First Industrial Realty Trust Inc

NYSE:FR

Earnings Call Transcript 2020-Q4

[Operator]

Good morning. My name is Athea, and I will be the conference operator today. At this time, I would like to welcome everyone to the First Industrial 4Q and Full Year '20 Results Conference Call [Operator Instructions]. Thank you.

At this time, I would like to turn the conference over to Art Harmon. Please go ahead.

[Art Harmon, Vice President, Investor Relations and Marketing]

Thank you, Athea. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2020 results as well as 2021 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, February 11, 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 Schultz, Executive Vice President]

Thanks, Art, and thank you all for joining us. We hope you're doing well and staying healthy. 2020 was a year unlike any other and one which we would each like to put in our very distant memory. Notwithstanding the turmoil, fear and uncertain operating environment, the FR team remained focused, executed the plan and performed admirably generating outstanding results for shareholders. Our portfolio performance was strong. We maintained high occupancy levels, grew cash rents and collected over 99% of billed rents. More on that in a moment. We capped off 2020 with an excellent fourth quarter. We delivered year end occupancy of 95.7%, up 70 basis points from the guidance midpoint provided on our third quarter call. This was driven primarily by leasing at our developments and one of our replacement tenants in Southern California, taking occupancy earlier than anticipated. For the full year, we grew cash rental rates 13.5%, which is the second highest in our company's history, just behind the 13.9% growth we achieved in 2019. These metrics reflect consistently strong tenant demand for high quality logistics space.

In our markets, we're seeing well located and highly functional space being absorbed by e-commerce and other traditional users in their efforts to optimize supply chain. The positive fourth quarter leasing statistics nationally are consistent with our own experience as CBRE's preliminary figure for net absorption is 104 million square feet, the highest quarterly result in the last four years and exceeding the 69 million square feet of 4Q completions. For the full year, net absorption was 224 million square feet, 15% higher than 2019. Completions were 265 million square feet, an increase of 10% over 2019. In 2021, we expect to capitalize on our current land holdings as well as new acquisitions to generate more growth and value creation. We're also focused on making progress in realizing the three year cash flow growth opportunity we laid out for you at our Investor Day this past November. I'm pleased to say we're off to a strong start as we've signed leases for approximately 54% of our 2021 rollovers and a cash rental rate increase of approximately 13%. This early performance is consistent with the 10% to 14% increase we expect on our new and renewal leasing for the full year 2021. Our expirations for the balance of 2021 are fairly granular, with our largest remaining rollover now a 400,000 square footer where the tenant is expected to vacate in May.

I'd like to highlight several big leasing wins on some of our developments. As evidence of the strength of the South Florida market, we're pleased to announce we have signed a long term lease for 100% of the three Building First Cypress Creek Commerce Center with a single e-commerce tenant. This project totals 377,000 square feet and the lease commenced right of completion on February 1st. Our total investment is $37.1 million and our first year stabilized cash yield is 6.6%. In the Inland Empire at our First Redwood project, we signed and commenced leases for both the 358,000 and the 72,000 square foot facilities in the fourth quarter. And just this week, we fully leased the remaining 44,000 square foot building. Given our own experience and the strong market dynamics reflected in CBRE's fourth quarter update report, which shows the Inland Empire vacancy rate at 1.9%, we're excited to be readying our next start in that market, which I will discuss shortly. Also in the fourth quarter in Dallas, we signed two leases at First Park 121 to bring a pair of buildings there to 100% occupancy. The first was for the remaining 101,000 square feet at the 434,000 square foot Building E, and the second was 25,000 square foot expansion at Building B. Each of these leases is a reflection of the continued strong demand for high quality logistics space and the effort and talents of our leasing teams across the country.

Turning to new development starts. We've broken ground on PB 303 Building C in Phoenix on our wholly owned site. This 548,000 square foot cross dock facility is our fourth speculative development in this highly sought after size range since 2017. Each of our prior projects in this market was fully leased at or near completion. Total investment for this new development is approximately $42.6 million with a targeted cash yield of of 6.6%. Turning now to the new project in the Inland Empire I referenced. We are planning to break ground in the coming weeks on First Wilson 1, a 303,000 square foot facility in the I-215 corridor of the Inland Empire. This is a $30.2 million development with a targeted completion at the end of December, and a projected cash yield of 6.3%. Lastly, we will be starting a 500,000 square foot development in Nashville, known as First Rockdale 4. The site is located within a park where we have successfully developed buildings over the years. Tennessee was among the fastest growing states in the US during 2020, and Nashville is its largest city. We've seen increased absorption and leasing activity from large distribution centers in this submarket and are excited about this opportunity. Total investment is approximately $26.8 million with a targeted cash yield of 7.2%.

Summing up our development activity, in 2020, we placed in service 10 buildings totaling 2.5 million square feet with an estimated investment of $222 million. These assets are 79% leased at an estimated cash yield of 7.2% upon full lease-up. This represents an expected overall margin of 58% to 68%, which is about $1 per share of NAV. One additional item of note regarding our highly successful JV in Phoenix. As we discussed on our third quarter call, we successfully leased the 644,000 square foot spec building at PB 303 to a single tenant. Upon completion in the fourth quarter, we negotiated the acquisition of our partner's interest in the building, reflecting a total purchase price of $42.6 million, which is net of our $5.2 million share of the joint venture's gain on sale and incentive fee.

Moving now to dispositions. During the quarter, we sold 15 properties for $97.1 million at an in-place cap rate of approximately 6.4%. In 2020, excluding the previously reported purchase option related sale in Phoenix, we sold 1.9 million square feet for a total of $153.4 million, essentially at the midpoint of our target sales guidance range for the year. For 2021, our guidance for sales is $100 million to $150 million. In the coming weeks, we anticipate selling 664,000 square foot building in Houston, at a sales price of approximately $42 million. Given its very high probability of closing, we are including the impact of this sale in 2021 guidance. Aside from the first quarter sale I just mentioned, we expect the majority of the remaining 2021 sales to be back end loaded. Based upon our strong 2020 performance and 2021 outlook, which Scott will discuss shortly, our Board of Directors has declared a dividend of $0.27 per share for the first quarter of 2021. This is $1.08 per share annualized, which equates to an 8% increase from 2020. This dividend level represents a payout ratio of approximately 69% of our anticipated AFFO for 2021 as defined in our supplemental.

To wrap it up, we had an excellent quarter to end the year on a high note. We're very excited about the strength of our platform and our future development pipeline, both of which position us well to benefit from continued strong fundamentals in the industrial market and to take advantage of the growth opportunities that are to come in 2021.

With that, let me turn it over to Scott.

[Scott Musil, Chief Financial Officer]

Thanks, Peter. Let me recap our results. NAREIT funds from operations were $0.44 per fully diluted share compared to $0.45 per share in 4Q 2019. For the full year, NAREIT FFO per share was $1.84 versus $1.74 in 2019. I'll remind you that our full year 2020 includes income related to the final settlement of two insurance claims for damaged properties recognized in prior quarters. This was partially offset by a restructuring charge and costs related to the accelerated vesting of equity awards for retirement eligible employees. Excluding the impact of approximately $0.04 per share related to these items, 2020 FFO per share was $1.80.

Now a quick update on our collection experience. We have collected 99% of the 2020 monthly rental billings every month since April and effectively, it would be 100% if we factored in reserves. We are also pleased to announce all tenants with deferral agreements had paid back those obligations in full and we currently have no other agreements outstanding. In another bit of good news, we have closure on one of our last tenants on the watch list that we discussed on our last call. This tenant occupied a 137,000 square foot building in the Chino submarket of the Inland Empire West and vacated on December 31st. Due to the great work of our Southern California team, we were able to lease 100% of the building on a long term basis with only one month of downtime at a cash rental rate increase of 28%. In the fourth quarter, we also wrote off the $1.1 million cash and straight line rent receivable related to this tenant. In doing so, we have taken care of the last material accounts receivable exposure related to our COVID related watch list.

Summarizing our outstanding leasing volume during the quarter, we commenced approximately 4.4 million square feet of leases. Of these, 700,000 were new, 1.6 million were renewals and 2.1 million were for developments and acquisitions with lease up. Tenant retention by square footage was 80.6%. For the quarter, same store NOI growth on a cash basis, excluding termination fees, was 1.3%, helped by an increase in rental rates on new and renewal leasing and rental rate bumps embedded in our leases, partially offset by lower average occupancy and an increase in free rent. For the full year 2020, cash same store NOI growth before lease termination fees was 4.4%. Cash rental rates for the quarter were up 10.4% overall, with renewals up 8.6% and new leasing 12.8%. On a straight line basis, overall rental rates were up 25.5% with renewals increasing 25.9% and new leasing up 25.1%. For the year, cash rental rates were up 13.5%, which as Peter mentioned, is the second highest in the company's history. On a straight-line basis, they were up 29.7%. Now on to a few balance sheet metrics. At December 31st, our net debt plus preferred stock to adjusted EBITDA is 4.8 times and and the weighted average maturity of our unsecured notes, term loans and secured financings was 6.3 years with a weighted average interest rate of 3.7%.

Moving on to our 2021 initial guidance for our earnings release last evening. Our guidance range for NAREIT FFO is $1.85 to $1.95 per share with a midpoint of $1.90. Key assumptions for guidance are as follows; quarter end average in service occupancy for the year of 95.5% to 96.5%; our cash bad debt expense assumption for 2021 is $2 million, consistent with last year's pre-pandemic assumption; same store NOI growth on a cash basis before termination fees of 3% to 4%; we expect our G&A expense to approximate $33 million to $34 million; guidance includes the anticipated 2021 costs related to our completed and under construction developments at December 31st, plus the expected first quarter groundbreakings of First Park PV 303 Building C, First Rockdale 4 and First Wilson 1. In total, for the full year 2021, we expect to capitalize about $0.05 per share of interest related to these developments. Guidance reflects the impact from the $42 million sale in Houston expected to close in the first quarter that Peter discussed, which could be as much as $0.02 per share of FFO impact in 2021, depending on redeployment of the anticipated proceeds. Guidance also reflects the expected payoff of $58 million of secured debt in the third quarter with an interest rate of 4.85%. Other than previously discussed, our guidance does not reflect the impact of any other future sales, acquisitions or new development starts, the impact of any future debt issuances, debt repurchases or repayments. And guidance also excludes, the potential issuance of equity.

Let me turn it back over to Peter.

[Peter Schultz, Executive Vice President]

Thanks, Scott. Before we open it up to questions, let me congratulate our team for their outstanding performance in 2020. It was a kind of year that is impossible to prepare for. There's no training for how to manage a business through a pandemic, especially one accompanied by social and political unrest, not seen in decades. The true leaders emerge during a crisis. And when they have managed well and the crisis has passed, to most, it may not have felt like a crisis at all. This is what we experienced within our company across every role in every region. So thank you, Team FR, for your commitment and dedication. I couldn't be more proud to work with such a talented group of people nor more excited about the opportunities ahead.

With that, we will now move to the question-and-answer portion of our call. We ask that you please limit your questions to one plus a follow up, and then you’re welcome to get back to the queue. So operator, please open it up for questions.

[Operator]

[Operator Instructions] The first question will come from Craig Mailman with KeyBanc Capital Markets.

[CraigMailman]

Nice job on the development leasing in 4Q and to date, and I'm just kind of curious as you guys derisk the pipeline here. I know you don't necessarily put numbers on starts, but as you're looking at the land bank and demand across your markets. What do you think a decent bogey could be on where you could be from a development start level this year?

[Peter Schultz, Executive Vice President]

As you pointed out, we don't give guidance on starts. But as you know, we can with the land that we own, build about 13 million square feet, we can build a lot more also on our JV land. And there is no reason that you should think that our development volumes won't go back to pre pandemic levels. Obviously, last year, we had a downtime of about six months where we suspended new starts. We got delayed on another project located in Philadelphia. So we're excited about the markets right now. There's a lot of demand. It's broad based. We also think that 2021, you're going to see a lot more capital expenditure into the business environment. And we're a very positive on 2021 outlook.

[CraigMailman]

And just, Scott, from a capital perspective, just with the cadence of potential spend here in the development pipeline and disposition proceeds coming in. I mean, do you guys feel good about where you are? I know you have no equity in the plan. But would you prefer to kind of use debt here in the near-term to bridge any gap, or would you guys, with where the stock is trading, could equity be ultimately in the plan?

[ScottMusil]

Equity could be in the plan, but we're sitting on about $135 million of cash as we stand today. Our line of credit is undrawn. So we have a full $725 million, and our leverage is at about 4.8 times, so we're in pretty good shape. But as you know, we had issued equity in past, if we see future investments that we really like, and we like the stock price, equity is on the table for something like that. And if you looked at the equity we've issued probably since 2015, which was more for growth, spec development, we're really happy about the development margins we earned on those investments. So even though we look in good shape as we stand today, equity is a possibility, it just depends on what our investment growth is.

[CraigMailman]

And can I slip one more in there, just on the loans you have come and due this year, kind of what timing expected on potentially the $200 million, kind of what would the plan be from a refinancing?

[ScottMusil]

The $200 million was a term loan that we refinanced last July during the pandemic. The spread popped up to 150 basis points that comes due this July. The bank market has gotten a lot better since then. We probably could shave off about 50 basis points in total spread on that. So we are looking at the bank market to refinance that. And Craig, we also have our line of credit coming due in October of this year. And if we did something with the term loan, we would package them together. On the $58 million of secured debt that we can pay off in July, we'll probably use excess cash or line of credit borrowings to pay that off.

[Operator]

The next question will come from Rob Stevenson with Janney.

[RobStevenson]

Can you talk a little bit about to any extent that the issue surrounding the shipping container capacity issues have impacted your tenants and/or the demand for increased expansion space in port markets like Southern Cal?

[JojoYap]

Yes, there is congestion in the Port of LA, Port of Long Beach, a lot of it has to do with the amount of goods coming into report, but also because of the inefficiencies in the port right now, given labor issues and then COVID related process. I would put that number one because of the COVID practices that's been extending slowing down the throughput from the container. Now the actual amount that has come into the port has increased year-over-year, but not meaningful enough to really significantly affect the market. The market in itself is already good, positive absorption in So Cal. And the marginal impact of that year-over-year, if you look at the port container throughput, it's about 5% now. It's lagged, first of the year. In the second quarter, it was negative. But then the second half of the year, it caught up as much as 15% to 20%. So net-net, year-over-year, we're about 5% up. So overall, our view is that when COVID reduces, I think the flow will come in quicker. And it will be back to normal with slightly more than inflationary adjusted growth year-over-year in terms of container volume.

[RobStevenson]

And how is that impacting your desire to develop in the Inland Empire land parcels, et cetera, in the near term?

[JojoYap]

It has actually increased because of what's happening now is that the take-up that the tenants want is actually increasing because they cannot accurately estimate the amount of goods they're getting because of the delay, they're actually ordering more. So it's rather than just in time inventory is really a severe case, just in case. So that's why, actually, in the last six months, spaces has been leasing a little bit quicker because of that just in case mentality of the tenants. They don't want to lose that sale, they're stopping up more.

[RobStevenson]

And then the other one for me is, how significant is the land purchase machine today for you guys? I mean you guys did a decent job at increasing your usable land position year-over-year and over the last couple of years. Assuming it's getting harder and harder to find developable land at prices, it makes sense for you guys. But how is that process going and what's that pipeline look like for you guys?

[PeterSchultz]

The pipeline is actually pretty robust. We're making a great many unsolicited offers on a weekly basis across the country in the higher barrier markets, which is where we're focusing our new investments. It's definitely getting more difficult. Land values, as you know, have gone up significantly and continue to rise. The good news is in those markets where land is appreciating the most rapidly, the rents are growing the quickest as well. So it justifies. The timetable for getting entitlements is not shortening, for sure. So basically, what that means is we got to have a lot more balls in the air to keep that volume going because we're going to win a lower percentage of those opportunities. But right now, the team is doing a great job fielding a lot of new opportunities.

[Operator]

The next question will come from Dave Rodgers with Baird.

[DaveRodgers]

Something in the press release, I think it was based on the same store NOI comments for the fourth quarter, talked about higher free rent. So I guess, maybe just expand upon the leasing economics that you were seeing that drove that comment and maybe whether you're seeing any of that in the development pipeline and driving some of this activity?

[ChrisSchneider]

In general, on the lease free rent concessions, we're not seeing really any changes there. We're still usually giving about half a month free rent for Europe term in the lease. So the changes in the free rent from quarter-to-quarter have to do just really with the free rent burning off on some deals, development deals. But as far as overall concessions, we're not seeing much change in that.

[DaveRodgers]

On those development deals, how much of that or when did those all commence? I mean, did those all commends essentially with signing or do you have some delayed starts in that activity?

[JojoYap]

Which development is in the Dave? Are you asking the $100 million that we've announced?

[DaveRodgers]

Yes, the 1.2 million square feet or so that you had in the press release last night, most of which I think was fourth quarter signings. I guess I'm just trying to make sure that those were signings for -- were they immediate starts or how do those stagger?

[JojoYap]

They are immediate starts because there's not a significant amount of this, and some of them were taking as is. So I’d say most of them were in 2020 then First Cypress Creek Commerce Center, that's February of this year.

[DaveRodgers]

Scott, since you spoke up. On the bad debt side, I think you gave guidance and maybe it was part of the same store of $2 million for bad debt, which was, I think, consistent with the expectation for '20 or what you delivered in '20. But why did you not expect that number to come down? Is that just kind of an overly cautious number, or is there something more specific in that?

[ScottMusil]

Nothing more specific. Our assumption on bad debt, Dave, is basically, we look at the 26 year history of the company, which is about 50 basis points of total revenues and that's how we get the $2 million. Last year, we incurred about $1.8 million of cash bad debt expense. So we're hoping we can beat that $2 million number that's in our guidance.

[DaveRodgers]

Lastly, are you guys seeing more short term lease activity? And heard a little bit about that early in the earnings season, but curious on kind of what your experience has been with that.

[ChrisSchneider]

Not really. If you look at what was in place at 12/31 between our month to month tenants and our short term tenants, it's about 200,000 square feet, so pretty low.

[Operator]

[Operator Instructions] Your next response will come from Ki Bin Kim with Truist.

[KiBinKim]

Can you just talk about how some of your conversations with your tenants have evolved over time? And what are their biggest pain points today and things being asked for?

[PeterBaccile]

I couldn't hear the last part of your question.

[KiBinKim]

So they're biggest pain points and things that they're asking for today, if that's changed at all over the past couple of quarters?

[PeterBaccile]

I wouldn't say substantially. We continue to see an increased level of confidence from our tenants. A lot of the deals that we're seeing continue to be expansions. And as Jojo remarked a couple of minutes ago, the shift from just in time to just in case in terms of inventory. We're seeing lease terms lengthen, as you saw in some of our information in the sub. So I would say, in general, continues to be positive. Jojo?

[JojoYap]

Not much change. Again, it's been happening already even for a year or two. The food related companies are more active, medical related are more active, home related also are more active. The three PLs and e-commerce has always been active. So I guess, if there's a change, it's a little bit more of broader type more indices are actually coming into because of the changes in the supply chain. But in terms of their ask, in terms of leasing and functionality buildings no change.

[KiBinKim]

And can you just talk about the R&D flex segment of your business? There's a little bit of an occupancy decline. I'm not sure if that's just transitory. And some of the pockets of vacancy that there's not much thankfully, but just some positive vacancy like in markets like Seattle or Baltimore?

[ChrisSchneider]

Obviously, R&D flex is a pretty small part of our portfolio. I think it's about 2% on net rents. The one, the drop in occupancy is really just one space. So it's obviously, we're marketing in that space, but that's really what that's from.

[PeterBaccile]

Relative to Baltimore, the occupancy level there is really a function of our vacancy at the former Pier 1 space. Leasing that space will take occupancy in that market to 98.4%, and we're seeing some activity on that space now, but nothing to report. And then Jojo can touch on Seattle.

[JojoYap]

Seattle, currently, that is only one space, about 64,000 square feet, and our portfolio is slightly over 4,000. So it's really only one vacancy, and it kind of skews the numbers in terms of occupancy. It's a good space. We just haven't found right tenant for it yet.

[Operator]

The next question will come from Michael Carroll with RBC Capital Markets.

[MichaelCarroll]

I guess, Peter, in your comments, I think you're making a comment that there's a large lease expiration in May, about 400,000 square feet where you expect the tenant will move out. Can you provide some details on that, maybe what their current rental rate is and where that asset is located?

[JojoYap]

So it's in Kansas City, very good quality property. The tenant has base told us that they will leave. And properties, again, good comparable to competition. But in terms of income, we've factored our downtime of 12 months, so it doesn't affect the numbers for this year.

[MichaelCarroll]

And then where is rents on that asset relative to market?

[JojoYap]

That we don't disclose for competitive reasons. We will report to you what happens there when we lease it.

[MichaelCarroll]

And then I guess, last question. I know that last call, there were two challenged tenants that were highlighted. And I believe that you announced the resolution to one of those. Did I miss the resolution to the second tenant, I guess, what was going on there?

[ScottMusil]

Yes, the one tenant is, I think, 45,000 square feet in the South Bay market of Southern California. That tenant is paid up and current at this point in time. So we're in good shape.

[Operator]

The next question will come from Vince Tibone with Green Street.

[VinceTibone]

As you think about potential dispositions for the year, could you see an opportunity for a portfolio deal or the way to accelerate your target market mix, given the desire of many institutions to increase their industrial exposure and scale?

[ChrisSchneider]

Vince, yes, we've looked at that. And what we've seen in the marketplace is we're able to maximize value by selling literally one off assets. The buyers of these assets tend to be about 30% go to users. And as you know, users are a little less price sensitive. So we're able to maximize value there. Another group of buyers would be the 1031 buyers who are also more focused on time than maybe paying that extra buck a foot. So we like those buyers. They're also being acquired by local and semi regional money managers and high net worth families. And given that, that buyer group is really focused on the smaller transaction, they're not really going to be interested in a few hundred million dollar portfolio. And they're really the ones that are going to pay the highest values in what we've experienced so far. So that's why we really haven't gone out with portfolios.

[VinceTibone]

And one more for me. In 2020, I'm curious, how much did leasing spreads and market rent growth defer between bulk, light industrial and flex properties in your portfolio?

[ChrisSchneider]

If you look at across, it's pretty broad-based across all the different types. I would say that actually R&D flex was a little bit higher as far as the spreads, but it was pretty broad based across all the property types.

[Operator]

The next question will come from Caitlin Burrows with Goldman Sachs.

[CaitlinBurrows]

Tenant retention on renewals was about 81% in the fourth quarter, which is similar to the full year level. So I was wondering if you could just talk about you think about what the right level is? And then also when tenants choose not to renew, what are some of the reasons, does it come down to rent or is it just expanding or decreasing the amount of space that they need?

[ChrisSchneider]

Catlin, well, typically, when we have a tenant that doesn't renew, it's because they need additional space. And given our high occupancy levels, we don't have any more space to give them. So clearly, it's in our interest to retain tenants at cost about 4 times as much to re-lease the space as it does to roll a space. And obviously, that factors into our desire to push rents as much as we can. I would say this in a really good market like we have now, retention is almost more of an outcome than a target. Obviously, in a very weak market, you want to retain. And so retention is more of your target then you want that to happen, you want that to be the outcome. So we're really working all the spaces as vigorously as we can to maximize value, and that's a combination of a lot of factors, as I've said, including rent growth and the cost to re-lease.

[CaitlinBurrows]

And then maybe on the dividend, you guys talked about how you raised it 8% in the quarter, which is higher than both the FFO growth in 2020 and the guidance for 2021. And I know that you've also talked about there was some acceleration of CapEx in 2020 to pull forward some expected spend. So I guess, what drove the decision to increase the payout ratio rather than retain more cash to reinvest?

[ScottMusil]

We grew the dividend by 8%, as we said in the press release. We grow our dividend as we grow our cash flow. As we laid out at the Investor Day in November, we think we have an opportunity to grow cash flow 9% a year for the next three years. So that's in line with that. As far as the payout ratio is concerned, it went up a couple of percentage points, so nothing material. And then we're still in the 60% level, which we're very happy with.

[Operator]

[Operator Instructions] Your next response is from Mike Mueller with JP Morgan.

[MikeMueller]

How does the 54% of the 2021 leases that you've addressed compare to the progress that you had last year?

[ChrisSchneider]

Actually, last year, I think we're right at about 59%. Historically, the last two or three years, we've been right around that 50% to 60% as far as the ones taken over by the earnings call. So pretty consistent.

[MikeMueller]

And then looking at the developments that were placed into service, there were a couple of assets in Texas that had fairly low leasing levels. I was just curious in terms of -- can you give us some color on progress there?

[JojoYap]

Let's start with Dallas. First part, 121. So we built three buildings there. We almost re-leased the largest building, and then we complete leased the second building. So we're left with one. Rough occupancy of the park is about 70s, a little bit over 70%. And so that's a multi-tenant building. We're getting inquiries. That's in the northwest part of Dallas, one of the best pieces of real estate there in terms of that size range. So we're getting increased. And we're pretty optimistic we can at least the rest. But overall, we're very pleased with the performance of the park. Now moving on to Houston, that's Grand Parkway. Now that's been a slower project. In Houston, last year, Houston had very good absorption of about net of absorption of 11 million square feet. But it also had about 16 million plus of new deliveries. If you look at Houston, the most deliberate part or submarket with the most supply was the North Park and Northwest was second. Now our project is in Katy, is part of the Northwest submarket, a little bit less. So there's a little bit more spaces there that tenants can choose from. So we're competing with some space. But again, that project has freeway frontage just off state Highway 99, really nice project. So over time, we'll lease it slowly but surely.

[Operator]

The next question is from Sumit Sharma with Scotiabank.

[SumitSharma]

I had a follow up actually, on a bad debt question that was asked a few minutes ago. I think Rob had asked this around the level of bad debt. I think it calculates around 40 basis points or 45 basis points based on 2020 reps. I'm wondering, and I understand your point about the 26 year average. But I'm trying to understand whether your higher end or lower end contemplate different levels of that debt or is it consistent across both the SS NOI ranges?

[ScottMusil]

Could you repeat the last half of that, Sumit, I didn't get that, you kind of broke up a little bit.

[SumitSharma]

What I was asking was the bad debt is that the same level that's contemplated in both your higher end and lower end of the ranges. So does that 40 to 50 basis points of bad debt, does that change between -- go up to like 30 basis points, or is it just consistent across your SS NOI range?

[ScottMusil]

That will impact the same store NOI range. So to the extent that our bad debt expense comes in lower, and I'll give you as an example. If you look from 2015 to 2019, our bad debt expense on average was $500,000 a year. That was pre pandemic. So if we were able to achieve that same level of bad debt expense in 2021, we would pick up another 50 basis points on our same store, all other things being equal. So that would increase our midpoint from 3.5% up to 4%. I think that's what you had asked.

[SumitSharma]

Yes, that's what I was asking. I was wondering whether the 4% range includes that -- implicitly calls out that assumption or not. And I think the bottom line bias was that does that 4% become 4.5% because of the bad debt, or is that already reflected in your assumptions? I think you addressed that.

[ScottMusil]

Yes. We do better than the $2 million. We should do better than the midpoint of our same store guidance, all things been equal, correct.

[SumitSharma]

I appreciate the response to the wonky question, I know. Let me ask you something more fun. One of your peers has mentioned that they're able to drive rent growth, 100 to 200 basis points in markets above the market in submarkets where they have density, which is defined as 20 or more assets in a five mile radius. So I'm not saying this. They said this. So I thought it may be worth asking you, given your density. I think you guys are pretty concentrated in the Riverside submarket in the Inland Empire and then in the Southwest or Arlington area in Dallas, those are the two spots that my work has sort of showed me. So just trying to understand whether you've seen the ability to push rents higher than the market in areas of high density of your own assets?

[PeterBaccile]

I'll start out with this and then pass it over to Jojo for his thoughts. But first of all, remember, there's 17 billion or so square feet of industrial in the United States. If you look at what each sponsor, owner entity owns, nobody owns an overwhelming percentage of that. So it's not like the major mall business, where if you own the two best malls in each town, you can effectively dictate the tenants. Our markets aren't really like that. So we think that the overall demand is so strong. Whether it's from e-commerce or more traditional users that we're going to be able to continue to grow rents at a very high rate and it's the offering, too, that matters significantly. The functionality, the quality of the functionality of the asset, the location of the asset, more so than who might own, how many assets within a five or 10-mile radius. Jojo?

[JojoYap]

Not much more to add to what Peter said, except that yes, that's why as a company, we focus, we prioritize for infill product, because when you have more infill properties, you have less supply and then you can raise rents higher than the average market, if you may, in a certain market. And I can confirm, Sumit that Arlington, we just, in general, is a Great Southwest market, it's a good market. And we like Arlington. In fact, we have product in Arlington. And the reason we invested there, too, is because it's quite in built. And we feel that overall in Arlington, maybe this is your question, that you can raise rents higher than if you're in South Dallas. And the reason is out Dallas is not infill and get more product there. So confirming your theses.

[SumitSharma]

Well, it's not a thesis, it's a hypothesis, but thanks for that data. I think your point is about market control and not being like malls is actually more, adds more clarity to it. But your infill point, I get and appreciate. I guess one last one, really quick. Contractual escalators in your leases. What are they averaging at and are you seeing any creep above the 3% range?

[ChrisSchneider]

Our overall portfolio, it's about 2.8%, that's on an annualized basis. I think that's about 98% of all of our long term leases. Certainly, some of the actual increases, we're seeing 3% plus. We are seeing that. Peter and Jojo comment a little bit more what they're seeing.

[PeterBaccile]

We are seeing the opportunity to push those rental increases on leases that are generally in the three year plus or minus range, whereas five or seven or 10, three is probably the upper limit.

[Operator]

The next question is from Jay Kornreich with SMBC.

[JayKornreich]

I guess, as you guys consider the risk that major cities may take a long time to return to pre pandemic levels. Does this inform you from a geographic perspective to consider future investments more in Sunbelt and less [Gateway] markets?

[PeterSchultz]

We certainly track movements of people. That's one of the reasons we're very intrigued by Nashville right now and Tennessee being the sixth fastest growing state in the country. When you look around and see how certain municipalities are being managed, we pay attention to that, that will matter over the long term. And people talk about California losing population. I think you have to remember that not only do people move out, but they move in. So looking at the net numbers, you'd find that the population reduction isn't huge relative to their nearly 40 million person population. So really, what we're focused on is consumption zones and movements that might change or alter, or move those consumption zones, and you're really not seeing any big trends that would cause us to shift our focus away from the markets that we're focused on today.

[Operator]

The next question is a follow-up from Ki Bin Kim with Truist.

[KiBinKim]

Just going back to the balance sheet. I think I missed some of the color you gave, Scott. But what would the kind of all in rate and duration fee for the debt you're looking to raise this year?

[ScottMusil]

So let me go over the expirations. We have a $200 million term loan that comes due in July. We have an option to extend it, but the spread on that loan is pretty high. It's 150 basis points. Because we entered into that loan during COVID, we think in today's market, we can refinance it 50 basis points inside of that rate. So 50 bps inside of that $200 million. And then the line of credit, we currently pay 110 basis points on that. We think we can knock another 10 bps off the line of credit. So those are the basically the two expirations we have this year. And then again, we've got the $58 million mortgage loan were paying off, but we've got plenty of excess cash. We have the line of credit we can use to pay that off, and that's at a rate of 4.85%.

[KiBinKim]

Now is there something that, debt investors are looking for or asking for you guys to perhaps move into a different bracket of credit spreads, whether that be issuing more unsecured bonds or I mean you're already grown your portfolio over time. So I'm not sure if size is a factor or not. But is there things that you can do or that investors are asking for that can maybe help you save a bit on interest costs going forward?

[ScottMusil]

So Kim, I would say a couple of things. I think one is, if we get a rating upgrade to BBB+ or BAA 1, that definitely impacts our spread, and our credit statistics are off the charts good. I think when you read the rating agency reports, they want to see a larger scale size of the company, they don't give us exactly what that number is, but it's probably over $1 billion or more of growth in the total value of the company. So that would definitely help. I would say from a public unsecured bond issuance point of view, we've historically been private placement issuers because the spreads in that market were inside the public market, that flip flop in the middle of this year in July. So we think we can get even more competitive spreads in the bond market than we were able to get in the private placement market. So all things being equal, if we did a bond deal today, that spread would definitely be inside of what we executed back earlier in 2020.

[KiBinKim]

And is the debt refinancing cost savings in your 2021 guidance?

[ScottMusil]

The term loan one is not. So that assumes it's 150 basis points for the rest of the year. So if we do, let's just give a hypothetical. If we're able to renew that on July 1st, that would save us about $0.5 million for that half of the year on an annualized basis, that would be $1 million. So it's a pay off of the mortgage debt to $58 million. We're getting six months of a benefit of interest savings there. And I'd like to pivot back to the Investor Day, where we said we'd get $7 million of savings from refinancing higher cost debt in the next couple of years. We're not seeing, that's going to come more after 2021. So we're really not seeing a lot of that $7 million savings flowing through 2021.

[Operator]

And at this time, there are no further questions. I would like to turn the conference over to Peter Bacilli for any closing comments.

[Peter Baccile, President and Chief Executive Officer]

Thank you, operator, and thanks to everyone for participating on the call today. As always, feel free to reach out to me, Scott or Art, with any follow-up questions. We look forward to connecting with many of you virtually and hopefully in person in 2021. Thank you, and have a great day.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect.