Q2 2023 First Industrial Realty Trust Inc Earnings Call
Good morning, and welcome to the first industrial Realty Trust incorporated second quarter results call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Art Harmon, Vice President of Investor Relations and marketing. Please go ahead.
Thank you, Jason Hello, everybody and welcome to our call before we discuss our second quarter results and our updated 2023 guidance. Let me remind everyone that our call may include forward looking statements as defined by Federal Securities laws. These statements are based on management's expectations plans and estimates of our prospects today's statements.
May be time sensitive and accurate only as of today's date July 22023, 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 caused those are described in our 10-K and other SEC filings you can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release, the supplemental report earnings release, and our SEC filings.
Our available at first industrial Dot com under the investors tab.
Our call will begin with remarks by Peter facility, our President and Chief Executive Officer, and Scott Musil, Our Chief Financial Officer, 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, Senior Vice President of operations and Bob.
Walter Senior Vice President of capital markets and asset management now, let me hand, the call over to Peter.
Thank you art and thank you all for joining US today, our team delivered an excellent quarter highlighted by an F. Our record setting increase in cash rental rates on new and renewal leasing.
We also achieved some leasing wins at some of our development and began construction of two new buildings in coastal markets.
As a result of our performance and updated outlook, we raised our estimates for our 2023 cash rental rate growth and full year <unk> per share guidance, which Scott will discuss shortly.
Before we get deeper into our results, let me spend a moment discussing the broader U S industrial market.
Overall fundamentals remain good national vacancy today is low at around three 7%.
In our 15 target market vacancy is three 3%.
As we discussed on our last call Theres, a fair amount of new supply expected to be delivered nationally and roughly the next 12 to 18 months.
Based on CBRE Eas analysis, there is 540 million square feet under construction across the U S, 31% of which is pre leased.
Focusing on our <unk> target markets completions are expected to be approximately 400 million square feet with 30% currently pre leased.
Nationally new starts in the first half of 2023 are down approximately 40% compared to the same period a year ago as sponsors continue to evaluate the economic landscape and the revised economics of new projects due to meaningful increases in the cost of capital.
With respect to demand the pace of leasing activity in our in service portfolio continues to be strong tenants are making leasing decisions. Many months in advance of their lease explorations and we are achieving very healthy rental rate increases I will touch on these two points later in my remarks.
For the <unk> portion of our one 8 million square feet of completed developments that is slated to be placed in service in the third and fourth quarters, we have interest from prospective tenants for many of the spaces.
However, tenants decision, making timeframes have elongated compared to a year ago.
Customers are dealing with uncertainty in the overall economy and the fed's decision to delay future rate hikes likely didn't provide any comfort.
As a result, we adjusted the lease up assumptions for some of these developments, which impacted our average occupancy guidance midpoint by 75 basis points for the year.
Scott will walk you through the details, but importantly, we have offset the <unk> impact with the help of leasing at other developments.
Returning now to our performance we finished the second quarter with an occupancy rate of 97, 7% our cash rental rate increase for leases commencing in the second quarter was 74, 1% exceeding the fr record, we established just last quarter.
As of yesterday, approximately 81% of our 2023 lease explorations are in the books at a cash rental rate increase of 63%.
We now anticipate that our cash increase on rental rates on new and renewal leasing for 2023 commenced leases will be in the range of 55% to 60%.
This is an increase of seven five percentage points at the midpoint compared to what we mentioned on our April call and 12, five percentage points higher than our original guidance.
As we've highlighted previously one of the drivers of our record setting rental rate increases as the contribution from our southern California lease signings.
For 2023 of the $2 1 million square feet expiring in southern California, We already have signed leases for 72% of that space at a cash rental rate increase of 156%.
Looking ahead, we're already seeing renewal activity on our 2024 lease expirations of note. We have taken care of next year's largest lease exploration by square footage was the renewal of a 700000 square foot tenant in Nashville, and a 40% cash rental rate increase.
We are also aimed at 213000 square foot renewal in Central New Jersey for a 128% cash rental rate increase.
So we're off to a good start addressing our 2024 lease expirations and we will provide you with an update on our leasing progress on our third quarter call.
Now I'd like to provide you with a leasing update on our 644000 square foot All post road building in Baltimore.
Our perspective three P. L tenant continues to await the final decision from the government regarding the contract awards.
We continue to assume lease up of the full building in the third quarter. As this is the start date of the contract award.
We also continue to market the building two new potential tenants.
Moving on to development activity since our last earnings call. We signed full building leases for 56000 square foot first Park Miami building 13, and a 132000 square foot first Gate Commerce Center, both in South Florida.
At our three building project in our Phoenix JV, we pre leased the 420000 square foot building to a restaurant supply business.
Given our success in South Florida at our first Park Miami project in the infill market of medley, we broke ground on the 136000 square foot building 12.
Total estimated investment is $34 million and the projected cash yield of six 9%.
This will be our seventh building at this multi phase park the previous six released at or shortly after completion.
Beyond this new start we look forward to further growth at first park Miami, We just closed on another phase of land at the park, which is buildable to approximately 430000 square feet.
We expect delivery of the last parcel from the seller per our option agreement in mid 2024, which would accommodate another 430000 square feet.
When fully built out the powerful totaled $2 5 million square feet.
On the West Coast, we broke ground at first Harley Nox Logistics center in the inland Empire.
First Harley <unk> will be a 159000 square foot facility with a total estimated investment of $31 million.
And a healthy projected cash yield of eight 4%.
Including the second quarter development starts our developments in process totaled $2 7 million square feet with an investment of $441 million.
The projected cash yield of these investments is seven 9%.
Which represents an expected overall development margin.
<unk>, 75%.
In addition to the first park Miami Land. We also closed on three more new development site since our last call in.
In the Lehigh Valley in Pennsylvania, We acquired 66 acres for $24 million.
This site can support a four building park totaling 762000 square feet.
In the inland Empire East, we added a four acre site in Paris for $13 million that is next to a site we already own.
Combining these sites will allow us to build a single 550000 square foot building and a higher yield and margin.
We also acquired five parcels totaling 101 acres from four sellers in North Palm Springs on the I 10 corridor for a total of $21 million.
This assemblage will position us to build up to three buildings totaling $1 9 million square feet with a very competitive land basis.
In total our balance sheet land today can support an additional $16 8 million square feet.
This represents approximately $2 6 billion of potential new investments based on today's estimated construction cost and the land at our book basis.
These figures exclude our remaining share of the land in our Phoenix joint venture.
Since our last call we completed the sale of two buildings in Houston, and Detroit totaling 190000 square feet plus a small land parcel in Minneapolis for a total of $18 million.
Our sales guidance for the year remains $50 million to $150 million.
With that I'll turn it over to Scott for some additional commentary and updated guidance. Thanks, Peter Let me recap our results for the quarter NAREIT.
NAREIT funds from operations were <unk> 61 per fully diluted share compared to <unk> 56 per share in <unk> 2022.
Our cash same store NOI growth for the quarter, excluding termination fees was 10, 8%.
The results in the quarter were driven by increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases, partially offset by slightly lower average occupancy higher free rent and an increase in real estate taxes.
As Peter noted we finished the quarter with in service occupancy of 97, 7% down 70 basis points compared to <unk> 2022, primarily due to anticipated move outs.
Summarizing our leasing activity during the quarter, approximately $1 7 million square feet of leases commenced.
These 200000 were new 900000 were renewals and 500000 work for developments and acquisitions with lease up.
As a reminder, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in two of our bank loans, which puts us in an advantageous position given the volatility and higher interest rates and the financing markets.
Moving onto our updated 2023 guidance per our earnings release last evening.
Our guidance range for NAREIT <unk> is now $2 37 to $2 45 per share.
Excluding the <unk> <unk> per share income item discussed on our first quarter call. Our guidance range is now $2 35.
To $2 43 per share.
Our new midpoint of $2 39 per share is a penny increase at the midpoint, primarily due to higher capitalized interest from our Thule newly announced development starts.
Key assumptions for guidance are as follows.
Quarter end average in service occupancy of 97% to 98%.
Peter mentioned this is a 75 basis point decrease at the midpoint given the lengthy decision, making timeframes, we're experiencing from some of our perspective tenants.
In particular, we have adjusted the lease up assumptions for the available space at the $1 2 million square feet of developments that will be placed in service in the third quarter.
We are now projecting that approximately 860000 square feet of that space will be leased up in the fourth quarter of this year with the remainder to be leased in 2024.
We also adjusted some of the lease up assumptions for the development schedule to be placed in service in the fourth quarter.
Of the 650000 square feet half is still anticipated to be leased in the fourth quarter and the other half is now slated to be leased up in 2024.
Moving onto our other guidance components.
Same store NOI growth on a cash basis before termination fees of 775% to 875%.
Note that the same store calculation excludes $1 $4 million of income related to insurance claim settlements recognized in the fourth quarter of 2022.
Guidance includes <unk> <unk> per share of <unk> related to our share of the ground rent from our joint venture discussed on our first quarter call.
Guidance includes the anticipated 2023 costs related to our completed and under construction developments at June 30.
For the full year 2023, we expect to capitalize about <unk> <unk> per share of interest.
And our G&A expense guidance range is unchanged at $34 million to $35 million.
Guidance does not reflect the impact of any future sales acquisitions development starts debt issuances debt repurchases or repayments, nor the potential issuance of equity after this call.
Let me turn it back over to Peter.
Thanks, Scott and thank you to all of my teammates for another excellent quarter.
We're delivering strong cash flow from our portfolio as we capture our cash rental rate growth opportunities and maintain high levels of occupancy.
Our regional teams are laser focused on the lease up of our pipeline as we build upon our track record of development execution and value creation.
Operator with that we're ready to open it up for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And our first question comes from Rob Stevenson from Janney. Please go ahead.
Good morning, guys.
Peter you saw both Houston asset in the quarter, what's the market like for asset dispositions today, given where rates are and the availability of debt for private buyers.
And I guess the other thing is is it how much are you guys able to rely on dispositions as a funding source today given those factors.
So that the disposition market is open the transaction market is open, albeit at lower volumes than <unk> seen in the past.
And as we've always said most of our sales end up going to users are high net worth family offices or regional small REIT smaller regional funds.
And we're having quite active dialogue on some deals with that kind of a buyer group.
In terms of financing or financing is available is expensive.
So youre seeing a lot of these deals happen with all equity right now.
Okay.
And then Uh huh.
<unk> hundred 45 million of trial mature expected to complete in the second half of this year. How are you thinking about starts behind those over the next six to nine months are you waiting and letting some of that 400 million square feet of development that you talked about in your markets clear do you just keep your head down and start your projects when they're already how are you guys thinking about star.
Over the next six to nine months.
Sure, obviously development leasing is going to dictate to a large degree.
The opportunity to have start but also so are the markets, we're going to continue to evaluate the fundamentals in the market leasing velocity et cetera.
And we do have a number of very good projects lined up that we can bring but we're a profit shop and not a volume shop and if the market and our risk adjusted returns aren't there and we'll just hold off.
Okay and last one for me Scott So nine point for same store NOI year to date guidance at the mid points like eight in a quarter, which implies about 7% in the back half of the year is it just tougher comps or is there something else that.
Lowe's you down.
Two 250 basis points versus what you've seen year to date in the back half of this year.
Yes. This is Chris the decline is primarily due to the year over year drop in average occupancy our average occupancy in the first half of 2023 versus the first half of 2022 is up slightly in the back half of 2023 versus a comparable 2022, the average occupancy is down slightly.
The balance of that decline is really just due to a little bit lower cash rent increases in the second half and then a re.
Real estate taxes, and bad debt are negatively impacting that a little bit.
Okay.
Very helpful. Thanks, guys.
Our next question comes from Michael Carroll from RBC Capital markets. Please go ahead.
Yes. Thank you could you guys provide some color on your Baltimore portfolio I mean, what drove the overall occupancy within that portfolio lower I mean, just kind of looking at the comps it looks like it's a property that's near your old Post road I mean is that correct.
Good morning, Mike, It's Peter Schultz, Yes, its one building of 350000 square feet that was a known move out the tenant move to a consolidation and almost 2 million square feet in a build to suit.
The building is being marketed we are seeing activity from full and partial users.
The amount of supply in that sub market continues to be very limited and in fact, there is a limitation on new industrial development.
Posed at the moment by the municipality. So we will keep up to date on our progress on re leasing that but if that's the one building that impacted the occupancy.
Okay, Great and then what is the I guess and I know you've kind of talked about that there is interested in that asset and I'm, assuming the the three PL tenant that might take the building next door or they wouldn't be interested in it.
Is this an expectation of another elongated leasing process or is that interest level is strong enough that there could be a quicker lease up.
So in general I would tell you that the smaller mid sized tenants are more active in making decisions quicker than larger tenants. So we would anticipate the lease up of this asset.
Certainly to be faster than.
And 500 old Post road, and we will keep you posted but as I said, we are seeing activity from full and partial.
Tenants now and they don't have a lot of choices.
Okay.
And then on the completed developments the ones that are going to go into service in the back half of this year I mean, how strong are those markets I mean, it looks like Denver is one of the markets that were a couple of assets are in I mean is there a lot of interest in those assets I mean, how many tenants are specifically looking at those properties in general.
So in Denver, we have two buildings.
588000 square foot building in a 200000 square foot building.
Generally speaking we're seeing act.
Activity from partial building users for the most part a couple of full building users on the smaller building and as I just said in answer to your other question.
Activity levels and interest levels are better.
And the smaller and mid size and those decisions are being made faster as opposed to tenants or larger size tenants, where they continue to be slow playing those discussions both of these buildings were designed and built with the expectation that we would multi tenant bulk.
Both of them so.
It's really.
Matter of when the deals get done, but we have multiple prospects on both buildings. We just would licensee the decision making proceed a little bit faster.
Yeah understood I mean, just last question for me is like what is the reasons for the delay decision, making is it just the current disruption in the capital markets and are you surprised that it's taking them this long to make those decisions.
So the decision to lease a six or 700000 square foot facility, it's a big big financial commitment not only do you have.
The rent, but you've got to equip the building and put in inventory in the building and hire people and it's.
It's tens of millions of dollars and so some of the larger users are decided and trying to decide what is the right time to fund their growth. This is all new growth the needed there, but the need may not be today. It may be three months from now or a bit later than that so that's really the decision they're tossing around as they look at what's happening with.
Rates and the impact on the economy, and whether we're going to have a recession et cetera.
Really just trying to make the right decision about when they invest pretty big dollars.
Into their business.
Okay are you surprised that it's taking this long to make these decisions.
Not really I mean, I think every business.
Is trying to figure out what that.
What the go forward looks like just like we are in.
It's not surprising given all the uncertainty in the market.
Okay, great. Thank you.
Our next question comes from Craig Mailman from Citi. Please go ahead.
Peter on the development pipeline that not to harp on this but.
Just going through it you guys.
I haven't done a lot of build to suit and it just feels like with a pullback in and your competitors really being able to secure financing.
Is this an area that you guys could start to gain some market share into maybe derisked.
Pipeline, a little bit on the incremental starts.
Good question Craig.
We are in the build to suit business as you know we don't do a lot. We will offer that we are having some conversations on that front now so.
We'll see where they go.
I mean our R.
Our return issue, where you guys don't want to give up the profit margin or is it just you don't have the land site, where the Rfps are at this point I would say that both the returns on speculative development or obviously and in many cases significantly higher.
And we target land is in pockets of unmet demand and we don't have as many alternatives in some markets as maybe some of the other competitors would have so.
That limits the number of build to suits or we're positioned to do.
Okay and then just.
Just going through where do you guys have the availability of there's clearly a fair bit of.
Square footage in California, and that's obviously ground zero for a lot of concerns right now among the Investor community I mean could you talk about what you're seeing in different size ranges in different submarkets.
Where do you guys have availability.
Specific to Socal.
Yeah.
Yes, Jojo you want to provide your thoughts on that sure in terms of availability are using portfolio is basically.
Close to 100% leased very very few spaces available, we have one space and led by our east that were.
We're dry lease very very good product well well below market.
In terms of our speed of development.
<unk>.
We have four ongoing right now nothing is completed right now and.
They are scheduled to be completed closer to Q4, and we are getting inquiries.
And tours, if you look at the four developments that are under construction. They range from 83000 square feet to 460000 square feet they are spread over.
And then the Empire West Montana into inland Empire East Submarket of residence and the $2 15 corridor.
Getting tourists and looks at every.
Building Wilson.
Haven't announced the Liza because they don't have lease yet, but we're working hard to get this all those free lease today.
Today.
Users are more inclined to.
Seriously engaged in leasing when the building is close to getting built.
As you May have heard just has it had been.
Some delays due to supply chain and municipal approvals in California, and then a lot of tenants has been a little bit concerned at buildings be deliberate exactly on time, so thats affected a little bit of leasing, but by and large again the prospect activity has been active.
Clearly there is a building that we just started Craig so.
Harley Ox deal, we talked about earlier, so yes, that's not going to be completed until Q U until 2024.
Yep.
And then.
Carvana put out some news yesterday about restructuring it looks like some of the ADESA assets were put up as collateral I mean from your standpoint.
Is that just improve the credit for you is there any insight you guys have on on that transaction and how you guys feel incrementally about that credit.
I mean, we don't have any particular insights that you already haven't read about in the newspaper.
It certainly looks like they're doing their best to.
To write the ship, it's interesting to us that the founders had put in some substantial cash into this new.
And at the end of the day. These ADESA sites are owned by Us.
<unk> to them and as we've said on prior calls if we get that back yes, we will have a short term head to <unk>, but the long term value creation is significant so we'll take the cash flow while they are paying rent and they are current and as they start paying rent, we will take the assets back and redevelop them and make a heck of a lot of money.
Okay, great that's it for me.
The next question comes from Keith <unk> Kim from Truest. Please go ahead.
Thanks, Good morning, just to go back to the inland Empire topic.
Given that you have a few projects that you're developing there how do you just view the supply demand dynamics in that market and how it might impact the lease up timing for your projects.
Okay again.
The buildings are still under construction.
As we've always said.
Our underwriting always has a one year downtime.
In the past there has been a pre leasing in that market.
Today, we're more of a normalized or in <unk>.
Within our underwriting period.
In terms of activity again, we've seen a better activity in Q2.
Even over Q1, if you look at even the containerized cargo flow of inbound containers only.
In June June almost.
This year almost matched June of 2022 were in the Q Q1 of 'twenty three lag Q1, 'twenty two teu traffic. So I mean, we see we see a little bit improvement.
I think overall this agreement between the unions and the owner.
The owners, it's actually been ratified yet, but the lease agreement.
On a on a labor agreement. So I think that will give more visibility to shippers and all of that and I think that will reduce any concern and.
All depends on how the economy moves, but bear in mind overall that L. A.
<unk> is still sub 2% vacancy at one 7% and basically I E is sub 3% a two 7% so and it's the hardest place to entitle land today in the U S. So.
Long term supplier should be continued to be constrained.
And your retention rate was 60% this quarter, obviously, the Baltimore at least probably made a big impact, but just overall when you look at the reasons why tenants don't renew have different reasons or category has shifted at all and I'm. Just curious if times are becoming increasingly more price sensitive.
So in our portfolio when tenants lease have less content. This continues to be true. They have left because we can accommodate their need to grow the tenant in fact.
And in Baltimore that moved out.
Consolidated into a nearly 2 million square foot facility. So.
We obviously couldn't provide that growth room for them. So that is really the reason people leave.
When we are discussing potential tenants for lease up of new developments once in a while a tenant will come around and say Gee I'm going to move.
Let's say, if it's California east to pay a little bit lower rent, but that's not that's not a trend and thats not really that doesn't represent the bulk of any of those conversations.
Okay. Thank you.
Given this is Chris doing majority of the time, we're releasing those is significantly IRS.
When they move out so.
Yes.
Okay. Thank you.
Our next question comes from Nick <unk> from Baird. Please go ahead.
Hey, guys. So maybe just going on development.
Like the market rent growth.
Sort of for new development have you seen market rents for new development in your markets have they peaked or you're kind of seeing any retreating there.
We.
Market rents are growing I think earlier in the year, we thought it would be in the kind of 5% to 10% range. We still have a view that when you get to the end of this year and look back Youll see that rents grew mid to high single digits for the year nationally obviously at the higher end of that range and the higher barrier markets.
In some places there may be.
Interest in racing to lease like South Dallas, So maybe rents there arent growing in fact, maybe sagging a tiny bit.
Dollars foot category, where there are quite a few large format buildings available.
But generally speaking across the markets, we do continue to see decent rent growth.
Okay, and then maybe another way of asking the southern California.
<unk> question, but just what are you guys tracking for like on a square footage basis demand in socal.
And maybe how has that changed over the last like three to six months.
Beyond that as well.
There is no exact square footage because there's no data exactly.
And income.
To shift quarter by quarter and bike week by week, but I think the way I would characterize it as that.
Q4, 2022 accused feeds as Q4 2022, I would say for every vacant space you have you might have three to four prospects.
Today.
You would have wanted to.
Looking at the building at any given point in time.
That's helpful. And then maybe last one for me for Scott any shift in the tenant watch list or bad debt expectations for the remainder of the year.
No nothing our bad debt expense continues to trend low is under $100000 <unk>. So year to date, our total was $180000. So very low again no material tenants on the watch list and Peter spoke about ADESA.
Let me add one more thing to adjust just said.
Tenant velocity of tenant interest reflects more of the demand that we had in 2019.
So obviously, we've been around all been around a while 2018 2019, where at the time the best markets we've ever seen so.
This is again why at the beginning of the year, we discussed normalization of demand, it's really going from.
Multiple.
<unk> five prospects per space down to two or three prospects for space.
Very helpful and thanks for the time.
The next question comes from Nicholas <unk> from Scotiabank. Please go ahead.
Thanks, I just wanted to follow up back on the old Post road.
Potential tenant there we're releasing it sounds like it I think you said youre still including this in the guidance for third quarter leasing.
Yeah, and you say, you're assuming even if the the one tenant with the government contract.
It doesn't work out that you have a back a backup tenant there for that asset.
Nick It's Peter Schultz. So the assumption is that the <unk> that we've been working with for some time as you know.
For the government contract that gets.
Released by the government.
Sometime in the near future and the lease up remains in our third quarter guidance I am not prepared to tell you that we have somebody else today behind that what I would say is we continue to market. The building and we continue to see prospects, we had a fresh tour.
Both buildings.
But we'll see how it goes.
The government wants to get this done.
And its taken an awfully long time as everybody on this call knows from our prior calls.
So hopefully we'll have some news to report on that sometime soon.
Our assumption of a third quarter lease up reflects our expectation.
And the probability that our tenant wins this contract.
Okay. Thank you I appreciate that and then just going back to southern California.
I know there's already been some questions on this but if you look at the occupancy at quarter end and this up I mean, it was down.
Basis points or so versus the average number.
Can you just talk about what drove that in particular, how we should think about maybe a trending occupancy for the market for the rest of the year.
Yeah. Nick this is Chris the GA, Ed mentioned that we had one space, though was available in that part of that was a 225 square foot move out.
The rent is.
Very very significantly below market rent. So we have opportunities to re lease at a much higher and so thats really what was driving that occupancy drop.
Okay got it and then just last one on.
The land inventory.
The number that's on the NAV page I think it's a fair value number can you just give some perspective on.
How you may have adjusted.
The land values, we have heard some level of correction in land values in the market. Realizing that many cases, you guys still have a good.
Basis in land, but how we should think about fair value of the land today.
Sure. This is Joe Joe.
Look at the schedule of quarter by quarter and we adjusted for what we believe are fair market values.
Basically Q1, and Q2 I would say.
The big change would be a big change, but it's all of these changes north Palm Springs, we acquired it and we think we're clearly in the money on that already because thats an off market deal with a assemblage.
And over time.
We've adjusted is especially on the impoundment basis, when I say salmon basis Socal, when it's acquired it's all entitled and US as we go through successful entitlement and we've been successful at 100% of the time, but all of this our socal that acquisitions, we have adjusted out overtime, but thats, we do this a fair Mike.
Value basis every quarter.
And is there just any rough percentage, you're able to share about how much you've adjusted your land values down versus a peak value.
Okay.
What we've actually done what they've actually done is not we've actually not adjusted up when it was due to be adjusted up and until we complete entitlements. So it's more of meeting the market.
Okay. Thanks.
Again, if you have a question. Please press Star then one.
Our next question comes from Anthony Powell from Barclays. Please go ahead.
Hi, good morning, everyone.
And one follow up on all post road I guess, how much <unk>, where occupancy is in the guidance.
Assuming that the contract is.
As we've done.
In the third quarter.
Sure. This is Scott Thats about a penny per share in <unk> related to that lease up in the occupancy impact. This is the impact on our quarterly weighted average occupancy is about 50 basis points.
Okay. Thanks, and then maybe one on market rent growth.
I think in prior quarters Theres, a lot of optimism about southern California, and coastal market is doing very well.
In recent calls Ive heard this.
<unk> strengthened more interior market. So maybe you can talk about.
Coastal versus non.
Non coastal rent growth trends, you've seen recently Peter.
Peter you want to talk about what Youre seeing and then Jojo can talk about.
Et cetera, and so Phoenix.
And in general the best.
Markets or southern Florida, and New Jersey, where rents continue to really grow as we mentioned in the script, we just leased or announced I believe so.
Two more buildings of about Florida that will occupy in the third quarter.
And the rent growth there has substantially outpaced.
Our pro forma Joe Joe, Yes, So if you look at that.
Basically in a southwest interior market and then go with it.
If you look at Dallas and Phoenix for example.
Due to increase in consumption zone due to the increase in migration of population and businesses. They really experience a good amount of rent growth and we've received these two experienced that in fact, Dallas and Phoenix has been a big contributor along with.
All Florida Big contributor for our quarterly.
Cash rent growth when you move out to the west and the west.
As you all know.
Socal primarily.
Rents have increased about 100% over the last two years and over three years, they've increased anywhere from a 125% to 150% over three years. So significant significant retro every portfolio owner and redevelopment has enjoyed that and thats. The reason why we've been able to continue to develop at higher yields.
So going forward, we think rent growth will be in the 5% to 5% is too high single digits and socal due to just a little bit of of companies, taking a breather and again, what a lot of owners have achieved significant return.
And the yields on our investments and then also due to the fact that it's a little bit reduced port traffic, Although I mentioned earlier. The June the June number is closer to the June 22 number so maybe that's a little bit of a.
Turnaround.
So.
That's what we're looking at.
Thank you.
The next question comes from Caitlin Burrows from Goldman Sachs. Please go ahead.
Hi, good morning, maybe going back to development lease up it sounds like you're still generally assuming 12 months lease up timeframes for the development projects. So I was just wondering what it could take for that assumption to change.
Recognizing that right now you still seem to feel good about 12 months in general.
I suppose the experience of it not not being long enough, which seems our view I think right now we think that we're in a period of adjustment as we digest and if you look at net absorption over the last several years. It was enormous in 'twenty one 'twenty two it actually started in the fourth.
Quarter of 2020.
And that fueled a lot more construction a lot more capital coming into the business and so you have this way above trend construction.
Construction pipeline and now as we said earlier starts are up 40% so.
The market is going to take a bit of some time to digest that larger development pipeline, but at the same time as we get into the second half of next year.
We think theres going to be.
A shortage of space. So that's really what we're dealing with right now and we look at our assumption for downtime and we think that given that picture that scenario 12 months, it's still the right the right.
Number.
Got it.
Thanks for that commentary and then maybe also just sub leasing as a topic that's been coming up some I think not because it's significant but just because it's off a low base.
Just wondering if you could comment on if youre seeing sub leasing activity happen, if so where.
At what point.
Potentially be a concern or not.
Caitlin, it's Peter Schultz, So youre right sublet space is up a little bit.
But I would probably put it in two different buckets.
There are.
A handful or some sublet spaces portions of buildings, but that occupiers are trying to sublet.
Or lam or tenants that are trying to limit.
Sublet term to only a year or two so we don't really consider that legitimate sublet space. The other bucket is.
Spaces that are on the market for sublet and in general we've seen those get absorbed pretty quickly.
And the higher barrier markets, Joe Joe anything you want to add.
Peter the only thing I would like to add there are some sublet sublease spaces. There actually the lessee took back because now Theyre plaza changed and they figure it out there.
They actually needed long term and a number of these are large sub leases. They are actually wanted to do only a couple of years of term and this is something that is very favorable for us.
New tenants coming in because a lot of tenants don't want to move in and be forced to move out in the short term.
Yes, no that makes sense. Thank you.
The next question comes from Todd Thomas from Keybanc Capital markets. Please go ahead.
Hi, Thanks. Good morning first question in terms of occupancy just stepping back a little bit more broadly you mentioned the decrease in Baltimore in the quarter and discuss southern California.
Can you provide some thoughts around whether you anticipate occupancy stabilizing by year end or in early 'twenty, four or whether you see potential for occupancy to continue normalizing.
As you as you move forward throughout 'twenty four is the 400 million square feet delivered in the pipeline that you've discussed.
Yes. This is Chris I mean, the drop in occupancy is all related to the new developments coming online and if you look at our same store portfolio.
That's very stable you.
We're expecting the average for the entire year to be about 98%, so still very healthy strong numbers on the existing portfolio.
Okay.
And then.
I guess.
A follow up on on Baltimore, and I'll Post road.
Maybe a point of clarification around something that you said earlier the recent Baltimore vacancy that occurred this quarter, that's adjacent to the 644000 square foot.
<unk>.
Does that vacancy at all impact your efforts or the outcome potentially at.
The old post road facility in.
Would the government tenant at all have have interest for and taking the additional square footage that's available now.
No.
The new vacancy doesn't impact or influence.
It come at the larger building.
We want to get the deal done with the government contractor.
500.
Certainly they could have.
Interest is most tenants have interest in expansion capabilities.
But as I said earlier in response to another question.
The level of activity.
For full or partial buildings and $3 50.
Is pretty good so.
We're optimistic.
We'll make some headway there and as Peter said earlier.
Our plan is.
Based on.
The government contract being finalized and awarded for the larger building here yet in the third quarter.
Okay, and just last one for me.
It's positioned you maintained.
That $50 million to $100 million guidance, you sold one asset so far for $15 million. This year can you just talk about demand for asset sales and whether there's anything sort of progressing at this point that that's in the pipeline that youre that youre seeing.
Sorry, just to correct that 50 to $1 50, not $50 million to $100 million the guidance, but.
There is a market.
The pricing isn't bad.
We've always intended our closings to be backend loaded. So that's why you haven't seen much volume and.
We maintain the guidance range and that's kind of reflective of our expectations of how that market is going to end up.
Okay, Alright got it thank you.
The next question comes from Michael Mueller from J P. Morgan. Please go ahead.
Yeah, Hi, I guess, if you look at your in process development, all but two of the projects are in California, where if you look at what's been delivered in 2003 to date in 'twenty. Two I think there was just one California development.
No California's fixed date, but do you see the geographic mix of the starts over the next couple of years as being in comp being as concentrated in California is what the current pipeline is.
The projects that we are evaluating for future starts are almost solely on the coasts, which will include California, obviously south Florida.
New Jersey, PAA et cetera, So that's where the focus is going to be.
Does that answer your question.
Yes, yes.
And I think that was it thanks.
The next question comes from Jessica Zhang from Green Street. Please go ahead.
Hi, Good morning, just wondering for some of your large box developments where.
The smaller suites.
That could help with that lease uptime at all.
Our projects are designed with that in mind, so that we can demise and still provide all the functionality that the tenants require so we're in a pretty good position with respect to that.
And have you.
That option for some of the.
The large boxes.
Where are you ultimately changed here.
Okay.
As Peter mentioned for example, in Denver with our 588000 square foot building that was designed to either be single or multi tenant obviously, we do some a few things differently to make sure we can multi tenanted.
But we do that so there's no change in direction. It was just maintaining our optionality and creating a building that is functional under both scenarios Jessica It's Peter Schultz. The other thing I'd add to that is.
When we deliver buildings theyre moving ready so they already have back office, we've permitted <unk> walls, and so forth. So to Peter's point, we're already way ahead of that curve nothing else, we would do differently because that is part of the strategy and then just to add.
And our design of multi tenant not only is on the large buildings, but in the mid size to smaller buildings case in point for steel in Seattle. That's a 129000 footer, we designed that building to basically be asked this on both as a building with docs.
Available to the length of the building and therefore, there we were able to successfully leased at completion half of the building 64000 in Florida.
Okay, great. Thank you.
And then just a second question curious for your Carvana sides.
They do go out of business.
For your lease agreement with them.
Youre getting back although man.
One or is there going to be a separate process.
If they default on those leases.
Likely be a legal process.
That we would go through I can't predict how long that would take but the outcome. Eventually it would be that we have.
The ability to develop or sell and some of the sites, we would probably sell because theres, a higher and better use now after all these years.
We would have the right to develop or sell those sites.
After after the legal process that we don't have to go through it to take back the.
To kick them out essentially to kick them out.
Okay, great. Thanks for those comments.
The next question comes from Vikram Malhotra from Mizuho. Please go ahead.
Thanks for taking the question just following on that development question around can you flex up.
Property.
<unk> is more sluggish so I'm just wondering more tactically, let's just say lease up is a little longer than the 12 months.
Baked in.
What do you do in terms of what's the thought process around gaining more share is it.
Rents is it more incentives.
Do you sort of.
What would you do to try to gain share in that environment, just given the macro if things slow down from here on.
Historically when market soften concessions go up whether it's free rent or additional above standard.
Our lower rent.
We're not anywhere near that.
Free rent today is continues to be a third or a half a month per year of the lease term at standard Ti packages today, we're still getting.
Higher rent.
Then had preexist existed previously so.
<unk> got a long way to go before you get to what you're talking about.
Okay makes sense and then just on Socal.
You talked about market rent growth now being five mid single digit to high single digits. You know one of your peers sort of articulated there the.
There's actually pushed back on the rent level itself, just like you highlighted rents up 150% over our USB thing incentive.
Also go up specifically in Socal.
As you as a landlord to try to attract new tenants.
Joe you want to cover that sure.
No we are not seeing any increase in incentives like Peter mentioned.
Re rent.
For.
Term of year has it really sticky.
<unk> been pretty standard Ti per square foot LTI allow us an improvement allowance.
In terms of discipline back I mean, if you look.
As mentioned earlier, if you look at there are some tenants who are looking for.
Little bit relief on rent because of that 100% depreciation so.
With that as the market a little bit of.
Less absorption of rents.
<unk> gave.
Gave a little bit maybe 1% to 2%, but in IEC, where in again theres cheaper rent.
They ran went up so I mean.
And there was from Q2 situation I think.
That's the kind of situation is more short term and may be.
Be a quarter or two.
Got it and then just.
Last one again, one of your peers sort of outlined.
Over the next several years three to five years.
Even if theres no rent growth limited more limited demand.
Theres been a scenario where same store NOI growth.
I believe the word with average seven ish percent I may be wrong on that.
If you look out sort of three years and not something for next year, a guide, but just on a longer term basis three.
Three five years, assuming market conditions exist.
Today, where do you see sort of the structural same store NOI growth of your platform.
Well a couple of things one obviously all of us have.
Significant upside as our leases continue to role as you've heard us today talking about what's going on in some of these markets and it's in a pretty broad basis. The second thing is.
Annual rent Escalations have gone up pretty significantly.
So our portfolio rent Escalations average is going to go north of 3% next year. So those are both going to contribute to pretty significant growth as you say, even if rents stay flat for the next three to five years.
I'm not I don't think we have a number to put on that right now I know one of our peers did but we are very.
Optimistic about the future growth opportunity again, even if rents don't grow.
Okay fair enough. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Peter facility for any closing remarks.
Thank you operator, and thanks to everyone for participating on our call. Today. If you have any follow up questions. Please reach out to art, Scott or me I wish everyone, a happy healthy and productive summer.
This concludes the conference. Thank you for attending today's presentation you may now disconnect.
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