First Industrial Realty Trust - Earnings Call - Q3 2016

Transcript

Speaker 0

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial Third Quarter Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

I would now like to hand the conference over to Mr. Art Harmon, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thanks, Nicole. Hello, everyone, and welcome to our call. Before we discuss our third quarter twenty sixteen results, 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, Friday, October 2836.

We assume no obligation to update our statements 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 ks 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 Bruce Duncan, our Chairman and CEO our President, Peter Bacilli and Scott Musil, our CFO, after which we will 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 Bruce.

Speaker 2

Thanks, Art, and thanks to everyone for joining us today. As Art noted, we have members of our management team assembled today for this call, including one new addition, Peter Basile. Peter, welcome. As you know, Peter will be taking over the reins as CEO on December 1, and we are very pleased to have him on board. And I will ask him to offer a few comments before we get into the business of the quarter and the state of the industrial real estate market.

Speaker 3

Thanks so much, Bruce. I'm honored and humbled to be chosen to lead First Industrial and build upon the accomplishments and track record that Bruce and the team have achieved. Bruce will leave some big shoes to fill, but he's also assembled a talented team of hardworking and dedicated people. He has orchestrated a significant enhancement to the assets of this company since he took the helm in 02/2009. And he and the team have worked diligently to reestablish a strong balance sheet and investment grade credit rating.

I look forward to working with the team to continue to grow our presence in our target markets, further enhance the portfolio and maintain a balance sheet and credit profile that will outperform through the cycle. Since I joined the company on September 29, I spent the vast majority of my time on the road, seeing our assets and meeting with and getting to know our people. I'm about halfway through my scheduled travel. And in every market, I've been impressed with the First Industrial team. I thank them for such a warm welcome to the company and all their insightful observations about our assets and the opportunities ahead.

I've had the pleasure and the benefit of working with First Industrial for many years as a banking partner and advisor. Having now had the opportunity to see the company from the inside, I'm even more enthusiastic about our prospects and again, humbled to have this opportunity to lead such a first class organization. Thanks, Bruce.

Speaker 2

Thanks, Peter. And as Chairman and as shareholder, I very much look forward to your stewardship. Now back to business. We had a solid third quarter. Our metrics reflect our team's strong performance and the continuing favorable fundamentals within our sector.

Cash rental rate growth for the quarter was robust at 11%, and cash rents have now been up 11 consecutive quarters. GAAP rents were up 20.4%, which marked the nineteenth positive quarter in a row. Cash same store NOI growth before lease termination fees was 3.5%, and occupancy was 95.4%, which was a dip from last quarter. Scott will walk you through the details in a bit. The industrial market continues to see broad based demand across industries and markets, while supply remains measured.

Through the third quarter, CBRE Econometric Advisors is reporting net absorption of two zero three million square feet against completions of 132,000,000. Against this favorable backdrop, our team is focused on pushing rents and driving cash flow. Given this opportunity, our track record and the opportunities we continue to see in the marketplace to create value through development, we started three new projects in the third quarter that we touched on in our second quarter call. At First Park 94 in Chicago, we started our second building, a 602,000 square footer that is expandable to 700,000 square feet. This follows the successful lease up of our initial 601,000 square footer at this multi building park.

Estimated investment is $29,900,000 with a targeted GAAP yield of 8%. As a reminder, we define GAAP yield as first year's cash NOI divided by the GAAP basis at the property at completion. In Phoenix, we started a 618,000 square foot facility at First Park at PV-three 03 with an expected investment of $32,800,000 and an estimated GAAP yield of 7.7%. We are also adding to our portfolio in Southern California, our largest market, with the start of the first Sycamore two fifteen logistics center in Riverside. This 243,000 square foot distribution center has an estimated investment of $17,800,000 and an estimated GAAP yield of 6%.

At the end of the third quarter, we had six projects under construction, totaling 2,500,000 square feet, with a total estimated investment of $157,800,000 They are currently 19% leased with a weighted average estimated GAAP yield of 7.2%. We also had two projects completed but not placed in service. First Park, Tulsa in Phoenix and First Arlington Commerce Center II in Dallas. These two six hundred and twenty thousand square feet were 50% leased at quarter end. They have a combined estimated investment of $35,900,000 with an estimated GAAP yield of 7.7%.

Here in the fourth quarter, we recently signed a full building lease for 234,000 square feet at First Arlington II. So today, with First Park Tulsa at 81% leased, we have just 74,000 square feet available at these completed developments. I refer you to Page 20 of our supplemental for details on our developments. Up next in our pipeline is the Ranch by First Industrial, which we plan to start by the first quarter of twenty seventeen. Recall that this $86,500,000 six building, nine and thirty six thousand square foot park is located in the Chino Eastvale market of the Inland Empire.

We love this submarket of Southern California due to strong demand and a vacancy rate of just 1% at the end of the third quarter. Moving to acquisitions. The heavy competition for quality assets continues. However, we were successful in acquiring two buildings in the third quarter and another in the fourth quarter to date. As discussed last time, we acquired a 99,000 square foot building in San Diego that is 100% leased for $11,900,000 Our initial GAAP yield is 6.1%.

We also acquired a recently completed 121,000 square foot vacant development in the I-fifty 5 submarket of Chicago for $9,000,000 Our team's job there is to add value through lease up, and our expected GAAP yield is 6.5%. In the fourth quarter to date, we acquired a 63,000 square foot building in the Doral submarket of Miami, in close proximity to the Miami International Airport. We like this asset due to its infill location in a very tight market. We paid $8,400,000 for this building, and our GAAP yield is 7.4%. We also added a development site in Dallas during the third quarter for $3,000,000 This site can accommodate a 420,000 square foot single or multi tenant building.

On the disposition side of our portfolio management efforts, we had a very active quarter. We sold 19 buildings totaling 653,000 square feet for $38,500,000 These had a weighted average in place cap rate of 6.3% and a stabilized cap rate of 7.5%. This brings our year to date sales total to $139,000,000 on our way to our 150,000,000 to $200,000,000 goal for the year. So we are working hard toward a strong finish to 2016 as we continue our focus on capturing opportunities to drive long term cash flow. With that, let me turn it over to Scott to walk you through some more details on the quarter and our guidance.

Scott? Thanks, Bruce. Let me start with the overall results for the quarter. EPS for the quarter was $0.27 versus $0.13

Speaker 4

one year ago. Funds from operations were $0.37 per fully diluted share compared to $0.35 per share in 3Q twenty fifteen. Funds from operations before one time items, namely our acquisition costs in 3Q twenty sixteen and 2015 as well as our gain on sale of non depreciable real estate in 3Q twenty fifteen were unchanged. As Bruce noted, we finished the quarter with occupancy at 95.4%, down 40 basis points from the second quarter and down 10 basis points year over year. Sales helped occupancy by 15 basis points since June 30.

Regarding leasing volume in the third quarter, we commenced approximately 3,000,000 square feet of long term leases. Of these, 638,000 square feet were new, 1,400,000 were renewals and 934,000 square feet were developments and not in service acquisitions. Tenant retention by square footage was 63.4. Same store NOI growth on a cash basis, excluding termination fees, was 3.5%, primarily reflected in place rental rate bumps, rental rate growth on leasing and a decrease in free rent. This was partly offset by lower average occupancy.

Lease termination fees totaled $11,000 in the quarter and cash same store NOI growth including termination fees was 3.4%. For the quarter, cash rental rates were up 11% overall with renewals coming in at 8% and new leasing at 17.3%. On a GAAP basis, overall rental rates were up 20.4% with renewals increasing 17.4% and new leasing up 26.6%. Moving on to our balance sheet metrics. At the end of 3Q, our net debt plus preferred stock to EBITDA is 5.5 times, adjusting EBITDA by normalizing G and A and excluding acquisition costs and adjusting debt by adding back loan fees.

This is below the low end of our target range of six to seven times. At September 30, the weighted average maturity of our unsecured notes, term loans and secured financings is 4.2 with a weighted average interest rate of 5%. These figures exclude our credit facility. Our credit line balance today is $2.00 $4,000,000 and our cash position is approximately $13,000,000 Now reviewing our 2016 guidance per our press release last evening. Our NAREIT FFO guidance is now $1.42 to $1.46 per share.

Excluding acquisition costs associated with our investment activity, our FFO guidance is $1.43 to $1.47 per share, which is a reduction of a penny compared to the midpoint of guidance we discussed in our second quarter call and a tightening of the range. The reduction in the midpoint of the guidance is primarily related to an increase to our projected performance based incentive compensation costs as well as incremental compensation related to our CEO hire. The key assumptions for guidance are as follows: average in service occupancy of 95.25% to 95.75% based on quarter end results, reflecting a narrowing of the range cash same store NOI growth for the fourth quarter of 2.5 to 4%. This implies a quarterly average same store NOI range for the full year 2016 of approximately 5.5% to 5.9%. This represents a midpoint of 5.7% compared to the midpoint of 5% in our second quarter results release.

Our G and A guidance range is now $26,500,000 to $27,500,000 an increase of $1,500,000 at the midpoint related to the projected incentive compensation and incremental CEO compensation that I just discussed. As a reminder, our prior G and A guidance did not reflect the impact related to the compensation of our new CEO. Note that guidance includes the costs related to our developments under construction at September 30. In total, for the full year 2016, we expect to capitalize about zero three dollars per share of interest related to our development projects. Guidance also includes the impact from the acquisition we made in the fourth quarter to date.

Our guidance does not reflect the impact of any future sales or any acquisitions or developments other than those we discussed nor the impact of any future debt issuances, debt repurchases or repayments. Guidance also excludes any future NAREIT compliant gains or losses or the impact of impairments nor the potential issuance of equity. With that, let me turn it back over to

Speaker 2

Bruce. Thanks, Scott. The industrial marketplace continues to be strong and joint broad based demand helped by the secular tailwind of e commerce. We will continue to capture the opportunity to serve this tenant demand throughout our portfolio and through targeted new developments and acquisitions. Since this will be my last earnings call, I'd like to take a few moments to publicly thank my teammates around the country.

Together, we have accomplished many great things. And I know there are many more to come because as I always say, there is work to be done. And we have the team here at FR that gets it done. I didn't join First Industrial expecting to be doing this nearly eight years later, but it has truly been a great ride and great fun working together with all of you. And I am excited about what lies ahead for our company.

You are in very capable hands with Peter and the leadership team. I would also like to thank our customers for the opportunities to serve your supply chain needs. We will continue to strive to provide you industry leading service and the right properties to support your business objectives. Thanks also to all of our financial and business partners for your past and continuing support. We appreciate it very much.

And I also thank all of you analysts on the sell side who have followed our transformation over the years. While we may not have always seen eye to eye on every matter, as I have often said, great minds can differ. I've greatly appreciated your efforts to get to know our business and our team. Although I must admit that I might not miss the Q and A session of the calls during my retirement, but I know Peter and the team embrace it. Lastly, I would like to thank our shareholders for your confidence and your investment in us.

We will keep working hard for you to drive cash flow and shareholder value. Thank you. And now we will open it up for your questions. As a courtesy to our other callers, we ask that you limit your questions to one plus a follow-up in order to give the other participants a chance to get their questions answered. You are, of course, welcome to get back into the queue.

Nicole, may we open it up for questions?

Speaker 0

Certainly. Your first question comes from the line of Greg Melman with KeyBanc Capital Markets.

Speaker 5

Thanks guys. Just want to first start congratulate you Bruce. Well deserved retirement here. You've done a great job over your tenure And it's not often that you hear a thanks to the sell side, so much appreciated.

Speaker 2

You're welcome and I appreciate all your work. It'll help. Thank you.

Speaker 5

Just, you know, first starting out on Phoenix, you guys have a little bit more work to do in Tolleson and you guys started a new development. One of your peers seems to be seeing a little bit of softness in demand in this market. Just curious if you guys are seeing anything similar to that?

Speaker 2

Sure. Let me ask Jojo to answer that.

Speaker 6

Yes. Basically in Phoenix, net absorption continues. Our vacancy that you referred to, we actually created a vacancy, One of the major influence of the current 88% occupancy was a vacancy we created as we grew a tenant from 79,000 square feet to 170,000 square feet. But nevertheless, so that really got us out of the shoot on First Park Towson at 81% pre leased. But there's still a job to do for us to do in terms of leasing that space that was vacated, that's functional space.

We like that space. It's competitive marketplace. And we have another space, the 74,000 square feet at First Park Towson that remains to be leased. Overall, we continue to get good prospect activity for those both of those spaces, Craig, but our job is to get that done and we'll let you know as soon as we get those leads. In terms of the 618,000 square feet at First PV-two 03 that you mentioned, we're very excited about that project.

Once we're done with that, we would be the highest quality building in that size range because of a number of things. Clear height, loading, freeway frontage that's right just less than a mile from the junction of I-ten and 303 into Beltway and it's this right between two interchanges which is Camelback Road and Indian School Road. And we're very excited about that project And there are already some bigger tenants in the marketplace looking for space. So that would be done next year and we'll report back to you when we get a lease.

Speaker 5

That's helpful. But if you compare to six to twelve months ago, you're not seeing any kind of changing demand dynamics in the market?

Speaker 6

Craig, no. No, we have not seen. In fact, if you look at the last nine months, I would say most of the large bounces have been consumed or tenanted.

Speaker 2

All right, great. Thank you. Thank you.

Speaker 0

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

Speaker 2

Great, great. Peter, welcome aboard. Big you, shoes to fill. Tell us a little bit about yourself,

Speaker 3

what your background is, where you're going to

Speaker 6

be living, all that sort of thing.

Speaker 3

Sure. I'm going to be I have an apartment here in Chicago,

Speaker 6

and so I'll

Speaker 3

be living here for the most part. Look, I've been a banker obviously for thirty years. I started out at Morgan and spent twenty six years there and had the opportunity over my career to work in this industry from the days when the market cap in REIT land was about $5,000,000,000 So, obviously, a lot has happened between then and now. I've been involved in a lot of the consolidation that's happened in this space over the years as well as the creation of new markets, like the CMBS market, as well as getting bringing what I would call corporate finance to real estate companies, getting investment grade ratings, etcetera. So I've had a lot of opportunity as well to work with a lot of the leaders of our businesses before they were leaders of our businesses in this industry.

So I've had management opportunities over the years. For the last fifteen years or so, I've had the good fortune to be a global head of a couple of different businesses. And so, I'm looking forward to this challenge. We have a great team here. It's a super opportunity for me and, the future looks bright.

Thanks.

Speaker 2

Great. Thank you.

Speaker 0

Your next question comes from the line of Dave Rodgers with Robert W. Baird.

Speaker 7

Yes. Hey, Bruce, congratulations. Peter, welcome. And Bruce, we'll leave value to the historians, but I think you've

Speaker 2

I like that value to the historians. Not being rude.

Speaker 8

We were ready for that question though. I

Speaker 7

don't even know what you prepared as an answer,

Speaker 6

but I'll leave it with that. You don't want to I did I don't know

Speaker 7

if this want go to Jojo or Bruce to you. Clearly saw a little bit of retention decline here in the most recent quarter occupancy decline. So kind of wanted to know the strategy that you've pushed because clearly we've seen a lot of rent growth, the spreads were extremely healthy. So I guess is that the strategy is to continue to push rents or have you kind of hit the point where it's time to maybe moderate the pushing of rents to kind of maintain the occupancy level? Just thoughts around that please.

Speaker 2

Our thoughts is number one, we'd like to have both. We'd like to have both great rental rate growth and increased occupancy. So again, we are pushing rents. We had a dip in the quarter. I would say as we look around the country, we feel very bullish about supply demand.

We feel very bullish about the opportunity to continue to push rates as well as increase occupancy. So this is a temporary dip and hopefully will continue to show some growth. Peter, you want to just comment on a couple of vacancies?

Speaker 8

Sure, Dave. The major part of the decline in retention really happened in Central Pennsylvania, where we had a handful of tenants move out, the largest of which is 178,000 square feet. But as Bruce said, in this environment, we continue to feel good about overall demand and continue to focus on pushing both rents and occupancy.

Speaker 7

Great. That's helpful. And then maybe a follow-up to that on the development side of the equation. And Jojo, I think I calculated something like $235,000,000 of capital at risk if you start the ranch, but maybe you can correct me if I'm not right. Also maybe provide the updated denominator to that overall.

And then I guess just more broadly with development, you have a number of vacancies in there. What size tenant are you seeing activity on in the development pipeline? And what are you really going after with the buildings that you're building today?

Speaker 6

Sure, sure. Okay. In terms of the $325,000,000 internal revolving cap that we've set, we have $68,400,000 in capacity. Okay? So I just want to make sure everybody understands that includes the most recent lease that we did in Dallas for Arlington Commerce Center.

But that also includes the acquisition of the vacant property in Chicago, the 121,000 square feet in the large submarket of the I-fifty 5 Corridor in Chicago and that includes the to be built ranch. To your next question of what we're trying to build, as you can see, we are building what we feel really fits the market and where we think the fundamentals are greatest. So case in point, example Dallas, we have built a multi tenant product right in the middle of Great Southwest. We're in the mid sized tenant is clearly underserved. And so we're very pleased to be able to announce that we have a full building lease for the 234,000 square feet.

In addition, so another example, so we've targeted for example, the Inland Empire East, the Mid sized tenants underserved as well. As you know, we built 187,000 square feet for San Michel. We got that lease at completion, and so now we're basically building a 242,000 square feet, a little bit north of that. But overall, all our buildings are very functional in the sense that it gets good clear, good access, that's a minimum, good loading and good storage, trailer storage and parking. So again, it really fits and multitudes of tenants because the demand from industrial real estate right now is broad based, not only e commerce.

It comes from auto, it comes from food, it comes from 3PLs and of course the migration of retailers to omni channel has to be included in there too. Hope that answers your question.

Speaker 4

It does. Thanks guys.

Speaker 0

Your next question comes from the line of Eric Frankel with Green Street Advisors.

Speaker 9

Thank you very much. First, Bruce, congratulations on obviously a phenomenal tenure at First Industrial. I can only hope to retire twice like you though. So and Peter, aboard and look forward to getting to know you better. My primary questions are one, I think you obviously outlaid how solid demand has been this year relative to supply.

We have seen some pipelines pick up in a few couple of different markets. Was hoping someone can comment on that, specifically some of the larger markets with larger populations such as Chicago and Atlanta.

Speaker 2

Sure. Jojo, you want take that? Sure.

Speaker 6

Eric, yes, there is a supply pickup, but at the same time, again, the demand continues to significantly exceed the supply. So for example, CVR, EEA, just for Atlanta, you're looking at year to date 16,000,000 square feet 16,000,000 square feet year to date of net absorption. That of course doesn't include the last quarter. If you look at 2015, that already exceeded 2015. In 2015, Atlanta had about 14.8 square feet of net absorption.

Chicago, year to date 16,000,000 square feet year to date. And last year Chicago brought in 18,000,000. So it's on track again to exceed the last year's net absorption. Finally, you mentioned maybe Dallas. Dallas, a year to date absorption, 20,700,000 square feet.

Last year's net absorption is 23.4. So it's on track to match or exceed last year's absorption. So, anyway, what I wanted to to paint to you is a picture wherein this year has been a good year and may exceed last year. Supply has picked up, but demand continues to outstrip supply.

Speaker 9

Is there any concern that this is some sort of onetime surge related to demand and there's developers that are building that they're trying to forecast something that may not be there though? I mean, I just like to maybe understand better if there is a solid list of prospects that are kind of known that can fill up that space and then have a better understanding of how that might impact market rent growth fundamentals?

Speaker 6

Sure, Eric. Overall, again, the product that's being built, again, overall and across markets being leased. Again, they're basically primarily you have to focus on some product, some product maybe at equilibrium, but most product, especially the mid to midsized tenants is still underserved.

Speaker 8

Eric, it's I'm sorry, Jojo. Eric, it's Peter. I would just add to what Jojo said. The best news is that demand continues to be very good and broad based across a number of different industries and size ranges. And everybody talks about e commerce, but it's not just e commerce.

As we said, we're seeing a lot of activity from the third party logistics providers, the parcel carriers, auto, food and beverage, a number of different verticals. And there's certainly more supply, but there's also been some discipline about the supply. And if you look at most of the markets, as Jojo said, demand continues to exceed supply. We're seeing record absorption in just about every market. But overall, I think there are always a lot of tenants in the market.

We discount some of that. You never know if it's duplicative. But I think the best thing is that most of the activity that we're seeing continues to be growth and additive. It's not just moving from a lateral move from one building to another. Almost all the deals we're seeing today, particularly in our development pipeline are real growth.

Speaker 2

And Eric, just when you look at things, we have we underwrite like a year's downtime. And if you look at what we've been able to accomplish, we've been able to lease these up quicker than that. We continue to be very encouraged by the demand, the strength of the demand in the marketplace across all regions basically.

Speaker 9

Very helpful color. Appreciate that. Just one quick follow-up. Looking at your development summary in First Park in Wisconsin. Congrats on getting the first building leased.

I did notice that, the first the second building seems comparable in size and presumably functionality to the first. You have construction cost on a per square foot basis is roughly 8% higher. Can you comment on construction cost trends or whether there are some other costs thrown into the second building that's different than the first?

Speaker 6

Sure. Yes. Just overall, it's the cost of the added infrastructure we added to the site and then inflationary increase in basically building materials and labor.

Speaker 9

Could you provide a rough breakdown what that inflationary pressure

Speaker 2

is?

Speaker 6

Yes. About 4%.

Speaker 9

4%.

Speaker 6

Okay. And half on the additional infrastructure because, know, again, our basis in that site is very low and it's a first class facility, as as you know. And so we just added a little bit on the infrastructure. But we, know,

Speaker 2

we like the site and we're getting through, you know, seeing good activity there. So we're we're encouraged. But, it's as we always say, it's on us to get this up built on time, on budget and get it leased.

Speaker 9

Absolutely. No, that's obviously it's that project seems like it's on a good path. So thanks. We'll jump back in the queue.

Speaker 2

Okay. Thanks,

Speaker 0

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

Speaker 10

Thank you. And Bruce, congratulations and it's been an amazing ride with FR. And Peter, welcome. So just a couple of quick questions. If I look at your guidance and what it implies about the fourth quarter, it's not much of a material change from where you ended the third quarter.

If I typically look at a lot of industrial small seasonality, if the fourth quarter is a little bit better. So just curious, what are you seeing for the couple of vacancies that you have? And is the fourth quarter this year going to be a little bit different than what we've seen in the past?

Speaker 2

Well, I mean in terms of vacancies, in terms of coming up, we don't in terms of we've got the stuff in Central PA, which we're doing some backfilling and Yes, Ki Bin, no large vacancies that we see coming up in

Speaker 11

the fourth quarter. It's just we've got work to do to backfill some of these vacancies. And on the retention, Peter had mentioned earlier, we had 250,000 square feet of move outs in Central PA. So work from that standpoint, but no large vacancies coming up in the fourth quarter.

Speaker 4

And Ki Bin, when you look our guidance for if you figure it out with the fourth quarter with the guidance we have for 2016, it's midpoints plus or minus 96%. So it's showing a little bit of growth there compared to where we ended in the third quarter.

Speaker 10

Okay. So and how is the I know it's probably pretty early, but how is the prospect list look like for some of your bigger vacancies?

Speaker 8

Ki Bin, it's Peter. I would say our larger vacancies around the country continue to be in Minneapolis, as we've talked about on some prior calls in the Northwest Quadrant where demand there has been a little bit weaker than supply. We did do some seasonal leasing with the post office in that building, which contributed to a pickup in occupancy in the third and will be in place for the fourth quarter as well. We have our acquisition that we did last year in the I-ninety 5 North Corridor North Of Baltimore that's 348,000 square feet. That will be in service in the fourth quarter and is in our numbers.

So that's a building that we have nothing to report on today, but good activity in that submarket where there's been some absorption both in a larger building and a smaller building. And we have some work to do there as we acknowledge. And then the comments I made about Pennsylvania and the third quarter move out to the largest space was 178,000 feet. And we'll certainly keep everybody posted on our next call on our progress there.

Speaker 10

Okay. And just last quick one here. The new development project in Phoenix, the 600,000 square feet property, From what I understand, and I might be wrong here, is that maybe this is Phoenix is not the big box, healthy market that perhaps it once used to be. Maybe some of the early occupiers of bigger space had more of a tax incentive to be there versus California. And maybe that demand profile changes going forward.

So just curious, what was the investment rationale for building a big box space in Phoenix?

Speaker 6

Sure. Ki Bin, this is Jojo. If you look at the last nine months, there has been quite a bit of good absorption in the large box activity in Phoenix. And when I define as large box, 300,000 to 600,000 square feet. In fact, if you are a user of over 400,000 square feet today and wanted to find a Class A building, you're virtually of out of choices.

Now this building that we've designed, we've provided the ability to, in addition to being the highest quality 600 to 625,000 sqft when it's done, We have the ability to actually demise the four spaces because we have provided four points of access. We can actually provide even secured truck course at each of every tenant. It is a very, very functional building and hopefully you'll get a chance to see it. And so we're very excited. We're going to be able to offer this building to multiple tenants or a single tenant.

But again, our job is to get it leased and we're making a bet. We think it's a high quality location our job is to get it leased, Ki Bin.

Speaker 2

Ki Bin, we're very excited about that. Think location is great and to Jojo's point about the functionality of the building, we think this is going be a great building. But it's all on us to get it leased and be pro form a

Speaker 10

and we're all over it.

Speaker 2

So we'll report back.

Speaker 10

Okay. See you guys soon.

Speaker 2

Thank you.

Speaker 0

You now have a follow-up question from Eric Frankel with Green Street Advisors.

Speaker 12

Hi. This is Vince. Could you discuss your refinancing plans for the roughly $150,000,000 of unsecured notes that are maturing in 2017? And can you also touch on how you think about public versus private debt and the length of term that would be best at this time?

Speaker 4

Vince, it's Scott. We've got just a summary, we've got about $157,000,000 of bonds coming due on 2017. It's higher cost at the weighted average interest rate, about 6.5. So we've got nothing baked into our guidance or capital plan for 2016. What we're thinking more of now is probably an early twenty seventeen execution.

Having said that, we constantly look at the financing markets. And if we see a pocket in 2016, we want to go, we will. We're looking at a couple of different markets. We're looking at the public bond market. We're looking at the private placement market.

We're looking at the bank market. The benefits of the public bond market going to be sized. You can do a really big deal in that market. I would say the benefits of the private placement market are you can do a smaller size deal, can do sub-two $50,000,000 and not take a hit on rate. You can do a delayed draw on that market as well.

The bank market is a good market as well. I'd say the downside on that is you're not going get the same tenor that you're going to get in the bond market or the private placement market. You're not going to be able to get a ten year deal in the bank market. So we're looking at all three markets at this point in time and we've got a

Speaker 6

lot of choices, which is a good thing to have.

Speaker 2

But our bias will probably be longer term.

Speaker 12

Great. Thank you. That's all I have.

Speaker 0

You have a follow-up question from the line of John Guinee with Stifel.

Speaker 3

Aaron Ausick and Bruce, congratulations as well from me. Quick question on the continuation of the asset sales. You guys have done a good job of continuing to sell out or reposition your capital out of older assets that are new. Do you, I would assume, plan to continue that effort into 2017 and perhaps increase it?

Speaker 2

Well, management is an ongoing process, and I'm sure the team is going to have lots to report on when they give guidance in terms of on the fourth quarter call in February.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you.

Speaker 0

And we are showing no further audio questions at this time. I would like to hand the conference back to Mr. Bruce Duncan.

Speaker 2

Great. Well, you very much. We appreciate it. And we look forward to seeing many of you out at NAREIT in Phoenix. And go Cubs.

Need to bring it home. Thank you very much.

Speaker 1

Thanks, everybody.

Speaker 0

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.