First Industrial Realty Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2024

There are 19 speakers on the call.

Operator

Good day, and welcome to the Industrial Realty Trust Inc. 2nd Quarter Results Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing.

Operator

Please go ahead.

Speaker 1

Thank you very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our Q2 results and our updated guidance for the year, 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, July 18, 2024.

Speaker 1

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 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 Peter Baccile, our President and Chief Executive Officer and Scott Musil, Chief Financial Officer.

Speaker 1

After which, we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer Peter Schultz, Executive Vice President Chris Schneider, Executive Vice President of Operations and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me hand the call over to Peter.

Speaker 2

Thank you, Art, and thank you all for joining us today. As we discussed on our last earnings call, 2024 is all about leasing. Since that call, our team has delivered some big leasing wins, both in our core portfolio and within our development projects. We're also excited to discuss the 3 new development starts that we kicked off in the Q2. More on all of this shortly.

Speaker 2

Looking at the industrial market broadly, fundamentals are slowly improving, although as expected, U. S. Industrial market vacancy ticked up by 40 basis points to 5.7% as last year starts continue to come online. New starts remain disciplined, totaling 50,000,000 square feet in the 2nd quarter, down 55% from the peak in the Q3 of 2022. With respect to demand, the market saw an uptick in tenant requirements being converted into leased spaces.

Speaker 2

Year to date, net absorption nationally was 70,000,000 square feet with 48,000,000 within our target markets. As the pace of demand continues to improve and new starts remain muted, we could see slower increases in vacancy near term and potential declines in 2025. Turning now to our leasing wins. For 2024, we're now through 88% of our expirations by net rent with a cash run rate change of 45%. This population now includes the renewal of the 221,000 square footer in the Inland Empire West we spoke about on prior earnings calls.

Speaker 2

Our 2024 guidance range for the increase in cash rental rates on new and renewal leasing remains 40% to 52%. The lease extension for the other significant Inland Empire West rollover, the 300,000 square footer, is still in progress. Note that the midpoint of our FFO and cash same store NOI guidance do not include any benefit from this potential renewal. We're also beginning to see some early decision making on our 2025 lease expirations. I'm pleased to report that we recently inked the renewal of our largest 2025 expiration, a 1,300,000 square footer in Pennsylvania.

Speaker 2

We'll provide you an update on our progress for next year's rollover on our Q3 call as we have done in prior years, but we're off to a strong start. As I mentioned at the beginning of my remarks, in the Q2 and Q3 to date, we signed 6 speculative development leases across several markets, including Southern California, which totaled approximately 1,100,000 Square Feet. This is almost half of the 2,300,000 square feet of speculative development leasing that was included in our updated 2024 FFO guidance provided on our Q1 call in April. In the Q3, we inked a full building lease for our 461,000 square foot First Pioneer project in the Inland Empire East to a 3PL. We also just signed a 61,000 Square Foot lease at our First seventy six project in Denver.

Speaker 2

In the second quarter, we signed a lease for the entire 359,000 Square Foot First State Crossing project in the Philadelphia airport market to a leading food and beverage company. We also leased the remaining 64,000 square feet at our 1st steel asset in Seattle and a 120,000 square feet at First Park 94 in the Kenosha submarket of Chicago. In South Florida, First Park Miami Building 12 that we just completed in the Q2, we've already leased a third of the 136,000 square foot building. The South Florida market continues to outperform and given our success there, we are starting 2 new projects. First Park Miami Building 3 is now underway.

Speaker 2

This is the latest phase of the 13 building, 2,500,000 Square Foot Park, where since 2021, we have successfully leased and placed in service 1,100,000 square feet of building that on average leased up well within our pro form a. Building 3 will be a 198,000 square footer to serve 1 or multiple customers and the total investment is estimated at $50,000,000 In a highly infill location in Pompano Beach in Broward County, we started a 60,000 square footer with an estimated investment of $15,000,000 The site is located directly between I-ninety 5 and the Florida Turnpike, an attractive location for businesses serving the Tri County area of Broward, Palm Beach and Miami Dade. Our combined estimated yield of these 2 South Florida projects is approximately 7%. We're also starting a 425,000 square foot development in the Northeast side of Houston at our infill site with frontage on Interstate 610, the First Loop Beltway. Total investment is expected to be approximately $44,000,000 with a cash yield of 7%.

Speaker 2

Prior to beginning construction, we inked the lease for 50% of this building. Moving to dispositions. In the Q2 and Q3 to date, we sold an incremental $90,000,000 of assets bring our year to date total to $138,000,000 With that, I'll turn it over to Scott.

Speaker 3

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.66 per fully diluted share compared to $0.61 per share in 2Q 2023. Our cash same store NOI growth for the quarter excluding termination fees was 5.6%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, rental rate bumps embedded in our leases and lower free rent, partially offset by lower average occupancy.

Speaker 3

We finished the quarter with in service occupancy of 95.3 percent and we have approximately 200 basis points of opportunity from developments placed in service in 202320 24. Summarizing our leasing activity during the quarter, approximately 2,900,000 square feet of leases commenced. Of these, dollars 500,000 were new, dollars 1,200,000 were renewals and $1,200,000 were for developments and acquisitions with lease up. Before I touch on guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in 2 of our bank loans. Also, the incremental funding required to complete our current development projects will be covered by our Q3 sales proceeds to date and our projected excess cash flow after dividends and capital expenditures during the construction period.

Speaker 3

Moving on to our updated 2024 guidance for our earnings release last evening. Our guidance range for FFO is now 2 point $6.7 per share, which is $0.03 higher at the midpoint than our prior guidance. This is primarily due to the progress we have made in leasing up our developments since last quarter's earnings call. Note as we detailed on our 4th quarter earnings call, our guidance excludes approximately $0.02 per share of accelerated expense related to an accounting rule that requires us to fully expense the value of granted equity based compensation for certain tenured employees. Including this $0.02 per share of expense, our NAREIT FFO guidance range is $2.57 to $2.65 per share.

Speaker 3

Key assumptions for guidance, all of which are unchanged since our last earnings call are as follows: quarter end average occupancy of 95.75 percent to 96.75 percent same store NOI growth on a cash basis before termination fees of 7.25% to 8.25%, primarily driven by increases in rental rates and new and renewal leasing along with rental rate bumps embedded in our leases. Note that the same store calculation excludes the 2023 one time tenant reimbursement that we previously disclosed. Guidance includes the anticipated 2024 costs related to our completed and under construction developments at June 30. For the full year 2024, we expect to capitalize about $0.05 per share of interest. Our G and A expense guidance range is $39,500,000 to $40,500,000 This includes the roughly $3,000,000 or $0.02 per share in accelerated expense I referred to earlier.

Speaker 3

Lastly, guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or payments nor the potential issuance of equity after this call. Let me turn it back over to Peter.

Speaker 2

Thanks, Scott. Congratulations again to our team for several Q1 earnings call. For the development leasing progress we have achieved, we're excited to allocate incremental capital to our South Florida portfolio as well as our new Houston project, which is already 50% leased. Our team is steadfastly focused on delivering on the remaining development leasing opportunities in our portfolio, which will contribute to our cash flow growth in 2025 beyond. Operator, with that, we're ready to open up for questions.

Operator

Our first question comes from Rob Stevenson with Janney. Please go ahead.

Speaker 4

Good morning, guys. You sold $90,000,000 of properties recently. Can you talk about the health of the disposition market today versus last year, given that we still yet to see any rating rate cuts and the banks have become more conservative on lending on industrial in 2024 to some of these potential buyers of your dispositions?

Speaker 2

Yes. I mean, we on the assets that we're bringing to market, we're getting number of NDAs and a significant number of bids. So there's a lot of capital out there. Remember that the assets that we're selling are most appealing to local buyers, users, and the 1031 buyers are back. So there's significant capital searching for new opportunities to invest in the space.

Speaker 4

Okay. And then, Scott, the 200 basis points of occupancy upside from leasing, the second half 'twenty three and first half 'twenty four developments that you guys talked about in the release, Is that inclusive of the leasing that you've announced in the release and on the call today? Or is that in addition to those announced leases?

Speaker 3

That's in addition to that Rob. So it's the 1,200,000 square feet of development that we still have in our guidance for 2024, all assumed to happen in the Q4.

Speaker 4

Okay. And then what is the difference yield wise today for you guys leasing an asset on a multi tenant basis versus a single tenant basis? Is that material?

Speaker 5

Rob, it's Peter Schultz. I would say it depends on market and asset. In some cases, it would be a little bit better, but not a wide margin today. Jojo, anything you want to add to that?

Speaker 6

Yes. Would agree. And then to the extent that the tenants get smaller, there's a little bit higher rent, but then you have to offset that by the increased demising costs. So overall, just like Peter said, it's not material difference.

Speaker 4

Okay. Thanks guys. Appreciate the time this morning.

Operator

Next question comes from Craig Mailman with Citi. Please go ahead.

Speaker 7

Hey, good morning. Just, Peter, I want to circle back up on your commentary that demand is starting at least get a little bit better here and put that in the context of the 1,100,000 square feet of development leasing guys have done since 2Q. I mean, as you look at those deals, what was the mix of deals that had been in the works for a couple of quarters versus maybe some that popped up more recently because people are trying to start to make decisions at this point?

Speaker 2

Yes. So good question. We have seen a good mix of both, I'll say, longer term gestation periods and shorter gestation periods. The larger deals, I won't surprise you, have been in discussion for a while. That just continues to be the case across the board, across the country that those deals take longer to do.

Speaker 2

We have the examples of the shorter gestation periods, the lease we signed in Denver, the lease we signed in our recently completed building at First Park Miami, those were not prospects in Q1. So those came and got done within the second quarter. Another good example is the partial build to suit in Houston, the gestation period on that was about 3 months. So, I guess you when you look at this, you would say that for smaller deals, that time frame is a little bit shorter and for the larger deals, as has been the case for several quarters now, those are taking longer.

Speaker 7

That's helpful. And then the 1st Pioneer lease to the 3PL, that's been a tenant segment that's been a little bit slower there. Can you just talk a little about that tenant, their needs? And just in terms of kind of the final returns on that given concessions rising that market? Was it materially different than what you guys had underwritten?

Speaker 7

Or was it or just any detail on that would be helpful?

Speaker 2

Jonjo, you want to take that?

Speaker 6

Sure. Thank you. So overall, this is a 3PL that has business in both the U. S. And Canada.

Speaker 6

And this is a this market was a growth market and this was a growth need for our 460 First Pioneer. Basically, the need was to establish a state of the art facility that has VNA technology or very narrow aisle and some robotics, with a lot of green kind of initiatives. That's basically the need. Our facility perfectly fit that and that was why our facility was chosen. In terms of yield, it exceeded the rents here exceeded our original underwriting and I will not quote you the exact yield, but I would tell you is in the low to mid-seven yields, which basically creates a lot of value.

Speaker 7

That's helpful. Then just one more to slip in here. The 1,300,000 square foot renewal in PA, I know you guys aren't giving a ton of details, but is the spread on that consists of where you guys have signed the average in 2024? Or is that materially different?

Speaker 5

Craig, good morning. It's Peter Schultz. You're right. We have a confidentiality agreement with that tenant. So we're not able to disclose much information.

Speaker 5

I will tell you that they exercised a fixed rate renewal option that was negotiated in the second half of twenty seventeen.

Speaker 7

All right. Thank you so much.

Operator

And the next question comes from Ki Bin Kim with Truist. Please go ahead.

Speaker 8

Thanks. Good morning. Could you start off by commenting on what you're seeing from a leasing demand standpoint, the improvement you're seeing? I know you mentioned some of it. I was just curious about the sustainability of that.

Speaker 8

And the pickup in leasing, congrats on it. Was it back end weighted in the quarter? Because Peter, I know you have a good poker face, but I didn't get the sense that there was this much activity from our kind of last NAREIT meeting.

Speaker 2

I'll start with this and then Peter and Jojo should chime in. Look, obviously, as we achieve some progress here with leasing, the data become more clear. Decision making on the whole remains fairly deliberate. It's still early to determine the resiliency and the pace of demand even though we see today indicators are pointing in the right direction. So we would suggest not to draw potentially long term conclusions from 1 quarter of activity.

Speaker 2

But we can say that things are feeling a little bit better. Peter, do you want to add to that?

Speaker 5

Ki Bin, I would just add that we're seeing more inquiries, more inspections, more RFPs. And as we've talked about now in the answer to a couple of questions, notably, we were pleased with the decision making timing of several deals that we've just announced in our development deals, whereas Peter said, the larger deals continue to move slower and that hasn't changed and we don't really see any indication that it will change. But it's a little bit more buoyant than it was earlier in the year.

Speaker 2

Let me say one more thing on this. There are still several alternatives to each space for the prospects that are available. And until that changes, the sense of urgency and the deliberate pace aren't going to change. And having said that, the national pipeline is down to about 289,000,000 square feet

Speaker 9

from a high of over 600,000,000.

Speaker 2

So we're getting there. And hopefully, net absorption will continue to improve as the year goes on.

Speaker 8

Okay. And in terms of the acquisition markets, what does the opportunities look like for you in pricing? I know you bought a small deal in LA this quarter at a good yield. So I was just curious how you might compare some potential yields that you might get on acquisitions versus development yields you're

Speaker 10

getting? So

Speaker 6

markets, Ki Bin, remain to be competitive. There's a lot of buyers both in one off assets, acquisitions and even land for development and across most markets. Capital is abundant. There is actually a more active investment pace now compared to Q1 and definitely compared to Q4 of last year. So the investors are back.

Speaker 6

We're very pleased with the acquisition we did in the Verdon submarket of LA, one of the tightest markets there with abundant power. And but the way we got that was as an off market deal, we actually closed the deal with this large tire manufacturer and they enjoy doing business with us and then that led to another piece of property that we end up transacting with them. So it did not hit the market.

Speaker 8

Okay. Thank you,

Operator

guys. The next question comes from Nick Thielman with Baird. Please go ahead.

Speaker 9

Hey, good morning guys. Wanted to go back to development and kind of just touch on the activity you're seeing on the space that remains to be leased. Any material change here? It sounds as though activity is a little bit better. And then have you changed kind of the concessions you're willing to offer on lease up here?

Speaker 5

Peter, do you want to start with that one? Sure. So let's talk about Denver first. We have our largest building there, 588,000 Square Feet. We continue to see activity from partial and full building users.

Speaker 5

I would say more activity with full building users at this time. The supply picture has improved in Denver. The competitive set has been reduced by half for that building as a result of a large 3PL leasing in 1,000,000 feet and a corporate occupier putting a building under contract to buy. So that's certainly a good backdrop for decision making there. As we've talked about, the larger deals have been moving slower for a number of reasons, including that they have more choices.

Speaker 5

So fewer choices is a good thing. The smaller building endeavor, we continue to see pretty good activity. We're pleased with the lease we just did, that got done start to finish from when we first started discussions with that tenant in less than 90 days. So that was a good indication of some urgency. In Pennsylvania, the building that we put into service at 50% occupied, we're in discussions with Orlando, the 4th building in our 1st loop project, we have some activity there.

Speaker 5

We'd like to see a little bit more. Jojo?

Speaker 6

Yes. Just on renewal activity, we have been most active in I. E. On renewal activity. It has not materially changed a lot.

Speaker 6

But like Peter Vasily had mentioned, there are some options. So the market is competitive, but we're very, very pleased about the renewal rates that we got. Not much change in free rent or TIs. And as you know, we leased the 1st Pioneer. That was done card market terms, long term with market TIs and market free rent.

Speaker 6

I would say that if you look at activity, the only development that we have constructed in 2023 in the SoCal market that's not been leased is our 83,000 footer. That is a low coverage site in Inland Empire West. And that kind of facility right now is somewhat slow because it has a lot of surface use. So we expect when productivity grows more in the future, I think that would be an asset that everybody would be interested in taking. And then it's still we just finished the other buildings in SoCal, and we're early in the process.

Speaker 6

And like we said, we budget 1 year lease on those, and we just completed those.

Speaker 9

That's helpful. And then going back to dispositions, kind of what you've completed year to date, you're kind of near the upper end of the range for this year. Is there more opportunity there? Or should we kind of just view it as you're well funded, anything else that kind of be non core sort of sales?

Speaker 2

I think you're correct. We've got plenty of funding and we'll continue to dispose of assets where we think the growth opportunity has passed and we can take that capital and redeploy it in better use. The volume of sales is likely to be lower going forward.

Speaker 10

That's it for me. Thanks.

Operator

And the next question comes from Rich Anderson with Wedbush. Please go ahead.

Speaker 11

Thank you. Good morning and great quarter. Question on market rents versus cash releasing spreads. I don't know if you mentioned what you're seeing nationally or in your portfolio in terms of market rent. Let's say the number is flat or up a bit or down a bit.

Speaker 11

And you have 40%, 50% cash releasing spreads. At what point do you think we get to a situation where because of that sort of imbalance in those numbers that we get closer to a cash releasing spread that's more pedestrian in nature, more like a 10 percentage number. Does that happen based on that math anytime soon?

Speaker 2

We've looked at that and the resilience of that mark is pretty good. So it has some duration. Obviously, it depends solely on whether rents, you called them flattish, let's go with that. If they were to fall significantly, then the resiliency of that mark goes away. But under what you might say 1 or 2 derivatives analysis, that mark has some resiliency.

Speaker 2

It will clearly come down each year because we're not growing like we were in 2021 2022.

Speaker 11

Okay, fair enough. And then in terms of your conversations with tenants, I would say election year, could very easily hear more conversation around tariffs and whatnot depending on who wins. What is how does that play into A, the mindset of your tenants and B, in the mindset of you guys in terms of does that become an opportunity or does it create disruption? Like where are you at on sort of the political landscape in 2025 and beyond?

Speaker 2

Yes. I think obviously the biggest question around that is the tariff question. Interestingly, both candidates are for tariffs. It seems that Trump is for much higher tariffs. Tariffs generally aren't going to be great for the country as they create a ton of inflation.

Speaker 2

But getting more specific to our space and our prospects, the tariff rates right now are on and increasing on semiconductors, EVs, lithium batteries, solar shells, ship to shore cranes, things like that. Those are not the kind of products that generate demand for our warehouses. Toys, furniture, that's a different conversation. That product is in our and our peers' warehouses. So it really a lot of the discussion is around manufacturing.

Speaker 2

We don't have manufacturing tenants by and large. We don't want to have manufacturing tenants. So we'll see where this goes. Clearly, the management of the economy is key to our prospects and key to consumption. So we'll see.

Speaker 11

But you may not want manufacturing, but suppliers to those manufacturers, you might think that this could push for more of a near shoring, reshoring type of phenomenon. Is that a fair statement?

Speaker 2

Yes, it is. And those vendors for those manufacturers would be our tenants. And depending on where the near shoring is and right now it looks like Mexico, by and large, that's going to help markets in Dallas, Houston and depending where in Mexico, maybe even Phoenix. So that would be a tailwind to demand for us.

Speaker 11

And just to follow-up, the tenants concerned about this, talking to you about it, anything of any at any level at this point in terms of your conversation?

Speaker 2

Again, not really, no, because we're not really spending a lot of time with the manufacturing tenant.

Speaker 11

Fair enough. Okay. Thanks very much.

Operator

The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Speaker 12

Hi, good morning everyone. Maybe on the development side, I think you guys talked about and it shows in the supplement 7% yield on the in process developments including the new Florida ones. So I guess as you guys think about what makes sense going forward, where rates are, where your costs are, what kind of yields do you think you need in order for projects today to pencil?

Speaker 2

That's going to depend on where it is and the size and the growth prospects. We're a total return investor. So yields could be lower where growth is going to be higher. But generally speaking, we're going to want to get a 6 handle on our developments at a minimum and a 8%, 8.5% IRR.

Speaker 12

Got it. Okay. And then on I think when I asked about it in the past on future starts, you talked about that they could happen in Florida, which we've now seen. So going forward, do you think there could be additional starts in the second half? Or again, what would it take for you to start more projects?

Speaker 2

I mean, we've had a bit of an improvement here in the Q2, and that's great. We want to see that this improvement is sustainable, clearly more development leasing. Now we came into the year with 4,700,000 square feet of developments, whether they were in process, completed or completed in service and on lease. We've leased $2,600,000 of that, it's 56%. That looks good.

Speaker 2

That's encouraging. But we want to make sure that that tempo is sustainable. And if it is, then we will absolutely engage in new starts with some of the other land holdings we have in places like South Florida and Nashville and Northwest Dallas.

Speaker 12

Got it. And maybe one other quick one. On the development leases that you signed in the Q2, do you have any overarching comments on what you think drove those decisions, whether it was, combining locations, splitting existing locations, just the business growing or anything like that?

Speaker 2

You want to

Speaker 5

talk about it? Sure, Kayla. It's Peter Schultz. Several of them were processing and fulfillment and upgrading from existing facilities. Some of them were expansions and some were just a need to establish a new location.

Speaker 5

None of them were a lateral move or downsizing.

Speaker 12

Got it. Thanks.

Operator

And the next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Speaker 13

Thanks. Good morning. Just wanted to get a little bit more color on Southern California market and some of the trends you're seeing there. Can you just touch on any change in the pace of leasing activity in that overall market over the past quarter and whether you've seen any notable weakness or strength from specific submarkets, tenant profiles or sizes?

Speaker 6

So Joe? Overall, I mean, like we've discussed and I've said, Q2 was much more robust than Q1, a lot more transactions. They were comprised of new deals that came that needed to take space quicker on Q2 and some that probably look for deals in Q1, but had to take space. I would say in terms of size range, the 400,000 square feet and up is very active. And then what's less active is about $150,000,000 to $400,000,000 That size range.

Speaker 6

There's quite a bit of supply there. And if you go below 100, then that's active again. So that's all the size range. In terms of markets in SoCal, like you said, LA is very, very it's a 4% vacancy. So tenants have fewer choices than if you're in the IE.

Speaker 6

And IE West and IE East both have kind of similar dynamics. If you want to save a little bit more and could get further into your supply chain, you go to IE East. If you want bigger space, you go to IE East and then and so forth in IE West. So our renewal also in our existing portfolio shows you that there's a lot of tenants that are renewing in their spaces. In our portfolio, we have a high renewal rate, kind of tells you that a lot of tenants want to stay put and not moving a lot.

Speaker 13

Great. That's really helpful color. And then several quarters ago, you guys talked about a few opportunistic acquisitions on development projects that had capital needs where you guys could step in to help with funding. Are you guys seeing any more of those opportunistic or distressed opportunities on the market? Or do you kind of expect those deals to be few and far between?

Speaker 2

Yes. They're few and far between. There's lots of capital. Most of the sponsors are deep pocketed and can wait out elongated leasing periods. We've done a couple.

Speaker 2

We're looking. We're making offers, but they are few and far between. There's really no distress.

Speaker 13

Great. Thank you, guys.

Operator

And the next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Speaker 14

Good morning. Thanks for taking the question. Sorry if I missed this, but did you comment or give an update on sort of the federal Mogul Lease or the property that I think comes up for or expires next year?

Speaker 5

Vikram, good morning. It's Peter Schultz. No, we haven't yet. So that's the 708,000 square foot building in Central PA. You're correct, the lease does expire the end of March of 2025.

Speaker 5

We know that they are vacating, so we're marketing the building now. We've seen some preliminary interest there. I would share with you that the mark to market is probably in the 40% to 50% range and we'll keep you up to date on our progress.

Speaker 14

Okay, great. And then just wanted to understand the impact of leasing has been great, so congratulations. Just the impact on 2024 versus obviously full year 2025, all the leasing that you kind of achieved in the Q2, just roughly can you give us a sense of like when does that actually hit FFO?

Speaker 1

Vikram, I don't have calculation

Speaker 3

of that, so I don't know what the incremental impact is going to be for 2025, but a lot of these leases are 2nd or 3rd quarter start dates that we signed. So quick math, you're going to get a doubling impact in FFO from them in 2025 to 2024. That's real quick math though.

Speaker 14

Got it. And then just last one, you mentioned the and sorry, I joined late, you achieved one renewal in SoCal. There was another one, which I believe there was more variability on that. Can you just remind us sort of where you are in those discussions? And are there any other sort of larger leases that you may be dealing with in the second half that where there's more variability?

Speaker 14

Thank you.

Speaker 2

Yes. The renewal of the 300,000 foot lease maturity is still in progress. At this point, this renewal is not included in our guidance, and we'll give you an update on our next earnings call.

Operator

And the next question comes from Todd Thomas with KeyBanc Capital Markets.

Speaker 15

Hi, thanks. Good morning. Just two quick follow ups, I guess. First on regarding the last question, does the 1,200,000 square feet of development leasing that's assumed in the Q4, what's the impact that that leasing has on 2024 guidance? And are those leases assumed to commence in the Q4?

Speaker 15

Or will they be mostly 2025 commencements?

Speaker 3

Todd, it's Scott. They're assumed to commence in the Q4. So if you assume a mid fourth quarter start date on all of the leasing on average, the impact to 2024 is about a penny per share.

Speaker 15

Okay, got it. And then in terms of the 200 basis point occupancy opportunity that you have from the 20 3 and 24 developments placed into service. The two leases that you announced in the Q3, 660,000 square feet, that's about 100 basis points, a little bit more, I believe. That's included, I'm assuming. So there's really an incremental 90 to 100 basis points from here?

Speaker 15

Or is there a 200 basis point opportunity that you see more near term on top of that 660 of commencements that you're anticipating?

Speaker 3

There is a 200 basis point opportunity and that opportunity is that 1,200,000 square feet of development leasing. Keep in mind, the vast majority of that number is already placed in service. So when it gets leased up, it's going to really positively impact occupancy.

Speaker 15

Okay, got it. That's helpful. Thank you.

Operator

Our next question comes from Jessica Zhang with Green Street. Please go ahead.

Speaker 16

Good morning. Just wanted to follow-up on your IE West versus IE East comment. So you said leasing dynamics are similar between the two sides. Are you seeing one market experiencing greater rent decline than another? Or are they also pretty similar?

Speaker 6

It's not too different. I would say that year over year, q2 2024 and q2 2023, I. E. East rent declined 5% more overall, but that's about it.

Speaker 16

Okay, great. That's

Speaker 6

helpful. Then IAE West, I mean.

Speaker 9

Okay.

Operator

And the next question comes from Michael Mueller with JPMorgan. Please go ahead.

Speaker 17

Yes. Hi, thanks. Just two questions. 1, the first I may have missed it, but on the 3Q disposition activity, if you didn't mention a cap rate, can you give us a sense of what that is and the types of buyers? And then as it relates to, I guess, new developments that you could potentially see yourself starting over the next year, year and a half or so, should we be thinking of projects to say the size of Houston and smaller for the bias or could you see some larger projects as well do you think?

Speaker 2

I'm going to take the second half of that and then Jojo can talk about the first half. As far as market demands. So new developments in South Florida are going to be, call it, 60,000 to 200,000 square feet. In Nashville, they could be 3,000,000 or 4,000 or 500,000 square feet. We have smaller opportunities, for example, in Northern California, those would be 40,000 or 60,000 square feet.

Speaker 2

We own land in SoCal, which clearly is not ready in this environment. And then you're talking $1,000,000 1,400,000 dollars So it ranges based on where it is. It really depends on what the alternatives are for tenants in any given market and what size range that market meets the biggest deepest demand for that market.

Speaker 6

The bulk of the sale is the sale in New Jersey. That is a substantial portion if you combine Q2 and what's happened in Q3. And that's the New Jersey portfolio sold at a 6.3% cap rate. And but the stabilized cap rate is 5.8%. And the reason is that just like Peter Schultz had mentioned earlier is that we are going to experience kind of a the rents have peaked out and potentially the rents were above market.

Speaker 6

And the cash flow yield on that is a sub-five.

Speaker 17

Got it. Okay. Appreciate it. Thank you.

Operator

And the next question comes from Nick Yulico with Scotiabank. Please go ahead.

Speaker 18

Hey, this is Greg McGinnis on with Nick. So on development, we can appreciate the 7 handle target on development. With where market rents stand today, how much of the land bank could actually be developed to that level? And then what are your plans for Inland Empire land that may no longer make sense given some of the rent declines there?

Speaker 2

Yes. So on average, and this is across the whole all of our land holdings, you're still about 7% yield. There are some holdings where that yield is in the 5% and those are going to wait, obviously. And with respect to our land in SoCal, look, we are strongly committed to SoCal. It's the 4th or 5th largest economy in the world.

Speaker 2

We have we are absorbing and digesting space that was overbuilt and over leased because of COVID. And once we work through that, you're going to see that that market is once again one of the best markets in the country. Don't forget that while we are living through this digestion period, it remains the toughest market in the country to get entitlements. And that's only going to get worse. So that means the value of our holdings will continue to increase.

Speaker 2

Over time, rents will again rebound and increase, and we are excited about the land holdings that we have there.

Speaker 17

Okay. Thank you. And then in which markets

Speaker 18

are you kind of looking to add to the land bank today? And specifically in Southern Florida where you guys are obviously building more and seems to be one of the strongest markets in the U. S. What have you seen in terms of land pricing over the last year?

Speaker 2

You want to talk about the land pricing?

Speaker 5

Sure. Land pricing has come down a little bit. I would say South Florida less so. But where we're seeing spec development yields today are generally with 5 handles. Land has not come down as much as rents and costs have come down.

Speaker 5

Jojo, anything you want to add to that?

Speaker 6

The land pricing has not come down commensurate with the maintenance of yields. Cost of capital has come up. In some cases, rents have flat or come down and the land is not adjusted. So there is very land is still pricey. Like Peter said, the only thing I'll add is that we see developers shooting for a total return with a 7 handle, 7 IRRs.

Speaker 18

Okay. Thank you. And just one more question for me on tenant recovery of operating expenses. They improved meaningfully quarter over quarter and as a percentage of expense was similar to last year despite lower occupancy this year. Was there any seasonal component there or unique items benefiting the quarter?

Speaker 3

I think Q1 of 2024 had the impact of that equity compensation expense item I spoke about before, that impacts the operating expenses or the property expenses of the portfolio because regional people are included in that as well. So that's probably the vast majority of the improvement in that

Speaker 18

recovery. Okay. And then year over year, it was basically the same as last year, but with lower occupancy. So I was just trying to see if there's any extra information we could glean on that also.

Speaker 3

Nothing I could think of, Chris.

Speaker 6

Yes. No, it's possibly in the Q1, a

Speaker 2

little bit, storm rose

Speaker 9

a little bit higher. So but I think there's a little bit

Speaker 6

of seasonality in it, but

Speaker 3

it's more what Scott referred to.

Speaker 18

Okay. Thank

Speaker 9

you.

Operator

And the next question comes from Brendan Lynch with Barclays. Please go ahead.

Speaker 10

Great. Thank you for taking my questions. Maybe just to touch on South Florida, it does seem like that is a very strong market for you and your peers. Maybe you could just walk through some of the dynamics, which are causing the increase in demand there?

Speaker 5

I wouldn't say it's an increase in demand. I would say it's consistent demand. Certainly, the ports play a role. The population growth in South Florida plays a role. As you know, it's very land constrained.

Speaker 5

There's just not a lot of new opportunities. In Broward County, where we're starting the smaller building, there's essentially no new construction at all today. So very difficult to get entitlements. They take a long time. The supply constraints to land keep that market in check, although there's a little bit more supply there today.

Speaker 5

We continue to see pretty consistent demand.

Speaker 2

Yes. Don't forget geographic geographically, you've got the ocean on one side and the Everglades on the other and north to south that market is about 100 and 15 miles and east to west is about 21 miles. So you have barriers to entry that are significant.

Speaker 10

Great. Thank you. That's helpful. And you referenced earlier the very narrow aisle racking systems. Can you talk about what percentage of your assets would have similar infrastructure and what the cost is for customers to implement that type of solution and maybe how that would impact your ability to drive renewal rates when leases roll?

Speaker 6

Yes. Well, B and A, it's a bigger capital investment because that just means more racking, and you do that when you have robotics. And that is a minority part of the market, meaning that it takes a lot of investment to do that and a lot of users don't need that. In this case, we have a FortiClear building at First Pioneer and the tenant love the idea of being able to use the cubic potential of that through significant stacking. So we're excited for them, but that's a more of a state of the art that's not being used by a lot of tenants in the marketplace.

Speaker 10

Great. Thanks for the color.

Operator

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

Speaker 2

Thank you, operator, and thanks to everyone for participating on the call today. If you have any follow ups from our call, please reach out to Art, Scott or me. Have a great week.

Operator

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

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Earnings Conference Call
First Industrial Realty Trust Q2 2024
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