INDUS Realty Trust, Inc. (NASDAQ:INDT) Q4 2021 Earnings Conference Call March 7, 2022 10:00 AM ET
Ashley Pizzo - VP of Capital Markets and IR
Michael Gamzon - CEO
Jon Clark - EVP, CFO
Conference Call Participants
Connor Siversky - Berenberg
Dave Rodgers - Baird
Tom Catherwood - BTIG
Brian Hollenden - Aegis Capital
Good morning, and welcome to INDUS Realty Trust’s 2021 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the program over to Ashley Pizzo, Vice President of Capital Markets and Investor Relations at INDUS.
Thank you, and good morning, everyone. Welcome to our 2021 fourth quarter and full year earnings call. In addition to regularly available earnings materials, INDUS has also published a supplemental presentation, which is available on our website at www.indusrt.com under the Investors tab. I would also like to mention that this conference call will contain forward-looking statements under federal securities laws.
These statements are based on current expectations, estimates and projections as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the risks listed in our most recent 10-K filing as updated by our quarterly report on Form 10-Q in subsequent quarters.
Additionally, our fourth quarter results press release and supplemental presentation contain additional financial measures such as NOI, FFO EBITDA for real estate that are all non-GAAP financial measures. And in accordance with Regulation G and Item 10e of Regulation SK, we have provided reconciliation to those measures. Also, please note that on this call, when we refer to occupancy statistics, square footage and NOI and same property NOI metrics, these are referring to our industrial logistics portfolio only, unless otherwise specified.
This morning, we will hear from Michael Gamzon, our CEO, who will cover recent activity, market conditions and updates in our pipeline. And we will also hear from Jon Clark, our CFO, who will cover the fourth quarter and full year results in detail. After their prepared remarks, we will be opening it up to your questions.
With that, I will turn the call over to Michael. Michael, will you please begin?
Yes. Thank you, Ashley. Good morning, everyone and thank you for your continued interest in INDUS. 2021 was a great year for our company as we achieved or exceeded a number of our major goals and initiatives. We increased our high-quality industrial logistics square footage by 23%. And if you include our disclosed development and acquisition pipeline, our growth will be over 70%. This growth was achieved through acquisitions, many of which we sourced off market as well as development, the most notable being the Build-to-Suit for Amazon, we placed in service during the fourth quarter.
These new properties increase our presence in the dynamic Southeast region with our geographic footprint expanding from 4 markets at the start of 2021 to what will be 7. Our portfolio performed well over the year. We ended 2021 with our stabilized in-service portfolio and with 100% leased, and our only vacancy relates to a value-added property in Charleston that we acquired in November.
We also divested several significant non-core assets, including some large land parcels, a specialized industrial property in Connecticut, and the majority of our office/flex portfolio. We announced this morning our intention to dispose of our remaining office/flex assets. While these remaining assets are a very small part of our portfolio, with the intended sale, we will truly be a pure play industrial logistics company in 2022.
We also greatly increased our capitalization. With the completion of two equity offerings, the most recent of which took place in October and generated $153 million in net proceeds. We also put in place $100 million credit facility with the ability to scale up along with our growth. Lastly, we continue to build and strengthen our in-house team. These results set us up well for 2022, which is already off to a great start.
Since January 1, we've closed out an acquisition in the Charlotte market placed under contract, a forward purchase and a new geographic market for us and pre-leased 43% of our soon to be delivered building at Nashville as well as 66% of our soon to be completed development in the Lehigh Valley.
As we look out into 2022, we believe we are well-positioned to take advantage of the broad-based tailwinds in the industrial logistics sector, and to significantly grow shareholder value and remain one of the most nimble and fastest growing public industrial REITs. We remain sharpshooters, focused on high quality properties in strategic locations in a market that we expect to be high performing over the long-term.
The vast majority of our efforts are focused on higher returning value add and development opportunities, where we remain very selective in our pursuit of core stabilized acquisitions. And many of our investments continue to come from off market or lightly marketed opportunities.
Heading into 2022, our current acquisition and development pipelines represent 2 million square feet and over $230 million in investment. We estimate the initial stabilized yields on this pipeline to be in the low to mid 5% range, which is meaningfully above current market cap rates.
This pipeline demonstrates the substantial future earnings power of the company with a potential additional $11 million to $12 million of cash NOI, representing 33% to 40% of external growth versus our last quarter annualized cash NOI of just under $30 million. And this includes the properties and developments we currently have under contract or closed as of the year-end. Completion of this pipeline will occur throughout 2022 and through 2023, with dates noted in our supplement.
In terms of recent acquisition and development activity, in November, we closed on the 197,000 square foot property in Charleston that is 57% leased to a global investment grade industrial manufacturer. In January, we closed on the acquisition of a 217,000 square foot warehouse in the Charlotte market, which we sourced off market. We were especially attracted to this opportunity because the existing tenant had a short-term lease that expires in the middle of this year at a rate below market.
There is limited availability to compete with this building and we note the current challenges in permitting and procuring, certain construction inputs and warehouse equipment that can continue to delay tenant movement. As a result, we believe having this property which is moving ready and certainty on an availability date is significantly valuable in the current market.
We also are pleased to have entered into a forward purchase of an approximate 280,000 square foot warehouse in the Greenville/Spartanburg market. We're very bullish on the I-85 corridor, which runs from Georgia through the Carolinas and represents the third largest economic region in the U.S after the Boston-Washington corridor in the Greater Chicago area. This region's population which makes up 12% of the U.S is growing at 2x the national average.
Greenville/Spartanburg sits between Atlanta and Charlotte and is very well located for regional distribution with 50% of the country's population within a one-day drive. The key part of this market success is its inland port or intermodal rail yard, which gets overnight shipments from the Port of Charleston. In addition, the region has a very strong manufacturing base, including BMW, Michelin and GE Aerospace amongst others.
The industrial market is over 200 million square feet, which is in line with Nashville, Central Pennsylvania, Orlando in terms of size, and it has experienced absorption of over 10 million square feet in the last year. The property we plan to acquire is extremely well located close to the inland port and BMWs major manufacturing facility and its great access to I-85. We are pleased to add this market to our portfolio and expect this property to deliver in the first quarter of 2023.
A finish up acquisition is noting that we expect to close on the two building 184,000 square foot property in Nashville later in the second quarter. This project isn't a true infill location, with the first building of 79,000 square feet being pre-leased, and we're seeing very good tenant interest in the second building. We continue to be choosy in selecting tenants and giving strong rent growth or stabilize yields continue to benefit from this approach.
Switching to development, as I mentioned earlier, challenges remain in the availability of construction inputs, and even in getting permits. And we also are aware of the impact of current geopolitical events on the price of oil and on supply chains. We continue to proactively address this by pre-ordering key items at the earliest possible dates, pre-purchasing certain excess components we can use across our projects, and making our spec development as moving ready as possible upon delivery.
In the supplement there's a schedule that reflects our updated estimates of construction costs, yields and delivery dates, which shows that we've maintained our strong development yields and margins. We expect to complete our 103,000 square foot Lehigh Valley project in the second quarter. The Lehigh Valley market remains very strong and tight. We pre-leased 66% of the building at a rate above our initial underwriting and the asking rate on the remaining space is now more than 15% above the rate on that pre-leased.
Given the strength of this market, we're excited to have closed on the land to support a previously announced 206,000 square foot building. We expect to commence construction on that project shortly. We also have made good progress in our two building 195,000 square foot development in Orlando, which we expect to be ready for occupancy sometime in the third quarter of this year.
Switching to dispositions. We had a very productive fourth quarter. And as I mentioned earlier, intend to sell the remaining office/flex portfolio. We do continue to have non-core undeveloped land holdings in Connecticut that we intend to actively market and sell over time. These remaining land holdings generate no income and provide a cheap source of capital to help fund our acquisitions and development. I'm also pleased to note that some of our recent as well as several past land dispositions have been to conservation of agricultural preservation groups, as well as for the development of large-scale solar farms.
Moving on to leasing. We only have 340,000 square feet of leases expiring in 2022, the most significant of which is a 228,000 square foot lease in the Lehigh Valley. In addition to Charlotte building that we acquired in January, we'll add to our 2022 lease rollover schedule in the next reporting period.
We completed a couple of renewals in the fourth quarter with tenants that had a fixed renewal rate. I point out that most of our renewals are tied to market for most of our leases, but we sometimes inherit a lease with a fixed renewal term as part of an acquisition. In terms of our portfolio, we only have three leases representing less than 5% of rent, that have fixed renewal rates going forward.
While our near-term lease rollover schedule is modest, we have significant embedded internal growth in our portfolio that we expect to capture over the next several years. Our in-place annual rent escalations averaged just under 3%. And in the current environment, we are pushing in lease negotiations to get escalations at a premium above this previously standard 3%.
Additionally, rent growth has been strong in all of our markets. And even with our relatively young portfolio with lots of new leases, we conservatively estimate the mark-to-market rents in our portfolio is an excess of 20% on a cash basis. For this stat we exclude any mark-to-market growth for the Amazon Build-to-Suit. Overall, we expect our mark-to-market rents to continue to grow given the strength of our industrial markets and quality of our portfolio.
Lastly, I just wanted to discuss our team which performed extremely well this past year. I appreciate their efforts and their loyalty to INDUS as we continue to experience very low turnover. We made great additions this past year, including in acquisitions as well as in finance, legal and operations.
Speaking of finance, Jon Clark officially assumed the CFO role at the start of this year. Jon has been working with us for over 6 months, and we've benefited from his deep REIT experience as well as his efforts in managing our recent accounting and property system conversion, which has gone smoothly.
With that, I'll turn it over to Jon for the financial review.
Thanks, Michael. I'm happy to be part of the INDUS team and engaging with both some familiar and new analysts and stakeholders. I'll just start with a quick review of our financial results.
Core FFO for the fourth quarter was $3.8 million to 29% increase over the comparable quarter of the prior year. For the year, core FFO was $13.7 million, a 19% increase over the prior year. FFO for the fourth quarter and for the full year was $1.7 million and 3.9 million, respectfully. The difference between AFFO and core is our maintenance and capital expenditures and leasing costs for a second generation space, which was $1.7 million in the fourth quarter and that includes two warehouse roof repair and replacement projects with an aggregate cost of about $800,000.
For the year, maintenance CapEx and leasing costs for second generation space was $3.5 million. The other large driver of difference between the two metrics is of course non-cash rental revenue adjustments, such as straight-line rent, which is 1 -- which was $1 million in Q4 and $2.6 million for the full year.
Core FFO benefited the most from the growth in NOI, which was up 25% to $8.9 million in Q4 over Q4 2020 and up 14% to $31 million for the 2021 full year over last year. Contributing to the increase in NOI this quarter was the Charlotte build-to-suit for Amazon that was placed in service in October 2021; a full quarter of rental revenue from properties acquired earlier in the year and lease up over the past year of both first- and second-generation space.
Now turning to cash same property NOI for the industrial logistics properties. For the 2021 fourth quarter and full year periods, growth in cash same property NOI was 9.2% and 8.3%, respectively versus the comparable 2020 periods. Our same cash property NOI for the 2021 fourth quarter benefited most from the burn off of free rent on first generation space at previously delivered spec buildings, offset by free rent this quarter on a 280,000 square foot renewal, which represented about 7% of the total SPNOI pool.
I'd point out that for the most part of this year our same property pool is 100% leased, and we expect to have very few new leases in the same property pool in 2022. This is going to make for some tough comparisons this year. At the same time, the same property pool represented about 76% of our total cash NOI from industrial logistics properties for the 2021 fourth quarter as our acquisitions and development activities ramps up, a larger and larger percentage of our total portfolio is not going to be captured in this metric.
Wrapping up just a few things on the income statement. Interest expense decreased slightly, reflecting an increase in capitalized interest, which correspond to an increase in development activity. Offsetting that slightly was interest from the new construction loan related to the Charlotte build-to-suit.
General and administrative expenses were $3.8 million in the 2021 fourth quarter and $11.8 million for the 2021 full year. Excluding the non-cash mark-to-market charge related to the non-qualified deferred compensation plan, G&A expenses were $3.5 million in the 2021 fourth quarter and $11.1 million for the year.
The fourth quarter numbers were higher than the first three quarters, reflecting the growth in compensation and recruitment expenses from increased headcount as well as the increase in the incentive compensation related to the company's strong performance. The impact of year-end bonuses for new talent added to the team also contributed to the increase and it was primarily recorded in this fourth quarter.
In addition, of course the overlap between myself and Anthony, our retiring CFO contributed to the increase. These increases were partially offset by a reduction in legal and accounting costs of about $1.3 million that was incurred in the prior year related to the company's conversion to a REIT.
During the fourth quarter, we generated about $34.5 million in proceeds from dispositions of non-core properties, and applied the majority of that to recent acquisitions of industrial and logistics properties. We also paid off $14.1 million in mortgage debt with an average weighted interest rate of approximately 5%.
Prior to the sale, NOI generated from the disposition properties was about $2.7 million annually. This included 1985 Blue Hills Avenue, 5 and 7 Waterside Crossing and 21 Griffin Road North as well as undeveloped land lease to a farm operator, all of which were sold in Q4.
We finished the year with a strong balance sheet that provides significant flexibility to fund our growth initiatives. In October, we raised $153 million in net proceeds from the issuance of 2.44 million shares of common stock in an underwritten public equity offering. Our liquidity at year-end was $250.3 million reflecting $150.3 million in cash, plus the undrawn capacity of the credit facility.
In addition, we had $10.3 million of restricted cash on our balance sheet at year-end. The majority of which was cash held in connection with the 1031 like-kind exchange, and it was used in January 2022 for the purchase of the 217,000 square foot building in Charlotte that Michael had mentioned. We ended the year with approximately $172 million in mortgage and construction loan debt. And excluding our cash balance, our current debt to total enterprise value is approximately 17%. Net of cash, we essentially have very little debt on our balance sheet.
As Michael mentioned earlier, we announced this morning our intention to exit the office/flex business and sell the remaining 7 office properties which comprise about approximately 175,000 square feet as well as the 18,000 square foot storage building that primarily serves the management of those properties.
Beginning with Q1 2022, we expect to classify this group of assets as held for sale on our balance sheet, and the operations and ultimately -- ultimate sale will be recorded as discontinued operations in our income statement. As a result, we will report core FFO, AFFO, cash NOI and any other financial measures without the assets to be disposed of.
The office/flex business generated NOI of approximately $2 million for the full year 2021. But remember, we sold some of these properties, the most significant of which were actually building sold in the fourth quarter. Excluding assets sold during the year, NOI from what would be the disposition portfolio of the office/flex properties was $1.1 million NOI.
The disposition portfolio including the 18,000 square foot storage facility, which is currently classified in industrial on our supplemental, has a net book value of approximately $6.5 million as of December 31. Looking forward to 2022, we wanted to help orient some of our investors and research teams around on a few financial line items.
Please note these assumptions do not include any new acquisitions or developments other than what's already been identified and scheduled on our pipelines, and do not assume any material capital raises of either equity or debt. They also exclude the financial results of the office/flex assets that'll be treated as a discontinued operations beginning with the first quarters reporting.
For 2022, we estimate NOI to range between $34 million and $38 million. I would remind you that this range reflects the removal of NOI from the dispositions we completed in the fourth quarter, and the removal of NOI from the expected sale the remaining office/flex assets.
Additionally, new building deliveries and several leases will be back end weighted in 2022. As an offset, we did budget for some potential downside -- downtime among the few removal -- renewals that we have this year, which generally occur in the second half of the year, particularly in the fourth quarter. As a result, the NOI range is forecast to increase each sequential quarter through Q3. And then with a little bit of flattening out in Q4 due to the leasing assumptions I just noted.
We estimate G&A excluding the mark-to-market changes on the non-qualified deferred comp plan to range between $13 million and $13.5 million. This growth reflects the full year compensation for new and planned talent added to the team in 2021 and 2022, including additional acquisition staff. With this amount, we estimate between $1.5 million and $1.8 million of non-cash stock-based compensation, and note approximately a half million of this reflect stock grants as part of our incentive compensation plan.
Last year, we began issuing stock compensation with a 3-year vesting period. So, we'll accordingly have increasing non-cash stock compensation costs for one more year, and then after that increases are expected to moderate. Additionally, including our G&A this year is approximately $400,000 of costs tied to the second half implementation of our new accounting, budgeting and project management system, and some related ongoing consulting fees. $200,000 of this expense is expected to be incurred in the first quarter.
Finally, I just like to note that we currently have sufficient liquidity to fund nearly all the investments required in 2022 for our existing properties as well as developments and forwards in our pipeline with just our existing cash on hand. Note that some of the spending will bleed into 2023, which is not addressed in the assumptions I just walked through.
As we had stated in the past, our current low levels of debt utilizing a conservative debt to asset value ratio, we believe we have the capacity for additional debt on future acquisitions and developments, in addition to any potential equity we raised.
With that, I'll turn it back over to Michael.
Thank you, Jon. We have great momentum in our business and remain focused on our strategy for growing cash flow, net asset value, and most importantly, shareholder value. I'm very excited about what we accomplished in 2021 and I'm encouraged by INDUS's future.
That concludes the prepared remarks. And I'll turn it back over to the operator to take your questions.
[Operator Instructions] Our first question comes from Connor Siversky with Berenberg. You may now go ahead.
Good morning, everybody. Thank you for taking the questions. Just to start, appreciate the color on the acquisition pipeline. I'm wondering if you can provide any perspective as to what competition is looking like in these current markets, whether you're seeing any cap rate movement. And kind of in real time since we're emerging into this somewhat extraordinary environment, you -- are you changing your expectations for the end of the year? Or are things relatively consistent on that end?
Yes, thanks, Connor. Good to hear from you. Yes, at this point, cap rates seem to be about where they -- they've been. We really haven't seen major changes in the markets we're looking at. I think good -- high-quality properties that are well located continue to be have low cap rate expectations. And I think as we look forward, it's obviously hard to predict the future. The 10-year had gone up for quite a while now. It's kind of settled back in obviously, there's a lot of uncertainty on the geopolitical front. But the underlying demand industrial remains really strong, rent growth remains really strong so that asset class and properties remain really attractive and continue to do well. So, it's sort of I think, status quo for the moment and where we think cap rates are and where they're going.
Got it. Thanks for the color. And then second for me on the development pipeline, seeing the $31 million that has already been spent. Can you clarify at all just how to spread out that funding between the five projects and the supplemental?
If I have to get back to you with that, I think, if you effectively look at the dates where the projects are delivering, typically to spend to get fairly back end waited just between time and a paying bills. The vertical construction is usually the biggest chunk of that, and that's kind of the last several months of the project. So, it's going to, if you think about each project kind of back end wait towards when the delivery dates are, it's probably the best approximation I can give you.
Got it. That makes sense. And then just an aggregate, can you get a sense of what the cost per square foot is looking like?
I don't have that off the top of my head. What we're seeing in general is kind of building shell costs. During that have driven up to about $60 foot range. The biggest change -- the biggest variable amongst our different projects is really land costs and a little bit of the site costs depending on the situation. Building costs have been fairly, fairly consistent across that. We can get back with that calculation on average per foot and thus, Ashley or Jon, have it handy.
Got it. Appreciate the color as well. And just last thing, I apologize if I missed this in the prepared remarks, but on the sale of the office/flex portfolio, any idea of timing on those dispositions?
We didn't give any timing, but we're launching marketing in any minute and hopefully, we'll be able to sell those as quickly as the process takes. But it's going to be several months of marketing, and then due diligence in any respect. And our goal is to have that done by the -- before the end of the year. But we'll have to see how the process goes.
Hey, this is Ashley, Connor. The development costs for the buildings that we've disclosed in the pipeline, that 92.8 in the supplement is that is roughly around 112 per square foot.
Okay, okay. I appreciate it.
And the only other -- at least one of follow-up on the office, we are, as Jon indicated that intention split those into discontinued operations. So, the financial results won't be reported for the next four quarters really going forward. So, '22 will be a clean industrial P&L numbers.
Okay. Good luck for the end of the year. Thanks for having me on the call.
Our next question comes from Dave Rodgers with Baird. You may now go ahead.
Yes. Good morning, everybody. Thanks for the continued improvement in disclosures and all the information that you're providing. It's very helpful. Michael, maybe wanted to start on the lease expirations for the year. It sounds like you're down to four after the two fixed rate renewals in the fourth quarter, if I've got that, right. Maybe talk about what you expect on the spreads. And then I did hear some downtime in the guidance commentary, and so maybe kind of tell us where the downtime is and where you'd expect that to kind of come out if I understood that correctly.
Yes. Sure, Dave, and thanks for the questions. As you mentioned, kind of the biggest renewal that's kind of scheduled is a building at Lehigh Valley. That's a market that's seen really strong rent growth. So, we would -- our expectation is we'll have a good leasing spread on that. I mean, in general, if we think about our mark-to-market rents, and think about our different markets, that Lehigh Valley has the highest mark-to-market potential in the portfolio. So, we feel good about the opportunities there. The other roles that kind of one of the tenants that roll in is actually moving into the building in Connecticut, they're taking two-thirds of that building in Connecticut. Given the timing of that there's actually a chance, they probably stayed overlap in that building potentially through the end of the year. So that might not end up being a new lease this year.
And one other that we mentioned is a building in Charlotte that we bought, was not in the queue for rent roll, but that lease comes up over the summer. And so that's one also we expect to see a good growth in that we bought it with a value add. In terms of the downtime, we just always assumed not every tenants going to renew. We have that Charlotte building I mentioned, the Lehigh Valley building. So, we just take into our estimate some downtime. It's not based on our belief that a tenant may leave or not leave. Some assumption that someone might leave at some point. But the Lehigh Valley markets extremely strong, there's lots of interest in the space and we feel really good about releasing that if the current tenant doesn't stay. In, same in Charlotte, which, again, we've assumed some downtime if that tenant doesn't stay with their lease coming up in the summer, but we feel really good that tenant possibly could stay or that there's really good demand in the market.
Appreciate that, that's helpful. Maybe second on the acquisition pipeline that you provided in the supplement. I know for the developments, you gave a weighted average stabilized yield expectation. I didn't see a number related to the acquisitions. And if I missed the comments, I apologize, do you have an updated kind of cap rate for the acquisitions in the pipeline? And maybe just a derivative question to that. Do you share any upside with the seller beyond what you've paid them up front?
So, on the acquisition pipeline, part of the reason we don't disclose is typically the sellers ask us not to until we've closed on it. And typically, I think for most of our acquisitions, even not wanting to have kind of a longer tail to it, we typically just bring it out at the end. Yes, I think what we said is you combine the acquisitions with the development, it's a load of myth five, since we give you the development back into the acquisitions, One, fascia, it's a number handy. In terms of the way the forwards work, they're generally a fixed price. So, if lease rates go up a lot, that's going to be to our benefit. So there really isn't a yield premium or anything else in the way that fillers are written. So, our price is X dollars. And that's what we pay at the end. There's cost overruns, it's, again -- the developer incurs those. And if rents continue to grow nicely, which we expected most of these markets that yield upside goes to us.
Got it. Thank you. That's very helpful, if I can do the math.
So, Dave, this is Ashley. I did want to point out too, that given the city conference this week, we just published a new investor deck this morning as well. And there's a little bit more detail on the acquisitions and yield, and kind of NOI bridge in that deck if it's helpful and happy to connect after the call.
I'm sure it'll be helpful. Thanks. We'll take a look at that. Last question for me, you create a good liquidity position, $160 million of cash roughly on the balance sheet at the end of the year, that ties out pretty equally to your acquisition and your development pipeline. So, as you go forward, do you anticipate continuing to pre-fund these announcements? Will you use more aggressively an ATM program? How should we think about the financing strategy around new announcements of investments?
Yes, I think, you know, there's a combination. I think, ideally, we're going to more closely match fund what we need, as we go forward with growth. And I think in John's comments, he mentioned, even using up all the cash we have, we've still been a very low leverage position, and therefore a flexibility to draw down the revolver and use additional debt to fund which, which we can do easily and incrementally.
And on the equity side, again as once we use up our cash and have additional needs, we agree that match funding using ATM is an efficient way to grow balance with or the advantage of doing larger equity deals as well at the right -- for the right time in the right thing. So, we're open to all those, but agree it's obviously makes financial sense, the better we can match fund against our near-term needs the better.
All right. Thank you.
Our next question comes from Tom Catherwood with BTIG. You may now go ahead.
Thanks. Good morning, everyone. Just following up on Dave's last question there, Jon obviously, you would mention not doing incremental equity or debt this year. But now that you've delivered old Statesville in Charlotte, what are your thoughts on terming out that construction loan and potentially accessing some excess proceeds for future reinvestment?
Yes, I just wanted to reiterate, I mean, we're in position where we wouldn't need to use any liquidity. I don't know that we would say that we wouldn't raise some debt or equity for this year, particularly, as Michael mentioned, to match fund. And also, I would say as far as doing construction financing, the terms on our revolver are actually pretty favorable and pretty unrestricted. So, we likely would just basically tapped in -- tap into our revolver, which is unutilized right now.
Yes, I think more generally time. I think your question is a good one about how we deal with the Amazon construction tat hat over time, as Jon said, we can obviously just switch it and have it on a revolver or seek to do other things to look at where interest rates are and what we could do to secure some longer-term funding, but obviously nothing we've announced or can discuss right here. But I think there's a lot of different options for that. It's a great asset, and provides great cash flow. So, it's something that will evaluate the best way to kind of continue to finance the business.
Makes a lot of sense, provides a lot of flexibility. Switching over to development for your [indiscernible] road asset stabilization. Timeline implies that you'll have the balance space leased up within the next few months. Does the tenant that did the 67% pre-lease have an option on the balance of the space? Are you all free to kind of go out there and lease as you see fit?
Yes, we're free to lease the remaining, call it 35,000 square feet. And I think the tenant that's in the two-thirds, that's the space they need. So, we're out marketing that space now. The building should complete in the next couple of months. So, we're hoping you will that market remains pretty tight and strong. So, we're hoping to find the right tenant for that space. As I mentioned, we're expecting rents to be at a premium to what we did the adjacent lease add. And we're hoping to find that tenant put him in as soon as we can.
Appreciate that, Michael. And then finally on 110 Tradeport, it's also another 33% there. How is the demand kind of shaping up there especially compared to a Chapman's road type asset?
Yes, I think the man there also has been good, We’ve got a series of Enquiries for that space. That delivery is a little bit later. So part of it is, as is sort of typical, and maybe even getting more so, his tenants are always looking for space immediately. What they're finding a lot of markets that there isn't anything immediate. So, they are starting to look a little bit longer ahead. But they also recognize deliveries, and even getting their own materials to put into their space take time. So, with that building, and where it is in construction, we've seen a number of increase. There's always discussions ongoing, but we expect even more interest in the next couple months as those panels go up and things really get moving their
Raises a good point just with tenants looking ahead, not able to find space has that given you any thoughts to starting, I don’t think you have entitlements at 105 trade port, if not mistaken. Any thoughts on maybe starting that sooner rather than later just to meet the market? Or is that something where you'd be looking to do a substantial pre-lease to start that?
Yes, I think at the moment, we're leaning at the moment towards waiting for either previous or built-to-suit, I think we're waiting to get 110 Trade Port completed and ensure we lease that back piece again, we're seeing really good interest. So that, that seems to be going well. And there's been a number of other projects that have leased up in and around the Connecticut markets. So, we feel really, really good about tenant demand, tenant interest in that market, rent growth in that market. So, it's definitely something to consider, but nothing we've announced yet.
Unidentified Company Representative
Got it. Appreciate the call. Thanks, everyone.
[Operator Instructions] Our next question comes from Brian Hollenden with Aegis Capital. You may now go ahead.
Yes, good morning, guys. Thanks for taking my questions.
Sure. Good morning, Brian.
Maybe if viewed on the macro side. Can you talk a little bit about inflation, what you're seeing from materials and labor versus the third quarter? And do you see these current levels of inflation continuing for the next few quarters?
Yes, So what I'd say on that is, 2021 sort of the biggest piece of the cost increase was structural steel. And I think we've talked about and others that if you think about a warehouse building, kind of vertical construction, the work -- the steel cost went from something in the mid-single-digits to the mid-teens, so almost a tripling of that component. And as I said, I think a little earlier in the call, kind of building costs are now in the 60s per square foot for vertical construction that used to be in the 40s, 45. So that was clearly a big piece of that. As of fairly recently that it sort of that growth had leveled off so much for structural steel.
I think, based on current geopolitical oil prices, everything else, we believe construction materials related to petroleum are clearly going to go up, that impacts probably the biggest factor will be an Asphalt for paving of [indiscernible]. Again, Asphalt is not a huge number. So even a kind of doubling of that cost is a couple bucks a foot, it's not $10 or $12 a foot of increase. So that's where we see sort of the private biggest increased comment along. There's also roofing materials PVC pipe in other things, but again, cause they're not in the order of magnitude of steel.
So as of kind of fairly recent information, costs have been going up a little but sort of manageable this year. I think Asphalt, particularly in the north -- Northeast and mid-Atlantic, when the Asphalt plans reopen with new pricing, we'll have to see exactly where that shakes out. But again, it's not something we think is going to be a huge step change in costs. Overall, there's inflation. We all see -- we all read about the same news. So that's going to, again, continue to drive up some costs. Labor, there's been some pressure on labor costs, but not a lot from what we've seen across our developments so far.
Thanks. That's helpful. And then just maybe switching up to interest rates, do you see a rising interest rate environment, slowing down the build cycle or demand from tenants?
Yes, it's hard to say exactly. I mean, again, I think we all thought interest rates we're going up, this kind of trade it back down. Obviously, inflation somewhat ties to where interest rates may or may not go. I think in our view, tenant demand going to remain strong. We think there's just several levels of several drivers of that demand, that are a little bit maybe disassociate from interest rates. It's ecommerce that everyone talks about. We think a lot of it is not just ecommerce, but B2B deeds. We just have tenants that are -- make engine parts or replacement parts, and they're growing their footprint, because they have shorter delivery times as well for their customers. It's not just one day Amazon deliveries, its 2-day delivery to all their customers.
In addition, I think with inflation and higher interest rates, ways for companies to save money is, frankly, reduce labor costs. So, drivers are hard to get, drivers are expensive for trucks, fuel costs are going up. One way to do that is to increase your distribution space and have more warehouses closer to where you need to be. So, we think that also is a driver. And if the economy stays relatively strong, that's definitely going to support growth. So, we feel that demand is really good in there. And rents have been kind of going along with it. It's still a challenge to get buildings delivered. But beyond kind of that near-term challenge, it remains a challenge to get really good quality land and really good locations, where people want to have warehouses closer to where the people are, but where the people are, they don't really want warehouses nearby.
So, with that, when you can get those well-located sites and put up really good buildings, it's going to drive rent growth, there's just that underlying tailwind to demand so we feel really good about developments -- and through to find additional development opportunities and for the short, medium and long-term benefits, not to say it's a cyclical business. There may be some slowdowns here and there, but there's just an underlying kind of nice tailwind to growing the business.
All right, thank you.
If no more questions, this concludes Industrial Realty Trust fourth quarter and full year 2021 earnings call. Thank you for joining us and enjoy your week.