First Industrial Realty Trust Inc

NYSE:FR

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial First Quarter Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. Thank you.

I'd now like to turn the call over to your host, Art Harmon, Vice President of Investor Relations. Sir, you may begin your conference.

[Art Harmon, Vice President, Investor Relations]

Thanks a lot, Catherine. Hello, everybody and welcome to our call. Before we discuss our first quarter 2019 results and 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, Wednesday, April 24, 2019. 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, 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 Baccile, President & Chief Executive Officer]

Thank you, Art. Good morning, everyone and thank you for joining us. 2019 is off to a great start. The First Industrial team has done an excellent job of building upon last year's achievements by signing 1.8 million square feet of new leases at nine developments and value-add investments year-to-date. Largely on the strength of this leasing, we have increased our FFO per share guidance which Scott will detail for you in his remarks.

I will walk you through those leases shortly, but before I do that let me provide you with a quick update on the state of the industrial market. On a national level demand and supply were in equilibrium. In its recent flash publication, CBRE Econometric Advisors reported preliminary first quarter net absorption of 32 million square feet and new completions of 33 million.

Those figures are consistent with the activity we are seeing in our markets with new requirements across an array of businesses and size ranges. I would note that for the markets that are oversupplied, excess inventory is predominantly in larger facilities in specific submarkets, which speaks to the importance of building the right product in the right location at the right time.

Moving now to our portfolio results for the quarter. Occupancy at quarter end was 97.3% down 120 basis points from year-end. This is in line with what we laid out for you on our last call as we experienced the seasonality that is typical for the first quarter and the expiration of several shorter-term leases.

Cash same-store NOI growth was 3.2% and cash rental rate growth was 8%. To update you on our rental rate change for the year, as of today, we have now signed approximately 70% of our 2019 rollovers at a cash rental rate change of 13%. So with tenant still facing limited choices for space, the conditions remain favorable for significant rent growth. Our team is doing a good job of capturing that growth and optimizing our overall leasing economics to drive incremental cash flow. We continue to see broad-based tenant activity across our markets as evidenced by our recently signed long-term leases at our new developments and value-add acquisitions.

Let me begin with our biggest signing. Per our press release last night, I am pleased to tell you that just last week, we signed a long-term lease for our 739,000 square foot First Logistics Center at I-78/81 in Central Pennsylvania. Our leases with Ferrero USA Inc., the U.S. arm of the third-largest confectionery company in the world, Ferrero is the maker of a number of well-known brands including Ferrero Rocher chocolates, TicTac Mints and Nutella Hazelnut Spread. The lease will commence by the fourth quarter.

Moving now to Southern California and our six building project, we call The Ranch in the Inland Empire West submarket. There we leased our two remaining buildings with 221,000 and 137,000 square footers. These were leased by two different 3PLs, one which serves a food and beverage customer and another that serves a variety of industries. With the completion of our leasing efforts at The Ranch, our stabilized cash yield is 7.8% on our total investment of $86.4 million for the entire park. This result significantly exceeded our original underwriting, which was in the low 6s. Our performance on this project gives you a window into the level of rent growth in Southern California these past few years.

We also pre-leased 100% for our First Perry Logistics Center in the Inland Empire East submarket to a multi-brand fashion company. The 240,000-square-foot building is scheduled to be completed in the third quarter with lease commencement shortly thereafter. We also leased 67,000 square feet to a specialty tool company at our 171,000-square-foot value-add acquisition we completed last year in the LA market.

Moving to Chicago, we were pleased to lease 207,000 of our 356,000-square-foot First Joliet development to a 3PL survey and consumer goods company. In the I-88 submarket, we leased 56,000 square feet of our First Orchard 88 Business Center, the 173,000-square-foot development forward that we acquired in the first quarter.

Switching now to Texas. In Dallas, at First Park 121, we signed a 63,000-square-foot lease with Triathlon Battery, bringing that 345000-square-foot two-building project to 18% pre-leased. Completion is slated for the third quarter. Lastly, just last week in Houston, we signed an 80,000-square-foot lease at our First 290 at Guhn Road development to a logistics provider serving an automotive tenant. That building is now two-third leased.

Turning now to new investments. We continue to source profitable opportunities in this very competitive environment. In addition to the two first quarter starts in Southern California and Dallas, we told you about in our February earnings call; we are pleased to have broken ground on three new developments since then. The first is our two-building 371,000-square-foot First Grand Parkway Commerce Center in Houston with an estimated investment and cash yield of $28.5 million and 7.7% respectively. The project is scheduled for completion in the fourth quarter.

The second is our 120,000-square-foot First Park at Central Crossing III in Central New Jersey. When we complete this building by year-end, we will have expanded our portfolio in the Burlington County submarket to four buildings totaling one million square feet. Out total estimated investment for the new facility is $12.1 million and our projected cash yield is 5.8%.

The third is our two-building 402,000-square-foot First Redwood Logistics Center in the Inland Empire West submarket of Southern California. The total estimated investment is $47.4 million with a pro forma cash yield of 6%. We expect delivery in the first quarter of 2020. We also added two new development sites in the first quarter. The first was the land site and subsequent 50,000-square-foot build-to-suit in Phoenix outlined on our February call. That building will be completed and occupied in the third quarter and our total estimated investment is $7.7 million with a cash yield of 5.7%.

The second was a 16-acre site in the Inland Empire East that we purchased for $4.2 million on which we can build a 301,000 square footer when entitled. In the second quarter-to-date, we acquired 28 acres of additional land adjacent to our First Park 121 in Dallas for $7.4 million on which we can build approximately 434,000 square feet.

Summing up our development pipeline, we currently have $298 million under construction comprised of 3.99 million square feet with a projected cash yield of 6.4% which is 49% leased as of today. At this cash return, our projected average margin on this batch of developments is approximately 37% based on prevailing market cap rates for comparable leased assets.

Moving to dispositions. We sold one building in the quarter, a high-finish 67,000-square-foot facility in San Diego for $10.5 million. In the second quarter-to-date, we had a sale of 8,400 square feet in Miami for $1.1 million. As a reminder, our balance sheet sales target for the year is $125 million to $175 million, which we expect to be back-end loaded similar to prior years.

I would also like to note that our Phoenix joint venture sold two land sites year-to-date to corporate users. The first sale was a 55-acre parcel in the first quarter. Our share of the sales price was $5 million. Just last week, we closed another sale at the second site. That site totaled 147 acres and our share of sales price was $18.2 million. Post these sales, the venture now owns 309 of the 532 acres originally acquired and has returned approximately 90% of our invested capital.

In sum, tenants remain active with many seeking additional space opportunities to accommodate new growth. Our team is working diligently to uncover profitable investments and we continue to execute on the sales side to refine our portfolio and provide capital through redeployment.

With that, I'll turn it over to Scott.

[Scott Musil, Chief Financial Officer]

Thanks Peter. Let me start with our EPS and FFO for the quarter. Diluted EPS was $0.19 versus $0.30 one year ago. NAREIT funds from operations of $0.41 per fully diluted share compared to $0.38 per share in 1Q, 2018. Excluding the severance and impairment charge from a year ago, 1Q, 2018, FFO was $0.40 per share.

As Peter noted, occupancy was 97.3%, down 120 basis points from the prior quarter and up 20 basis points from a year ago. Regarding leasing volume in the quarter, we commenced approximately 3.5 million square feet of long-term leases. Of these 260,000 square feet were new, 3.1 million were renewals and 212,000 square feet were for a redevelopment and acquisitions with lease-up. Tenant retention by square footage was 86%.

Same-store NOI growth on a cash basis, excluding termination fees, was 3.2%. This was driven by rental rate bumps, increase in rental rates and leasing and lower free rent, which was partially offset by real estate tax true-ups for markets paying it in arrears, predominantly in Denver.

Lease termination fees totaled $571,000 and including termination fees cash same-store NOI growth was 4%. Cash rental rates were up 8% overall, with renewals up 7.8% and new leasing up 10.4%. On a straight-line basis, overall rental rates were up 16.7% with renewals increasing 16% and new leasing up 24%.

Moving now to the balance sheet. During the first quarter, we paid off $72 million of mortgage loans at a weighted average interest rate of 7.8%, bringing our secured debt as a percentage of gross assets to less than 6%.

Quickly moving on to a few balance sheet metrics. At the end of 1Q, our net debt plus preferred stock to adjusted EBITDA is 4.8 times. And at March 31, the weighted-average maturity of our unsecured notes, term loans and secured financings was 5.8 years, with a weighted-average interest rate of 4%. These figures exclude our credit facility.

Moving on to our 2019 guidance per our press release last evening. Our NAREIT FFO guidance is now $1.65 to $1.75 per share with a mid-point of $1.70. This is an increase of $0.01 from our initial 2019 guidance, primarily driven by our ability to outperform our underwritten leasing assumptions at our developments.

The key assumptions for guidance are as follows; average quarter end occupancy of 96.75% to 97.75%, same-store NOI growth range of 1.5% to 3%, our G&A guidance range is $27.5 million to $28.5 million and guidance includes the anticipated 2019 costs related to our completed and under-construction developments at March 31; in total, for the full year 2019, we expect to capitalize about $0.03 per share of interest related to our developments; our guidance does not reflect the impact of any future sales, acquisitions, or new development starts after this earnings call; the impact of any future debt issuances; debt purchases or repayments, other than the expected payoff of approximately $33 million secured debt maturity in the third quarter and an approximately $1 million secured debt maturity in the fourth quarter, these payoffs carry a weighted average interest rate of 7.5%; the impact of any future gains related to the final settlement; two insurance claims from damaged properties; and guidance also excludes potential issuance of equity.

With that, let me turn it back over to Peter.

[Peter Baccile, President & Chief Executive Officer]

Thanks Scott. We're off to an excellent start in 2019, as our team continues to execute on all fronts to drive incremental cash flow growth from our portfolio and new investments.

And with that, operator, would you please open it up for questions?

[Operator]

[Operator Instructions] Your first question comes from the line of Craig Mailman with KeyBanc Capital Markets.

[Craig Mailman, KeyBanc Capital Markets]

Hey, good morning, guys. Nice job on the development leasing. Just on that. Just curious, if you could give us a little bit of color on kind of how deep the pool was of potential tenants there. And in the case of someone like a Ferrero, is that a consolidation from other facilities in the area? Or is that kind of pure expansion?

[Peter Schultz, Executive Vice President]

Hey Craig, it's Peter Schultz. Relative to Ferrero, you've probably seen some press on them that they've done a couple of acquisitions. So this is growth for them. And we're certainly pleased to have that deal done. And there was a fair amount of activity in the market for that size space.

[Bob Walter]

So for the rest of the leasing, I would say that we had multiple inquiries and multiple interested parties, and the ones we picked were the ones who fit the space the most and who had the best credit.

[Craig Mailman, KeyBanc Capital Markets]

That's helpful. Then just on the rent spreads the acceleration here on the deals you guys have done in 2Q. I mean is that -- is there anything particular geographic-wise or anything in particular that's driving that pure acceleration? And is it the same dynamic, or are you getting better spreads on new leases versus renewals? I mean just give us some insight into that.

[Chris Schneider, Senior Vice President, Operations]

Hey Craig, this is Chris. And the renewals as we have mentioned in the script that we're looking at all our commencements for 2019 that are completed were about 13% for the year, so obviously great results there. As far as where that's coming from, it's broad-based, but the leading markets where we're seeing those rental rate spreads are Southern California, our Houston market Dallas and Denver. So we're seeing across the board.

[Art Harmon, Vice President, Investor Relations]

Yes. Craig, this is Art. Just to be clear that signed year-to-date the commencements will be in the following quarters of the year, not just limited to 2Q.

[Craig Mailman, KeyBanc Capital Markets]

Quite right. Stuff that you guys at least through April 25.

[Art Harmon, Vice President, Investor Relations]

That's right, through the date.

[Chris Schneider, Senior Vice President, Operations]

Correct.

[Craig Mailman, KeyBanc Capital Markets]

And do you think as you're looking at the mark-to-market for the balance of the year, is that 13% sustainable? Or did you guys kind of roll stuff that was well in your market relative to what you kind of have left to do or where you can pull forward from 2020?

[Chris Schneider, Senior Vice President, Operations]

Yes. As far as sustainability, as we said, it's about 70% of our renewals have been taken care of. So we look to be in that plus or minus range right around that 13% throughout the year.

[Craig Mailman, KeyBanc Capital Markets]

Great. Thank you.

[Operator]

Your next question comes from the line of Rob Stevenson with Janney.

[Rob Stevenson, Janney]

Good morning, guys. Can you tell me a little bit about what you're seeing in terms of potential inflationary pressures on labor and material costs on new developments? I mean land is land, but I mean on the stuff that's more controllable, how much pressure you're seeing there? And is it starting to impact underwriting?

[Jojo Yap, Chief Investment Officer]

This is Jojo, Rob. It's actually leveled off from last year, but it's still increasing. So we're looking -- it depends on market-to-market, so it is depending on building volume, because part of that is contractor margins. But we are underwriting anywhere from 4% to 7%, depending on the market increase year-over-year.

[Rob Stevenson, Janney]

And how does that compare to the last year, the year before?

[Jojo Yap, Chief Investment Officer]

Rents have been growing faster overall in the number -- on the areas that we're redeveloping. So -- and what's affecting margins for us is more -- is on the competitive land prices. I think you said the land price, but that has been escalating more than construction costs.

[Rob Stevenson, Janney]

And I mean how does that construction cost increase compare to 2018 and 2017?

[Jojo Yap, Chief Investment Officer]

2018 was larger, and similar to 2017.

[Rob Stevenson, Janney]

Okay. And from that standpoint, I mean anything that you're seeing today out there, either nationally or in any certain markets that would have you pause in terms of starting a new project in a market these days where you have land?

[Peter Baccile, President & Chief Executive Officer]

There are some markets where there is some excess supply. As I mentioned in our remarks, it's largely in the bigger spaces, call it 900,000 feet-and-up properties and that would continue to be South Dallas, Northeast Atlanta, the I-80 quarter, and Chicago, and Central PA. So we're watching those markets closely to see when and how the space there gets absorbed.

[Rob Stevenson, Janney]

Okay. And then Scott in terms of the balance sheet, I mean seems like the preferred markets come back strong. What's the company's thoughts on preferred splice in your capital stack? And where do you think you guys could issue today? And how is that sort of evolving in terms of your funding for the next couple of years?

[Scott Musil, Chief Financial Officer]

I'd have to say just looking globally as far as capital needs for the rest of 2019, we really only have about $34 million of debt payoffs that we're going to make in 2019, and we've got plenty of room in the line of credit. As far as preferreds, I think the last time we had it in our capital stack might have been 2012 or 2013. We look at it every now and then. I'd have to go back to the banks to get a refresher rate on it. But I'd say right now our preference for capital was more than 10 or 12 year debt maturities.

[Rob Stevenson, Janney]

Okay. Thanks guys.

[Operator]

Your next question comes from the line of John Guinee with Stifel.

[Joab Dempsey, Stifel]

Hi. Good morning, everyone. This is Joab Dempsey on the line for John. Could you provide some color on the straight-line rent? Looks like it came in above -- just about $3 million, which seems a bit higher relative to prior quarters. Is most of that free rent?

[Chris Schneider, Senior Vice President, Operations]

Yes. I mean, typically the spread with the straight-line rent or the gap rents is the free rent. So that is the primary impact of that.

[Scott Musil, Chief Financial Officer]

And I think one big driver of that is you got to remember we leased up the 1.4 million square foot First Nandina Logistics Center at the end of last year. So that free rents is pushing through in the first quarter of 2019. So my guess that's probably one of the bigger drivers.

[Joab Dempsey, Stifel]

Got you. That's probably most of it. Okay, great. And then just looking at the development completed in 2018 and not yet in service, could you maybe provide a little insight as to when we might see those assets move into service?

[Peter Baccile, President & Chief Executive Officer]

Well, when you look at that, I mean The Ranch is already leased, I mean in an Inland Empire and then we just spoke about our largest lease so that's already leased. And the only other three buildings that are not fully leased are 250,000 square foot First Logistic at 78/81, a portion of the un-leased phase for our First Joliet and a portion to the First 215 -- First 290 Guhn Road. We are having inquiries and activity in all those. As you know we projected a one-year downtime in those. We will announce when they are fully leased.

[Joab Dempsey, Stifel]

All right, great. Thanks for taking my questions. Nice quarter guys. Thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of Eric Frankel with Green Street Advisors.

[Eric Frankel, Green Street Advisors]

Thank you. I think per your guidance last quarter, you discussed property tax true-ups distorting your same-store NOI growth. Can you provide the impact of that on 1Q 2019 NOI growth?

[Scott Musil, Chief Financial Officer]

Eric its Scott. It's about 80 basis points was the impact on 1Q. And that's what we were projecting the impact to be for the entire 2019 year.

[Eric Frankel, Green Street Advisors]

So we should expect that 88 basis points consistently for the rest of -- for each quarter for the rest of the year?

[Scott Musil, Chief Financial Officer]

Absolutely, yes.

[Eric Frankel, Green Street Advisors]

Okay, thank you. And then with the First Nandina, the free rent will there be -- continue to be free rent in the second quarter as well?

[Scott Musil, Chief Financial Officer]

Jojo when's the -- at Nandina when's the -- are we able to say when the free rent period runs out?

[Jojo Yap, Chief Investment Officer]

No. No I mean I would -- we were subject to confidentiality there. I will tell you, Eric that it's market -- the range of market ranges from half a month per year to a month per year. And so we're within that range. But I'm not at liberty to disclose the actual free rent.

[Eric Frankel, Green Street Advisors]

Okay. And what was the term of the lease?

[Jojo Yap, Chief Investment Officer]

That I cannot disclose the sale. I can tell you it's long-term.

[Eric Frankel, Green Street Advisors]

Okay, great. I appreciate that. Thank you. I understand your disposition program is usually backend loaded for rest of the year. So maybe can you describe the assets -- your type of assets you're planning to sell for rest of the year as well as just some additional details on the San Diego sale? Obviously that looks a little bit funky.

[Peter Baccile, President & Chief Executive Officer]

I'll talk about the overall and Jojo will handle the San Diego topic. The profile of the assets that we're selling this year is very similar to the profile of the assets we've sold in the last couple of years. The profile of the buyer is also similar. So it's typically going to be users 1031 buyers and high net worth individuals. So really that program continues as you've seen in the last two years. And yes as you said we expect it to be backend loaded. Jojo you want to talk about it?

[Jojo Yap, Chief Investment Officer]

Sure. So Eric, so that building is a high finished building and it was leased with significant amortization with that current tenant. Now the tenant is moving out eventually. By the end of next month they'll be totally out. And the reason for that is that they're consolidating to another building they own.

So we had an option to either redevelop it or sell it. We looked at redevelopment and when we looked at the capital we would put in there and the end product, we thought that redevelopment did not make sense for us. And the reason is that, we would not have ended up with a high quality building as we always look for when we develop or redevelop meaning that it was not ultrahigh clear, nor did it have very generous amounts of truck courts and parking. So given all that, we said that it's better for us to take the capital and reinvest somewhere else. So we sold it for $156 per foot to a flex property redeveloper in the market who had a 1031 exchange need.

[Eric Frankel, Green Street Advisors]

Okay. And just the amortized rent. Was that included in NOI? Like is that really -- would you like a 17% cap rate on trailing NOI? Or does it look -- or should it -- we take it…

[Jojo Yap, Chief Investment Officer]

Yes. It was in trailing NOI. That's correct.

[Eric Frankel, Green Street Advisors]

Okay, okay. I appreciate that. Final question, just on the land sales in Phoenix. It seems like you're cycling through that pretty efficiently. Do you actually plan on developing anything on that big joint-venture property?

[Peter Baccile, President & Chief Executive Officer]

Yes, the strategy all along has been to execute on spec development build-to-suits and land sales. We've been very, very pleased with the activity there and the opportunities to achieve pretty high pricing on the land that we've sold. And we are continuing to evaluate development opportunities there. And as soon as we have something that's ready to go we will let you know.

[Eric Frankel, Green Street Advisors]

Okay, that's it. Thank you.

[Operator]

Your next question comes from the line of Rich Anderson with SMBC [ph].

[Rich Anderson, Mizuho Securities]

Hey, thanks and good morning. Early on in the call you described the national market is in an equilibrium state. And on a theory that would happen before oversupply is equilibrium. I'm curious as to why you're not maybe a little bit more cautious in your approach.

And second to that if you -- you described four markets -- or a list of four markets where you see some risk. Are there other markets that would perhaps be on a secondary list that have absorption outpacing supply but you see the gap between those two metrics is shrinking?

[Peter Baccile, President & Chief Executive Officer]

Let me go at the first part of your question. So, our entire business plan is meant to perform well through the cycle and one of the ways we manage or mitigate risk is through our self-imposed development cap which today is $475 million. And so as we look at these markets as you know we have about 16 offices across the country and we're evaluating the risk in each market on a continual basis.

Where there are submarkets, as I outlined earlier, whether is that excess supply, of course, we're not going to go into those markets and start new projects. But there are other markets in the country that are continuing to grow at a very, very rapid pace where land values are appreciating significantly. It won't surprise you that most of those markets are on the coasts.

On the other hand, Denver and Houston and Dallas are doing pretty well as well. So, we're constantly evaluating the risk assessment there and looking forward. And as I said in the past the cap is not a target it's a risk mitigant. And we're always looking to be profitable on our activities. We're not volume shot.

[Jojo Yap, Chief Investment Officer]

Also I just want to note that we actually only started three buildings which we -- it certainly feels that it'd kind of slow. I mean we would've wanted to start more, but that shows -- just shows our discipline. There is a under 200,000 square feet in North Fort Worth market that is definitely not overbuilt in the pocket that we have in Northwest Houston.

Again this is multi-tenant. We've got a front load and a rear load that is not oversupplied. And we don't even have one building and right now that's not leased in the whole Inland Empire. So, we wish we had, but it's tough to buy land it's tough to start. So, we're looking for a lot more.

[Peter Baccile, President & Chief Executive Officer]

I'm sorry what was the second part of your question?

[Rich Anderson, Mizuho Securities]

Yes. So, you listed those four markets Dallas, Atlanta, Chicago, Central PA where you have oversupplied, but is there a secondary list where conditions are good, but the spread between demand supply is starting to shrink?

[Peter Baccile, President & Chief Executive Officer]

Not really. When you look at the markets where we are focused that wouldn't be the case. I cannot speak to other markets where we don't have targeted for new investment. But the national vacancy rate is -- still hovers in the 4%, 5% area. So, even though deliveries and net absorption are in balance, it's still a landlord's market and it will be for some time.

[Peter Schultz, Executive Vice President]

And Rich to add to what Peter said, to be clear, those four markets or those four submarkets rather it's predominantly larger buildings 900,000, 1 million square feet or up that's feeling oversupplied. So, that doesn't mean that there aren't opportunities in submarkets within those broader markets that we continue to feel bullish about. As Jojo mentioned some of our starts in Dallas as an example.

[Peter Baccile, President & Chief Executive Officer]

Yes. Building the right product at the right time in the right place is really the answer here and size matters depending on the submarket.

[Rich Anderson, Mizuho Securities]

Okay, which leads me to my second question a segue. A lot of talk about even Amazon moving into smaller facilities closer in last mile all that stuff. Are you seeing that within your sort of circle of activity where tenants perhaps are paying bigger rents, but taking -- or interested in smaller spaces? Is that sort of starting to materialize as you see it?

[Peter Schultz, Executive Vice President]

We continue to see really broad-based demand across a range of sizes. If you look at the development leasing that we signed several in the 52,000 to 80,000 several in the 100,000 to 250,000 and obviously, the largest one the 739,000. But we continue to see activity across all those size ranges. And I would add that from a rent spread standpoint we're definitely seeing more traction on under 200,000-square-foot spaces than we are on some of the larger spaces.

[Jojo Yap, Chief Investment Officer]

And to add to what Peter said one of the reasons for that is that there's less building in the under 200,000-square-foot spaces. And therefore supply is more limited and so tenants have fewer choices and they have very few -- they have pretty much a limited choice, but to pay higher rents.

[Rich Anderson, Mizuho Securities]

Right, and so, is that a probable change that you've noticed in the past year, that sub-200,000 sort of number that you just described?

[Chris Schneider, Senior Vice President, Operations]

Yes. If you look at even the first quarter results, under 200,000 square feet we saw -- rental rate increase was about 9%. And over 200,000 square feet was about 7%. So, about a 200 basis point spread in the smaller spaces.

[Rich Anderson, Mizuho Securities]

Thanks very much.

[Operator]

Your next question comes from the line of Ki Bin Kim with SunTrust.

[Ki Bin Kim, SunTrust]

Thanks. So did I hear you guys right that, you got most of the invested capital back in your land in Phoenix already? And on top of that you already have 300 million, land that's already left?

[Peter Baccile, President & Chief Executive Officer]

Yes. That's true.

[Ki Bin Kim, SunTrust]

300 acres, sorry.

[Peter Baccile, President & Chief Executive Officer]

Yes. The venture has 90% of its invested capital back. And we continue to own the 309 acres.

[Jojo Yap, Chief Investment Officer]

Yes. We're about 60% -- we still own about 60%.

[Ki Bin Kim, SunTrust]

That's pretty impressive. So, does that mean anything for percentage-wise if you want to develop versus funding more parcels?

[Peter Baccile, President & Chief Executive Officer]

No. I think again, we have had an idea of what we wanted the mix to be. We knew that execution on that mix was not going to be even, I guess is the word I'm looking for. And the fact that we are now going through the land component of it on a pretty quick time frame it thrills us because now we can focus on the rest.

[Jojo Yap, Chief Investment Officer]

And our focus is again like we said in initial plan is maximization of value, creation of value, and then spread over land sales site development and build-to-suits.

[Peter Baccile, President & Chief Executive Officer]

Yes. We're not in the land speculation business. We came into this project because we had an opportunity to have a very strong position in what we think is the best submarket there in Phoenix and it's all working according to plan.

[Ki Bin Kim, SunTrust]

And now you're playing with house money right? So, second question is a little bit bigger picture. Obviously Industrial has done really well. Everyone knows that. How do you guys go about trying to be better -- trying to do better in the market where you're located?

And how does that direct your attention to investing more in systems processes or people to do better than the market? And things like if you get a 20% spread in a certain market how do you try to inform yourself a little better so that maybe you have conviction that you can get 25% and things like that?

[Peter Baccile, President & Chief Executive Officer]

Yes. You're really talking about the strength of the platform and the breadth of our platform Ki Bin. We felt there's a lot of things that go into the mix. Our customer service certainly goes into the mix. Being in constant contact with our tenants is very, very important.

It allows us to see down the road a bit, and to try to anticipate what's coming in terms of not only supply and demand but their needs. And you mentioned technology. And we're obviously focused on that as well. We are a real estate company. And that's going to be our business. And that's we're going to focus most of our time obviously but the other components are also important.

[Ki Bin Kim, SunTrust]

All right, thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of Michael Muller with JPMorgan.

[Michael Muller, JPMorgan]

Hi. Just two questions here, I think you said that development cap was $475 million. I guess the first question is has that number gone up? I seem to recall I thought it was a little bit lower.

And the second question is, can you remind us what do you typically underwrite for development lease-up? And -- say over the course of the past year or so where has it been actually running relative to that?

[Peter Baccile, President & Chief Executive Officer]

Okay. So I'll handle the first part on the cap. So the cap's $475 million, we did raise that in -- from $325 million in January of 2018 so a little bit over a year ago. And today we've got about $245 million of capacity under the cap.

[Jojo Yap, Chief Investment Officer]

And in terms of lease-up time we've -- we continue to underwrite a one-year downtime from substantial completion of construction. And on average we release it well before that.

[Michael Muller, JPMorgan]

Okay. Is well before that, nine months, six months I mean just rough ballpark?

[Jojo Yap, Chief Investment Officer]

Six months for the year, that will be the range. I can’t give you the exact a number.

[Michael Muller, JPMorgan]

Got it, okay. That was it. Thank you.

[Operator]

Your next question comes from the line of Bill Crow with Raymond James.

[Bill Crow, Raymond James]

Hey! Good morning guys. Just a quick question from me, when you set aside the industrial rates and you look at the other developers out there, any change in pace in development?

Are you seeing new merchant builders or new parties come to the table given the success that everybody's having in Industrial?

[Peter Baccile, President & Chief Executive Officer]

Yes. Sure, I'll start and then I'll turn it over to Jojo for more color. But the amount of capital that is looking for a home in industrial continues to grow significantly. There are some new players in terms of merchant builders, but the large -- the predominance of the growth is in demand for capital to come into the space. And that definitely impacts the market. It impacts land values. It impacts transaction pricing and ultimately it impacts the margins that we can all earn on the projects that we pursue. Jojo?

[Jojo Yap, Chief Investment Officer]

Yes. And just to add to Peter, foreign capital and foreign acquisitions of entities and the expense in those entities through additional investment. So that's a -- over the past couple of years, there's been acceleration to that.

[Bill Crow, Raymond James]

Yes. And that's pushed cap rates down as you said Peter, it's pushed margins on development up and too much of a good thing can be a problem. You're just not seeing that yet, I guess, not that many new developers coming on that might threaten to overbuild the market.

[Peter Baccile, President & Chief Executive Officer]

Well, I think -- again, it's a very submarket oriented analysis. There are markets where it's easier to get entitlements. We don't happen to participate in those markets now. And in the markets where it's tougher that really does put a covenant on the pace with which that money can get invested. So when you look at the prospect or the potential of overbuilding, again in a higher barrier market, that's a tougher thing to do. Just by definition, higher barrier, there is less land, it costs more entitlements take longer et cetera. So it's -- I call it a tale of two cities, but it's very much submarket by submarket based.

[Bill Crow, Raymond James]

Okay. Appreciate it. That’s it for me.

[Operator]

[Operator Instructions]

And there are no further questions at this time. I'd like to turn the call back over to Peter Baccile for any closing comments.

[Peter Baccile, President & Chief Executive Officer]

Thank you, operator and thank you all for joining us today. Please feel free to reach out to Scott or Art or me with any follow-up questions and we look forward to seeing many of you at NAREIT in early June. Have a great one.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.