Ladies and gentlemen, thank you for standing by, and welcome to the First Industrial 3Q 'twenty one Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Thank you.
Please go ahead.
Thank you, Shelby. Hello, everybody, and welcome to our call. Before we discuss our Q3 2021 results as well as updated guidance, let me remind everyone that our call may include forward looking statements as defined by federal securities These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time sensitive and accurate only as of Today's date, Thursday, October 21, 2021. We assume no obligation to update our statements or the other information we provide.
Actual results may differ materially from our forward looking statements and factors which could cause this are described in our 10 ks 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 Baccile, our President and Chief Executive Officer and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also on the call today are Jojo Yav, our Chief Investment Officer Peter Schultz, Executive Vice President Chris Schneider, Senior Vice President of Operations and Bob Walters, Senior Vice President of Capital Markets and Asset Management.
Now let me turn the call over to Peter.
Thanks, Art, and thank you all for joining us. Our team continued its strong performance in 2021 by delivering another great quarter, highlighted by increased in service occupancy, new development leasing and continued strong growth in rental rates on new and renewal leasing. As importantly, we were also successful in readying land for new development starts and replenishing our pipeline with strategic land acquisitions. I'll discuss those successes in more detail shortly, But let me first update you on the overall strength of the U. S.
Industrial market. Per CBRE EA, Net absorption was a healthy 120,000,000 square feet in the 3rd quarter, while completions came in at 79,000,000 square feet. Through the 1st three quarters of this year, net absorption was 292,000,000 square feet, Outpacing new supply of $193,000,000 In our portfolio, we grew occupancy 50 basis points to finish the Q3 at 97.1%. Cash same store NOI increased 6.9% And cash rental rates for new and renewal leases were up 22.8%. Looking at rental rate growth for the full year, as of today, We have signed roughly 98% of the 2021 expirations and including new leasing, our overall cash rental rate increase is 15.3%, which puts us on pace to top our previous company record of 13.9% in 2019.
With respect to 2022 expirations, we're off to a great start With 29% of renewals signed at a cash rental rate increase of 19%. Let me move now to the primary driver of our external growth, our development program. As most of you know, as part of our underwriting process In the industrial market, the strength of our balance sheet and growth in our portfolio and the significant opportunities we have to create shareholder value through new investments, We've increased our speculative leasing cap by $175,000,000 bringing the total to $800,000,000 Now let me walk you through our recent land acquisitions as well as 3 exciting new development starts that will put some of the incremental cap capacity to good use. During the Q3, we closed on 3 development sites totaling 122 Acres for $59,000,000 2 are in the Inland Empire East and the third is in Denver. In total, these sites can accommodate up to 2,100,000 square feet of new development.
At one of the new Inland Empire East sites, we are starting our first Pioneer Logistics Center, a 461,000 square foot cross dock facility. Our total projected investment is $73,000,000 with a targeted cash yield of 6.8%. The Inland Empire continues to be one of the strongest logistics real estate markets in the U. S, helped by significant net absorption from activity related to the 2 largest ports in North America. Market vacancy in the Inland Empire is sub 2% And market rents have grown more than 80% since we went under contract on this site in early 2020.
Of our rental income as of the end of the third quarter. Moving to the East Coast, we are starting another development In South Florida to serve the strong tenant demand we have experienced there with our recent leasing successes at First Park Miami and First 95 Distribution Center. First Gate Commerce Center will be a 132,000 Square Foot Class A Distribution Facility in the infill Coral Springs submarket. Market rents in Broward County have grown 15% to 20% since the end of 2019. Our total estimated investment is $24,000,000 and our targeted cash yield It's 5.5%.
In the Q4, we acquired a site in Bordentown, New Jersey, just off of Exit 7 on the Jersey Turnpike for $8,000,000 We immediately started construction of First Bordentown Logistics Center, A 208,000 square foot facility. We look to build upon our past successes in this location where our 2 prior developments were leased Near construction completion. The Central New Jersey market has been exceptionally strong with asking rents up 34% versus last year according to a recent market report from CBRE. Our total projected investment is 33,000,000 with an estimated cash yield of 5.8%. In summary, these 3 planned 4th quarter starts total approximately 8 1,000 square feet with an estimated investment of $130,000,000 and a cash yield of 6.3%.
Including these planned starts, our developments in process totaled 6,400,000 Square Feet with a total investment of approximately $725,000,000 At a cash yield of 6%, Our expected overall development margin on these projects is approximately 65%. With development as our primary driver of external growth, we're also focused on replenishing our land holdings. In the Q4 to date, in addition to the New Jersey site I just discussed, we also acquired a total of 10 acres in the Inland Empire Northern California for a total of $10,000,000 As of today, Adjusted for our planned 4th quarter starts and the aforementioned land acquisitions, our balance sheet land can support approximately 12,500,000 square feet of new development. Our share of the Phoenix Camelback joint venture is an additional 3,800,000 square feet. In total, that's north of 16,000,000 square feet and represents approximately $1,700,000,000 A potential new investment activity.
Now let me update you on our recent development leasing successes. We just leased the entire 548,000 Square Footer at First Park at PV303 in Phoenix at completion to a leading omnichannel retailer. As part of this lease, we are also Expanding the building another 254,000 square feet for a total of 802,000 square feet. The total estimated investment for the project, including the expansion, is $72,000,000 and the estimated cash yield is 6%. The tenant is expected to take occupancy of the just completed space by year end with the expansion ready for use in the Q2 of 2020.
We also leased 100% of our 303,000 Square Foot First Wilson Logistics Center in the Inland Empire that will be completed in the Q1 of 2022. With a cash yield of 8.7%, we substantially outperformed our underwritten yield. This lease Further showcases the rapid rental rate growth in the Inland Empire that I discussed earlier. We are pleased that we have land sites in this high growth market that can support another 2,800,000 square feet of development. As another example of the We just leased our Laurel Park redevelopment project in the South Bay.
This property is very well suited for port centric warehouse distribution users given its great location and highly sought after yard for surface use. Our 1st year yield is 7.5% on our $21,000,000 investment, which represents a margin of around 150%. Moving on to sales. During the quarter, we sold 6 properties and 4 units for $14,000,000 And in the Q4, we have sold 4 additional buildings in Detroit, totaling $7,000,000 bringing our year to date total to $126,000,000 Given current visibility on our disposition pipeline, We now expect sales for the year to total $175,000,000 to $225,000,000 a $75,000,000 increase from the prior midpoint of 125,000,000 With that, let me turn it over to Scott to walk through additional details on the quarter and updated guidance. Thanks,
Peter. Let me start by summarizing our results and leasing stats for the Q3. Day refunds from operations were $0.51 per fully diluted share compared to $0.49 per share in 3Q 2020. Excluding approximately $0.04 per share of income related to the final settlement of an insurance claim, 3Q 2020 FFO was $0.45 per share. Our cash basis same store NOI growth for the quarter, Excluding termination fees was 6.9%, primarily due to higher average occupancy, An increase in rental rates on new and renewal leasing, rental rate bumps and lower bad debt expense Slightly offset by an increase in free rent.
We commenced approximately 2,400,000 square feet of leases. Of these, dollars 500,000 were new, dollars 1,400,000 were renewals and $500,000 were for developments and Acquisitions with LeaseUp. Tenant retention by square footage was 85%. Cash rental rates for the quarter were up 22.8% overall with renewals up 21% And new leasing up 27.5 percent and on a straight line basis, overall rental rates were up 36.2% with renewals increasing 34.9% and new leasing up 39.5%. Moving on to some capital markets activity.
As previously announced in early July, we closed on 2 financing transactions. First, we expanded our line of credit to $750,000,000 and improved our pricing to LIBOR plus 77.5 basis points, A reduction of 32.5 basis points compared to our prior facility. The maturity is now pushed out 5 years, including our 2 6 month extension options. We also refinanced our $200,000,000 term loan. The new term loan matures in July 2026 and has an interest rate of LIBOR plus 85 basis points, A reduction of 65 basis points in the spread compared to our prior facility.
With our interest rate swaps in place, The new fixed interest rate on the term loan is 1.84%. On the equity side for our ATM, We issued 1,100,000 common shares at a weighted average price of $55.35 per share for total net proceeds of $59,000,000 to help fund the new investments Peter spoke about. Moving on to our updated 2021 guidance per our earnings release last evening. Our guidance range for NAREIT FFO was now 1 point $0.93 to $1.97 per share, which is a $0.02 per share increase at the midpoint, reflecting our 3rd quarter performance And an increase in capitalized interest due to our announced development starts. Key assumptions for guidance are as follows: In service occupancy at year end of 96.75 percent to 97.75 percent.
This implies a full year quarter end average in service occupancy of 96.5% to 96.8%, an increase of 15 basis points at the midpoint. 4th quarter same store NOI growth On a cash basis before termination fees of 6% to 7.5%. This implies a quarterly average Same store NOI growth for the full year 2021 of 4.3% to 4.7%, an increase of 25 basis points at the midpoint due to our 3rd quarter performance. Please note that our full year same store NOI guidance Excludes the impact of approximately $1,000,000 from the gain from an insurance settlement. Our G and A expense guidance is now $34,000,000 to $35,000,000 an increase of $1,000,000 at the midpoint.
And guidance includes the anticipated 2021 Costs related to our completed and under construction developments at September 30, plus the expected 4th quarter starts 1st Pioneer Logistics Center, 1st Gate Commerce Center and First Bordentown Logistics Center. In total, For the full year 2021, we expect to capitalize about $0.08 per share of interest. Other than previously discussed, our guidance does not reflect the impact of any future sales, acquisitions Our new development starts after this call, the impact of any future debt issuances, debt repurchases or repayments after this call, And guidance also excludes the potential issuance of equity. Let me turn it back over to Peter.
Thanks, Scott. Before we take your questions, let me thank our team for another great quarter. We're excited about our growth prospects as we continue to put into production our land holdings that currently support more than 16,000,000 square feet of value creating developments. We are also focused on replenishing our Pipeline with new sites and higher barrier markets. We continue to benefit from robust sector fundamentals that are reflected in strong net absorption, high occupancy levels and increasing rents.
With that, operator, would you please open it up for questions?
Your first question is from Craig Mailman of KeyBanc Capital Markets.
Hey, good morning guys. Scott, maybe this one's for you. Just looking at the year to date FFO, kind It implies a decel in the 4th quarter to get to the midpoint of your range. Could you just walk through that?
Hey, sure, Craig. I would say the 2 drivers there are 1 is we forecasted $500,000 of bad debt expense in the 4th Quarter, our actual in the Q3 was $25,000 Hopefully, we can do better in the Q4 than our $500,000 And also the Q4 is being hit with a full quarter dilution related to the equity issuance where the 3rd quarter It was only partial. So I would say those are the 2 drivers.
Okay. And did you say that there's equities More equity included in the guidance going forward or did I mishear you?
No, no future equity. But what I'm saying is that The equity issued in the Q3 was more back end in the Q3. So the Q4, it's in for the entire quarter. So you have a higher share count 4th quarter compared to Q3.
Got you.
And then just separately, Peter, you noted your spec cap Is up $175,000,000 Kind of what could you just walk through as you the balance sheet gets bigger over time, how we can kind of maybe track The upside to this, like what's the most important metric you guys use to set that cap?
Sure. So we put the cap in place back in 2012 and a little history here will give more context to the answer because the answer is pretty straightforward. We put in place in 2012, obviously, we had a very, very different portfolio and a very different balance sheet. And back then, the formula was 9% of the total market cap of the company. As time has passed, we have adjusted the cap based on that formula.
So we adjusted it in 15% and 18% and then again at the beginning of this year. We have not changed the multiplier. It's still 9%, notwithstanding the dramatically improved portfolio and balance sheet. So you can say it's Even more conservative today than it was back in 2012. So it's pretty simple, Craig.
It's just 9% Of the total traded value plus debt of the company.
Got you.
Thank you.
Your next question is from Ki Bin Kim of Truist.
Thanks. Good morning. Sticking with the same line of questioning, I wasn't sure how you calculated the how much you've eaten into that speculative cap because You also considered the vacancy in your existing portfolio. So I guess first question, like how much have you eaten into the cap? And do you use I can't remember if you use like book value for your assets or market value to get to that calculation?
So committed dollars, so any new development that we start that has less than 90% leasing, Those dollars go in on a pro rated basis. If we were to do a forward with no tenant, those dollars go in. And that's how we the cap works. We have $279,000,000 of capacity today, largely due to the great leasing on our new developments that we've just completed. So of the $800,000,000 $279,000,000 is available.
Does that answer your question, Ki Bin?
It's based on book value too, Ki Bin. Also, Ki Bin, it adds acquisition vacancy. So if we acquire an empty building, it goes into the spec We treat that risk the same as development. And so when we lease any acquisition vacancy, it comes off the list.
And finally, once an asset is 90% leased, it all comes off.
Got it. So When you think about that and the amount of good leasing that you've done in your portfolio, what is A practical range for development starts on an ongoing annual basis. I know you guys don't typically provide guidance, just looking for some type of ballpark
Right. So given the strength And scale of our current land position, the spec cap and the pace at which we lease new developments Ultimately, you're going to determine the development volume going forward, of course, subject to profitability. As we always say, We're a profit shop, not a volume shop. So you should see development levels going forward are going to be at higher levels Than in the past several years, again, assuming fundamentals hold.
Okay. And
as you think about funding that development pipeline That's growing. Should we expect a kind of steady state contribution from dispositions, So like $200,000,000 that should ratchet up as the pipeline grows or different forces?
With respect to dispositions, I think the volumes that we've guided to the last few years are going to be similar going forward. Obviously, we just And that has a lot to do with quite often we'll get unsolicited offers on assets that Are in markets where we want to dispose of more assets and we'll take those offers. That's really what you see when we pop up from our original guidance. So I think the guidance volumes going forward will be similar, Ki Bin, to what we've been giving. And obviously, as we get bigger, that's a much lower percentage dwindling percentage of the overall size of the company.
Right. Thank you.
Your next question is from Rob Stevenson of Janney.
Good morning, guys. Just a follow-up on Ki Bin's question. The 4th quarter disposition guidance is now roughly, I guess, dollars 60,000,000 to $100,000,000 given the full year guidance. Are you seeing any meaningful change in the asset pricing there? Or is that increase more of a reflection of the increases to the development pipeline and the need to fund that And the attractiveness of dispositions as a funding source?
No, I mean, I think the bottom line is we're getting really good pricing And again, in these markets, and you all know that the markets that are outside our 15 target markets are the markets where we find lower growth we're going to be disposing of more of those assets and the markets for assets the market for assets in those submarkets is very, very strong. That's really what drives it. We're really not looking to sell real estate to fund development. That's not the key driver. Obviously, it's a benefit, But it's not the key driver.
And will you be with these $60,000,000 to $100,000,000 in the 4th quarter, are you going to be exiting any markets as a result of that?
Wholesale exit, I don't think so.
Okay. And then Peter, there's been
a lot of press on the continued supply chain issues and the cargo ships sitting off the coast. What impact is that having on your tenants And then their incremental demand for industrial space these days. And if this continues through 2022 as many expect, What's the impact down to your business, you think?
I'm going to give that to Jojo and Peter to give their thoughts on
Sure, sure. Basically, the net impact is that a lot of the tenants in our business who need imported products have It's really having a hard time getting product, and they cannot ascertain the availability nor the timing. So the net effect is that they order more. They have to stop more. They have to put more inventory because it's so hard.
The bigger loss is Sales of that product and if you if they don't really know the timing that creates a lot of issues. So they're going out, the net effect to us they're Getting wanting to take more space. And what's been happening is that we now have less space than the start of the year. And so what happens is that now rents And in terms of 2022, we don't know. There's so many issues in the supply chain right now, and there's strong demand.
So We hope that this levels off for our tenants' sake, but the reality is that I don't think it will level off. I think it will the supply chain issues will continue And the rent pressure will continue because of the lack of space and increased demand.
Hey, Rob, it's Peter Schultz. The other thing I'd add to that is We're seeing a marked increase of activity from the 3rd party logistics companies looking for space to Help with the capacity constraints that a lot of our tenants and companies have. So they are very, very active looking for, As Jojo said, a finite and declining amount of space today.
Should we be thinking about this time period of elevated rental rates and increased demand as a pull forward. And then at some point, whether it's 2023, 2024, who knows That there will be some sort of lull as the catch up actually happens? Or is this you think that this Sort of elevated level winds up of demand winds up sticking around for a prolonged period of time as people are reluctant to go back to previous just the time inventory procedures.
That's a very, very good question. In order to answer that question, we have to predict where e commerce as a Percentage of total sales will be in the market. And if e commerce in the next 5, 6 years, I don't know, goes to 50%, That's even going to be a bigger driver than the supply chain issues. So the supply chain issues will be very, very minimal Compared to that long term driver. So now that's the first thing.
The second thing is that in terms of supply chain, it's hard to predict really When it's going, because you have offshore issues, you have inshore issues, you have shipper issues, you have labor issues, you have trucker driver Issues here, COVID still a little bit, it's lessening, related efficiency issues, supports. We don't know when that's all going to get fixed.
Don't forget, the primary catalyst to these supply chain issues was COVID, where everything shut down and then it opened up all at once. And so if anything, you're catching up more than you're selling forward, If you follow me.
Okay. All right. Thanks, guys. Appreciate it.
Your next question is from Anthony Powell of Barclays.
Hi, good morning. Question on the spec cap. You said that it's at 9% of the total, I guess, market value and that's conservative relative to Where you used to be as a company given the increase of the size of the company and the increase of the quality of the portfolio, given the Strong fundamentals, why not be a bit more aggressive and increase that spec cap a bit more, just given what you're seeing in the market?
Yes. Well, one thing that we're very focused is making sure that we have a business strategy and a portfolio that's going to outperform through the cycle. And while it is tempting in times like this To do what you just said, we think going forward, we're going to be a lot better off if we just stick to the fundamental business plan that we've always had. And we are working hard, as you can see, in terms of replenishing our pipelines, not only for land, but new developments And creating great margins there. And we're mindful that trees don't grow to the sky.
Trust me, we've discussed what you've said. And at the end of the day, we really like the discipline for new leasing that the current cap structure demands.
Got it. Thanks. And I guess on the land side, you said you're replenishing your land bank right now. What are you seeing in terms of pricing on land, the competitive environment and Just competitive players for industrial land out there.
Jojo? Very competitive, and land prices continue to increase. They're increasing a lot more on the coast than the middle part of the country. The reason for Bigger increase in coastal markets because the rent growth there has been higher as well. So we project that land prices will continue to increase.
All right. Thank you.
Your next question is from Rich Anderson of SMBC.
Thanks. Good morning. So just a follow-up on the supply chain question that got started with Rob's inquiry. Now did you say that the issues that we're talking about are very Kind of small in terms of rent pressure upwards versus the broader commentary about e commerce demand. Is that what you said?
No, no. What I was saying is that when you look at the supply chain issues today, you don't really know what the long term impact Is if you don't know where e commerce as a percentage of total sales will go. And what I said was that if E commerce as a present total sales will go to 50, then that will actually make the supply chain issues kind of minimal because Today, that's for 2025 and it goes to 50, that's a bigger driver than anything else that we're seeing. And that's what I meant.
Okay. I understand. Thank you for that. So, but when you I don't know if it's if you're able to quantify this, but Would you be able to say if there's $50 of rent, how much of that and probably impossible But how much of that is supply chain related? How much of that is just basic demand related?
Is there any way to answer Question?
It's not there's no way to answer it, but I would say that the demand side of that is vastly exceeds the current pressure from the supply chain challenge. There just isn't enough space for the demand anyway. A lot of that has to do with the fact that everybody stopped building last year for 7 or 8 months. A lot of it has to do with the fact that it's difficult now and this is a supply chain challenge, but it's difficult to get some commodity inputs. But the demand is just very, very strong.
You saw that you heard the net absorption numbers earlier relative to new deliveries. And that's really what's the primary driver of the very, very strong rent growth that we're experiencing.
And Rich, it's Peter Schultz. The other thing I'd add to that is remember, Occupancy costs are only in the 4%, 5%, 6%, 7% range of a company's operation. So While rents are going up, we're seeing labor and transportation go up even more. So the occupancy cost is still a very small percentage of the total.
Got you. You mentioned that as a way to counter some of these stresses that they're stockpiling more, But how does that play into the shortage of truck drivers and moving things around? I mean, it just sounds like something's going to burst here. And I don't know if that's good or bad for your business, but can you talk about how the shortage of Truck drivers is impacting those types of decisions?
Jojo? Well, when you look at one of the more successful operators Right now, they're the LTLs, doesn't truckload because they're very, very busy, and they're actually raising rates, and they're very profitable. And so a lot of businesses in the transportation industry are Naming their price and they're getting their bids and they're getting their prices.
So I
mean a lot of people in the fulfillment business are doing really well. So and some and a lot of them are customers too. So I guess, the question is that how is it going to affect the industry? I think My feeling is that some of the costs are going to be passed to consumers. There's an increased cost by businesses and some of those are going to affect their margins But some are going to be passed by to the consumers.
So but the thing is, is they're not going to change. They're wanting to store more because they want to make the sales. Right now, there's already top of some importing for next year's season. So that's how bad it is.
Great. Thanks for that. And lastly for me, dollars 0.08 of capitalized interest I think is in your numbers. How has that trended and how do you see it trending into 2022 with all the development activity that you've got teeing up?
I would say over the last several years, it's trended higher just because the development pipeline today is larger. I would say next year, it's hard to say because we got to look at our starts and what gets leased up. My best guess at this point in time, it's going to be at least $0.08 Not more.
Okay. Thanks very much.
Your next question is from Cole Carroll of RBC Capital Markets.
Yes, thanks. So how do you guys currently view your land bank? I mean, right now, it's fairly sizable. I know that you indicated that you're still looking for some attractive sites to buy to kind of add to that. I mean, what's kind of the reasoning behind that is that you're Short of land in some of these higher end markets that you want to be in, and that's going to be a short term hold.
If you do buy that land, you can start it right away. Can you talk a little bit about that?
Sure. We're always looking for new land opportunities that are near term developable. The definition of near term has certainly changed over the last few years. Entitlement periods are more like 18 months now and We talked a little bit earlier about some of the delays with respect to getting some of the commodity inputs, in particular steel. But our current land holdings, we estimate would take about 3 to 5 years To build out, but remember again, our land positions are never static.
We're always sourcing and titling new sites And we'll always have some land sales to users such as some of the land in our JV out in Phoenix.
Are there any markets that you're short on land that you're trying to aggressively acquire? I guess, is there any markets that you're focused on more than others right now?
Well, we're focused on new investment focuses on the 15 markets that we talked about in our Investor Day about a year ago. And of course, we're always interested in new opportunities in the higher barrier markets. Those are the coastal markets.
Okay, great. And then can you provide an update on the former Pier 1 space? I don't remember if we talked about that on this call or I know that's the leasing expectations pushed out to 2022, but is the leasing activity similar to what it has been or has that changed at all?
So you're referring to our 644,000 square foot cross dock building at Old Post Road along I-ninety 5 North of Baltimore. With our portfolio occupancy over 97%, we continue to look for the right fit On a long term basis, for a single tenant for the building, we're one of 2 buildings, that are available in that submarket, The other being an 860,000 square foot building that was delivered earlier this year. And we continue to see rent growth in the market and the upside that, that building provides, but we have no further update today.
Okay, great. Thank you.
Your next question is from Dave Rodgers of Baird.
Yes. Good morning, everybody. You guys addressed a lot already, but I guess I just wanted to ask about the margins on your development starts. I think last year, What your 2020 stabilizations were around 100% margin, your starts for the Q4 this year about 100% margin. But what's in pipeline is about half of that that we want to sneeze at a 50% to 60% margin, but maybe more curious on kind of what the driver is.
Are you having differences in land utilization? Is it Entirely rent growth, that would be the first question. And I guess the second question is if you guys are able to buy land, put it into service quickly in a development at 100% margin, How I mean despite the fact that you're saying land prices are up, how inefficiently is land price today? I mean what are land prices going to do in the next round of Purchases at sea.
I'll start off with that and Jojo and Peter can add their thoughts. As far as I mean, land prices are going up rapidly, especially where we want to buy it, but rents are so far growing a little bit quicker. We're looking at land prices on a per square foot basis that we never thought we would see. And in terms of the margin impact, Again, rents are growing quicker than the cost of land and cap rates obviously have continued to come down and that contributes to the Big margins that you're referring to.
Jojo? So yes, I would just maybe just for me is the trifecta of higher yields. And I would say It's really kudos to the platform for FR. One is that we work really hard on the basis. We don't bid on highly marketed deals.
It's all the land that we bought It's off market and direct yield and a result assemblages. So we hit the basis. We basically buy below market. So the basis helps the yield. The second thing is that in almost every deal that we did, we underwrote conservatively.
So the rent projection actually, the rent grew more than we projected. So that helps our yields as well. And then lastly, Dave, as you know, this year alone, there has been cap rate compression up to 50 basis points. So if you put those three together, That's a formula for high returns.
When you look at the in process just right here at the end of The Q3, the relative lower margins on that, is that a function of when you bought that land? Is that a function of just location?
When you look at the developments under construction, you do have Some markets like a Seattle market, you're correct. It's a function of a recently kind of acquired site that's lower than our average. So that would be one example. And then the other example would be a large development Central PA that's a function of a Recent land pricing too? Yes.
And on that project, we bought and started immediately.
Yes.
Where some of these projects like the big margin product that we spoke about in our remarks, we tied that land up in 2020 and the rents in that market grew Tremendously. And cap rates compressed. So that's why you saw the huge margin there.
Yes.
That's helpful. Land is We've been told of running about 30% to 35% of kind of total building construction costs. Is that holding pretty consistent, it sounds like, from what you're saying?
Overall, it's higher now, Dave. I would add about 10 percentage points to that. Great. That's helpful. Thank you.
Thank you.
Your next question is from Nick Yulico of Scotiabank.
Hey, this is Greg McGinniss. I'm with Nick. All my questions have been answered actually. So thank you very much.
Your next question is from Connor Seversky of Berenberg.
Hey, all. Thanks for having me. On the 2022 leases already signed, can you comment at all on what markets where you're seeing particular strength? And maybe what are the upper and lower bounds of What I assume to be a weighted average on that 19% spread figure?
Well, I'll comment on the The 29% that's signed is pretty representative of the entire portfolio of the company. And when you look at all of expirations in 2022, it's Pretty representative of the overall portfolio as well. But the markets that we've been talking about in Q and A and we mentioned in the script, those are the markets that we've been seeing really strong rental rate growth.
Okay. That helps. And then what kind of escalators are baked into the new leases? Has there been any meaningful change What you would have signed in 2020 or 2019?
We're definitely seeing the escalators across all our markets In that 3% to 4% range, so you're definitely going to see those escalators going up in the next year or 2.
Okay. And last one for me. Sorry if you guys already commented on this, but I noticed there was a pretty big delta in the price breaker on the parcels acquired in the Inland Empire during the quarter. Can Provide any color as to what explains the difference?
Sure, sure. Well, different submarkets Has different rents and therefore different basis, but they're all increased from Last year, and we project profitability in those. Of course, we still have to entitle those, but We think we are well below market and definitely below well below market
Okay, that helps. Thank you.
Your next question is from Bill Crow of Raymond James.
Hey, good morning, Peter and team. We're now almost a year past November 2020 Investor Day and you offered some 2023 expectations that were really well received. So I'm Just wondering how the past year's actualized results and the current fundamentals kind of impact your view towards 2023? And Maybe specifically the $260,000,000 AFFO target coming throughout there?
Sure, Scott. Bill, it's Scott. First thing I'll mention is rental rate growth or increase in rental rates and new and renewal leasing. You remember I had a question about it at Investor Day. I assume 12% this year, 8% in 2022 and I think 6% in 2023.
And I said at the time, I think we're going to beat it Conservative. I really, really believe that's the case today. Case in point, the 12% projection is going
to be, We think plus
or minus 15% this year. So I think there's upside in that. As far as progress on the AFFO goal, This year, we'll think we'll be around $207,000,000 plus or minus. 260 is our goal. Keep in mind that 2 of the drivers that we spoke about lease up of development and refinancing higher cost debt, the impact of that is going to be more 20 So I would say we're definitely on track and I would say there's going to be some upside in Investor Day on growth and rental rates due to new and renewal leasing.
Perfect. Thanks for the color.
Your next question is from Mike Mueller of JPMorgan.
Yes, hi. Just a couple of quick ones here. The 3 4th quarter development starts, are they all expected to be completed in 2022?
Yes.
Yes. Okay. Okay.
So
it looks like you're going to have quite a bit of deliveries in 2022. If we're thinking out the next few years beyond that, Should we think of 2022 as kind of being this anomaly on the big side? Or do you think you can kind of replicate Deliveries or something
close to that?
Well, we should hit. Yes. Okay. So the run rate, if you will, has been Truncated or changed because we all stopped new projects last year for many months. And so you do see this phenomenon where we have a lot of starts and a lot of completions kind of delivering all at once.
Over time, You ought to see completions or deliveries that are more consistent as we quote earn into the new development volumes over time.
So is that it?
Yes, yes. I think you kind
of answered it without putting numbers out there. So That was it. Thank you.
Okay.
Your next question is from Caitlin Burrows of Goldman Sachs.
Hi, good morning. Just one, I think earlier you mentioned when somebody asked about dispositions that you weren't looking to sell real estate to fund development. So I was just wondering as you think about that development activity going forward, is it that you just fund it with retained cash and Equity where needed or how you're thinking about
that? What I was really saying is that our decisions to sell particular assets Or groups of assets or volume relate only to maximizing the value of that decision and not to how we fund our development pipeline. It will be the case that as we execute sales going forward, We have the added benefit of using those proceeds to fund development, but we don't sit here and say, oh, we better go sell $500,000,000 because we have a huge development pipeline. Because when you do that, you might tend to take lower prices than you should just to raise the proceeds.
That makes sense. So, I guess, would it be reasonable to assume, I know you mentioned in the beginning that equity issuance isn't assumed in your 20 1 guidance going forward, but that going forward, equity will be one of the options for how you end up funding development?
Certainly, based on the volumes that we're looking at today, that will be one of the options on the table.
Great. That's all. Thanks.
Your final question is from Tayo Okusanya of Credit Suisse.
Hi, yes. Good morning, everyone. A great a solid quarter. Question still around the supply chain Again, still not 100% clear to me exactly how that's impacting the demand curve for industrial real estate. I mean, it sounds like a lot of the occupancy increases you guys have seen has just really been driven by not a lot of Development in the past year or so and still pretty good demand.
And maybe to an extent, there's some formal out there from all Company is saying I need space because everyone's running out. Is that really the way we should kind of think about it versus the whole kind of collapse of the supply It actually did is causing some type of increased demand that probably could still be around until the supply chain issues are fixed. So
I guess for me, the simplest way to think about it is that companies Do try to at best try to operate in just in time, meaning they get the product And they have an order they shipped the product to minimize warehouse inventory because warehouse inventory has capital carrying costs. And today, they can't operate that way. So everybody's operating on a just in case. Why just in case? And basically, they don't know when the product is coming And they're not sure the product is coming.
And in some, they don't know what cost is coming. So they'd rather front load and order more Because also remember, due to the increased demand, the inventory to sales ratio has dropped. So now they're just trying to go back to inventory. They call now just in case to basically increase their inventory. And on the simplest impact, that requires more space when you're carrying more inventory.
So That is, by the way, the simplest way of looking at what's happening in the industry in the U. S. Today, and that's Creating demand for a more warehouse space.
I'd add to Jojo's point though, we're seeing a lot of demand not only for Just in case, but just net growth across a variety of industries around the country. Demand is really good, Particularly from the larger companies in food and beverage and the transportation logistics field, as we said earlier, Consumer products companies, traditional retailers, they're all growing in addition to trying to
I mean, I guess that's helpful. It's just again, a lot of companies just kind of even still saying they don't have inventory at all. So It's just interesting to me. I just kind of wonder sometimes if this whole issue is kind of Overblown in the space and it's kind of many other things that are really driving the increase in demand, not necessarily this one factor.
The primary as I mentioned earlier, the primary driver is just good solid demand. The consumption that is happening in this country is Higher than it's ever been, largely due to COVID. Household savings are the highest they've been. Household debt levels are low. And so you've got all the right fundamentals for people to go out and of course try to celebrate life after a year off, But also they have the capital to do it.
So that's what you're seeing. It's flat out Strong demand and all of the wrinkles in the supply chain have a lot to do with that exploding demand When we aren't fully back to work in a lot of these delivery chains.
Also just to finish up with what Peter said, We expect our customers were fairly capitalized and really well heeled in the industry because we've got very good customers. We expect them to be marginally more competitive than the small users in getting supply. As you know, they've got capital spend, they've got big relationships, And you will notice that the larger suppliers out there are getting you goods. Give example, Amazon, if you order from Amazon today, you'll probably get it Quicker than from a small shipment company. So I mean, having good
We can tell you just from our portfolio that all of our spaces are fully being utilized.
Got you. That's helpful. Thank you.
There are no other questions in queue. I'd like to turn the call back over to Peter Bustilli for any closing comments.
Thank you, operator, and thank you all for joining us today. As always, please feel free to reach out to me, Scott or Art with any follow-up questions. We look forward to talking with many of you during the NAREIT virtual conference in a few weeks.
Be well.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.