First Industrial Realty Trust Inc Q4 FY2022 Earnings Call

Good day, and welcome to the First Industrial Realty Trust, Inc. Fourth Quarter Results Call. I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead.

Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2022 results and our initial guidance for 2023, 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, February 9, 2023. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also on the call today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter.

Thank you, Art, and thank you all for joining us today. The First Industrial team delivered another excellent performance in 2022. We ended the year with in-service occupancy of 98.8%, and achieved an annual cash rental rate increase of 26.7% on our 2022 commencements, both our First Industrial records. The end result was an FR record-setting annual increase in cash same-store NOI of 10.1% that Scott will discuss further in his remarks. Fundamentals in the industrial real estate market continue to support further market rent growth in our target markets and within our portfolio. According to CBRE EA, industrial vacancy was 3% at year-end. Fourth quarter completion of 113 million square feet exceeded net absorption of 91 million square feet. And for the full year, net absorption was 412 million square feet versus completions of 370 million. Given this backdrop, we are off to a strong start, signing leases that commenced in 2023 at very healthy increases. As of last night, we are through 50% of this year's lease expirations at a cash rental rate increase of 33%, which is already ahead of our 2022 pace. With 4 of the 5 largest remaining lease expirations by net rent in the Inland Empire, our current outlook for cash rental rate changes for the full year 2023 is 40% to 50%. Moving to our new development activity. In Orlando, at our first loop project, we signed 2 leases totaling 126,000 square feet to bring that project to 49% leased. At First Park Miami, we also leased the remaining 66,000 square feet at Buildings 9 and 11, bringing those 2 buildings totaling 333,000 square feet to 100% occupied. We continue to see good activity in both of these Florida markets. During the year, we placed in service 4.1 million square feet of development, representing a total investment of $448 million, all 100% leased at a cash yield of 6.6%. We have one new start to announce. Our first Stockton logistics center in the Central Valley of Northern California, the prime location for large format buildings. There, we are building a 1 million square foot distribution center to serve the San Francisco and East Bay markets where the supply of large buildings is constrained. Our estimated investment is $126 million with a projected cash yield of 6.3%. Including this start, our developments in process totaled 3.6 million square feet with an investment of $556 million. The projected cash yield for these investments is 7.3%, which represents an expected overall development margin of 75%. With respect to dispositions, in the fourth quarter, we sold a 581,000 square foot facility in Minneapolis for $54 million at a stabilized cap rate of 5.3%. As part of our continual portfolio management efforts, our sales guidance for 2023 is $50 million to $150 million. The guidance range is a bit wider than in the past, which reflects the continued price discovery dynamic in the investment sales market. Before turning it over to Scott, given our performance and outlook for growth, our Board of Directors has declared a dividend of $0.32 per share for the first quarter of 2023. This represents an 8.5% increase from the prior rate and a payout ratio of approximately 70% based on our anticipated AFFO for 2023 as defined in our supplemental. With that, I'll turn it over to Scott to provide additional details on our performance and our 2023 guidance.

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.60 per fully diluted share compared to $0.52 per share in the fourth quarter of 2021. For the full year, NAREIT FFO per share was $2.28 versus $1.97 in 2021. Our fourth quarter and full year 2022 results include income related to the final settlement of insurance claims for damaged properties. Excluding the approximate $0.01 per share impact related to these claims, fourth quarter and full year 2022 FFO per share was $0.59 and $2.27, respectively. As Peter noted, we finished the quarter with in-service occupancy of 98.8%, up 70 basis points compared to the year ago quarter. Our cash same-store NOI growth for the quarter, excluding termination fees and the income related to the final settlement of insurance claims that I previously discussed, was 7.6%. This was driven by higher average occupancy, increases in rental rates and rental rate bumps, slightly offset by an increase in free rent. As Peter mentioned, our 10.1% cash same-store NOI growth for the full year, calculated under the same methodology was a company record. Summarizing our leasing activity during the fourth quarter, approximately 2.1 million square feet of leases commenced. Of these, 700,000 were new, 1.2 million were renewals and 300,000 were for developments and acquisitions with lease-up. Tenant retention by square footage was 81%. Moving on to the capital side. On November 1, we drew down all $300 million of the term loan that we closed in August. We were successful in putting in place swaps to fix the all-in interest rate at 4.88% beginning in December. So once again, our only variable rate debt is our line of credit. Before I move on to our initial 2023 FFO guidance, I would like to comment on a topic that we've been asked about recently by the investor and analyst communities. The parent company of one of our tenants has been in the news recently. As of the fourth quarter, ADESA, a leading auto auction and related services provider accounted for 1.8% of our rental income. ADESA was acquired by Carvana last year, and Carvana has been facing some challenges in its retail segment. For those newer to the FR story, we did a sale-leaseback transaction with ADESA about 14 years ago, for 7 valuable locations critical to their operations. These are leased until 2028, after which they have 2 additional 10-year renewal options. Let me also add that ADESA is current on its rent obligations. It is helpful for you to know that we believe that our basis in this land and current rents are both well below market and that the majority of these sites can be developed at significantly high margins. Moving on to our initial 2023 guidance for our earnings release last evening. Our guidance for NAREIT FFO per share is $2.29 to $2.39 with a midpoint of $2.34. Our 2023 FFO guidance is impacted by an additional $0.02 per share in real estate taxes in one of our markets that we will accrue in 2023, but will not be recoverable from our tenants until the taxes are paid in 2024. Without the impact of this item, our FFO midpoint guidance would be $2.36 per share. Key assumptions for guidance are as follows: average quarter-end in-service occupancy of 97.75% to 98.75%. Cash same-store NOI growth before termination fees of 7.5% to 8.5%. Please note, our cash same-store guidance excludes $1.4 million of income of 2022 related to the final settlement of insurance claims for damaged properties I discussed earlier. Annual bad debt expense of $1 million, which assumes that ADESA stays current on its rent obligation. Guidance includes the anticipated 2023 costs related to our completed and under construction developments at December 31. For these projects, we expect to capitalize about $0.08 per share of interest. Our G&A expense guidance range is $34 million to $35 million. 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 now turn it back over to Peter.

Thank you, Scott, and thank you again to the First Industrial team for a job well done. Our sector continues to exhibit the best fundamentals in memory. However, we, like all of you, are keeping a watchful eye on the economic and geopolitical landscape, and we are prepared for whatever challenges or opportunities the immediate future may bring. As you've heard us say, we operate, acquire, build, and fund ourselves to outperform through the cycle. Our portfolio, land holdings, and balance sheet are well positioned for cash flow and value generation across a range of operating environments. Operator, with that, please open it up for questions.

Our first question comes from Ki Bin Kim with Truist Securities.

I guess can we first start off with the development pipeline. Can you provide some just high-level commentary on what this total pipeline could look like in '23 in terms of starts? And maybe reasons why the capitalized interest is kind of coming down.

Ki Bin, it's Peter. With respect to the development pipeline for '23, clearly, given that we are operating essentially at the cap, it's going to be heavily dependent upon our new development lease-up. Just as a reminder, we do assume in our underwriting 12 months of downtime, and yes, over the past few years, we've done better than that. We certainly hope we'll continue on that pace. So I can't really give you, and we don't guide on starts anyway. But we do expect to have additional starts this year. And we expect those starts would be certainly in high barrier markets on the East and West Coast. Scott, do you want to talk about the capitalized interest?

Yes. Ki Bin, it's Scott. I think Peter hit right on the head. Our guidance assumes a 12-month lease-up on respective elements. We've been doing better than that. I think we've been 6 months or better. To the extent we can do better than that, and we have new starts, our capitalized interest number will go up. But again, I think it's just a function of how we guide and that we don't include any new development starts in our guidance. So that number could increase as the year goes on if we lease up the portfolio quicker than 6 months, and we start new developments.

And on the first Stockton development, how are you thinking about I guess, the total project, is it a single user you're going after? Is that multitenant? What does the demand kind of profile look like as of today?

Yes. Thank you. There is significant demand for large users that is the tightest submarket right now. Stop like the IE to L.A. and it serves the Bay Area and the East Bay corridor. So the demand right now is for large format buildings. And this is just the right out of the interchange.

The next question comes from Rob Stevenson with Janney.

Scott, how much pressure are you seeing on the same-store expense side? And what are you factoring into your '23 guidance?

Yes, Rob, we're not going to see much pressure on there. Expenses, I know in the fourth quarter, the same-store were up a little bit, but that was really seasonal. That was snow removal and some utility costs and all those costs are recoverable 100%, so.

Yes. In 2023, you're observing increases in taxes, particularly in markets like Denver where there's a timing difference. However, it's important to remember that most of our leases are net leases, making the expenses recoverable. With an occupancy rate of 98.5% to 98.8%, even if expenses do increase, the impact is minimal.

Okay. All right. And then you guys did about $60 million of acquisitions in the second half of the year, right around the 3 cap rate, including this fourth quarter one in the Inland Empire. Is there something incremental that you plan on doing there? Or what's the rationale of spending 3 cap rate on that type of money versus land or incremental development at this point?

Sure. Yes, let me address the acquisition of the 47,000 square foot building. That's a 5.5 acre parcel that we're going to just adjacent to roughly a 14-acre site that we own that has a building on it. So our plan here is actually more land-focused and building focus. We're going to basically join those 2 parcels and develop over 400,000 square foot Class A building in IE. That's the plan...

So we're getting paid to carry the land as opposed to the other way around.

Do you need to knock down the 47,000-foot building? Or is this going to be an addition to the 47,000 building?

No, we're going to basically knock down. Our plan is to knock down our existing building plus this building and develop a 400,000 square foot really Class A high clearance nice building. So right now, it is under entitlement.

And what type of timeframe are you looking at there for potential start?

Again, you know what entitlement takes anywhere from 18 months to 24 months. But you know what, we've been doing better than that. So I'll let you know once we're ready to start that building.

Our next question comes from Nick Yulico with Scotiabank.

This is Greg McGinniss on with Nick. Peter, in the opening remarks, you touched on the continued price discovery dynamic in the investment sales market. Could you expand on that a bit more? What types of trends are you seeing in cap rates, how far apart? Sellers from where you want to buy? And are you starting to see land prices fall at all.

I'll share some thoughts on that, and then I'll ask Peter and Jojo to provide their insights. Cap rates have certainly shifted. As you know, last year we anticipated an increase of around 100 basis points. There are not many data points or transactions available to set precise cap rates on a market-by-market basis. We won’t know the exact figures until we engage in the market. It helps when buyers are motivated by 1031 exchanges or are end-users, and as we mentioned before, many of our sales do go to users. However, the availability and cost of debt will also influence this. That's why I mentioned a wider range; we won't have clarity until we delve deeper into discussions. If the pricing aligns with our expectations, this is still solid real estate, fully leased. So we will move forward based on market feedback. Peter, do you have anything to add?

Sure. On land values, we've seen them come in depending upon the submarket location 30%, 40%, 50% or so. Jojo?

Yes, yes. And it's just a contract of increasing the pro forma returns. Of course, the variables, the land, construction costs is not a variable, so land takes the hit. So we've adjusted our investment criteria to reflect that in terms of our increased return requirements.

Okay. And then in terms of like supply chain considerations with construction and development, are you seeing alleviation there in terms of getting materials and build time? Any color would be appreciated.

Peter, do you want to take that?

Sure. So yes, we're seeing certain components improved. There's more certainty around delivery dates and the delivery dates have come in some. The notable exceptions to that would be switchgear electrical components, rooftop units are still taking about a year or so and that is certainly a critical element. On the costs, the trajectory of cost is coming down from where it's been. We're seeing costs come in on a couple of components. Others are still going up a little bit.

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

First question, I just wanted to see if you could talk a little bit about some of the moving pieces, I guess, looking at same-store NOI growth and the FFO growth that contemplated with the guidance, which is expected to be a little bit more muted around 2% at the midpoint or I guess, 3% excluding the insurance claims, but that compares to the 7.5% to 8.5% same-store NOI growth forecast. I realize there are some moving pieces, but just curious if you can help us bridge the gap there and talk about what else might be having an impact on FFO...

Sure, Todd. It's Scott. I think we're coming up with a 4% increase. We compare the 236, taking out the impact of the taxes compared to the 227 in '22 before the insurance came. But I get your point, and I would say there could be a couple of pieces there. I would say one is on the development lease-up side. We talked about it earlier with Ki Bin's question. We're assuming 12 months lease-up on our spec development. Historically, we've been 6 months or less over the last 3 years. If we were to lease up, the spec portfolio that we have in place now, we can pick up about $0.08 per share. So that's a big piece of it right there. We hope we can do better. But our underwriting is 12 months, and that's what we go with our guidance. I think the other thing, Todd, you should look at is interest expense. We did incur more indebtedness last year to fund the investments our developments. So we're getting a full year impact of that this year. And then the last thing I think you need to look at is just the impact of rising interest rates, and I'll give an example on our line of credit. That's our only floating rate debt that we have outstanding. The weighted average rate on that last year was about 2.9%. And we're modeling high 5% in our model this year. So the interest rate is almost doubling in our line of credit borrowings. So I think those are the couple of things that would impact that your question.

Okay. Yes, that's helpful. Regarding the development leasing and the 2.1 million square feet that have been completed but are not in service, how are the leasing discussions progressing for those assets? What are you expecting in terms of the potential to meet that 6-month target? How are those conversations going?

I'll just make a comment there, and then Peter and Jojo can discuss the various projects. You look at those projects, they are just completing or have just completed. So we haven't really had much time pass in terms of leasing discussions. Having said that, we are having very active discussions across a number of those projects. And Peter, you can give a little color on what's going on with the...

Sure. So Todd, the projects in Pennsylvania, Denver, Nashville and Florida that are in that population that you mentioned, active proposals and prospects for all or a portion of all of those buildings. And I would say we've actually seen an increase in new prospects just in the last couple of weeks. So it continues to be encouraging there. And in most of these cases, tenants continue to have very few choices. Jojo?

Yes, for the buildings in Seattle and Chicago. They've been complete now for 6 weeks, and we have active proposals and active interest from a broad range of users, 3PLs, consumer goods and food and beverage.

Okay. Great. That's helpful. And just one last one, and sorry if I missed this. But any update on Old Post Road that was previously expected to be leased in the first quarter. Is that buttoned up? Or is there any update that you can share and also talk about what's included in the guidance for that?

Sure, Todd. It's Peter Schultz. So the update is this. Our primary prospect for the full building is a third-party logistics company who's servicing a long-term contract with the federal government. That lease has been fully negotiated for a while. The contract was awarded to this group and protested by the runner up, not once but on 2 separate occasions, which has delayed that moving forward. Given that this is with the federal government, a little hard to handicap quite when that gets done, although it certainly feels given it's been through a couple of rounds, it's probably more when, not if. And we continue to engage with other prospects for the building. In terms of guidance, given some of the uncertainty around that process and where we are with other interest, it's forecast to lease in the third quarter of this year.

Our next question comes from Anthony Powell with Barclays.

I guess another question on the leasing environment. You mentioned that you're in active discussions with tenants on the development pipeline. Has the kind of the tenor of the competition has changed in the past few weeks versus last quarter, are tenants just being a bit more cautious on taking space or do they continue to be kind of opportunistic and aggressive at taking space? And any changes in the types of tenants you're seeing coming through the total space?

It's Peter. The number of prospects for new spaces are down a little bit. I would say we're looking at what I'd call a normalization of demand, probably back to 2019 days. You recall that '17, '18 and '19 were the best of times back then. So we're coming off of, call it, some disruption in '20 and '21 from COVID and inflation, et cetera. And I think what's happening here is that those who are responsible in the C-suite are taking some time to absorb everything they're seeing to figure out what exactly their needs are going to be for sure, they have growth needs. They have to catch up. Many of them did not invest in their supply chains in '20 and '21. So the demand is there. We're hearing also from the brokerage community that there's going to be significant demand. So we're bullish on what's going to happen. We think it's going to be a pretty active market. But I would say in terms of sense of urgency, you're seeing more of a normalization. Peter, you have anything else.

Sure. The other thing I would add to that is the smaller spaces continue to move a little faster to Peter's comments about some of the users being more deliberate in circumspect in their decision-making. That's where we're seeing it take a little bit longer. But we continue to see solid and broad-based demand across the country and as I said a couple of minutes ago, activity is up in the last several weeks from where it was in the fourth quarter.

Our next question comes from Scott Mullen with JPMorgan.

If there is additional capacity available, and if we halt some of these development projects, what are the alternative financing sources beyond the physicians? How are you considering debt and equity to support potential new initiatives if you have the opportunity to expand?

Sure. This is Scott. We're in really good shape from a liquidity point of view. Let's just talk about what we have in process as far as development. It's about $225 million, that will be funded by excess cash flow after our dividend of $75 million. Peter talked about some sales we're going to do this year. Midpoint is $100 million. And then we have $600 million of liquidity on our line of credit. So we're set up pretty good. And let me say, if you give us credit for extension options in our line of credit, $300 million term loan, we don't have any maturities until 2026. So we're set up from a good standpoint there. If we start with development starts, I think the benefit that we have is we already own the land. It's not like we have to go out and buy it and expend dollars. So my take is that if we do additional development starts. Most likely, that's just going to be funded on the line of credit or potentially could be new sales as well. So that's...

And new starts just by the dynamic that we have now of meeting now to lease up these newly completed assets, it's going to be largely back-ended. So the dollars that we will have to put out this year are not that significant.

Yes, during the development phase, you are likely looking at a payment term of 12 to 14 months, with the first payment typically made 2 to 3 months after the start date. As Peter mentioned, if you initiate new projects in the latter part of the year, you probably won’t be allocating a lot of additional cash flow.

Our next question comes from Vikram Malhotra with Mizuho.

Just first one, you talked about the 40% to 50% rent spreads you're anticipating, but can you just maybe walk us through your expectations or forecasts for market rent growth across the portfolio, in particular, maybe call out where you're seeing accelerating trends versus decelerating trends in market rent growth?

Jojo, you want to talk on trends in market rent growth?

Yes. Thank you. Yes. Our health view right now is about 5% to 10%.

That's National...

National, 5% to 10% across the nation. And higher end towards the 10% will be the coastal markets. And then on the lower end of 5%, which is still good is more of the Midwest market.

I have a couple of specific questions regarding the bad debt you've accounted for. First, are you noticing any impacts from tenants related to housing, especially in Sunbelt areas like Phoenix? Secondly, are there any other tenants on your watch list that you are keeping an eye on? One in particular that I have come across is Boohoo plc, which seems to be experiencing some operational challenges. I am not implying this will affect their warehouse operations, but I am curious if they are on your watch list.

Okay, this is Scott. I would say there are no significant tenants on the watch list aside from our earlier comments regarding ADESA. Boohoo is making their payments on time as well. Peter will discuss the lease structure we entered into with them in 2022.

Yes. The Boohoo lease has been in effect since September of last August, September last year. they're getting ready to start operating in the building after completing their work. We did structure credit enhancement on that deal we have, and we are comfortable with that. As Scott said, all good at the moment.

In terms of Phoenix, the economy has been doing pretty well. Absorption levels have actually been record absorption. A couple of things happen in Phoenix. They got the huge investment from TSMC. Not that it's going to affect whole economy there, but it's going to be a positive because that's going to generate a lot of jobs. And also, there's a lot of data center investment in the Phoenix area, one of the biggest investments in the country. So that should add more good economic growth to the market.

Our next question comes from Dave Rodgers with Baird.

Maybe Jojo, for you on the rent growth. I guess I wanted to talk about new supply as well. Obviously, this is the year of new supply we've been waiting for, maybe not waiting for, depending on your perspective. But I think that you talked about 5% to 10% market rent growth, how does that trend throughout the year? And when do you get hit with the most amount of competitive supply do you think? I guess I'm worried about market rent growth kind of really slowing maybe in third and fourth quarter when we see that supply. How do you see that playing out?

Sure, sure. Right now, the whole market is about 3% vacancy, and we see continued demand. So landlords still has pricing power here. In terms of what could affect that. In terms of under construction, if you look at where we've developed, most of the construction are coming into the submarkets we're not invested in, so for example, on the developments under construction, 85% of our developments under construction are either in Florida, Northern California or Southern California, which I would deem this is one of the top five markets in the U.S. where we expect further rent growth because of its infill nature and kind of the lack of supply. So we feel good about in terms of our competitive positioning and our development. We feel like I've said, because they're 3% vacancy, and we don't see the demand falling off. We still be landlords, being a driver seat in terms of rent pricing.

Appreciate that color. Maybe this goes to Peter next is I think you had a 550,000 square foot tenant move out end of the year. Have you commented on kind of backfill for that downtime, et cetera?

Dave, I'm not sure which tenant you're referring to, as nobody in that size range moved out at the end of the year.

Okay. That's fair. And last question, Scott, for you. You mentioned an answer earlier, $0.08 per share of development income. And it sounded like that, that could be maybe upside to the guidance or maybe that was what was embedded in guidance. Can you clarify that comment around the development relative to I guess, leasing and how that could progress throughout the year?

Yes, David, we assume 12 months lease-up in the guidance. And what I was just illustrating there is if we were to cut that in half if we were to get superior execution and that came in at 6 months. Just to give people an idea that would be an additional $0.08 per share. So that's not in guidance. I would say that's aspirational if we're able to do better. And again, over the last several years, we've been leasing up 6 months or less. Peter?

I was just going to add, Dave, of the projects we've completed with our 12-month downtime assumption, only 3 of those projects would generate some revenue this year and that wouldn't be until the fourth quarter. So there's not a lot there. So when you back that assumption from 12 to 6 months, which perhaps some people do, we don't. Then you introduced the opportunity to generate a lot more revenue this year from those completions and that's why you have the difference of $0.08.

Our next question comes from Mike Mueller with JPMorgan.

I have two quick questions. First, regarding the expected leasing spreads of 40% to 50%, can you clarify the typical range for coastal markets compared to the Midwest markets? And for last year, what was the average escalation rate included in the leases?

Yes. So your two questions on the 40% to 50% rental rate increase, certainly in our Southern California markets, that number is higher. If you look at our remaining 2022 rollovers about 40% is from Southern California. So we're certainly going to get higher rental rate increases there. As far as our escalators, right now, currently, the entire portfolio in place is about 2.9%. If you look at our 2023 commencements signed to date, that number is about 3.6%. So that number is certainly trending upwards.

Our next question comes from Rich Anderson with SMBC.

Can you hear me okay?

Yes, you're good.

Okay. Great. My headset has been on and off. Jojo, can you repeat what you said about land values being down earlier in the call. I think I misheard you, but I just want to make sure before I ask the question.

Sure. Peter addressed part of the question earlier. Essentially, land values have decreased year-over-year. This trend is due to an increase in pro forma returns, which Peter Baccile mentioned, with a change in cap rate of about 100 basis points. Consequently, we've raised our returns to 150 basis points. As a result, while construction costs have mostly remained stable with some escalations, land values have seen significant declines. The range of these declines is between 20% and 45%, with the more substantial drops occurring in Midwest cities where land constitutes a larger portion of the overall investment. Hence, this variable has a more pronounced impact.

So how do you look at your own land bank of $1.6 billion on your balance sheet as of December? And how does that compare? And how has it changed relative to market in terms of its value relative...

Sure. We've examined the situation and provided fair market values for those land sites. Overall, there has been very little change, which is due to the grid basis. We have acquired many of our properties in coastal cities, with some offset from adjustments in interior Midwest and noncoastal markets. So, when everything is considered, it results in a minor adjustment.

Look, there haven't been a lot of trades to evidence this. But clearly, with debt costs being up a couple of hundred basis points, construction that, in particular, being very difficult to come by. That strong bid by the merchant builder has now weakened or gone away. So land values have come down for lack of that opportunity there. The land that we own, we're referring to values. It's in some of the best submarkets in the country, County, Broward County, Lehigh Valley, Inland Empire. I can go on and on. It's our holdings are very, very strongly located. So we're excited about the opportunity.

A significant portion of our land values in the Inland Empire comes from the assemblages and unentitled land we have acquired. We have generated substantial value, and that is evident in our results.

Let me clarify one point. I think you mentioned the fair value of our land was around $1.6 billion, but it's actually approximately $840 million. You can find that information on Page 25 of the supplemental materials.

Yes. Looking at the balance sheet briefly, you mentioned that your rents and land at ADESA are well below market. I'm curious about the land being undervalued. If you were to reacquire it, would you consider redeveloping it or completely tearing it down and starting fresh? I'm interested in knowing more about the quality of that asset.

Yes. If we were to get them back, we would focus on developing most of the portfolio. We would consider development in Seattle, Nordic, California, Houston, and Atlanta. Based on our perspective on SMB, this would represent about 86% of our currently leased portfolio to ADESA.

Yes. There's minimal build-out on those sites. There's no infrastructure, really no associated square footage in our portfolio. So they're pretty raw, ready to work. They're storing cars and running auctions on infrastructure and improvements they've made over time.

Okay. Understood. I understand better now. Last question is on Old Post. You mentioned you're expecting third quarter for it to be leased. What's the sensitivity to earnings if that gets pushed back a couple of quarters. Is there any material impact on earnings as a result of that?

One month of rent is approximately $350,000 in net operating income.

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

Thank you, operator, and thanks to everyone for participating on our call today. We look forward to connecting with many of you in person during the year. Be well.

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