Q4 2023 First Industrial Realty Trust Inc Earnings Call
Operator: Good day, and welcome to the First Industrial Realty Trust Inc. fourth-quarter results call. All participants will be in listen-only mode.
Good day and welcome to the first industrial reality Trust, Inc. Fourth quarter results call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to.
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Operator: To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead.
Please note. This event is being recorded I would now like to turn the conference over to Art Harmon Senior Vice President of Investor Relations and marketing. Please go ahead.
Arthur J. Harmon: Thanks very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2023 results and our initial 24 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, February 8, 2024. We assume no obligation to update our statements or the other information we provide.
Arthur J. Harmon: Alright, thanks, very much Dave Hello, everybody and welcome to our call before we discuss our fourth quarter and full year 2023 results and our initial 24 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.
Arthur J. Harmon: Today's statements, maybe time sensitive and accurate only as of todays date February eight 2024, we assume no obligation to update our statements or the other information we provide.
Arthur J. Harmon: 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 firstindustrial.com under the Investors tab. 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 will open it up for your questions. Also with us today are JoJo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now, I hand the call over to Peter. Thank you, Art.
Arthur J. Harmon: 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 dotcom.
Arthur J. Harmon: Under the investors tab.
Arthur J. Harmon: 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 will open it up for your questions also with US today are Jojo Yap, our Chief investment Officer, Peter Schultz Executive Vice President.
Arthur J. Harmon: Chris Schneider Executive Vice President of operations, and Bob Walter Executive Vice President of capital markets and asset management now, let me hand, the call over to Peter.
Peter E. Baccile: And thank you all for joining us today. And thank you to all the members of the First Industrial team who navigated a challenging 2023 to once again produce some great results. We delivered another record year of cash rental rate growth on new and renewal leasing and have laid the groundwork for another strong year in 2024. We executed on both sides of the transaction ledger with attractive new investments and impactful sales. We finished the year with some key leasing wins in our in-service portfolio and in our development. Moving now to the broader industrial market, the increased level of tenant traffic we saw towards the end of 2023 has continued into 2024. With the overall economic picture and interest rate environment becoming a bit more clear, and with slightly lower market volatility, more businesses are revisiting their space needs for growth.
Peter: Thank you art and thank you all for joining us today.
Peter: And thank you to all of the members of the first industrial team, who navigated a challenging 2023 to once again produced great results.
Peter O. Schultz: We delivered another record year of cash rental rate growth on new and renewal leasing.
Arthur J. Harmon: The groundwork for another strong year in 2024.
Arthur J. Harmon: Yes, both sides of the transaction ledger with attractive new investments and impactful sales.
Arthur J. Harmon: We finished the year with some key leasing wins and our in service portfolio and our developments.
Arthur J. Harmon: Moving now to the broader industrial market the increase level of tenant traffic we saw towards the end of 2023.
Arthur J. Harmon: <unk> into 2024.
Arthur J. Harmon: But the overall economic picture and interest rate environment, becoming a bit more clear and with slightly lower market volatility more businesses are revisiting their space needs for growth.
Peter E. Baccile: On the supply side, as you know, starts nationally ramped up in 2022 and early 2023 to meet customer demand driving national vacancy to around 5%, still low by historical standards. Those projects have made and are making their way into inventory, with completions for 2023 totaling 487 million square feet, compared to net absorption of 239 million square feet, according to CBRE. Importantly, the market has responded to this imbalance appropriately, with new starts down around two-thirds from the peak.
Arthur J. Harmon: On the supply side as you know starts nationally ramped up in 2022 in early 2023 to meet customer demand driving national vacancy to around 5% still low by historical standards.
Arthur J. Harmon: Those trials that you have made.
Arthur J. Harmon: And are making their way into inventory with completions for 2023 totaling 487 million square feet compared to net absorption of 239 million square feet. According to CBRE.
Arthur J. Harmon: Importantly, the market has responded to this imbalance appropriately with new starts down around two thirds from the peak.
Peter E. Baccile: Within our portfolio, broader activity has resulted in several signed leases in both our in-service portfolio and new development. We're pleased to announce two big long-term leasing wins in Baltimore. We leased 100% of the 644,000-square-foot Old Toast Road asset to a government-related 3PL and 50% of our neighboring 349,000-square-foot asset.
Arthur J. Harmon: Within our portfolio broader activity has resulted in several signed leases and both our in service portfolio and new developments.
Arthur J. Harmon: We're pleased to announce two big long term leasing wins in Baltimore, we leased 100% of the 644000 square foot all coast road asset to a government related and three PL and 50% of our neighboring 349000 square foot.
Peter E. Baccile: In our development portfolio, inclusive of our Phoenix joint venture, we have signed a total of 651,000 square feet of leases since our last call. In the fourth quarter, we signed a 209,000 square foot lease at our first Park 94 building in the Kenosha sub-market of Chicago. We also signed a 26,000 square foot lease at our first loop development in Orlando. So far in 2024, we've signed a 40,000 square foot lease at our first 76th Logistics Center in Denver. Also, in our Phoenix joint venture, we signed two leases at the 376,000 square footer to bring that building to 100% leased prior to completion. We've now fully leased two of the three JV buildings, with the third slated to be completed in the second quarter.
Arthur J. Harmon: In our development portfolio inclusive of our Phoenix joint venture, we signed a total of 651000 square feet of leases since our last call.
Arthur J. Harmon: In the fourth quarter, we signed a 290000 square foot lease at our first park 94 building and the Kenosha Submarket of Chicago.
Arthur J. Harmon: We also signed 26000 square foot lease at our first loop development in Orlando.
Arthur J. Harmon: So far in 2024, we signed a 40000 square foot lease at our first <unk> Logistics center in Denver.
Arthur J. Harmon: Also in our Phoenix joint venture, we signed two leases at the 376000 square footer to bring that building to 100% leased prior to completion.
Arthur J. Harmon: We've now fully leased two of the three JV buildings with a third slated to be completed in the second quarter.
Peter E. Baccile: For the developments we placed in service in the third and fourth quarters of 2023 that are not currently fully leased, we have approximately 240 basis points of occupancy opportunity. We're seeing prospect activity at most of these assets, so we hope to have more progress to report throughout 2024. As I mentioned in my opening remarks, we set a new annual record for cash flow rate increase for new and renewal leasing in 2023 of 58.3%. 2024 is also off to a good start.
Arthur J. Harmon: For the developments, we placed in service in the third and fourth quarters of 2023 that are not currently fully leased we have approximately 240 basis points of occupancy opportunity.
Arthur J. Harmon: We're seeing prospect activity at most of these assets. So we hope to have more progress to report throughout 2024.
Arthur J. Harmon: As I mentioned in my opening remarks, we set a new annual record for cash generate increase for new and renewal leasing in 2023.
Arthur J. Harmon: Eight 3%.
Arthur J. Harmon: <unk> 24 is also off to a.
Arthur J. Harmon: Good start.
Peter E. Baccile: To date, regarding lease signings related to 2024 commencements, we've taken care of 53% of the rental income with a cash rental rate change of 39%. We have a few leasing opportunities within our Southern California portfolio over the balance of the year, which we expect will bolster this metric. Overall, for 2024, we're currently forecasting cash rental rate growth on new and renewal leasing of 40 to 52%. Moving now to the investment side. We brought home a few attractive deals during the fourth quarter for an aggregate purchase price of $37 million. In Southeast Houston, we added a fully leased 54,000 square foot building at our Energy Commerce Business Center asset. With this addition, we now own all five buildings totaling 676,000 square feet in this well-located park with frontage on Beltway 8. We have also completed a sale-leaseback transaction for a 69,000-square-footer in the Inland Empire West.
Arthur J. Harmon: To date regarding lease signings related to 2024, Commencements, we've taken care of 53% by rental income at a cash rental rate change of 39%.
Arthur J. Harmon: We have a few leasing opportunities within our southern California portfolio over the balance of the year, which we expect will bolster this metric.
Arthur J. Harmon: Overall for 2024, we're currently forecasting cash rental rate growth on new and renewal leasing of 40% to 52%.
Arthur J. Harmon: Moving now to the investment side, we brought home a few attractive deals during the fourth quarter for an aggregate purchase price of $37 million.
Arthur J. Harmon: In southeast Houston, we added a fully leased 54000 square foot building at our energy Commerce business Center asset with this addition, we now on all five buildings totaling 676000 square feet in this well located park with frontage on beltway eight.
Operator: We also completed a sale leaseback transaction for 69000 square footer in the inland Empire West.
Peter E. Baccile: Longer term, this investment provides us with an opportunity to build a new 175,000 square foot building on the site when the lease expires. Lastly, we acquired a nine acre land site in Orlando for which we have a built to suit tenant in place for a 112,000 square foot project. Our total investment, including the land, will be approximately $21 million, and the tenant is expected to take occupancy in 2025. Moving now to dispositions. In the fourth quarter, we sold 785,000 square feet for $64 million. The largest sales were two buildings in Cincinnati for $23 million, and a 264,000 square footer in central PA for $21 million.
Arthur J. Harmon: Longer term this investment provides us an opportunity to build a new 175000 square foot building on the site when the lease expires.
Arthur J. Harmon: Lastly, we acquired a nine acre land site in Orlando for which we have a built to suit tenant and toe for a 112000 square foot project, our total investment, including the land will be approximately $21 million and then tenant is expected to take occupancy in 2025.
Peter E. Baccile: Moving now to dispositions in the fourth quarter, we sold 785000 square feet for $64 million. The largest sales were two buildings in Cincinnati for $23 million and 264000 square footer in Central P. A.
Arthur J. Harmon: $21 million.
Peter E. Baccile: For the year, we sold 1 million square feet plus two land sites for a total of $125 million. With these property sales, we ended the year with 95% of our rental income in our 15 target markets, meeting the goal we laid out at our 2020 Investor Day, and 57% in our coastal markets, which exceeded the 55% high end of our target range. Scott will update you shortly on how we performed on our $260 million ASFO opportunity. Thus far in 2024, we closed on a five-building, 278,000-square-foot sale in Cincinnati for $33 million.
Peter E. Baccile: For the year, we sold 1 million square feet, plus two land sites for a total of $125 million.
Peter E. Baccile: With these property sales we ended the year with 95% of our rental income and our 15 target markets meeting the goal we laid out at our 2020, Investor day, and 57% and our coastal markets, which exceeded the 55% high end of our target range.
Arthur J. Harmon: Scott will update you shortly on how we performed on our $260 million peso opportunity.
Arthur J. Harmon: Thus far in 2024, we closed on a five building 278000 square foot sale in Cincinnati for $33 million.
Peter E. Baccile: For the full year 2024, we expect sales of $100 million to $150 million. Regarding our dividend, given our performance and outlook for growth, our Board of Directors has declared a dividend of $0.37 per share for the first quarter of 2024, or an annualized rate of $1.48. This represents a 15.6% increase from the prior rate and a low payout ratio of approximately 70%, based on our anticipated 2024 AFFO as defined in our supplemental. With that, I'll turn it over to Scott to provide additional details on our performance and our 2024 guidance. Thanks, Peter.
Peter E. Baccile: Full year 2024, we expect sales of 100 to 150 million.
Scott: Regarding our dividend given our performance and outlook for growth. Our board of directors has declared a dividend of 37 per share for the first quarter of 2024 or an annualized rate of $1 48.
Scott: This represents a 15, 6% increase from the prior rate and our low payout ratio of approximately 70% based on our anticipated 2024, <unk> as defined in our supplemental.
Arthur J. Harmon: With that I'll turn it over to Scott to provide additional details on our performance and our 2024.
Scott: Thanks, Peter let me recap our results for the quarter NAREIT funds from operations were 63 per fully diluted share compared to <unk> 60 per share in <unk> 2022.
Scott A. Musil: Let me recap our results for the quarter. May REIT funds from operations were $0.63 per fully diluted share compared to $0.60 per share in 4Q 2022. For the year, NARED FFO per share was $2.44 compared to $2.28 in 2022.
Scott: For the year NAREIT <unk> per share was $2 44.
Scott: Compared to $2 28 and 2022.
Scott A. Musil: Excluding two cents per share of income related to the accelerated recognition of a tenant improvement reimbursement associated with a departing tenant, 2023 FFO per share was $2.42. As a reminder, our fourth quarter and full year 2022 results included a penny per share of income related to the final settlement of insurance claims for damaged properties. Excluding this impact, fourth quarter and full year 2022 FFO per share was $0.59 and $2.
Scott A. Musil: Excluding <unk> <unk> per share of income related to the accelerated recognition of a tenant improvement reimbursement associated with a departing tenants 2023 assets per share was $2 42.
Scott A. Musil: As a reminder, our fourth quarter and full year 2022 results included a penny per share of income related to the final settlement of insurance claims for damaged properties.
Scott A. Musil: <unk> this impact fourth quarter and full year 2020, <unk> per share was <unk> <unk>.
Scott A. Musil: At $2.27 respectively.
Scott A. Musil: Our cash seems to run high growth for the fourth quarter excluding termination fees, with 7.2%, and for the year, it grew 8.4%. Our 2023 results were driven by increases in rental rates on new and renewal leasing. Rental rate bumps embedded in our leases and lower free rent were partially offset by a slightly lower average occupancy and an increase in real estate taxes.
Scott A. Musil: Our cash same store NOI growth for the fourth quarter, excluding termination fees was seven 2% and for the year. It grew eight 4%.
Scott A. Musil: Our 2023 results were driven by increases in rental rates on new and renewal leasing rental.
Scott A. Musil: Rental rate bumps embedded in our leases and lower free rent, partially offset by slightly lower average occupancy and an increase in real estate taxes.
Scott A. Musil: We finished the quarter with in-service occupancy of 95.5 percent, ten basis points from the prior quarter, helped by leases in Baltimore and Chicago, partially offset by developments placed in service. Now we'd like to take a moment to recap our $260 million AFFO opportunity that we laid out at our 2020 Investor Day. We discussed the opportunity to grow our AFFO, as defined in our supplemental, to $260 million, or $1.97 per share, on a steady state basis by fiscal year 2023, including the $41 million potential NOI impact related to the funded portion of our unleased developments. Our 2023 AFFO approximates $289 million, $2.13 per share, which is well above the opportunity we discussed at our 2020 investor day.
Scott A. Musil: We finished the quarter with in service occupancy of 95, 5%.
Scott A. Musil: 10 basis points from the prior quarter.
Scott A. Musil: By leases in Baltimore, and Chicago, partially offset by development placed in service.
Scott A. Musil: Now I would like to take a moment to recap our $260 million <unk> opportunity that we laid out at our 2020 Investor day.
Scott A. Musil: We discussed the opportunity to grow our <unk> as defined in our supplemental to $260 million or $1 97 per share on a steady state basis by fiscal year 2023.
Scott A. Musil: Including the $41 million of potential NOI impact related to the funded portion of broadly developments for 2023, <unk> approximating 289 million $2 13 per share, which is well above the opportunity we discussed at our 2020 index.
Scott A. Musil: Your day.
Scott A. Musil: Before I review guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in two of our bank loans. Also, with our planned 2024 asset sales that Peter discussed and our expected excess cash flow after capital expenditures and dividends, we will have sufficient funding to complete our developments in process. Moving on to our initial 2024 guidance for earnings relief, our guidance range for FFO is $2.56 to $2.66 per share. Note that guidance excludes approximately $3 million or $0.02 per share of accelerated expense related to accounting rules that require us to fully expense the value of granted equity-based compensation for certain tenured employees. Including this $0.02 per share of expense, our neighboring FFO per share guidance range is $2.54 to $2.64. Key assumptions for guidance are as follows.
Scott A. Musil: Before I review guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2020, you said is assuming the exercise of extension options at two of our bank loans.
Scott A. Musil: Also with our planned 2024 asset sales that Peter discussed and our expected excess cash flow after capital expenditures and dividends, we will have sufficient funding to complete our developments in process.
Scott A. Musil: Moving on to our initial 2024 guidance per our earnings release last evening.
Scott A. Musil: Our guidance range for <unk> is $2 56.
Scott A. Musil: To $2 66 per share.
Scott A. Musil: Note that guidance excludes approximately $3 million or <unk> <unk> per share of the accelerated expense related to accounting rules that require us to fully expense the value of granted equity based compensation for certain tenured employees.
Scott A. Musil: Including <unk> <unk> per share of expense, our NAREIT <unk> per share guidance range is $2 54 to.
Scott A. Musil: $2 64.
Scott A. Musil: Key assumptions.
Scott A. Musil: <unk> for guidance are as follows we are projecting quarter and average occupancy of 96% to 97%.
Scott A. Musil: We are projecting quarter-end average occupancy of 96 to 97 percent, thanks to ROI growth on a cash basis before termination fees of 8% to 9%, primarily driven by increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases. Note that the same store calculation excludes the 2023 tenant reimbursement that I discussed earlier. Guidance includes the anticipated 2024 costs related to our completed and under construction development as of December 31st. For the full year 2024, we expect to capitalize about five cents per share of interest. Our GINA expense guidance range is $39.5 to $40.5 million. This includes the roughly $3 million in additional expense I referred to earlier. We expect first quarter's G&A expense to be higher than each of the remaining quarters.
Scott A. Musil: Same store NOI growth on a cash basis before termination fees of 8% to 9% primarily driven by increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases.
Scott A. Musil: Note that the same store calculation excludes the 2023 tenant reimbursement that I discussed earlier.
Scott A. Musil: Guidance includes the anticipated 2020 for costs related to our completed and under construction developments at December 31.
Scott A. Musil: For the full year of 2024, we expect to capitalize about <unk> <unk> per share of interest.
Scott A. Musil: Our G&A expense guidance range is 39 $5 million to $45 million. This includes the roughly $3 million in additional expense I referred to earlier.
Scott A. Musil: We expect first quarter G&A expense to be higher than each of the remaining quarters.
Scott A. Musil: Lastly, guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or repayments, nor the potential issuance of equity after this call. Let me turn it back over to Peter. Thanks, Scott. Thanks again to my teammates for all of their efforts in 2023.
Scott A. Musil: Lastly guidance does not reflect the impact of any future sales acquisitions development historical debt issuances debt repurchases or repayments, nor the potential issuance of equity. After this call. Let me turn it back over to Peter.
Peter: Thanks, Scott Thanks, again to my teammates for all of their efforts in 2023.
Peter E. Baccile: We're excited about the opportunities to drive cash flow growth by continuing to capture market rent growth in our portfolio from new and renewal leasing, the embedded NOI opportunity within our completed and in-process developments, and from our annual escalators and our leases. Additionally, we are well positioned with coastally oriented land sites that can be put into production and provide attractive risk-adjusted returns as market conditions warrant. Operator, with that, we're ready to open it up for questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.
Peter: We're excited about the opportunities to drive cash flow growth by continuing to capture market rent growth in our portfolio from new and renewal leasing the embedded NOI opportunity within our completed and in process developments and from our annual escalators in our leases.
Peter E. Baccile: Also we are well positioned with costly oriented land sites that can be put into production and provide attractive risk adjusted returns as market conditions warrant.
Speaker Change: Operator with that we're ready to open it up for questions.
Peter E. Baccile: Hello.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Operator: If you're using a speakerphone, please pick up your handset before pressing the... If at any time, your question has been addressed and you would like to withdraw your question, please press star, then two. Also, please limit yourself to one question and one follow-up. Request to ask additional questions. Our first question comes from Vikram Malhotra. Please go ahead. Good morning, this is Giorgi on behalf of Vikram.
Giorgi: If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two also please limit yourself to one question and one follow up re queue to ask additional questions.
Giorgi: First question comes from Vikram Malhotra. Please go ahead.
Giorgi: Good morning, this is Georgia on for Vikram.
Operator: Can you walk us through your thoughts on further lease up, and in which markets have you seen any signs of weakness and strength? I think you asked if we could comment on leasing prospects and weaknesses and strengths across markets. Is that right? It was correct. Okay, Peter, do you want to... Sure, this is Peter Schultz.
Giorgi: Can you walk us through your thoughts on further lease up and reach markets have you seen any signs of weakness.
Operator: Strength.
Peter O. Schultz: I think you asked if we can comment on.
Peter O. Schultz: Leasing prospects and weaknesses and strengths across markets is that right now.
Peter O. Schultz: Good morning.
Peter O. Schultz: Okay Peter sure.
Peter O. Schultz: Peter Schultz.
Peter O. Schultz: Generally speaking, we've seen an increase in activity and tenant engagement in the last 60 days or so compared to the second half of last year. Activity, broadly speaking, is better in smaller or mid-sized spaces, and that's relative to which sub-markets and markets those are in. As an example, in Denver and South Florida, that might be 50,000 feet and under. In Pennsylvania and Nashville, that's 300,000 to 500,000 feet.
Peter O. Schultz: Generally speaking, we've seen an increase in activity in China and inflation.
Peter O. Schultz: In the last 60 days or so from the second half of last year.
Peter O. Schultz: Activity broadly speaking is better than the smaller and mid sized spaces.
Peter O. Schultz: And Thats.
Peter O. Schultz: Relative to which Submarkets and markets those are in as an example in Denver and South, Florida that might be 50000 feet and under in Pennsylvania in Nashville, That's three to 500000 feet, Joe Joe Im sure. We will have some comments about California for you.
Peter O. Schultz: JoJo, I'm sure, will have some comments about California for you. We've also seen a higher level of urgency in some cases from some tenants making decisions quicker, although I would say a lot of tenants still continue to be somewhat cautious and methodical about their decisions. But we're encouraged by the level of activity that we're seeing today. JoJo, anything you want to add to that?
JoJo: Also seeing.
Speaker Change: A higher level of.
JoJo: Urgency in some cases from some tenants making decisions quicker.
JoJo: Although I would say.
JoJo: Lot of tenants, so continues to be somewhat cautious and methodical about their decisions, but we are encouraged by the level of activity.
JoJo: That we're seeing today, Joe Joe anything you want to add to that yeah. Thanks Peter.
Johannson L. Yap: Yes, thanks, Peter. So, in the last 60 days, activity, tour activity, and proposal activity has increased over Q4-23. And what I'd just like to add, too, are the major companies that are touring. I would say general retail, wholesale, food, and beverage, e-commerce, and manufacturing, and auto-related.
JoJo: Over the last 60 days, so TV tore do you have any.
Johannson L. Yap: Sure.
JoJo: Proposal activity.
JoJo: As increase over Q4 of 23.
JoJo: Just like to add to the.
JoJo: To be a major company directory in Basel, III, Del's, I would say general retail wholesale food and beverage.
JoJo: E Commerce and manufacturing and auto related.
Peter E. Baccile: Thank you. That is helpful. And just a follow-up question for me. What trend spreads are baked into the guidance? And where do you see the overall market? I'm sorry, the first part of your question... Rent spreads in the guidance, which is the 40-52% cash rental rate we articulated in our script.
Peter E. Baccile: Thank you that's helpful and just a follow up on me lots of rent spreads are baked into the guidance and where do you see overall market.
Peter E. Baccile: Well this year.
Peter E. Baccile: Im sorry, the first part of your enterprise isn't the guidance, which is the 40% to 52% cash rental rates are.
Peter E. Baccile: Articulated in our ceramic.
Peter E. Baccile: So the midpoint of 46%. Rent growth in 23, so we at the beginning of 23 expected it to be about 5 to 10%, kind of a wide range. We weren't real sure in a year where the markets were moving quite a bit with a lot of volatility. As it turned out, rents grew in our portfolio about 8%, so we're right in the middle of that range. For 2024, we're looking at rent growth that approximates inflation plus a point or two, so say 3 to 5% as our expectation. Thank you very much. The next question comes from Ki-Bin Kim with Truist. Please go ahead. Thanks. Good morning, and congrats on leasing up Old Post Road. I know that was your favorite comic book topic. Give him a smile.
Peter E. Baccile: So a midpoint of 46%.
Ki Bin Kim: Rent growth in 'twenty three so we at the beginning of 'twenty three expected to be about 5% to 10% kind of a wide range, we werent rail share.
Ki Bin Kim: On a year, where the markets were moving quite a bit of a lot of volatility. It ended up rents grown our portfolio about 8%. So we're right in the middle of that range.
Ki Bin Kim: For 2024.
Ki Bin Kim: We're looking at rent growth that approximates inflation, plus a point or two so say 3% to 5%.
Ki Bin Kim: As our expectation.
Peter E. Baccile: Sure.
Ki Bin Kim: Thank you for taking my question.
Ki Bin Kim: The next question comes from key been Kim with Truest. Please go ahead.
Ki Bin Kim: Thanks, Good morning.
Ki Bin Kim: Congrats on leasing up a whole path road I know that was zero.
Ki Bin Kim: Got it.
Peter E. Baccile: Smiling.
Peter E. Baccile: Steven.
Peter E. Baccile: Yes.
Peter E. Baccile: [laughter].
Peter E. Baccile: Thank you, Steven. So, turning to your Inland Empire projects, I think the last time we spoke, you talked about how for all your projects, you had about one or two prospects, with the obvious challenge being that these tenants have multiple options. So could you just provide an update on the tenant demand that you're seeing in that market, perhaps how you're calibrating your leasing strategy, and just overall, how should we think about the pace of leasing? Yeah, I will start, and then Jojo will talk more about SoCal in particular. This year, honestly, is a difficult year to project. The pace is tough to call.
Ki Bin Kim: So turning to your inland Empire projects I think the last time, we spoke you talked about for all your projects you had about one or two prospects with obvious challenge being that these tenants have multiple options. So could you just provide an update on the tenant demand that youre seeing in that market.
Peter E. Baccile: Perhaps how you're calibrating leasing strategy and just overall like how should we think about the pace of lease up.
Speaker Change: Yes, I will start and then Joe Joe will talk more about socal in.
Peter E. Baccile: This year honestly as a difficult year to project that pace is tough to call or in this period of time now where we think things are improving.
Peter E. Baccile: We're in this period of time now where we think things are improving, less market volatility, and a little bit more confidence-inspiring economic data coming out. What I mean by that is, you know, it's easier for potential tenants to begin to make decisions about what would be rather large investments if they take down larger properties. So, all that's good. The difficult part, even, is deciding, you know, what the pace of that activity is with respect to the activity turning into ink. So, that's part of the challenge for us this year in the projection. And, Jojo, you can talk more about traffic. Sure.
Peter E. Baccile: Less market volatility a little bit more confidence inspiring economic data coming out when I mean by that is.
Peter E. Baccile: Easier for four potential tenants to begin to make decisions about what it would be rather large investments if they take down larger properties. So all that is good and the difficult part key deciding what the pace of that activity is with respect to the activity turning into Inc. So that's that's part of the <unk>.
Peter E. Baccile: <unk> for us this year and the projection and Jody can talk more about traffic sure.
Johannson L. Yap: So, in terms of, you know, in Q4, there's quite a bit of loss of new completions that exceed interruption. So, the market is digesting through the additional supply. Some of the positive things that we're seeing in the market right now are that, if you look at port activity in the last four months of 23 compared to the last four months of 22, it actually increased by 20%. So, you know, if that continues, then there's definitely going to be a little bit more activity. Recently, freight activity, when I say freight, truck freight activity, has been increasing. We think we're recovering from the bottom. So, that's clearly a sign of maybe a little bit of positive GDP growth, a little bit of a positive impact from maybe retailers restocking their inventories.
Peter E. Baccile: So.
Johannson L. Yap: In Q4.
Johannson L. Yap: There is.
Johannson L. Yap: Quite a bit of a master new completions that exceeded absorption. So the market is digesting through the additional supply.
Johannson L. Yap: Some of the positive things that we are.
Johannson L. Yap: As seen in the market right now is that if you looked at the export activity in the last four months of 'twenty three compared to the last four months of 'twenty two it actually increased by 20% so.
Johannson L. Yap: So thats.
Johannson L. Yap: If that continues there is definitely going to be a little bit more activity recently freight activity.
Johannson L. Yap: Truck freight activity has been increasing we think we are.
Johannson L. Yap: The recovery from the bottom so that's clearly a silo, maybe a little bit.
Johannson L. Yap: Obviously with GDP growth, a little bit of positive impact from maybe retailers restocking their inventories so.
Johannson L. Yap: That's what we're looking at.
Johannson L. Yap: By the end of the day, if you look at our assets.
Johannson L. Yap: I won't go through each one of them, but I wouldn't say that in each of our new developments.
Johannson L. Yap: Each of the Submarkets they are top tier I would say in terms of quality and functionality. There are about 15% maybe top 10% even on some of the submarkets, but so what we're focused on a dry lease model.
Speaker Change: Okay and on the G&A guidance of $40 million.
Speaker Change: The accelerated equity investing I, just want to understand that a little better.
Johannson L. Yap: Equity programs become multi year program. So next year that $3 million portion won't repeat.
Johannson L. Yap: Okay.
Johannson L. Yap: Yes.
Johannson L. Yap: The aim of the program we have in place is very similar to other companies for tenured employees. So basically once they reach certain milestones each year as a service their equity awards are expensed immediately for accounting purposes.
Johannson L. Yap: I would say specifically the $3 million charge that we assume this year, we're not going to incur that in 2025 and in fact, probably a lot of that is going to reverse so that's going to be the impacts that $3 million on a go forward basis.
Speaker Change: Okay. Thank you guys.
Johannson L. Yap: Yeah.
Johannson L. Yap: Okay.
Johannson L. Yap: The next question comes from Rob Stevenson with Janney. Please go ahead.
Speaker Change: Hey, Good morning, guys can you talk about current trends in material Labour pricing and how the next batch of starts compares to the 74 cap and 38% to 48 profit margin on the current six projects under construction.
Speaker Change: Yes, I can take the construction pricing.
Johannson L. Yap: So if you look at middle of <unk>.
Johannson L. Yap: Last year in 'twenty three.
Johannson L. Yap: Overall prices material.
Johannson L. Yap: Labor prices came down anywhere from 5% to 8%.
Johannson L. Yap: Our view is that in 2024 first half it will be flat.
Johannson L. Yap: Outside of any supply chain shocks is going to be flat or even kind of declining while we're not underwriting yes, we're underwriting any inflationary.
Johannson L. Yap: Yes.
Johannson L. Yap: <unk> development projects and right now we.
Speaker Change: We have nothing new to announce whether that's a trend.
Johannson L. Yap: Construction material.
Johannson L. Yap: Labor prices in terms of just supply chain and materials, it's better the environment right now is better much better than last year in terms of getting materials and we're seeing now is really coming into schedule accepts this year and thats basically due.
Johannson L. Yap: Due to the supply cliffs.
Johannson L. Yap: Industry is facing right now record low development starts.
Speaker Change: With respect to your question on margins.
Johannson L. Yap: If you look at our portfolio of opportunities. So the land holdings that we have the entitlements that we have et cetera, it's a very large.
Johannson L. Yap: Investment opportunity that is taken as a portfolio will yield, 7% or better and thats being underwritten that.
Johannson L. Yap: Today's rates so.
Johannson L. Yap: And a significant margin opportunity there.
Speaker Change: Okay. That's helpful. And then now that the Baltimore assets are largely leased where's the biggest vacancy upside beyond just the recently developed.
Johannson L. Yap: Projects and those under constructions in any known move outs of consequence in 'twenty four 'twenty five at this point.
Johannson L. Yap: Chris you want to take that yes, as far as known move outs, we've got $3 1 million square feet Rolling in 2024, and there is no significant known move outs in that population.
Johannson L. Yap: Any sort of.
Johannson L. Yap: You can see targets in the stabilized portfolio that you look at the lease up at this point or is that all just little pockets here and there a vacancy beyond the development pipeline.
Johannson L. Yap: I will say that Robin Scott, there's a couple of leases that we do have budgeted and forecasted for a couple hundred thousand square feet that are scheduled to lease up this year. So that's in the core portfolio. So non development.
Speaker Change: Okay. That's helpful. Thanks, guys I appreciate the time.
Johannson L. Yap: Our next question comes from Todd Thomas with Keybanc Capital markets. Please go ahead.
Johannson L. Yap: Right.
Speaker Change: Hi, Thanks. Good morning, just wanted to follow up I guess on that last question and the last bit there.
Johannson L. Yap: Scott.
Johannson L. Yap: What's embedded in the guidance in terms of additional lease up and commencements related to the developments there.
Johannson L. Yap: And our completed and.
Johannson L. Yap: That are not in service that it'll be transitioned into service. During during 2024 is there anything embedded assurance, but for those projects.
Johannson L. Yap: Yes, so we have two 8 million square feet budgeted in our guidance related to development lease up.
Johannson L. Yap: I would say half of that relates to development is completed in 2023 that are scheduled to lease up in 'twenty, four and the other half of that or not.
Johannson L. Yap: Not fully leased developments, we placed in service in 2023 as.
Johannson L. Yap: As far as timing is concerned.
Johannson L. Yap: One 4 million square feet is scheduled to lease up in the second quarter with the remaining one 4 million square feet scheduled to lease up in the back end of 2024.
Speaker Change: Okay, that's helpful and what's the timing.
Johannson L. Yap: Of the Commencements at both 405 hundred old post road with those lease assigned.
Johannson L. Yap: And at 500, all post road.
Speaker Change: Just wondering.
Johannson L. Yap: It was a lengthy process there, but did anything change with regard to rent or the.
Johannson L. Yap: Roughly I think 25% Mark to market was that consistent with with everything that you originally anticipated or were there any any changes.
Speaker Change: Sure. So the commencement date core beliefs at 500, All post road was in December of 2023.
Johannson L. Yap: The commencement date for the half of 400, all hose is scheduled to be in the first quarter of 2024 and.
Johannson L. Yap: In terms of the.
Johannson L. Yap: The economics for 500, all post growth.
Speaker Change: We did better.
Johannson L. Yap: The mark to market that will be described in earlier calls.
Johannson L. Yap: So we were pleased with that result.
Speaker Change: Yes, It certainly took a long time and torturous path dealing with the government at all of that.
Speaker Change: We do not.
Johannson L. Yap: Reduce any of our terms or economics.
Johannson L. Yap: Through that process.
Johannson L. Yap: The mark to market on the smaller space was better yet again.
Johannson L. Yap: We did on 500, all post stroke.
Speaker Change: Okay, Great and just lastly, just one question I guess back to the accelerated.
Johannson L. Yap: <unk> expense for the noncash comp as well so all of that is expected to be realized in the first quarter is that right and then I think you said that the expense will be reversed and in.
Speaker Change: In the future can you just explain real quick the accounting treatment for that expense and the corresponding shares.
Johannson L. Yap: How that will work.
Johannson L. Yap: So the $3 billion that we spoke about it in the script that is going to be radically.
Johannson L. Yap: Expense over the four quarters, Okay. Now we have other tenured employees there.
Johannson L. Yap: That were 10 year last year, and our 10 year. This year that are getting expense as well in the first quarter of 2024, and Thats whats, causing we think G&A in the first quarter of 2024 to be about $3 million higher than what it is going to be per quarter for the remaining quarters.
Johannson L. Yap: As far as the reversal is concern.
Johannson L. Yap: Coming into 2025, we really don't have any folks in a region that is 10 years. So we're really not going to have any additional expense, but when you work through the math through the vaccine process. The vast majority of the $3 million that we talked about is basically not going to be incurred next year, so it'll cost reduction.
Johannson L. Yap: And our G&A.
Speaker Change: Does that clarify it Todd.
Johannson L. Yap: I think so so so all else equal if G&A outside of the comp plan is unchanged G&A and 25 would be lower by roughly $3 million year over year.
Speaker Change: Thats correct, plus whatever increases in costs are in 2025, but thats correct, yes sure.
Speaker Change: Okay got it alright, thank you.
Johannson L. Yap: The next question comes from Craig Mailman with Citi. Please go ahead.
Speaker Change: Hey, guys.
Johannson L. Yap: Just looking at the development pipeline it looks like the expected yield ticked up a little bit quarter over quarter at the same time kind of E.
Johannson L. Yap: E herself.
Johannson L. Yap: No free rent concessions are rising I'm just trying to.
Johannson L. Yap: Get a sense of how you guys are looking at.
Johannson L. Yap: The underwritten rents maybe walk us through kind of.
Johannson L. Yap: How old is underwritten rents or when the time period of those rights were.
Johannson L. Yap: And maybe that's why.
Johannson L. Yap: Youll dirt moving or just kind of how you're thinking about that.
JoJo: Yes, Hi, Greg This is jojo.
Johannson L. Yap: First of all there is a change of mix.
Johannson L. Yap: Second of all these are.
Johannson L. Yap: All adjusted for what we think.
Johannson L. Yap: We can get in the market today, So we will always judge them every quarter.
Johannson L. Yap: And.
Johannson L. Yap: In terms of we Didnt change, we didn't change the market cap rates.
Johannson L. Yap: Although we think.
Johannson L. Yap: In Q1 to Q2, this year will be better than <unk>.
Johannson L. Yap: Second half of last year, so no change to that.
Johannson L. Yap: Okay.
Speaker Change: I mean are you guys, what's the competition like it sounds like you do have good activity on Stephanie I E. What kind of what is pricing looking like given the competition from other developers out there who also want to lease space.
Johannson L. Yap: How has that trended.
Johannson L. Yap: So.
Johannson L. Yap: When you really look at our development. So for example, right now developments completed not in service.
Johannson L. Yap: And therefore.
Johannson L. Yap: <unk> thousand Florida there.
Johannson L. Yap: Thats kind of a unique assets about 45%.
Johannson L. Yap: So we're not really competing with anybody there whether we need to look at it you get it there.
Johannson L. Yap: Those are going to use that facility.
Johannson L. Yap: And Red lives. So we have a 460000 square footer Thursday, ornithologist display user how they looked at the market or across with this kind of functionality and clearly there should be nothing there. So it's hard to kind of compare.
Johannson L. Yap: We've got a really great as is there.
Johannson L. Yap: But we have three buildings are going to be finishing up in Paris.
Johannson L. Yap: It is still under construction.
Johannson L. Yap: At this point.
Speaker Change: I would say we were there.
Johannson L. Yap: Those are the three buildings competitive with each of those buildings there.
Johannson L. Yap: So there's a lot of talk about rents generally have come down.
Johannson L. Yap: I went to 10% in Q4 last year, but the comps are not supporting it but the tenants are choppy.
Johannson L. Yap: Okay.
Johannson L. Yap: Thank Peter I've I've asked this in the past going forward.
Johannson L. Yap: Just risk mitigation standpoint, you guys have the spec cap, but just how do you think about an optimal mix of maybe.
Johannson L. Yap: Adding in a higher level.
Johannson L. Yap: The complement kind of some of the bigger stuff that you guys do.
Speaker Change: Yes, we are in the market for build to suit pretty regular basis.
Johannson L. Yap: We're looking to deploy the land that we have at the highest risk adjusted returns and sometimes.
Johannson L. Yap: That will mean built to suits.
Johannson L. Yap: Sometimes it won't I think while we expect to do more built to suit the mix between build to suit and spec probably not going to change meaningfully Craig going forward.
Johannson L. Yap: And our holdings are in.
Johannson L. Yap: Let's just say very high barrier coastal locations. So.
Johannson L. Yap: The speck business in those markets is obviously much much better than it would be say in the inland.
Johannson L. Yap: Sites in the country.
Speaker Change: Okay. That's helpful. And then maybe if I can sneak one more in.
Johannson L. Yap: Could you just walk through kind of the difference between the kind of the 8% to 9% same store and how that translates into kind of 7% that's the playbook.
Johannson L. Yap: Yes.
Speaker Change: Sure. So we gave a midpoint of eight 5% on a same store.
Johannson L. Yap: Happening, though in 2020 for Craig is on the interest expense side, we're incurring more interest expense.
Johannson L. Yap: Two reasons there are average indebtedness is scheduled to be higher in 2024 compared to 2023.
Johannson L. Yap: Then to the weighted average interest rate in 'twenty four is going to be slightly higher than what it was in 2023. So that's the main driver of the offset to that same store.
Johannson L. Yap: Great.
Johannson L. Yap: Right.
Johannson L. Yap: The next question comes from Nick Tillman with Baird. Please go ahead.
Speaker Change: Hey, guys, maybe wanted to touch a little bit on the investment sales market and kind of what youre seeing there like who are the buyers and then are you seeing any differentiation between portfolio deals that are single asset deals.
Joe: Yes. This is Joe.
Johannson L. Yap: So in terms of the investment market.
Johannson L. Yap: Q4, obviously influential industry was very slow NTIC.
Johannson L. Yap: Q3 and Q4.
Johannson L. Yap: In terms of investment in market, there's been there's continued demand for <unk>.
Johannson L. Yap: Buyer doesn't have you seen in $2022 three issues.
Johannson L. Yap: <unk> users.
Johannson L. Yap: <unk> Mark and their users are buying.
Johannson L. Yap: Investors and private and institutional so.
Johannson L. Yap: We are hearing from our capital markets day is that.
Johannson L. Yap: She is the.
Johannson L. Yap: Interest rates have been.
Johannson L. Yap: Already become more stable more funding now theres more interest.
Johannson L. Yap: Capital markets people when I say that is a major progress on getting more offers today on product updates within our market.
Johannson L. Yap: Forgive me actually more players than the second half of 'twenty three so the market seems to be.
Johannson L. Yap: In terms of investment appetite for investors can be increased.
Johannson L. Yap: Quite a bit.
Speaker Change: That's helpful. And then maybe just you guys seem a little bit more optimistic on the outlook for 2024, but maybe get some more commentary on big box demand and maybe appetite for multi tenant in some of these developments later, they're vacant that had been placed in service you guys mentioned like some of the sweet spots are in the small to midsize area.
Speaker Change: And Nashville, and Denver, but just wanted to get some commentary there.
Johannson L. Yap: Peter you want to cover off the vendor multi tenant sure. So I would say again the.
Johannson L. Yap: Demand for the larger spaces are $1 million up.
Johannson L. Yap: In most markets has been softer as I've said earlier smaller and midsized better.
Johannson L. Yap: Then it was south, Florida, and Denver 50000 feet and under.
Johannson L. Yap: Nashville in Central Pennsylvania kind of three to 500000 square feet.
Johannson L. Yap: As I think we've talked about on prior calls.
Johannson L. Yap: Most of our if not all of our buildings are designed to be multi tenanted.
Johannson L. Yap: And that flexibility is something we.
Johannson L. Yap: We focus on.
Johannson L. Yap: Likely in Denver.
Johannson L. Yap: The bulk buildings, we have there will be leased for multiple tenants.
Johannson L. Yap: As opposed to single tenants that we've seen over the last several years.
Johannson L. Yap: We see that a similar dynamic.
Johannson L. Yap: And Florida as you know our building in Pennsylvania that was 700000 fee laboratory at least half of that so I think it'll be a mix but.
Johannson L. Yap: Absolutely we are seeing in the market has seen more activity for multi towns are smaller and mid size.
Johannson L. Yap: Joe do you have anything you want to add to that no.
Johannson L. Yap: Again, I want to emphasize all our abilities are designed to be multi tenanted or larger buildings.
Johannson L. Yap: We could access that almost besides of course sites secured strong quarters and all of that so it gives us a lot of flexibility.
Speaker Change: That's helpful. Thank you guys.
Johannson L. Yap: The next question comes from Mike Mueller with JP Morgan. Please go ahead.
Speaker Change: Yeah, Hi, I actually I think my questions were answered I was just really going to ask about activity levels on some of the larger developments and just kind of what youre seeing today compared to two or three months ago, and I guess how real.
Johannson L. Yap: Discussions feel.
Johannson L. Yap: Mike It's Peter Schultz I would say again the activity is better.
Johannson L. Yap: Engagement is better.
Johannson L. Yap: Decision, making.
Johannson L. Yap: Across some prospects.
Johannson L. Yap: Demonstrated a little bit greater urgency.
Johannson L. Yap: But I would say most are still proceeding cautiously so while theres a lot of activity under the surface.
Johannson L. Yap: Tenants still need to be.
Johannson L. Yap: Deliberate in making their decisions.
Johannson L. Yap: To move forward as Peter mentioned earlier.
Johannson L. Yap: The commitments for tenants, particularly for large buildings.
Johannson L. Yap: There's a lot of money when you ask that one of these large buildings and like we've seen with elevated construction costs previously they are seeing elevated elevated costs in some of those material handling equipment. So it is a slower decision and that's partly why we're seeing much better activity and faster decision, making on the smaller mid sized tenants.
Speaker Change: Got it okay. Thank you.
Johannson L. Yap: Okay.
Johannson L. Yap: Next question comes from Michael Carroll with RBC capital markets. Please go ahead.
Speaker Change: Hi, This is <unk> on for Mike I guess, just a quick question apologies I missed this but how much of the remaining 2020 for leasing is in southern California.
Johannson L. Yap: Chris you want to cover that.
Johannson L. Yap: Yes.
Johannson L. Yap: There is actually a higher percentage in southern California remain in 2024, if you look at it.
Johannson L. Yap: Top three rollovers in 2024 are in southern California.
Johannson L. Yap: If we assume in our guidance that the two of those three tenants.
Johannson L. Yap: We'll renew them.
Johannson L. Yap: Okay.
Johannson L. Yap: Where do you just I guess, where do you think spreads would be for that renewal.
Johannson L. Yap: We expect both of those rental rate increases will be 100% or more.
Speaker Change: Got it.
Johannson L. Yap: Yeah.
Johannson L. Yap: Next question comes from Nicholas <unk> with Scotia Bank. Please go ahead.
Johannson L. Yap: Hey, Good morning, this is Greg mcginniss on with Nick.
Johannson L. Yap: And looking at some of the a.
Speaker Change: 800000 square feet vacant in Denver, I understand that youre going to be converting some of the larger spaces into multi tenant can you just give us an idea of the cost of that conversion.
Johannson L. Yap: And what the expected spreads will be just trying to get an understanding of kind of like net effective increase.
Johannson L. Yap: Hey, Craig it's Peter Schultz.
Johannson L. Yap: And our underwriting we assumed multi tenant.
Johannson L. Yap: So most of those costs are covered.
Johannson L. Yap: To the extent we.
Johannson L. Yap: Demise to a couple of additional spaces, there might be some some incremental cost, but it's not going to be material.
Speaker Change: Okay, Thanks, and just a follow up here on.
Johannson L. Yap: Developments you see you added the Orlando build to suit pipeline. This quarter, we do know that tenants pulled back a bit from build to suits with growing vacancy and more deliveries this increase in activity and urgency that youre seeing.
Speaker Change: Could we potentially see build to suits kind of pick back up or does that feel like more of a unique situation in Orlando.
Johannson L. Yap: The situation in Orlando is for a manufacturing company.
Johannson L. Yap: With the additional capacity because their business is growing there and the mechanical equipment business.
Johannson L. Yap: So they had a real need for additional space and we have the opportunity here to step into a deal where the sponsor was struggling with financing. So we were happy to take advantage of that opportunity I would say more broadly speaking in terms of Peter can jump in on this.
Johannson L. Yap: It depends on where you are in some markets there are some additional supply.
Johannson L. Yap: And we're return expectations, maybe given where the interest rate environment.
Johannson L. Yap: Is it may be less expensive for tenants to convince to consider existing buildings. So we will see treasurer, Peter anything you want to add to that.
Speaker Change: Say the build to suit as well as our acquisition in Houston are good examples of opportunities that came up because the owners couldn't raise the money.
Johannson L. Yap: So we had an opportunity to step in there and obviously get some good economics.
Johannson L. Yap: And that's in great assets to the portfolio.
Speaker Change: Great. Thank you.
Johannson L. Yap: The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Speaker Change: Hi, good morning, everyone.
Johannson L. Yap: Maybe on development starts slowed later in 2023 I was wondering if you could talk about your expectations for 2024, and when or under what conditions you would get some additional effect.
Johannson L. Yap: Yes.
Johannson L. Yap: So we do anticipate new starts this year.
Johannson L. Yap: The level of that in terms of volume that will be very dependent upon the leasing pace that we experience over the next call it six months.
Johannson L. Yap: But we do expect to have starts and I will go so far as to say that first starts will probably be in south Florida.
Speaker Change: Okay got it and then the sale leaseback that you announced could you give a little more detail like how long is that lease and you mentioned that you can build I think it was over 100000 square feet on the site.
Johannson L. Yap: Is that in addition to the existing building and maybe also what the competition for the asset.
Speaker Change: Sure sure.
Johannson L. Yap: And on the Empire West.
Johannson L. Yap: We acquired and basically just land value in a sale leaseback as long term and.
Johannson L. Yap: We can build a 175000 square foot there.
Johannson L. Yap: And that would be demolishing the existing building and building a new one.
Johannson L. Yap: It is a completely new RV 75000 square footer and.
Johannson L. Yap: Basically based on our numbers today, and where construction costs are and based on our land value. We think we can.
Johannson L. Yap: I see good value creation on that how does the new density New 175000 square feet with a lease expires, but at least right now is long term.
Johannson L. Yap: We will enjoy a read from that tenant while we have a valuable valuable asset and Phil and Michael <unk>.
Speaker Change: And anything you could say in kingdom like was it a marketed deal or off market or how that came to be.
Johannson L. Yap: I'll have that seem to be it was a through a relationship just being in the market leasing space we came about.
Johannson L. Yap: This tenant needing to monetize this cooperation need to monetize our real estate and so we came in on the market.
Speaker Change: Got it okay.
Johannson L. Yap: Our next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Speaker Change: Great. Thanks, Good morning, I think last quarter, you talked about a few opportunistic acquisitions on development projects that had capital needs, where you stepped in to kind of help with funding are you seeing any more of those opportunistic or distress opportunities emerge or do you expect those deals to continue to be few and far between.
Speaker Change: Yes, so we are definitely looking beating the bushes as I mentioned a bit ago.
Johannson L. Yap: Orlando and Houston deals would fall in that category. There is a lot of institutional capital looking for similar opportunities. So it is very competitive.
Johannson L. Yap: And that just means that.
Johannson L. Yap: The opportunity is the arbitrage opportunity is probably fleeting theres a lot there was a lot of money on the sidelines a lot of that capital has come in and so it's very competitive out there too.
Johannson L. Yap: Try to bid on these opportunities.
Speaker Change: Alright, great that's helpful and then.
Johannson L. Yap: Given that development deliveries are still hitting the market at a higher than average rate. Despite the drop in new development starts can you just talk about whether you think there are any markets that might be significantly weaker rent growth as we look into 2024, given the ryzen availability.
Johannson L. Yap: No.
Johannson L. Yap: I think it would be the traditional markets that you would think of that or less high barrier are going to have lower growth.
Johannson L. Yap: That would be markets like Chicago.
Johannson L. Yap: Houston.
Johannson L. Yap: Denver.
Johannson L. Yap: And then the coastal higher barrier markets would be the ones that are going to grow obviously.
Johannson L. Yap: Oster.
Speaker Change: Very helpful. Thank you.
Johannson L. Yap: The next question comes from Jessica Zhang with Green Street. Please go ahead.
Speaker Change: Good morning could you. Please provide some color around the trends youre seeing for rent concessions.
Johannson L. Yap: Are you seeing concessions increase.
Johannson L. Yap: Any of your markets compared to the last couple of years.
Johannson L. Yap: Transfer rent concessions petering around them.
Peter: Sure. This is Peter.
Johannson L. Yap: So you generally speaking.
Johannson L. Yap: Rent abatement is up a little bit.
Johannson L. Yap: Where it has been less than one half month per your term trending a little bit more than one half months per year of term.
Johannson L. Yap: But that would really be or have been higher largely because the cost is more not really as an additional concession.
Johannson L. Yap: And the only thing I'll add is and renewals so it hasn't changed.
Johannson L. Yap: And renewals.
Johannson L. Yap: Alright, the past free rent MTI has been very very sticky basically no free rent in OTI.
Speaker Change: Great. Thank you that was helpful and then just.
Speaker Change: Just a follow up I guess, you mentioned you're optimistic on the Socal markets, given the 20% year over year increase import volume.
Johannson L. Yap: I was wondering on the flip side are you seeing that shift back to silicone negatively impacting the east and Gulf Coast.
Speaker Change: Mark has that at all.
Johannson L. Yap: No.
Johannson L. Yap: Yes.
Johannson L. Yap: As far as the answer right supply chain for a long time to change companies have diversified.
Johannson L. Yap: Their supply chains to take advantage of both the east coast and the West Coast.
Johannson L. Yap: There are certainly disruptions now as we all know and the Suez Canal in Panama Canal Theres been labor issues on the West Coast pit will go back and forth and Theres, a labor agreement on the east coast to be done.
Johannson L. Yap: Pace of change is slow.
Speaker Change: Just to add to that I mean.
Johannson L. Yap: Our major retailers their corporations.
Johannson L. Yap: It doesn't see that as one of their.
Johannson L. Yap: Strategic things that they always think about bill usually just closed one port access because something might happen in a report so there's a lot of times the redundant supply chains, we don't think Walter is going to change.
Speaker Change: Alright, thank you.
Johannson L. Yap: At the end of the day the companies need to be close to where their customers are to deliver their goods, but that is not really going to change much.
Johannson L. Yap: The next question comes from Bill Crow with Raymond James. Please go ahead.
Johannson L. Yap: Team.
Speaker Change: Peter I'm going to pass the question that I get regularly from investors.
Johannson L. Yap: As we look forward call. It 18 months and interest rates may have come down a little bit in the spreads may have eased a little bit.
Johannson L. Yap: What's to stop us from getting back to a point, where we've got 400 million square feet of construction starts.
Johannson L. Yap: Yeah.
Johannson L. Yap: So there has been a big pause starts are way up as you know down about two thirds from the peak in 2022.
Speaker Change: Here's the thing.
Johannson L. Yap: In 'twenty, one 'twenty two.
Johannson L. Yap: 500 million square feet of starts each year.
Johannson L. Yap: And that was a direct result of the business activity around Covid and people were just and you saw E. Commerce go from 14% of sales to over 20.
Johannson L. Yap: And so this huge surge in demand created this.
Johannson L. Yap: Massive influx of capital, which pushed all of these new starts and Thats what were digesting now that was the catalyst for those starts.
Johannson L. Yap: Demand ought to be more on a upward trajectory, but a flatter upward trajectory instead of that hockey stick, which should mean that capital behaves appropriately and that starts to come in.
Johannson L. Yap: In and around the neighborhood of where net absorptions I mean, thats, what you would expect.
Speaker Change: We don't see a catalyst.
Johannson L. Yap: Right now today to say Oh, we need another four or 500 million square feet of starts each year. So that would be the way we look at that question.
Johannson L. Yap: Fact that I think.
Johannson L. Yap: Every one of the public companies is talking about ramping up starts later this year you don't think that's that sort of attitude is.
Johannson L. Yap: As in the private sector as much I guess.
Johannson L. Yap: That depends a lot on the financing and how they do that if somebody is going to if someone's going to come in all cash and worried about the debt part later.
Johannson L. Yap: Encourage some some new investment in development right now construction loans are very hard to get and when you can they are very expensive in fact for the most part it's going to make any high barrier deal impossible the vessel.
Johannson L. Yap: And Thats, where we are in the highest barrier markets and Thats, where our land holdings are so.
Speaker Change: Maybe we are a bit insulated from that.
Speaker Change: Alright, well congrats on a great 23, and the outlook for 'twenty four.
Speaker Change: Thanks very much.
Johannson L. Yap: This concludes our question and answer session I would like to turn the conference back over to Peter the silly for any closing remarks.
Speaker Change: Thank you operator, and thanks to everyone for participating on our call. Today. If you have any follow up questions. Please reach out to Scott Army, we look forward to connecting with many of you in the first quarter take care.
Johannson L. Yap: Okay.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.