First Industrial Realty Trust Inc

NYSE:FR

Earnings Call Analysis

First Industrial Realty Trust Sees Record Growth

First Industrial Realty Trust closed 2023 on a strong note with record cash rental rate growth, forecasting continued strong performance into 2024 with an expected growth of 40-52%. Previously executed long-term leases and new tenant agreements in strategic locations like Baltimore, Chicago, and Orlando have bolstered their portfolio. The company has also adeptly managed investment activities with key acquisitions amounting to $37 million and dispositions totaling $125 million, aligning 95% of rental income with their 15 target markets. Reflecting confidence in their financial standing, the company has increased their dividend by 15.6%, offering $0.37 per share for the first quarter of 2024. The solid AFFO achievement of $289 million or $2.13 per share in 2023 surpassed their original Investor Day projections.

Sound Financial Performance with Promising Guidance

The company has forecasted a steady Funds From Operations (FFO) per share range of $2.56 to $2.66 for the upcoming year. This figure is exclusive of certain expenses, namely a $0.02 per share or approximately $3 million cost related to immediate accounting recognition of equity-based compensation for tenured employees. When these additional costs are considered, the FFO per share is estimated to lie between $2.54 and $2.64.

Strong Market Position and Occupancy Rates

Optimism shines through as the company eyes a high average occupancy rate of 96-97% for the end of the quarter. A notable drive behind this metric is the expected 8-9% same-store Net Operating Income (NOI) growth on a cash basis, which the company has credited to an uptick in both new leases and renewals, alongside inherent rental rate increases within existing contracts.

Controlled Expenses Adding to the Profitability

Despite expecting a minor capitalization of interest amounting to roughly $0.05 per share, the company has been prudent with its General & Administrative (G&A) expenses, laying out a guidance range of $39.5 to $40.5 million. This again encapsulates the aforenoted atypical expense due to equity-based compensation for certain employees.

Rising Tenant Interest and Leasing Activity

The latest trends have shown an escalation in leasing activities, particularly for midsized spaces in various regional markets. Higher levels of urgency from tenants in making leasing decisions have been observed, although there remains a degree of caution. Nonetheless, this uptick is a positive sign and could reflect in increased same-store NOI growth.

Projected Rental Rate Growth

Prospects for rental income seem robust, with the company baking in a growth rate of 40% to 52% for cash (capital) rental rates within their operational guidance. This figure aligns well with prior performance trends and projections, showing confidence in capturing future market rent growth.

Improving Market Conditions and Development Quality

The company is navigating an improving market landscape with less volatility and gradually building economic confidence, which bodes well for future leasing and development prospects. Furthermore, the company emphasizes the high quality of their new developments, positioning them within the top tier in terms of both quality and functionality – likely aiming at capturing premier tenants for these spaces.

Positive Market Indicators Supporting Growth

Recent industry activities such as a 20% increase in productivity and growing trade activities like truck freight are indicative of a recovery and an overall positive economic momentum. These could be early signs of increasing GDP growth and could lead to further restocking of inventories by retailers, thereby impacting the company's leasing activities positively.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the First Industrial Realty Trust, Inc. Fourth Quarter Results Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead.

[Art Harmon, executive]

Thanks very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our quarter and full year 2023 results and our initial '24 guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects.

Today's statements may be time-sensitive and accurate only as of today to date, February 8, 2024. 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 will open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management.

Now let me hand the call over to Peter.

[Peter Baccile, executive]

Thank you, Art, and thank you all for joining us today. And thank you to all of the members of the First Industrial team who navigated a challenging 2023 to once again produce some great results. We delivered another record year of cash rental rate growth on new and renewal leasing, and have laid the groundwork for another strong year in 2024. We executed on both sides of the transaction ledger with attractive new investments and impactful sales. We finished the year with some key leasing wins in our in-service portfolio and our development.

Moving now to the broader industrial market. The increased level of tenant traffic we saw towards the end of 2023 and has continued into 2024. With the overall economic picture and interest rate environment becoming a bit more clear and with slightly lower market volatility, more businesses are revisiting their space needs for growth. On the supply side as you know, starts nationally ramped up in 2022 and early 2023, to meet customer demand, driving national vacancy to around 5%, still low by historical standards. Those projects have made and are making their way into inventory, with completions for 2023 totaling 487 million square feet compared to net absorption of 239 million square feet, according to CBRE. Importantly, the market has responded to this imbalance appropriately with new [ starts ] down around 2/3 from the peak.

Within our portfolio, broader activity has resulted in several signed leases in both our in-service portfolio and new developments. We're pleased to announce 2 big long-term leasing wins in Baltimore. We leased 100% of the 644,000 square foot Old Post Road asset to a government-related 3PL and 50% of our neighboring 349,000 square foot asset.

In our development portfolio, inclusive of our Phoenix joint venture, we signed a total of 651,000 square feet of leases since our last call. In the fourth quarter, we signed a 209,000 square-foot lease at our First Park 94 Building in the Kenosha submarket of Chicago. We also signed a 26,000 square foot lease at our First Loop Development in Orlando. So far, in 2024, we signed a 40,000 square foot lease at our First 76 Logistics Center in Denver. Also, in our Phoenix joint venture, we signed 2 leases at the 376,000 square-footer to bring that building to 100% leased prior to completion. We've now fully leased 2 of the 3 JV buildings with the third slated to be completed in the second quarter.

For the developments we placed in service in the third and fourth quarters of 2023 that are not currently fully leased, we have approximately 240 basis points of occupancy opportunity. We're seeing prospect activity at most of these assets, so we hope to have more progress to report throughout 2024. As I mentioned in my opening remarks, we set a new annual record for cash run rate increase for new and renewal leasing in 2023 of 58.3%. 2024 is also off to a good start. To date, regarding lease signings related to 2024 commencements, we've taken care of 53% by rental income at a cash rental rate change of 39%. We have a few leasing opportunities within our Southern California portfolio over the balance of the year, which we expect will bolster this metric.

Overall for 2024, we're currently forecasting cash rental rate growth on new and renewal leasing of 40% to 52%. Moving now to the investment side. We brought home a few attractive deals during the fourth quarter for an aggregate purchase price of $37 million. In Southeast Houston, we added a fully leased 54,000 square foot building at our Energy Commerce Business Center assets. With this addition, we now own all 5 buildings totaling 676,000 square feet in this well-located park with frontage on Beltway 8. We also completed a sale-leaseback transaction for a 69,000 square footer in the Inland Empire West. Longer term, this investment provides us an opportunity to build a new 175,000 square foot building on the site when the lease expires. Lastly, we acquired a 9-acre land site in Orlando for which we have a build-to-suit tenant in tow for a 112,000 square foot project. Our total investment, including the land, will be approximately $21 million, and the tenant is expected to take occupancy in 2025.

Moving now to dispositions. In the fourth quarter, we sold 785,000 square feet for $64 million. The largest sales were 2 buildings in Cincinnati for $23 million and a 264,000 square-footer in Central PA for $21 million. For the year, we sold 1 million square feet, plus 2 land sites for a total of $125 million. With these property sales, we ended the year with 95% of our rental income in our 15 target markets, meeting the goal we laid out at our 2020 Investor Day and 57% in our coastal markets, which exceeded the 55% high end of our target range. Scott will update you shortly on how we performed on our $260 million AFFO opportunity. Thus far in 2024, we closed on a 5-building 278,000 square foot sale in Cincinnati for $33 million. For the full year 2024, we expect sales of $100 million to $150 million.

Regarding our dividend. Given our performance and outlook for growth, our Board of Directors have declared a dividend of $0.37 per share for the first quarter of 2024 or an annualized rate of $1.48. This represents a 15.6% increase from the prior rate and a low payout ratio of approximately 70% based on our anticipated 2024 AFFO as defined in our supplemental.

With that, I'll turn it over to Scott to provide additional details on our performance and our 2024 guidance.

[Scott Musil, executive]

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.63 per fully diluted share compared to $0.60 per share in 4Q 2022. For the year, NAREIT FFO per share was $2.44 compared to $2.28 in 2022. Excluding $0.02 per share of income related to the accelerated recognition of a tenant improvement reimbursement associated with a departing tenant, 2023 FFO share was $2.42.

As a reminder, our fourth quarter and full year 2022 results included $0.01 per share of income related to the final settlement of insurance claims for damaged properties. Excluding this impact, fourth quarter and full year 2022 FFO per share was $0.59 and $2.27, respectively.

Our cash same-store NOI growth for the fourth quarter, excluding termination fees, was 7.2% and for the year, it grew 8.4%. Our 2023 results were driven by increases in rental rates on new and renewal leasing, rental rate bumps embedded in our leases and lower free rents were, partially offset by slightly lower average occupancy and an increase in real estate taxes. We finished the quarter with in-service occupancy of 95.5%, up 10 basis points from the prior quarter held by leases in Baltimore and Chicago, partially offset by developments placed in service.

Now we'd like to take a moment to recap our $260 million AFFO opportunity that we laid out at our 2020 Investor Day. We discussed the opportunity to grow our AFFO as defined in our supplemental the $260 million or $1.97 per share, on a steady-state basis by fiscal year 2023. Including the $41 million potential NOI impact related to the funded portion of our on-lease developments, our 2023 AFFO approximates $289 million or $2.13 per share, which is well above the opportunity we discussed in our 2020 Investor Day.

Before I review guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in 2 of our bank loans. Also, with our planned 2024 asset sales that Peter discussed, and our expected excess cash flow after capital expenditures and dividends, we will have sufficient funding to complete our developments and process. Moving on to our initial 2024 guidance for our earnings release last evening.

Our guidance range for FFO is $2.56 to $2.66 per share. Note that guidance excludes approximately $3 million or $0.02 per share of accelerated expense related to accounting rules that require us to fully expense the value of granted equity-based compensation for certain tenured employees. Including this $0.02 per share of expense, our NAREIT FFO per share guidance range is $2.54 to $2.64. Key assumptions for guidance are as follows. We are projecting quarter-end average occupancy of 96% to 97%. The same-store NOI growth on a cash basis before termination fees of 8% to 9%, primarily driven by increases in rental rates on new and renewal leasing, and rental rate bumps embedded in our leases.

Note that the same-store calculation excludes the 2023 tenant reimbursement that I discussed earlier. Guidance includes the anticipated 2024 costs related to our completed and under construction developments at December 31. For the full year 2024, we expect to capitalize about $0.05 per share of interest. Our G&A expense guidance range is $39.5 million to $40.5 million. This includes the roughly $3 million in additional expense I referred to earlier. We expect first quarter G&A expense to be higher than each of the remaining quarters. Lastly, guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or repayments nor the potential issuance of equity after this call. Let me turn it back over to Peter.

[Peter Baccile, executive]

Thanks, Scott. Thanks again to my teammates for all of their efforts in 2023. We're excited about the opportunity to drive cash flow growth by continuing to capture market rent growth in our portfolio from new and renewal leasing, the embedded NOI opportunity within our completed, and in-process developments and from our annual escalators in our leases. Also, we are well positioned with coastally oriented land sites that can be put into production and provide attractive risk-adjusted returns as market conditions warrant.

Operator, with that, we're ready to open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Vikram Malhotra.

[Unknown Analyst]

This is George on for Vikram. Can you walk us through your thoughts on further lease up? And in which markets have you seen any signs of weakness and strength?

[Peter Baccile, executive]

I think you asked if we can comment on leasing prospects and weaknesses and strengths across markets, is that right?

[Unknown Analyst]

That's correct.

[Peter Baccile, executive]

Okay. Peter, do you want to?

[Peter Schultz, executive]

Sure. This is Peter Schultz. Generally speaking, we've seen an increase in activity in tenant [indiscernible] in the last 60 days or so from the second half of last year. Activity, broadly speaking, is better in the smaller or midsized spaces. And that's relative to which submarkets and markets those are in. As an example, in Denver and South Florida, that might be 50,000 feet and under. In Pennsylvania and Nashville, that's 300,000 to 500,000 feet. Jojo, I'm sure we'll have some comments about California for you. We've also seen a higher level of urgency, in some cases, from some tenants making decisions where, although I would say a lot of tenants still continue to be somewhat cautious and methodical about their decisions. But we're encouraged by the level of activity that we're seeing today. Jojo do you have anything you want to add to that?

[Johannson Yap, executive]

Yes. Thanks, Peter. So in the last 60 days, activity, tour activity, proposed activity has increased over Q4 '23. And what I'd just like to add to is the major companies that are touring in both 3PLs I would say, general retail, wholesale, food and beverage, e-home and manufacturing and all other related.

[Unknown Analyst]

That is helpful. And just a follow-up for me. What trend spreads are baked into the guidance? And where do you see overall market rent growth this year?

[Peter Baccile, executive]

I'm sorry, the first part of your question?

[Art Harmon, executive]

In the guidance, which is the 40% to 52% cash [ capital ] rental rates we articulated in our script. So a midpoint of 46%.

[Peter Baccile, executive]

Rent growth in '23. So we, at the beginning of '23, expected to be about 5% to 10% kind of a wide range. We weren't really sure in a year where the markets were moving quite a bit with a lot of volatility. It ended up, our rents grew in our portfolio about 8%. So we're right in the middle of that range. For 2024, we're looking at rent growth that approximates inflation plus 1 point or 2. So say, 3% to 5% is our expectation.

[Operator]

Next question comes from Ki Bin Kim with Truist.

[Ki Bin Kim, analyst]

Congrats on leasing up Old Post Road. I know that was your favorite [indiscernible] project. So turning to your Inland Empire projects. I think the last time we spoke, you talked about for all your projects, you had about 1 or 2 prospects with the obvious challenge being that these tenants have multiple options. So could you just provide an update on the tenant demand that you're seeing in that market? Perhaps how you're calibrating leasing strategy? And just overall, like how should we think about the pace of lease-up?

[Peter Baccile, executive]

Yes. I will start and then Jojo will talk more about SoCal, in particular. This year, honestly, is a difficult year to project. The pace is tough to call. We're in this period of time now where we think things are improving. Less market volatility, a little bit more confidence inspiring economic data coming out. What I mean by that is it's easier for potential tenants to begin to make decisions about what would be rather large investments, if they take down larger properties. So all that's good. The difficult part, Ki Bin, is deciding what the pace of that activity is, with respect to the activity turning into Inc. So that's part of the challenge for us this year and the projection. And Jojo, you can talk more about traffic.

[Johannson Yap, executive]

And so in term of, in Q4, there's quite a bit of oil completions that exceed absorption. So the market is digesting through the additional supply. Some of the positive things that we're seeing in the market right now is that if you look at the productivity in the last 4 months of '23 compared to the last 4 months of '22, it actually increased by 20%. So that's, if that continues, then there's definitely going to be a little bit more activity. Recently, trade activity -- when I say trade, truck freight activity has been increasing. We think we are recovering from the bottom. So that's clearly a side of maybe a little bit of a positive GDP growth, a little bit positive impact from maybe retailers restocking their inventories.

So that's what we're looking at. At the end of the day, if you look at our assets, I would say, I won't go through each one of them, but I would say that in each of our new developments, in each of the submarkets, they are top tier. I would say, in terms of quality,and functionality, they're about top 15%. Maybe top 10% even on some of the submarkets. But -- so we're focused on trying to lease them on.

[Ki Bin Kim, analyst]

Okay. And, on the G&A guidance of $40 million and the accelerated equity investing, I just want to understand that a little better. Are these equity programs like a multiyear program? So next year, that $3 million portion won't repeat?

[Scott Musil, executive]

[indiscernible] the program we have in place is very similar to other companies for tenured employees. So basically, once they reach certain milestones, age, years of service, equity awards are expensed immediately for accounting purposes. I would say specifically, the $3 million charge that we assume this year, we're not going to incur that in 2025. And in fact, probably a lot of that is going to reverse. So that's going to be the impact of that $3 million on a go-forward basis.

[Operator]

The next question comes from Rob Stevenson with Janney.

[Robert Stevenson, analyst]

Can you talk about current trends in material labor pricing? And how the next batch of starts compares to the 7.4% cap and 38% to 48% profit margin on the current 6 projects under construction?

[Peter Baccile, executive]

Jojo you want to take that?

[Johannson Yap, executive]

Yes, I can take the construction pricing part. So if you look at the middle of last yearn '23, overall prices material and labor prices came down anywhere from 5% to 8%. Our view is that in 2024 first half, it will be flat outside of any supply [indiscernible]. It's going to be flat or even kind of declining. But we're not underwriting that. We're underwriting inflationary in any of our [ unrelated ] development projects. And right now, we have nothing new to announce but that's the trend of construction material and labor prices. In terms of just supply chain and materials, it's better. The environment right now is better, much better than last year, in terms of getting materials. Everything now is really coming into schedule except this year. And that's basically, a lot of is due to the supply cliff that the industry is facing right now, record low development starts.

[Peter Baccile, executive]

And with respect to your question on margins, I.f you look at our portfolio of opportunities, so the landholdings that we have, the entitlements that we have, et cetera, it's a very large investment opportunity. That has taken as a portfolio, will yield 7% or better, and that's being underwritten at today's rate. So significant margin opportunity there.

[Robert Stevenson, analyst]

Okay. That's helpful. And then now that the Baltimore assets are largely leased, where is the biggest vacancy upside beyond just the recently developed projects and those under constructions? And any known move-outs of consequence in '24, '25 at this point?

[Peter Baccile, executive]

Chris, do you want to take that?

[Christopher Schneider, executive]

Yes. As far as known move-outs, we've got 3.1 million square feet still growing in 2024. And there's no significant -- no move-outs in that population.

[Robert Stevenson, analyst]

And any sort of vacancy targets in the stabilized portfolio that you're looking to lease up at this point? Or is that all just little pockets here and there of vacancy beyond the development pipeline?

[Scott Musil, executive]

I'll take that, Rob. It's Scott. There's a couple of leases that we do have budgeted forecasted for a couple of hundred thousand square feet that are scheduled to lease up this year. So that's in the core portfolio, so not development.

[Operator]

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

Just wanted to follow up, I guess, on that last question, the last bit there. Scott, what's embedded in the guidance in terms of additional lease-up and commencements related to the developments that are completed, and that are not in-service that will be transitioned into service during 2024? Is there anything embedded in the terms for those projects?

[Scott Musil, executive]

Yes. So we have 2.8 million square feet budgeted in our guidance related to development lease-up. I would say half of that relates to developments completed in 2023 that are scheduled to lease up in '24, and the other half of that are the not fully leased developments we placed in service in 2023. As far as timing is concerned, 1.4 million square feet is scheduled to lease up in the second quarter with the remaining 1.4 million square feet scheduled to lease up in the back end of 2024.

[Todd Thomas, analyst]

Okay. That's helpful. And what's the timing for the commencements at both 400 and 500 Old Post Road with those leases signed? And at 500 Old Post Road, I was just wondering, I know it was a lengthy process there. But did anything change with regard to rent or the roughly, I think, 25% mark-to-market? Was that consistent with everything that you originally anticipated? Or were there any changes?

[Peter Schultz, executive]

It's Peter Schultz. So the commencement date for the lease at 500 Old Post Road was in December of 2023. The commencement date for the half of 400 Old Post is scheduled to be in the first quarter of 2024. In terms of the economics for 500 Old Post Road, we did better than the mark-to-market that we described in earlier calls. So we were pleased with that result. And yes, it certainly took a long time and torturous path dealing with the government and all that. But we did not reduce any of our terms rates or economics through that process. The mark-to-market on the smaller space was better yet again, than we did on 500 Old Post Road.

[Todd Thomas, analyst]

Okay. Great. And just lastly, just one question, I guess, back to the accelerated expense for the noncash comp is, also all of that is expected to be realized in the first quarter. Is that right? And then I think you said that the expense will be reversed in the future. Can you just explain real quick the accounting treatment for that expense and the corresponding shares. How that will work?

[Scott Musil, executive]

So the $3 million that we spoke about in the script, that's going to be ratably expensed over the 4 quarters, okay? Now we have other tenured employees that were tenured last year and are tenured this year that are getting expensed as well in the first quarter of 2024. And that's what's causing, we think G&A in the first quarter of 2024 to be about $3 million higher than what it's going to be per quarter for the remaining quarters. As far as the reversal is concerned, coming in 2025, we really don't have any folks that are reaching this tenure, so we're really not going to have any additional expense. But when you work through the math through the vesting process, the vast majority of the $3 million that we talked about is basically not going to be incurred next year. So it will cause a reduction in our G&A. Does that clarify it Todd?

[Todd Thomas, analyst]

I think so. So all else equal, if G&A outside of the comp plan is unchanged. G&A in '25 would be lower by roughly $3 million year-over-year?

[Scott Musil, executive]

That's correct. Plus whatever increases in costs are in 2025. So that's correct. Yes.

[Operator]

Next question comes from Craig Mailman with Citi.

[Craig Mailman, analyst]

Just looking at the development pipeline, it looks like the expected yields picked up a little bit, quarter-over-quarter. At the same time, kind of rent to the [indiscernible] are softening up and free rent concessions are rising. I'm just trying to get a sense of how you guys are looking at kind of underwritten rents? And maybe walk us through kind of how those underwritten rents or when the time period of those rents were and maybe that's why yields are moving? Or just kind of how you guys are thinking about that?

[Peter Baccile, executive]

Jojo?

[Johannson Yap, executive]

Craig, this is Jojo. First of all, there's a change in mix, number one. Second of all, these are all adjusted for what we think we can get in the market today. So we always adjust them every quarter. And in terms of, we didn't change the market cap rates although we think that Q1 to Q2 this year will be better than second half of last year. So no change in that.

[Craig Mailman, analyst]

Okay. I mean, are you guys, what's the competition like it sounds like you do have good activity on stuff in the IE? But kind of what is pricing looking like given the competition from other developers out there who also have the lease space kind of how is that trending?

[Johannson Yap, executive]

So when you look at our development, so for example, right now, development is completed, done in service in [indiscernible], we have 83,000 footer there. That's kind of a unique asset about 45% [ AAR ]. So we're not really competing with anybody there. What we need to look at getting there as tenants is going to use that facility. And in residence, we have a 460,000 square footer. If there is a 400,000 square footer user out there, we look in the market for across that with this kind of functionality and clear hike, especially nothing there. So it's hard to kind of compare. We've got a really great asset there. But we have 3 buildings that are going to be finishing off in Paris. It is still under construction. That's the market, I would say, we would have about 2 to 3 buildings compared it with each of the buildings there. So there's a lot of talk about rents clearly have come down 5% to 10% in Q4 of last year, but the comps are not supporting it. But the tenants are choppy.

[Craig Mailman, analyst]

Okay. And I think, Peter, I've asked you this in the past, just going forward from a just risk mitigation standpoint, you guys have the spec cap, but just how do you think about an optimal mix of maybe adding in a higher level of [indiscernible] complement kind of some of the bigger spec that you guys do?

[Peter Baccile, executive]

Yes. We are in the market for build-to-suit on a pretty regular basis. We're looking to deploy the land that we have at the highest risk-adjusted returns. And sometimes, that will mean build-to-suit and sometimes it won't. I think while we expect to do more build-to-suits, the mix build-to-suits and specs probably not going to change meaningfully, Craig, going forward. And our holdings are in, let's just say, very high barrier coastal locations. So the spec business in those markets is obviously much, much better than it would be, say, in the Inland sites in the country.

[Craig Mailman, analyst]

Okay. That's helpful. And then maybe if I could sneak one more in. Scott, could you just walk through kind of the difference between the kind of the 8% to 9% same-store and how that translates into kind of 7% FFO growth?

[Scott Musil, executive]

Sure. So we gave a midpoint of 8.5% on same-store. What's happening though in 2024, Craig, is on the interest expense side, we're incurring more interest expense, two reasons there. Our average indebtedness is scheduled to be higher in 2024 compared to 202. And then two, the weighted average interest rate in '24 is going to be slightly higher than what it was in 2023. So that's the main driver of the offset to that same-store.

[Operator]

The next question comes from Nick Thillman with Baird.

[Nick Thillman, analyst]

Maybe wanted to touch a little bit on the investment sales market and kind of what you're seeing there, like who are the buyers? And then are you seeing any differentiation between portfolio deals and just single asset deals?

[Peter Baccile, executive]

Jojo you want to talk about that?

[Johannson Yap, executive]

This is Jojo. So in terms of the investment market. Q4, obviously, in 2023 was very slow actually Q3 and Q4. But today, in terms of investment markets, there's been -- there's continued demand for every kind of buyer as we see in 2022 or 2023. Institutional, private users, the investment market, their users are buying investors in private and institutional. So with regarding the capital markets today is that since the interest rates have been, started to become more stable, more funding now. There's more interest capital markets people, when I say that the major brokers are getting more offers today on products they put in the market. significantly actually more players than the second half of '23. So the market seems to be -- in terms of investment appetite for investors to increase quite a bit.

[Nick Thillman, analyst]

That's helpful. And then maybe just, you guys seem a little bit more optimistic on the outlook here for 2024, but maybe give some more commentary on big box demand and maybe appetite for multi-tenanting some of these developments that are vacant that have been placed in service. You guys mentioned like some of the sweet spots are in the small to midsize areas in Nashville and Denver. But just wanted to get some commentary there?

[Peter Baccile, executive]

Peter you want to cover off the Denver multi-tenant?

[Peter Schultz, executive]

Sure. So I would say, again, the demand for the largest spaces, so 1 million up in most markets has been softer. As I said earlier, smaller and midsized better. My comment was South Florida and Denver, 50,000 feet and under. Nashville and Central Pennsylvania kind of 300,000 to 500,000 square feet. As I think we've talked about on prior calls, most of our, if not all of our buildings are designed to be multi-tenanted. And that flexibility is something we focus on. It's slightly endeavor that both buildings we have there will be leased to multiple tenants as opposed to single tenants that we've seen over the last several years. We see that similar dynamic in Florida. As you know, our building in Pennsylvania, the 700,000 feet we've already at least half of that. So I think it will be a mix. But definitely, we're seeing and the market is seeing more activity for multi-tenants or smaller midsized space. Jojo, anything you want to add to that?

[Johannson Yap, executive]

No. Looking [indiscernible] that, again, I want to emphasize, all our buildings are designed to be multiheaded our larger buildings, we could access them almost every time the lower size secured [indiscernible] and all that. So it gives us a lot of flexibility.

[Operator]

The next question comes from Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

Actually, I think my questions were answered. I was just really going to ask about activity levels on some of the larger developments and just kind of what you're seeing today compared to 2 or 3 months ago? And I guess, how real do the discussions feel?

[Peter Schultz, executive]

Mike, it's Peter Schultz. I would say, again, the activity is better. Engagement is better. Decision-making across some prospects has demonstrated a little bit greater urgency, but I would say most are still proceeding cautiously. So while there's a lot of activity under the surface, tenants still need to be deliberate in making their decisions to move forward. As Peter mentioned earlier, the commitments for tenants, particularly for large buildings, it's a lot of money when you have one of these large buildings. And like we've seen with elevated construction costs previously, they're seeing elevated costs and some of those material handling equipment. So it's a slower decision, and that's partly why we're seeing much better activity and faster decision-making on the smaller midsized tenants.

[Operator]

Next question comes from [ Michael Carroll ] with RBC Capital Markets.

[Unknown Analyst]

Cindy on for Mike. I guess, just a quick question. Apologies if I missed this, but how much of the remaining 2024 leasing is in Southern California?

[Peter Baccile, executive]

Chris, do you want to cover that?

[Christopher Schneider, executive]

Yes. There's actually a higher percentage in Southern California. Remaining in 2024. If you look at the top 3 rollovers in 2024, our in Southern California. And we assume in our guidance that 2 of those 3/10 will renew.

[Unknown Analyst]

And where do, just, I guess, where do you think spreads would be for that renewal?

[Christopher Schneider, executive]

We expect both of those rental rate increases would be 100% or more.

[Operator]

Next question comes from Nicholas Yulico with Scotiabank.

[Greg McGinniss, analyst]

This is Greg McGinniss on with Nick. And looking at some of the 800,000 square feet vacant in Denver, understanding that you're going to be converting some of the larger spaces into multi-tenant. Can you just give us an idea of the cost of that conversion and what the expected spreads will be? Just trying to get an understanding of kind of like benefit of that increase?

[Peter Schultz, executive]

Greg, it's Peter Schultz. In our underwriting, we assumed multi-tenant. So most of those costs are covered. To the extent we demise to a couple of additional spaces, there might be some incremental cost, but it's not going to be material.

[Greg McGinniss, analyst]

Okay. And just a follow-up here on the developments. We see that you added the Orlando build-to-suit to the pipeline this quarter. We do know that tenants pulled back a bit from build-to-suits with growing vacancy and more deliveries. This increase in activity and urgency that you're seeing, could we potentially see build-to-suits kind of pick back up? Or does that feel like more of a unique situation in Orlando?

[Peter Schultz, executive]

The situation in Orlando is for a manufacturing company, that is the additional capacity because their business is growing. They're in the mechanical equipment business. So they had a real need for additional space, and we have the opportunity here to step into a deal where the sponsor was struggling with financing. So we were happy to take advantage of that opportunity. I would say more broadly speaking, and Peter can jump in on this. It depends on where you are in some markets, there's some additional supply and where return expectations may be given where the interest rate environment is, it may be less expensive for tenants to consider existing buildings. So we'll see, Jojo, Peter, anything you want to add on that?

[Peter Baccile, executive]

The only thing I'd say is that the build-to-suit as well as our acquisition in Houston are good examples of opportunities that came up because the owners couldn't raise the money. So we had an opportunity to step in there and obviously, get some good economics and add some great assets to the portfolio.

[Operator]

Our next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

Hi. Good morning, everyone. Maybe on development starts, they slowed later in 2023. So I was wondering if you could talk about your expectations for 2024 and when or under what conditions you would start some additional spec developments?

[Peter Baccile, executive]

Yes. So we do anticipate new starts this year. The level of that in terms of volume of that to be very dependent upon the leasing pace that we experienced over the next, call it, 6 months. But we do expect to have a start and I'll go so far as to say the first starts will probably be in South Florida.

[Caitlin Burrows, analyst]

Okay. Got it. And then the sale leaseback that you announced, could you give a little more detail like how long is that lease? And you mentioned that you can build, I think it was over 100,000 square feet on the site. Is that in addition to the existing building? And maybe also what the competition was for the asset?

[Johannson Yap, executive]

Sure. So the Inland Far West. So we acquired it basically just land value and the say leaseback is long term. And we can build a 175,000 square foot there. And that would be demolishing the existing building and building a new one completely new 175,000 square foot. And basically, based on our numbers today and where construction costs are and based on our land value, we think we can achieve good value creation on that new, potentially new 175,000 square feet when the lease expires. The lease right now is long term, and we will enjoy a rent from that tenant. While we have a value -- valuable asset an infill market of [indiscernible].

[Caitlin Burrows, analyst]

And anything you could say in terms of like was it a marketed dealer cost market or how that came to be?

[Johannson Yap, executive]

How that came to be? It was through a relationship just being in the market leasing space, we came about this tenant needing to monetize this corporation, needed to monetize their real estate. And so we came in, yes, off market.

[Operator]

Next question comes from Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

I think last quarter, you talked about a few opportunistic acquisitions on development projects that had capital needs or you stepped in to kind of help with funding. Are you seeing any more of those opportunistic or distressed opportunities emerge? Or do you expect those deals to continue to be few and far between?

[Peter Baccile, executive]

Yes. So we are definitely looking, beating the bushes. As I mentioned a bit ago, the Orlando and Houston deals would fall in that category. There's a lot of institutional capital looking for similar opportunities. So it's very competitive. And that just means that it's -- the opportunity is, the arbitrage opportunity is probably fleeting. There's a lot, there was a lot of money on the sidelines. A lot of that capital has come in, and so it's very competitive out there to try to bid on these opportunities.

[Blaine Heck, analyst]

All right. Great. That's helpful. And then given that development deliveries are still hitting the market at a higher-than-average rate despite the drop in new development starts. Can you just talk about whether you think there are any markets that might see significantly weaker rent growth as we look into 2024, given the rise in availability?

[Peter Baccile, executive]

No, I think it would be the traditional markets that you would think of that are less high barrier are going to have lower growth, that would be markets like Chicago, Houston, Denver, and then the coastal higher barrier markets would be the ones that are going to grow, obviously, faster.

[Operator]

Next question comes from Jessica Zheng with Green Street.

[Jessica Zheng, analyst]

Could you please provide some color around the trends you're seeing for rent concessions. Are you seeing concessions increasing in your view your markets compared to the last couple of years?

[Peter Baccile, executive]

Trends for rent concessions. Peter, do you want to start?

[Peter Schultz, executive]

Sure. This is Peter Schultz. I would say, generally speaking, rent abatement is up a little bit, where it has been less than 1.5 per month per year term trending a little bit more than 1.5 month per year term. But that would really be it. TIs are, have been higher largely because the cost is more, not really as an additional concession.

[Johannson Yap, executive]

And the only thing I'll add is that renewals has changed. And renewals, the current, the past [indiscernible] NPI has been very, very sticky, basically [indiscernible].

[Jessica Zheng, analyst]

Great. That was helpful. And then just a follow-up. I guess you mentioned you're optimistic on the SoCal markets given the 20% year-over-year increase in import volume. I was wondering, on the flip side, are you seeing that shift back to SoCal negatively impacting the East and Gulf Coast port markets at all?

[Peter Schultz, executive]

No. [indiscernible] a long time to change. Companies have diversified their supply chains to take advantage of both the East Coast and the West Coast, right? There are certainly disruptions now, as we all know, in the Suez Canal and Panama Canal. There's been labor issues on the West Coast. It will go back and forth.

[Peter Baccile, executive]

There's a labor agreement on the East Coast to be done.

[Peter Schultz, executive]

The pace of change is slow.

[Johannson Yap, executive]

And just to add to that. I mean, a major retailers or corporations have redundancy. That is one of their strategic things that they always think about. They don't usually just close one port access because something might happen in our report. So there's a lot of times, they're redundant supply chains. We don't think long term that's going to change.

[Peter Baccile, executive]

At the end of the day, companies need to be close to where their customers are to deliver their goods. That's not really going to change much.

[Operator]

The next question comes from Bill Crow with Raymond James.

[William Crow, analyst]

Peter, I'm going to pass the question along that I get regularly from investors. And that is as we look forward, call it, 18 months and the interest rates may have come down a little bit and the spreads may have eased a little bit. What's to stop us from getting back to a point where we've got 400 million square feet of construction starts?

[Peter Baccile, executive]

Yes. So there's been a big pause. Starts are way up, as you know, down about 2/3 from the peak in 2022. Here's the thing. In '21 and '22, over 500 million square feet of starts each year. And that was a direct result of the business activity around COVID, when people were just, and you saw e-commerce go from 14% of sales to over 20%. And so this huge surge in demand created that massive influx of capital, which pushed all these new starts, and that's what we're digesting now. That was the catalyst for those starts. Demand ought to be more on an upward trajectory but a flatter upward trajectory instead of that hockey stick, which should mean that capital behaves appropriately and that starts come in, in and around the neighborhood of where net absorption is. I mean that's what you would expect. I don't, we don't see a catalyst yet right now today to say, "Oh, we need another 400 million to 500 million square feet of starts each year". So that would be the way we look at that question.

[William Crow, analyst]

And so the fact that every one of the public companies is talking about ramping up starts later this year. You don't think that sort of attitude is in the private sector as much, I guess?

[Peter Baccile, executive]

That depends a lot on the financing and how they do that. If someone is going to come in all cash and worry about the debt part later, that could incur some new investment in development. Right now, construction loans are very hard to get. And when you can, they're very expensive. In fact, for the most part, it's going to make any high barrier deal impossible to pencil. And that's where we are. We're in the highest barrier markets and that's where our land holdings are. So maybe we're a bit insulated from that.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Baccile for any closing remarks.

[Peter Baccile, executive]

Thank you, operator, and thanks to everyone for participating on our call today. If you have any follow-up questions, please reach out to Art, Scott or me. We look forward to connecting with many of you in the first quarter. Take care.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.