentage of the net rent over the entire lease term and if you look at that number, that extra number for the of the ones signed already is actually a little bit lower than when we were in 2022.
So we're not spending any more money to get those higher rents. The other way of saying it, we're not buying increases in rents through above market tenant improvements, Todd.
These are standard allowances that are included in our results. And no additional concessions. In fact, there are some deals in California where the renewal is where it is. Okay, good. Thanks for that. It's a pretty pure number.
And then on the development side, Scott, you and I had a quick chat last night about tenant commitment to their space. You talked about larger tenants moving a bit slower in their decision process. What about the commitment they're making financially to the interior space and the build-out that's on their dime?
Are you guys seeing anything to suggest that perhaps they're not making as much of a financial commitment on top of the fact that they're maybe moving slower to making the commitment in general? Can you just talk about that decision tree for me? Rich, this is Peter Phelps. No, we're not seeing any.
real degradation in the level of their commitment. What we are seeing is they're just taking longer to make the decisions because the commitments are large. So no change in their program or what they're anticipating, particularly in the larger buildings, given the sophistication of material handling equipment and how tenants operate in the buildings.
We continue to see probably that growing, not shrinking. Can you quantify how much a typical tenant that does a, you know, beyond the just basic racking system, but more the higher tech type of investment, how much is that as a percentage of something? Can you quantify how...
that activity for the most part. Jojo, anything you want to add to that? No, I mean in addition to the racking that Todd mentioned, I mean the interesting forklifts.
and that's in charging stations, and then sometimes dock packages. But overall, we're not open to all of the expenditures, but these are some of the expenditures.
Nothing material has changed.
Okay, that's all I got. Thanks very much. Okay, and we will follow up with a question from Nicholas Ulico from Scotiabank.
Nicholas, please go ahead. Hey, this is Greg McGinnis on with Nick. Good morning everyone. Just looking at the FFO per share guidance which was raised four cents to the midpoint with the two cents from Camelback, one cent from Capitalized Interest, and potentially one cent from a more bad debt expense assumption embedded in the system.
Let me just correct you on a couple of things about the four cent increase. Two cents per share was primarily due to early development leasing, First Park Miami 10, on firstly, high as examples. Two cents per share was the increase in the FFO from the joint ventures primarily due to the ground leases.
You're absolutely correct that our capitalized interest was increased a penny. That was offset by an increase in interest rates, we're assuming, for the remaining three quarters of the year in our line of credit, so that got netted against it. But what I would say is, if you look at our guidance now compared to what it was in fourth quarter, the only change we made was an increase.
Sides FFO guidance was the increase in the cash saved store by 25 basis points and that has to do with the better increases on cash rental rates due to new and renewal leasing.
One other point we want to make also, if you remember from the fourth quarter call, this relates to our mid-point $2.38. Our fourth quarter call we mentioned we were being negatively impacted by real estate taxes in one of our regions in Denver. It's about 2 cents per share if the values in that market went up.
We're going to collect those that was increases in the following fiscal year so if you were to take out that negative impact our FFO midpoint would be $2.40 per share.
Right, okay. I appreciate the color there. And I guess just following up on the million of bad debt, is that no longer assumed within same store growth? And I guess, you know, what changed there? And if you could just touch on, you know, following some movement in the top tenant disclosure this quarter, you know, how are you viewing the credit quality of tenants today? And what is your...
tenant watch list look like? Sure, so bad debt expense for the quarter was $100,000 compared to $250,000. What we assumed in original guidance for the quarter, quarters 2, 3, and 4Q are $250,000 per quarter, which is unchanged compared to our fourth quarter of guidance.
I would say, so bad debt expense was very low in the quarter, I would say as far as tenants on our watch list, nothing material on our watch list, but I will bring up Odessa which we talked about in the fourth quarter called owned by Carvana. They've been having some financial problems, but what we're seeing on the tenant front from Odessa is they're paying their rent timely. Okay, thank you.
And our next question is coming from Caitlin Burrows from Goldman Sachs. Caitlin, please go ahead.
Okay. Caitlin? There we go. Caitlin? Yes, hello. Go ahead. Go ahead, Caitlin. Okay. So yeah, just another follow-up on the guidance shifts. I know last quarter you guys had talked about the potential eight cents.
or is from a timing perspective, since we're already where we are in the year, is it not quite that amount? Just wondering kind of if we keep on dating the 12 months, Lisa, how much potential there still is. Very good question. Caitlin, you're right. We did pick up two cents of that due to our early development leasing that I talked about.
We have another three cents per share of opportunity related to early lease up if we're able to lease up our developments within the six months. That leaves us with about three cents short of what we talked about in the fourth quarter call. So some of the developments that we talked about in the fourth quarter are already inside of that six month period so we're not including them in our number.
Does that answer your question?
And then separately, you guys have talked about how demand today seems characteristic of the 2018 and 19 timeframe, which I agree was a really good time for the industry. So I was just wondering, what do you think driving that change versus say 2021 is that that company's warehouse needs have been built out?
Is pricing too high, macro uncertainty, delaying more build out? Just wondering if you have a view on kind of what's driving the current demand situation. Caitlin, it's Peter Schultz. I would go back to what I said a few minutes ago. So the cadence of decision making smaller mid-sized tenants continues to be better than larger tenants.
Larger tenants had been certainly a large percentage of the net absorption the last couple of years. So given that the decision making time frames are taking longer, I think that's really where we're seeing a little bit more normalization of demand as Peter was saying earlier.
But the smaller midsize tenants continued to be very active and make decisions quicker. So the other thing, Caitlin, remember in 2020, leasing was pretty anemic given COVID and the shutdowns and everything. And one very, very large e-commerce player went and leased about 70 million square feet.
probably in an effort to outrun and outpace and put down their competition, who was weaker that year. In fact, Amazon needs more space than the next 30 most active tenants combined in 2020. So you get to 21. thousandPtr donors ourselves on twitter.com.
in the beginning of 22 and everybody's playing catch up and you had this very, very high strong sense of urgency that it was build out your network and your platform now or maybe get out competed and go out of business. So you had a high sense of urgency and a huge pop in leasing to try to catch up and I think now as we look forward, we're getting back to what we more call a normal course of business and normalized demand.
And that's why we refer more to 2018 and 19. That makes sense. And then maybe one last one, just in terms of what you talked about, how the market starts and development activities could come down some, but given what you have placed in service and started, you've maintained close to $600 million of in-process construction. So just wondering, for First Industrial, I know you talked about how much opportunity you have and that you could move pretty quickly.
heard a couple of times already this morning. The larger tenants who have a very large financial commitment when they take down a building are making those decisions a little bit more slowly so that will impact the timing of any new starts that we have. We're not going to violate our CAP, our self-imposed CAP is there for a reason.
We'll just have to see what happens with leasing, especially with the larger spaces as we move forward.
Okay, thank you. Our next question comes from Vince from Green Street. Vince, go ahead.
Hi, good morning. I wanted to follow up on your cap rate commentary embedded in the development pipeline across margins. I'm just curious, is the higher stabilized cap rate the result of the transacting you've seen and a little bit more pricing visibility or is it still...
is the best estimate at this point in time. Yeah, there haven't been a lot of data points in a lot of trades. Again, I guess a year ago we said to be intellectually honest, we felt like with the change in the capital markets and the increase in cost of capital and the lack of construction financing, et cetera, that cap rates clearly have to have moved.
one to confirm. And then also somewhat related, I was wondering if you could talk about some recent trends in the development land market and in particular I'm curious where you would estimate the Phoenix land sell price relative to the peak presumably about a year ago. How far off do you think that price was from the peak or kind of broader development land values.
This is Jojo. You know, the pricing is basically to a data center buyer and the data center metrics land price is totally different from the industrial pricing. So we're very happy to be selling at the data center, although I will tell you that we are not data center experts and we do not.
and the higher cost of capital. So that is a trend across all markets including Phoenix.
No, that's a really helpful caller. Anything you throw out there for a range of how much land would have fallen? I agree with your broader points. Is there any way you can take us out of quantifying that?
Are you asking about a data point on data center pricing? Uh, well, no, I guess this is for more traditional industrial development land.
Do you think pricing is off 10%, 30%? Any kind of rough range would just be your thoughts on.
Okay, in terms of national pricing, it really depends on the market. When the market in the middle part of the country on a percentage basis has come down less than the coastal markets, then it's a simple reason why. Because the land in the southern part of the market represents a smaller portion of total investment.
So if your total investment comes down, therefore your dollar per square foot comes less. In the coastal markets, you know, the land component there represents a higher portion of total investment. So if I were to force a given range, the range would be anywhere from 10 to 40%.
Delta. No, I appreciate those numbers and taking a stab at it. Thank you.
At this time, I would like to remind you if you still would like to pose a question, please press star then 1. And we will continue with a question from Mike Miller from JP Morgan. If you would like to pose a question, please press star then 1.
At this time, I would like to remind you if you still would like to pose a question, please press star then 1. And we will continue with a question from Mike Miller from JP Morgan. Mike, go ahead.
Yeah, hi. Two questions. First, are you seeing any trends for tenants wanting to sign either longer or shorter spaces than normal? And secondly, I guess, for the ground lease income, do we just assume that the four cents of annual income goes away in 2Q20, 2Q2025? Or is it something more to it than that?
Mike, it's Peter Schultz. I'll take the first part of the question. No, we're not seeing any material change in terms from tenants, newer renewal. Our average lease term has ticked up a little bit, but I wouldn't say it's material. And then Mike, yeah, Mike, it's Scott on the two cents per share related to the ground lease.
The option holder has the ability to buy the land over the next two years. If they do buy the land, you're right, the ground lease income goes away. The benefit that we have though is we'll get sales proceeds and a distribution from the joint venture to first industrial. We will use those proceeds to pay down our line of credit, which we're assuming roughly a six-year period.
And we'll proceed with a question from John Patterson from Jefferies.
John , please go ahead. Great, thank you.
A lot of talk about development, and that's where you focus most of your capital deployment in recent years, but curious what you're seeing or expect to see in the acquisition market and what it kind of takes. You know, we hear a lot about a pretty wide bid ask spread. You know, what do you guys, do you expect that bid ask spread to narrow as the year progresses and see more acquisition opportunities.
And then maybe one way to kind of also frame that question is last year you did 300 million of acquisitions at a 3.9% cap rate. If you were to do those same acquisitions today, what kind of cap rate would you be willing to pay?
You guys want to talk about CapRi? Overall, let me address, you know, in terms of the market for more acquisitions. We're not forecasting that. We're not seeing a lot of distressed sales. A lot of the quality product that we may have considered are still the bid-ask spread is really, really high. Owners, you know, because of the strong fundamentals in all the markets, …
of 2022 from today, cap rates have increased roughly 120 basis points.
a little bit over 120 base points to date. Okay, all right, that's very helpful. And then, I guess within your markets and your properties, do you guys have a view of, or what are you guys seeing in terms of market rent growth, the first four months of this year, or maybe just talk about the cadence of rent growth that you're seeing this year versus what we were seeing last year?
In terms of year over year, we expect 2023 market growth to moderate versus 2022. In 2022, market statistics from different sources stated that the rent growth was anywhere from 15 to low 20s in terms of percentage.
We internally are forecasting 5 to 10 this year. Okay. Alright, that's helpful. Thank you very much. And we have a question now from Vikram Malhotra from Bissou. Please Vikram, go ahead.
Thanks so much for taking the question. So I just may be building off of that market rent question. I just may be just leading into SoCal. There's been some debate amongst the brokerage community, some of the data would show there's maybe a lot of dispersion amongst the broader, the sub-markets within SoCal and then some differences between demand for large box versus small. Can you maybe un-practice a little bit?
What are you seeing that may be similar to what brokers are calling out and maybe what's different?
Well, in terms of what we're seeing in the market, our portfolio is doing really well. We've been able to push trends, strong activity. We've been getting on the only tenants we lose in our SoCal portfolio has been tenants that are expanding or else everything is almost all renewal. Of course, when they're expanding we couldn't accommodate their growth.
In terms of rent growth, we're seeing positive rent growth from all size ranges. I would say that businesses right now, of course, given all the things they're seeing in the macro economy,
are watching rents as well. But for larger format buildings, the only thing I will add is that some tenants have gone a little bit further in LA. So there's activities, continued activities to the I-10 corridor all the way to Beaumont Banning. There's some large format building happening.
are looking a little bit further, the same on red.
Okay, so the core sort of Inland Empire, then I guess East-West, are there any specific inflections you're seeing? Maybe still very, very strong, but I'm wondering if there are any inflections in terms of those two specific markets around either rent growth or the type of demand or just maybe as you're watching some of the supply come in.
Is there anything you're sort of thinking about changing or seeing any signs of inflection? No, no, no change. I'm not seeing really any big infection. In IE West, there's not much opportunity to build like in IE East. So if you look at the total gross leasing absorption...
IE East, because of the ability to build a little bit more there, took a lot of activity. And then IE East, rent growth actually now was higher than IE West, but that doesn't mean IE West is flagging. IE West does not have enough products to really compete with IE East. So that's the ego.
And then just in terms of the last question, just on the development side, assuming there are more opportunities, sorry I missed this, I join later, but just in terms of funding, if you think about further divesting properties to raise capital for additional funding, can you just remind us where are we in that?
process and your appetite for that versus other forms of capital? Sure. To the spend that we're forecasting in 2023 related to our developments is about $180 million.
Property sales is going to be a big piece of that. At the midpoint of our guidance for sales is about $100 million.
We're going to generate excess cash flow after CapEx and dividend of about $60 million, and then the remaining $20 million will be funded by cash on hand or a line of credit. So we're in pretty good shape from a funding point of view.
cash flow after CapEx and dividend of about $60 million, and then the remaining $20 million will be funded by cash on hand or a line of credit. So we're in pretty good shape from a funding point of view. Thank you.
We now have a question from Anthony Powell from Barclays. Anthony, please go ahead.
Thank you. Just one for me on Dallas where we've seen some deliveries and availability increase. What's your role in Dallas in the next 12 months and do you expect to see any rent under pressure there given the supply?
In Dallas, our portfolio is primarily in the markets. We have a good investment in the great Southwest, which is the infill market. You're absolutely correct that when you look at deliveries in Dallas, there are three markets that have the influx of most.
you know, products which we don't have either ownership in or not planning to develop. That's South Dallas, East Dallas, and North Fort Worth. If you combine all the new buildings in those markets, that comprises about 80%, I think, of the products coming in. So we're not in those markets. So, in those markets, if you have a product, expect a competition, but we're not.
touching on demand a little bit. Peter usually mentioned lease renewals or the timeline on that is a good indicator on demand in the market. Have you seen any shift in the timeline of tenants going to discuss renewal options with you? Not really. That timeline has stayed pretty consistent over the past year, two years. Not a big change.
And then the last one from me, maybe just on 2023 roll, you said there was a little bit more outside exposure to Southern California. As we're looking at 24, is that going to be more in line with your current portfolio or is there anything, any markets there a little bit more exposed there?
From a rollover standpoint, as you know, in 23, California was disproportionately high, meaning disproportionate to its share of our portfolio.
In 2024, it is slightly lower than its share of our portfolio.
is slightly lower than its share of our portfolio.
And this concludes our question and answer session. I would like to turn the conference back over to Peter Bocelli for any closing remarks. Go ahead.
Thank you, operator, and thanks to everyone for participating on our call today. We look forward to connecting with many of you in June in New York.
Thank you, operator, and thanks to everyone for participating on our call today. We look forward to connecting with many of you in June in New York. The conference has now concluded.