First Industrial Realty Trust Inc (FR) Q3 2021 Earnings Call Transcript

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First Industrial Realty Trust Inc (FR 0.34%)
Q3 2021 Earnings Call
Oct 21, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Industrial 3Q '21 Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Thank you. Please go ahead.

Arthur Harmon -- Vice President-Investor Relations And Marketing

Thank you, Shelby. Hello, everybody, and welcome to our call. Before we discuss our third quarter 2021 results, as well as updated guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, Thursday, October 21, 2021. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors, which could cause this, are described in our 10-K and other SEC filings.

You can find a reconciliation of non-GAAP financial measures, discussed in today's call, in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at 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 Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.

Now, let me turn the call over to Peter.

Peter E. Baccile -- President And Chief Executive Officer

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 million square feet in the third quarter, while completions came in at 79 million square feet. Through the first three quarters of this year, net absorption was 292 million square feet, significantly outpacing new supply of 193 million.

In our portfolio, we grew occupancy 50 basis points to finish the third quarter 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 and a cash rental rate increase of 19%. Let me move now to the primary driver of our external growth, our Development program. As most of you know, as part of our underwriting process and risk management discipline, we operate with a self-imposed speculative leasing cap. Due to continued robust fundamentals in the industrial market, 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 million, bringing the total to $800 million.

Now, let me walk you through our recent land acquisitions, as well as three exciting new development starts that will put some of the incremental cap capacity to good use. During the third quarter, we closed on three development sites, totaling 122 acres for $59 million. two are in the Inland Empire East and the third is in Denver. In total, these sites can accommodate up to 2.1 million square feet of new development. And one of the new Inland Empire East sites, we are starting our First Pioneer Logistics Center, a 461,000 square foot cross-dock facility. Our total projected investment is $73 million, 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 two largest ports in North America. Market vacancy in the Inland Empire is sub-2%, and market rents have grown more than 80% since we went under contract on this site in early 2020.

We look forward to adding this prime asset to our Southern California portfolio, which represents approximately 23% of our rental income, as of the end of the third quarter. Moving to the East Coast. We 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. FirstGate 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 million, and our targeted cash yield is 5.5%. In the fourth quarter, we acquired a site in Bordentown, New Jersey, just off of Exit 7, on the Jersey Turnpike, for $8 million. We immediately started construction, a First Bordentown Logistics Center, a 208,000 square foot facility. We look to build upon our past successes in this location, where our two 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 million, with an estimated cash yield of 5.8%. In summary, these three planned fourth quarter starts total approximately 800,000 square feet, with an estimated investment of $130 million and a cash yield of 6.3%. Including these planned starts, our developments in process totaled 6.4 million square feet, with a total investment of approximately $725 million. At a cash yield of 6%, 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 fourth quarter to date, in addition to the New Jersey site, I just discussed, we also acquired a total of 10 acres in the Inland Empire and Northern California for a total of $10 million.

As of today, adjusted for our planned fourth quarter starts and the aforementioned land acquisitions, our balance sheet land can support approximately 12.5 million square feet of new development. Our share of the Phoenix Camelback joint venture is an additional 3.8 million square feet. In total, that's north of 16 million square feet and represents approximately $1.7 billion of potential new investment activity. Now, let me update you on our recent Development leasing successes. We just leased the entire 548,000 square footer at First Park @ 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 million, and the estimated cash yield is 6%. The tenant is expected to take occupancy of the just-completed space by year-end, with the expansion ready for use in the second quarter of 2020. We also leased 100% of our 303,000 square foot First Wilson Logistics Center in the Inland Empire that will be completed in the first quarter of 2022. With a cash yield of 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 2.8 million square feet of development. As another example of the strength of the Southern California market and our platform, we just leased our Laurel Park redevelopment project in the South Bay. This property is very well suited for port-centric warehouse distribution users, given its great location and highly sought-after yard for surface use. Our first year yield is 7.5% on our $21 million investment, which represents a margin of around 150%. Moving on to sales. During the quarter, we sold six properties and four units for $14 million. And in the fourth quarter, we have sold four additional buildings in Detroit, totaling $7 million, bringing our year-to-date total to $126 million. Given current visibility on our disposition pipeline, we now expect sales for the year to total $175 million to $225 million, a $75 million increase from the prior midpoint of $125 million.

With that, let me turn it over to Scott to walk through additional details on the quarter and updated guidance.

Scott Musil -- Chief Financial Officer

Thanks, Peter. Let me start by summarizing our results and leasing stats for the third quarter. NAREIT funds 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 2.4 million square feet of leases. Of these, 500,000 were new, 1.4 million were renewals and and 500,000 were for developments and acquisitions with lease-up. Tenant retention by square footage was 85%.

Cash rental rates for the quarter were up 22.8% overall, with renewals up 21% and new leasing up 27.5%. And on a straight-line basis, overall rental rates were up 36.2%, with renewals increasing 34.9% and new leasing up 39.5%. Moving on to some capital markets activity. As previously announced in early July, we closed on two financing transactions. First, we expanded our line of credit to $750 million and improved our pricing to LIBOR plus 77.5 basis points, a reduction of 32.5 basis points, compared to our prior facility. The maturity is now pushed out five years, including our two six-month extension options. We also refinanced our $200 million term loan. The new term loan matures in July 2026 and has an interest rate 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, through our ATM, we issued 1.1 million common shares, at a weighted average price of $55.35 per share, for total net proceeds of $59 million to help fund 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 is now $1.93 to $1.97 per share, which is a $0.02 per share increase at the midpoint, reflecting our third quarter performance and an increase in capitalized interest due to our announced development starts. Key assumptions for guidance are as follows: in-service occupancy at year-end of 96.75% to 97.75%. This implies a full year quarter-end average in-service occupancy of 96.5% to 96.8%, an increase of 15 basis points at the midpoint. Fourth quarter same-store NOI growth, on a cash basis, before termination fees of 6% to 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 third quarter performance. Please note that our full year same-store NOI guidance excludes the impact of approximately $1 million from the gain from an insurance settlement.

Our G&A expense guidance is now $34 million to $35 million, an increase of $1 million at the midpoint, and guidance includes the anticipated 2021 costs related to our completed and under-construction developments at September 30, plus the expected fourth quarter starts of First Pioneer Logistics Center, First 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 or new development starts after this call, the impact of any future debt issuances, debt repurchases or repayments after this call and guidance also excludes the potential issuance of equity.

Let me turn it back over to Peter.

Peter E. Baccile -- President And Chief Executive Officer

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 landholdings that can currently support more than 16 million square feet of value-creating developments. We are also focused on replenishing our pipeline with new sites in 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.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Craig Mailman of KeyBanc Capital Markets.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey. Good morning guys. Scott, maybe this one's for you. Just looking at the year-to-date FFO, kind of, implies a, decel in the fourth quarter to get to the midpoint of your range. Could you just walk through that?

Scott Musil -- Chief Financial Officer

Hey. Sure, Craig. I would say the two drivers there, are, one is, we forecasted $500,000 of bad-debt expense in the fourth quarter. Our actual in the third quarter was $25,000. Hopefully, we can do better in the fourth quarter than our $500,000. And also, the fourth quarter is being hit with a full-quarter dilution related to the equity issuance, where the third quarter was only partial. So I would say those are the two drivers.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And did you say that there's, equities -- more equity included in the guidance, going forward? Or did I mishear you?

Scott Musil -- Chief Financial Officer

No, no future equity, but what I'm saying is that, the equity issued in the third quarter was more back end in the third quarter. So the fourth quarter, it's in for the entire quarter. So you have a higher share count, fourth quarter, compared to third quarter.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Got you, and then, just separately, Peter, you noted your spec cap is up $175 million. Kind of, what -- could you just walk through, as you -- the balance sheet gets 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?

Peter E. Baccile -- President And Chief Executive Officer

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 2015 and 2018. 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.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Got you. Thank you.

Operator

Your next question is from Ki Bin Kim of Truist.

Ki Bin Kim -- Truist -- Analyst

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 consider the vacancy in your existing portfolio. So I guess, first question, how much have you eaten into the cap? And do you-I can't remember that you use like book value for your assets or market value to get to that speculation?

Peter E. Baccile -- President And Chief Executive Officer

So committed dollars. So any new development that we start, that has less than 90% leasing, those dollars go in on a pro rata 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 million of capacity today, largely due to the great leasing on our new developments that we've just completed. So of the $800 million, $279 million is available. Does that answer your question, Ki Bin?

Scott Musil -- Chief Financial Officer

Yeah, it's based on book value, too, Ki Bin.

Peter E. Baccile -- President And Chief Executive Officer

Also, Ki Bin, as acquisition vacancy, so if we acquire an empty building, it goes into the spec cap. We treat that risk, the same as development. And so when we lease any acquisition vacancy, it comes off, it comes off the list. And finally, once an asset is 90% leased, it all comes off.

Ki Bin Kim -- Truist -- Analyst

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 figure.

Peter E. Baccile -- President And Chief Executive Officer

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, are 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.

Ki Bin Kim -- Truist -- Analyst

Okay. And as you think about funding that development pipeline, that's growing, should we expect a steady-state contribution from dispositions, so like $200 million, that should ratchet up as the pipeline grows, or different sources?

Peter E. Baccile -- President And Chief Executive Officer

With respect to dispositions, I think the volumes, that we've guided to the last few years, are going to be similar, going forward. Obviously, we just increased, and that has a lot to do with -- quite often, we'll get unsolicited offers on assets that are in markets, where we want to dispose off 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 lines, going forward, will be similar, Ki Bin to what we've been giving.

Ki Bin Kim -- Truist -- Analyst

Okay. That's it for me. Thanks.

Peter E. Baccile -- President And Chief Executive Officer

And obviously, as we get bigger, that's a much lower percentage -- dwindling percentage of the overall size of the company.

Ki Bin Kim -- Truist -- Analyst

Right. Thank you.

Operator

Your next question is from Rob Stevenson of Janney.

Rob Stevenson -- Janney -- Analyst

Good morning guys. Just a follow-up on Ki Bin's question. The fourth quarter disposition guidance is now roughly, I guess, $60 million to $100 million, given the full year guidance. Are you seeing any meaningful change in the asset pricing there? Or is that increase more of a reflection of the increases to the development pipeline and the need to fund that and the attractiveness of dispositions as a funding source?

Peter E. Baccile -- President And Chief Executive Officer

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, and we're going to be disposing of more of those assets. And 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.

Rob Stevenson -- Janney -- Analyst

And will you be -- with these $60 million to $100 million in the fourth quarter, are you going to be exiting any markets as a result of that?

Peter E. Baccile -- President And Chief Executive Officer

Wholesale exit, I don't think so.

Rob Stevenson -- Janney -- Analyst

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?

Peter E. Baccile -- President And Chief Executive Officer

I'm going to give that to Jojo and Peter, to give their thoughts on that.

Johannson Yap -- Chief Investment Officer

Sure, sure. Basically, the net impact is that a lot of the tenants in our business, who need imported products, have -- is 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 to sell that product. And if they don't really know the timing, that based on our issues, certainly. So they're going out. The net effect toward 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 the now rents have been rising because of that. And in terms of 2022, we don't know. There are so many issues in the supply chain right now, and there's strong demand. So we hope that this level is off for our tenants sake, but the reality is that I don't think it will level off. I think it looks -- the supply chain issues will continue, and the rent pressure will continue because of the lack of space and increased demand.

Peter Schultz -- Executive Vice President

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 third-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.

Rob Stevenson -- Janney -- Analyst

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-in-time inventory procedures?

Johannson Yap -- Chief Investment Officer

That's a very, very good question. In order to answer that question, we have to predict where e-commerce, as a percentage of total sales, will be in the market. And in e-commerce, in the next five, six years, I don't know, goes to 50%, then all -- 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 checker driver issues, you have COVID, still, a little bit, it's lessening, related efficiency issues and supports. So we don't know when that's all going to get fixed.

Peter Schultz -- Executive Vice President

Don't forget, the primary catalyst to these supply chain issues was COVID, where everything is 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.

Rob Stevenson -- Janney -- Analyst

Okay. All right. Thanks guys. Appreciate it.

Operator

[Operator Instructions] Your next question is from Anthony Powell of Barclays.

Anthony Powell -- Barclays -- Analyst

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 at the company, given the increase of the size of the company and the increase of quality of its 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?

Peter E. Baccile -- President And Chief Executive Officer

Yes. Well, one thing that we're very focused on, 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 pipeline, not only for land, but new developments and creating great margins there. And we're mindful that trees don't grow to the sky. Trust me, we've discussed what you've said. And at the end of the day, we really like the discipline for new leasing that the current cap structure demands.

Anthony Powell -- Barclays -- Analyst

Got it. Thanks. And I guess, on the land side, you said you replenishing our land bank right now. What are you seeing in terms of pricing on land, the competitive environment, just competitive players, for industrial land out there?

Peter E. Baccile -- President And Chief Executive Officer

Jojo?

Johannson Yap -- Chief Investment Officer

Very competitive and that prices continue to increase. They're increasing a lot more on the coast than the middle part of the country, but the reason for a bigger increase to coastal markets because the rent growth there has been higher as well. So we project that land prices will continue to increase.

Anthony Powell -- Barclays -- Analyst

All right. Thank you. Your next question is from Rich Anderson of SMBC.

Rich Anderson -- SMBC -- Analyst

Hey, thanks. Good morning. So, just a follow-up on the supply chain question that got started with Rob's and Cory. 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?

Peter E. Baccile -- President And Chief Executive Officer

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 percentage of sales, will go to 50, then that will actually make the supply chain issues, kind of, minimal. I think, as big -- today, that for 2025, and it goes to 50, that's a bigger driver than anything else that we're seeing. And that's why I am saying.

Rich Anderson -- SMBC -- Analyst

Okay. I understand. Thank you for that. So -- but when you -- I don't know if it's -- if you're able to quantify this, but would you be able to say, if there's a $50 of rent, how much of that -- probably impossible question to answer, but how much of that is supply chain related? How much of that is just basic demand related? Is it -- is there any way to answer that question?

Peter E. Baccile -- President And Chief Executive Officer

It's not an -- 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 seven or eight months. A lot of it has to do with the fact that it's difficult now and this is a supply chain challenge, but it's difficult to get some commodity inputs. But the demand is just very, very strong. You saw that -- you 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.

Peter Schultz -- Executive Vice President

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.

Rich Anderson -- SMBC -- Analyst

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?

Peter E. Baccile -- President And Chief Executive Officer

Jojo?

Johannson Yap -- Chief Investment Officer

Well, when you look at one of the more successful operations right now, there the LTL, less than truckload, because they're very, very busy, and they're actually raising rates, and they're very profitable. And so a lot of businesses, 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, yes, 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 that increased cost by businesses. And some of those are going to affect their margins, and -- but some are going to be passed to the consumers. But the thing is they're not going to change. They are wanting to store more, because they want to make the sales. And right now, there's already top of some importing for next year's season. So that's how bad it is.

Rich Anderson -- SMBC -- Analyst

Great. Thanks for that. And lastly for me, $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?

Scott Musil -- Chief Financial Officer

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, if not more.

Rich Anderson -- SMBC -- Analyst

Okay. Thanks very much.

Operator

Your next question is from Michael Carroll of RBC Capital Markets.

Michael Carroll -- RBC Capital Markets -- Analyst

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?

Peter E. Baccile -- President And Chief Executive Officer

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 -- our core current landholdings, we estimate, would take about three to five years to build out. But remember, again, our land positions are never static. We're always sourcing, entitling new sites, and we'll always have some land sales to users, such as some of the land in our JV, out in Phoenix.

Michael Carroll -- RBC Capital Markets -- Analyst

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?

Peter E. Baccile -- President And Chief Executive Officer

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.

Michael Carroll -- RBC Capital Markets -- Analyst

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 not. 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?

Peter E. Baccile -- President And Chief Executive Officer

Peter?

Peter Schultz -- Executive Vice President

So you're referring to our 644,000 square foot cross-dock building at Old Post Road, along I-95, north of Baltimore. With our portfolio occupancy over 97%, we continue to look for the right fit, on a long-term basis, for a single tenant, for the building. We're one of two 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.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. Thank you.

Operator

Your next question is from Dave Rodgers of Baird.

Dave Rodgers -- Baird -- Analyst

Yes. Good morning, everybody. You guys have 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 start for the fourth quarter, 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, that it's just 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 priced today? I mean, what are land prices going to do and the next round of purchases that I'd see?

Peter E. Baccile -- President And Chief Executive Officer

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?

Johannson Yap -- Chief Investment Officer

So, yes, I would just -- basically, just for me, it's a trifecta of higher yields in the -- I would say, it really to the platform for FR. One is that we work really hard on the basis. We don't bid on highly marketed deals, all the land that we bought is off-market and direct field 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 yield as well. And then lastly, 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.

Dave Rodgers -- Baird -- Analyst

When you look at the in-process just right here, at the end of the third quarter, the relative lower margin than that. Is that a function of when you bought that land? Is that a function of just location?

Johannson Yap -- Chief Investment Officer

Well, when you look at the developments under construction, you do have some markets like a Seattle market, you're correct. And 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 at central PA. That's a function of a recent land pricing, too. Yes.

Peter E. Baccile -- President And Chief Executive Officer

On that project, we bought and started immediately

Johannson Yap -- Chief Investment Officer

Yeah.

Peter E. Baccile -- President And Chief Executive Officer

Where some of these projects, like the big margin project 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.

Johannson Yap -- Chief Investment Officer

Yeah.

Dave Rodgers -- Baird -- Analyst

That's helpful. And 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.

Johannson Yap -- Chief Investment Officer

Overall, it's higher now, Dave. I would add about 10 percentage points to that.

Dave Rodgers -- Baird -- Analyst

Great. That's helpful. Thank you.

Johannson Yap -- Chief Investment Officer

Thank you.

Operator

Your next question is from Nick Yulico of Scotiabank.

Greg McGinniss -- Scotiabank -- Analyst

Hey. This is Greg McGinniss. I'm with Nick. All my questions have been answered, actually. So, thank you very much.

Operator

Your next question is from Connor Siversky of Berenberg.

Connor Siversky -- Berenberg -- Analyst

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?

Scott Musil -- Chief Financial Officer

Well, I'll comment on the 29% debt signed. It's 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&A, we mentioned in the script, those are the markets that we've been seeing some really strong rental rate growth in.

Connor Siversky -- Berenberg -- Analyst

Okay. That helps. And then what kind of escalators are baked into the new leases. Has there been any meaningful change from what you would have signed in 2020 or 2019?

Scott Musil -- Chief Financial Officer

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 two.

Connor Siversky -- Berenberg -- Analyst

Okay. And last one for me. I'm sorry, if you guys already commented on this, but I noticed there's a pretty big delta in the price per acre, on the parcels acquired in the Inland Empire during the quarter. Can you provide any color as to what explains the difference?

Johannson Yap -- Chief Investment Officer

Sure, sure. Well, different submarkets has different rents and therefore, a 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 well below market, post-entitlement.

Connor Siversky -- Berenberg -- Analyst

Okay. That helps. Thank you.

Operator

Your next question is from Bill Crow of Raymond James.

Bill Crow -- Raymond James -- Analyst

Hey, good morning, Peter and team. We're now almost a year past your November 2020 Investor Day, and you offered some 2023 expectations that were really well received. And I'm just wondering, how the past years actualized results and the current fundamentals, kind of, impact your view toward 2023? And maybe specifically, the $260 million AFFO target throughout there?

Peter E. Baccile -- President And Chief Executive Officer

Sure. Scott?

Scott Musil -- Chief Financial Officer

Hey, Bill, it's Scott. First thing, I'll mention, is rental rate growth or increase in rental rates on new and renewal leasing. You remember, I had a question about at Investor Day. I assume 12% this year, 8% in '22, and I think 6% in '23. And I said at the time, I think we're going to be 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, would be around $207 million, plus or minus, $260 is our goal. Keep in mind that two of the drivers that we spoke about, lease-up of development and refinancing higher-cost debt. The impact of that is going to be more in 2022, 2023. 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 in rental rates due to new and renewal leasing.

Bill Crow -- Raymond James -- Analyst

Perfect. Thanks for the color.

Operator

Your next question is from Mike Mueller of JPMorgan.

Mike Mueller -- JPMorgan -- Analyst

Yes. Hi. Just a couple of quick ones here. The three fourth quarter development starts, are they all expected to be completed in 2022?

Peter E. Baccile -- President And Chief Executive Officer

Yes.

Scott Musil -- Chief Financial Officer

Yes.

Mike Mueller -- JPMorgan -- Analyst

Yes. 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 being this anomaly, on the big side? Or do you think you can, kind of, replicate deliveries or something close to that?

Peter E. Baccile -- President And Chief Executive Officer

We should see -- 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 on, once. Over time, you ought to see completions or deliveries that are more consistent, as we "earn into the new development volumes over time". Is that...

Mike Mueller -- JPMorgan -- Analyst

Yes. Yes. I think you, kind of, answered it, without putting numbers out there. That was it. Thank you.

Peter E. Baccile -- President And Chief Executive Officer

Okay.

Operator

Your next question is from Caitlin Burrows of Goldman Sachs.

Caitlin Burrows -- Goldman Sachs -- Analyst

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 then incremental equity were needed? Or how are you thinking about that piece?

Peter E. Baccile -- President And Chief Executive Officer

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 million 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.

Caitlin Burrows -- Goldman Sachs -- Analyst

That makes sense. So I guess, would it be reasonable to assume -- I know you mentioned in the beginning that equity issue assumed in your 2021 guidance, going forward, but that, going forward, equity will be one of the options for how you end up funding development?

Peter E. Baccile -- President And Chief Executive Officer

Certainly, based on the volumes that we're looking at today, that will be one of the options on the table.

Caitlin Burrows -- Goldman Sachs -- Analyst

Great. That's all. Thanks.

Operator

Your final question is from Tayo Okusanya of Credit Suisse.

Tayo Okusanya -- Credit Suisse -- Analyst

Yes. Good morning, everyone. Great solid quarter. Questions still around the supply chain issues. Again, still not 100% clear to me exactly, how that's impacting the demand curve for industrial real estate. I mean, it sounds like a lot of the occupancy increases you guys have seen, has 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 these companies, saying, "I need space because everyone is running out". Is that really the way we should, kind of, think about it versus the whole, kind of, collapse of the supply chain actually did, is causing some type of increased demand that probably could still be around until supply chain issues are fixed?

Johannson Yap -- Chief Investment Officer

So I guess, for me, the simplest way to think about it is that companies do try to best -- try to operate in just in time, meaning, they get the product, and they have an order, they ship the product to minimize warehouse inventory because warehouse inventory has capital carrying costs. And today, they can't operate that way. So everybody is operating in 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 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 US today, and that's creating demand for more warehouse space.

Peter Schultz -- Executive Vice President

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 and logistics' field, as we said earlier, consumer product companies, traditional retailers, they're all growing, in addition to trying to increase their inventories, as Jojo said.

Tayo Okusanya -- Credit Suisse -- Analyst

Got you. 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.

Peter E. Baccile -- President And Chief Executive Officer

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.

Johannson Yap -- Chief Investment Officer

Also, just to finish up with what Peter said, we expect our customers were fairly capitalized and really well yield in the industry because we've got very good customers. We expect them to be marginally more competitive with the small users in getting supplied because they've got capital spend, they've got big relationships. And you will notice that the larger suppliers out there are getting you good. To 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 customers and tenants like ours is boding well in the industry today.

Peter E. Baccile -- President And Chief Executive Officer

As far as you're concerned as whether people have inventory or not, we can tell you just from our portfolio that all of our spaces are fully being utilized.

Tayo Okusanya -- Credit Suisse -- Analyst

Got you. That's helpful. Thank you.

Operator

There are no other questions in queue. I'd like to turn the call back over to Peter Baccile for any closing comments.

Peter E. Baccile -- President And Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Arthur Harmon -- Vice President-Investor Relations And Marketing

Peter E. Baccile -- President And Chief Executive Officer

Scott Musil -- Chief Financial Officer

Johannson Yap -- Chief Investment Officer

Peter Schultz -- Executive Vice President

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Ki Bin Kim -- Truist -- Analyst

Rob Stevenson -- Janney -- Analyst

Anthony Powell -- Barclays -- Analyst

Rich Anderson -- SMBC -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Dave Rodgers -- Baird -- Analyst

Greg McGinniss -- Scotiabank -- Analyst

Connor Siversky -- Berenberg -- Analyst

Bill Crow -- Raymond James -- Analyst

Mike Mueller -- JPMorgan -- Analyst

Caitlin Burrows -- Goldman Sachs -- Analyst

Tayo Okusanya -- Credit Suisse -- Analyst

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