Q3 2023 First Industrial Realty Trust Inc Earnings Call

Speaker 1: conference specialist by pressing the star key forward by zero. After today's presentation there will be an opportunity to ask questions. To ask the question you may press star then one on a touchdown phone. To withdraw your question please press star then two.

Our key followed by zero after today's presentation, there will be an opportunity to ask questions to ask any question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two.

Speaker 1: Please limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead.

Please limit yourself to one question and one follow up please.

Please note this event is being recorded.

Now like to turn the conference over to Art Harmon, Vice President of Investor Relations and marketing. Please go ahead.

Speaker 1: Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our third 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 prospect.

Thank you, David Hello, everybody and welcome to our call before we discuss our third 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 October 19 2023.

Speaker 2: Today's statements may be time sensitive and accurate only as of today's date, October 19, 2023. We assume no obligation to update our statements or the other information we provide.

No obligation to update our statements or the other information we provide.

Speaker 2: Actual results made different materially from our forward-looking statements and factors which could cause this are described in our 10K and other SEC filings. You can find a reconciliation of non-GAAT 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 www.Furstindustrial.com under the Investors tab.

Actual results may differ materially from our forward looking statements and factors, which could cause. This are described in our 10-K and other SEC filings you can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release.

Supplemental report earnings release, and our SEC filings are available at first industrial Dot com under the investors tab.

Speaker 2: Our call will begin with remarks by Peter Bacilli, our president and chief executive officer, and Scott Musil, our chief financial officer, after which we'll open it up for your questions.

Our call will begin with remarks by Peter <unk>, 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 <unk>.

Speaker 2: Also with us today, our Jojo Yatt, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walters, Senior Vice President of Capital Markets and Affid Management. Now, let me hand the call over to Peter. Thank you, Art. And thank you.

<unk> 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.

Speaker 3: We continue to deliver strong cash rental rate growth on new and renewal leasing. And we're making good progress on our 2024 explorations, which I will touch upon shortly.

We continued to deliver strong cash rental rate growth on new and renewal leasing and we're making good progress on our 2020 for exploration, which I will touch upon shortly.

Speaker 3: We also achieved some leasing wins at our developments in Pennsylvania, Northern California, and Orlando, and we're capturing significant value from the sailing ground lease of our on-balance sheet land sites in Phoenix. As expected, our quarter-end occupancy metric was impacted by a few recently placed in service developments that remain in Lisa.

We also achieved some leasing wins at our developments in Pennsylvania, Northern California in Orlando, and we're capturing significant value from the sale and ground lease of our on balance sheet land site in Phoenix.

As expected our quarter end occupancy metric was impacted by a few recently placed in service development that remain in lease up.

Speaker 3: As we noted on our last call, prospective tenants continue to be deliberate in making significant commitments for new space in the face of the uncertain interest rate, economics, and geopolitical environment.

As we noted on our last call prospective tenants continue to be deliberate in making significant commitments for new space in the face of the uncertain interest rate economic and geopolitical environment.

Speaker 3: This is being reflected broadly in the national vacancy figures as new supply continues to come online.

This is being reflected broadly in the national vacancy figures as new supply continues to come online.

Speaker 3: National vacancy was up 50 basis points in the third quarter, but still at an overall low, 4.2 percent. In our 15 target markets, vacancy is 4 percent.

National vacancy was up 50 basis points in the third quarter, but still at an overall low four 2%.

And our 15 target market vacancy is 4%.

Speaker 3: As we discussed on our last call, there is a fair amount of new supply expected to be delivered nationally in roughly the next 12 months. Based on CBRE's analysis, there is approximately 475 million square feet under construction across the U.S., 30 percent of which is pre-leased.

As we discussed on our last call. There is a fair amount of new supply expected to be delivered nationally and roughly the next 12 months.

Based on <unk> analysis, there is approximately 475 million square feet under construction across the U S.

30% of which is pre leased.

Speaker 3: Focusing on our 15 target markets, completions are expected to be approximately 325 million square feet.

Focusing on our 15 target markets completions are expected to be approximately 325 million square feet.

New starts nationally have trended downward with third quarter 2023 starts down more than 60% compared to third quarter 2022.

Speaker 3: New starts nationally have trended downward, with third quarter 2023 starts down more than 60% compared to third quarter 2022. This market response is being driven by the rapid increase in the cost of capital and the uncertain economic environment.

This market response is being driven by the rapid increase in the cost of capital and the uncertain economic environment.

Speaker 3: In our portfolio, we're capturing strong rental rate increases on our renewals, realizing the benefit of the healthy market rent growth we've seen for the past several years.

And our portfolio, we're capturing strong rental rate increases on our renewals realizing the benefit of the healthy market rent growth, we've seen for the past several years tenant.

Speaker 3: Tenants continue to renew well in advance of their lease expiration dates, reflecting continued confidence in their core business.

Tenants continue to renew well in advance of their lease exploration date, reflecting continued confidence in their core business.

Speaker 3: Overall, leasing market dynamics continue to favor the landlord, particularly with renewals given the low vacancy levels I discussed earlier.

Overall leasing market dynamics continue to favor the landlord, particularly with renewals given the low vacancy levels I discussed earlier.

Speaker 3: Through yesterday, with 97% of our 2023 lease expirations in the books, our cash rental rate increase is 60%, with average annual rental rate escalators of 3.8%.

Through yesterday with 97% of our 2023 lease explorations in the books, our cash rental rate increase at 60% with average annual rental rate escalators of three 8%.

Speaker 3: A big driver of our cash rental rate increases has been the outperformance of our Southern California assets, where we've achieved a cash rental rate increase of 151%.

A big driver of our cash rental rate increases has been the outperformance of our southern California asset.

We've achieved a cash rental rate increase of 151%.

Speaker 3: Looking ahead to 2024, we've taken care of 40% of next year's lease expirations and a cash rental rate increase of 38%, which is similar to our pace of progress at this time last year.

Looking ahead to 2024, we've taken care of 40% of next year's lease exploration and a cash rental rate increase of 38%, which is similar to our pace of progress at this time last year.

Speaker 3: Our 2023 rental rate increase has benefited from slightly more than 25% of rental income coming from leases signed in Southern California.

Our 2023 rental rate increase has benefited from slightly more than 25% of rental income coming from leases signed in southern California.

Speaker 3: Due to a few Southern California leases that expired in 2023 that are assumed to lease up in 2024, we expect the Southern California portion of lease signings by rental income in 2024 will be roughly the same as 2023 at a little over 25%.

Due to a few southern California leases that expired in 2023 that are assumed to lease up in 2024, we expect the southern California portion of lease signing I rental income in 2024 will be roughly the same as 2023 and a little over 25.

<unk>.

We will give you a refined view of our thoughts on our 2024 cash rental rate increase on our fourth quarter call when the benefit of our budget reviews.

Speaker 3: We'll give you a refined view of our thoughts on our 2024 cash amount rate increase on our fourth quarter call with the benefit of our budget review.

Speaker 3: We anticipate our cash rental rate increase on new and renewed leasing will be in excess of the 38% we've currently achieved on lease signings related to 2024 expirations.

We anticipate our cash rental rate increase on new and renewal leasing will be in excess of the 38%. We currently achieve lease signings related to 2024 explorations.

Speaker 3: Moving on to development leasing. Since our last earnings call, we leased half of our 699,000 square foot first logistics center at 283 Building B in Central Pennsylvania.

Moving on to development leasing since our last earnings call. We leave half of our 699000 square foot first logistics center at $2 83 building be in Central Pennsylvania.

Speaker 3: We also leased our 37,000 square footer in Northern California and a 17,000 square feet at our first loop park in Orlando.

We also leased our 37000 square footer in Northern California, and a 17000 square feet at our first loop Park in Orlando.

Speaker 3: With these lease signings, the capacity on our self-imposed $800 million speculative leasing cap today stands at $108 million.

With these lease signings and capacity on our self imposed $800 million speculative leasing cap today stands at $108 million.

Speaker 3: We continue to monitor tenant demand for new growth to determine the appropriate time to start new development.

We continue to monitor tenant demand for new growth to determine the appropriate time to start new developments.

Speaker 3: As I discussed earlier, tenants' decision-making on space for new growth continues to be deliberate. When we do decide on new starts, we're well-positioned with our existing coastally-oriented land bank that can accommodate 15.2 million square feet. This represents approximately $2.4 billion of potential new investment based on today's estimated construction costs and the land at our book base.

As I discussed earlier tenants decision, making on space for new growth continues to be deliberate.

When we do decide on new starts were well positioned with our existing coastal oriented land bank that can accommodate $15 2 million square feet. This represents approximately $2 4 billion of potential new investments based on today's estimated construction cost and the land at our book basis.

Moving now to dispositions since our last call. We completed a significant sale of 39 acres of land at our PV 303 project in Phoenix for $41 million to a data center user.

Speaker 3: Moving now to dispositions, since our last call, we completed a significant sale of 39 acres of land at our PB303 project in Phoenix for $41 million to a data center user.

Speaker 3: We also entered into a ground lease with that buyer for the remaining 100 acres of land at this project.

We also entered into a ground lease with that fire for the remaining 100 acres of land at this project.

Speaker 3: The ground leases for five years and include the purchase option, exercisable beginning in year three.

Ground leases for five years and includes a purchase option exercisable beginning in year three.

Our year to date sales totaled $61 million, we now expect sales for the full year to be $75 million to $150 million.

Speaker 3: Our year-to-date sales total $61 million. We now expect sales for the full year to be $75 to $150 million.

Speaker 2: 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. NARIF funds from operations were $0.62 per fully diluted share, compared to $0.60 per share in 3 Q2 022.

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.

Funds from operations were <unk> 62 per fully diluted share compared to <unk> 60 per share a three Q2 thousand 22.

Speaker 2: Our cash, same store, NOI growth for the quarter, excluding termination fees, was 7.4%.

Our cash same store NOI growth for the quarter, excluding termination fees was seven 4%.

Speaker 2: The results in the quarter were driven by increases in renter rates on new and renewal leafing, renter rate bumps embedded in our leases and lower free rent, partially offset by slightly lower average occupancy and an increase in real estate tax.

The results in the quarter were driven by increases in rental rates on new and renewal leasing rental rate bumps embedded in our leases and lower free rent.

Actually offset by slightly lower average occupancy and an increase in real estate taxes.

Speaker 2: We finished the quarter with in-service occupancy of 95.4%, down 230 basis points compared to 2 Q2 023, primarily due to completed developments placed in service in the third quarter.

We finished the quarter with in service occupancy of 95, 4% down 230 basis points compared to Q2 thousand 23, primarily due to completed developments placed in service in the third quarter.

Speaker 2: Summarizing our building, leasing activity during the quarter, approximately 1.4 million square feet of leases come in.

Summarizing our building leasing activity during the quarter, approximately $1 4 million square feet of leases commenced.

Speaker 2: Of these, 300,000 were new, 500,000 were renewals, and 500,000 were for developments and acquisitions with lease-ups.

These 300000 were new 500000 were renewals and 500000 work for developments and acquisitions with lease up.

Speaker 2: As a reminder, we are strongly positioned with no debt maturity about until 2026, assuming the exercise of extension options and two of our bank loans.

As a reminder, we are strongly positioned with no debt maturities out till 2026, assuming the exercise of extension options in two of our bank loans.

Speaker 2: Moving on to our updated 2023 guidance for our earnings release last evening.

Moving on to our updated 2023 guidance per our earnings release last evening.

Speaker 2: Guidance Range for Named Read FFO is now $2.40 to $2.44 per share.

Our guidance range for NAREIT <unk> is now $2 40.

To $2 44 per share.

Speaker 2: excluding the two cents per share income item discussed in our first quarter call. Our guidance range is now $2.38 to $2.42 per share, which is a one-pay increase at the midpoint. Kia.

Excluding the <unk> <unk> per share income item discussed in our first quarter call. Our guidance range is now $2 38.

Do you do $2 42 per share, which is a one penny increase at the midpoint.

Key assumptions for guidance are as follows.

Speaker 2: We are projecting year in occupancy of 94.25% to 94.75%.

We are projecting year end occupancy of $94, two 5% to 90, 475%.

Speaker 2: This range assumes that the 644,000 square foot old post road asset is leased up in 2024.

This range assumes that the 644000 square foot all post road asset is leased up in 2024.

Speaker 2: We have made this assumption based upon our experience with the asset and that delays in the final government's award process experience by our prospective 3PL tenet.

We have made this assumption based upon our experience with the asset and the delays in the final governmental award process experienced by our perspective, three PL tenant.

Speaker 2: Your endocupancy guidance also assumes the lease-up of our developments placed in service and the third and fourth quarters will now occur in 2024 due to prospective tenants' measured pace in making significant commitments.

Your occupancy guidance also assumes the lease up of our developments placed in service in the third and fourth quarters will now occur in 2024 due to perspective tenants measured pace and making significant commitments.

Speaker 2: I would note that if you excluded the impact of these developments being placed in service, our midpoint for year end occupancy would be approximately 97%. Our 4Q occupancy assumption implies a quarter end full year average of 96.5% to 96.6%. Moving on to Phase six.

I would note that if you excluded the impact of these developments being placed in service our midpoint for year end occupancy would be approximately 97%.

Our four key occupancy assumption implies a quarter and full year average of 96, 5% to 96, 6%.

Moving on to other guidance components.

Speaker 2: Ford corner same store at a wide growth on a cash basis before termination fees of 6 to 7.5%.

Fourth quarter same store NOI growth on a cash basis before termination fees of <unk>.

Six to seven 5%.

Speaker 2: This implies a full year quarterly average growth for this metric of 8 to 8.5%.

This implies a full year quarterly average growth for this metric of eight to eight 5%.

Speaker 2: Note that the same store calculation excludes 1.4 million of income related to insurance claims settlements recognized in the fourth quarter of 2022.

Note that the same store calculation excludes $1 4 million of income related to insurance claims settlement recognized in the fourth quarter of 2022.

Speaker 2: Guidance includes the anticipated 2023 costs related to our completed and under construction developments at September 30th for the full year 2023. We expect to capitalize about 10 cents per share of interest.

Guidance includes the anticipated 2023 costs related to our completed and under construction developments at September 30 for the full year of 2023.

We expect to capitalize about <unk> <unk> per share of interest.

Speaker 2: Our GNA expense guidance range is 34.5 to 35.5 million dollars in increase of a half of a million dollars at the midpoint.

Our G&A expense guidance range is $34 five to $35 $5 million, an increase of a half of $1 million at the midpoint.

Speaker 2: and guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or repayments, north of potential issuance of equity after this call. Let me turn it back over to Peter.

And 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.

Speaker 3: Thanks Scott, and thank you to all my teammates for all that you have accomplished thus far this year. Together we're focused on delivering strong cash flow by pushing rental rates on new and renewal leasing and the continued lease-up of our development pipeline. Operator with that, we're ready to...

Thanks, Scott and thank you to all my teammates for all that you have accomplished thus far this year together, we're focused on delivering strong cash flow by pushing rental rates on new and renewal leasing and the continued lease up of our development pipeline.

Operator with that we're ready to open it up for questions.

Okay.

Dave.

Yeah.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Speaker 1: We will now begin the question and answer session to ask a question. You may press star, then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Also, please limit yourself to one question and one follow up. Req to ask additional questions.

Also please limit yourself to one question and one follow up re queue to ask additional questions.

Speaker 1: At this time, we will pause momentarily to assemble our Ross

At this time, we will pause momentarily to assemble our roster.

Okay.

Speaker 1: Our first question comes from Rob Stevenson with Janie.

Hi, first question comes from Rob Stevenson.

With Janney. Please go ahead.

Speaker 4: Good morning guys. A couple of questions on development. Are you expecting to start any new developments in the fourth quarter or early first quarter at this point? And then first state moved from a first quarter completion to a fourth quarter completion. Can you update us what's going on there?

Good morning, guys a.

A couple of questions on development are you expecting to start any new developments in the fourth quarter early first quarter at this point and then first state moved from our first quarter completion to a fourth quarter completion can you update us what's going on there.

Speaker 3: I'll take the first part of that. Rob, look, development starts are going to be a function of, you know, market strength, tenant velocity, economic outlook, and of course, lease up of our completed developments. Given our desire to operate with additional capacity under our self-imposed cap.

I'll take the first part of that Rob.

Development starts are going to be a function of market strength tenant velocity.

The economic outlook and of course lease up of Har.

Pleated developments.

Given our desire to operate with additional capacity under our self imposed cap.

Speaker 3: so that we can take advantage of potential stress in the market.

So that we can take advantage of potential stress in the market.

It's unlikely we're going to have any additional starts this year.

Speaker 3: And as you know, we don't give guidance on starts, so I won't comment on 2020.

And as you know, we don't give guidance on starts so I won't comment on 2024.

Speaker 4: Good morning Rob, it's Peter Schultz to your question on first day crossing. Our construction schedule has gone well. We've had great weather. So the building is a little bit ahead of schedule. And that's what allowed us to move it from first quarter of 25. I'm sorry, first quarter of 24 into fourth quarter 23 toward completion.

Hey, good morning, Rob It's Peter Schultz to your question on first day crossing our construction schedule.

<unk> gone well, we've had great weather. So the building is a little bit ahead of schedule and that's what's allowed us to move it from <unk>.

First quarter of 'twenty, five I'm, sorry, first quarter 'twenty four into fourth quarter 'twenty three for completion.

Okay.

Speaker 4: and then any of you peter talked about the macro in the core market uh... as a whole supply picture which of your core markets are you seeing the least amount of new supply in relative to size

And then how do you view Peter talked about the macro in the core market.

As a whole supply picture, which of your core markets are you seeing the least amount of new supply in relative to size.

Speaker 3: Yeah, there are a number of markets that didn't have any start to the third quarter. Starts are down pretty significantly across the country. In some markets, 100% and 90% range. I'm not going to go market by market, but many, many markets have seen little to those starts. A couple of markets, starts on up in Q3 or Lando in Denver would be two markets that happened. But by and large, the vast majority of the markets are down significantly. So if you look at the same experiencing market Spinade Market, you might be seeing the limits of market prices and those markets that clearly stopped pushing markets

Yeah. There are a number of markets that didn't have any starts in the third quarter starts are down pretty significantly across the country and some markets are 100%, 90% range I'm not kind of go market by market, but many many markets have seen little to no starts a couple of markets.

Starts on up in Q3, Orlando in Denver would be two markets that happened, but by and large the vast majority of the markets are down significantly.

Okay. That's helpful. Thank you guys.

Our next question comes from keeping Kim with Truest. Please go ahead.

Speaker 1: Our next question comes from Keben Kim, with Truest. Please go ahead.

Speaker 5: Thanks, good morning. Can you help us better understand your commentary about new leasing demand being deliberate? Maybe you can put it in, maybe you can frame it versus 2019 in terms of type of feedback you're hearing or the number of prospects that you're fielding. I just wanna get it better. Grassless hot things might be changed.

Thanks, Good morning.

Can you help us better understand your commentary about new leasing demand being deliberate maybe you can put it and maybe you can frame it versus 2019 in terms of the type of feedback you're hearing or the number of prospects that you're fielding I'm, just trying to get a better grasp of how things might be changing.

Speaker 3: I'll take the front end of that Joe to impeter chime in too.

I'll take the front end of that Jojo and Peter should chime in too.

Speaker 3: You know, I think when we talk about 2018-2019, when we had a perspective, when we had a space available, we were usually talking to one or two, maybe three tenants in 21 and 22, maybe it was five or six. So we're back down to a smaller number of prospects. Obviously with the increase in development deliveries, we also have a little bit more competition than we had in 21 and 22 for new space.

I think when we talk about 2018 2019, when we had our perspective when we had a space available we were usually talking to one or two maybe three tenants in 'twenty, one and 'twenty two.

Maybe it was five or six so we're back down to a smaller number of prospects.

Obviously with the increase in development deliveries, we also have a little bit more competition than we had in 'twenty, one 'twenty two for new space.

Speaker 4: Peter, you want to talk about your recent? Sure, Kevin, Peter Schultz here. I would say a couple of things. The overall level of activity to Peter's point has been generally consistent. But what we are seeing is tennis being cautious.

Peter you want to talk about your recent short came in Peter Schultz here.

I would say a couple of things.

Overall level of activity to Peter's point has been generally consistent but what we're seeing is tenants being cautious.

Speaker 6: and really delaying their decision making. We've seen a number of...

And really delaying.

Their decision, making we have seen a number of deals where they had a targeted commencement date only to see those pushed back.

Speaker 6: of deals where they had a targeted commencement date, only to see those pushback as tenants are hesitant to make those commitments given some of the macroeconomic.

Tenants are hesitant to make those commitments given some of the macroeconomic.

Speaker 6: and geopolitical issues of Peter touched on in the script.

And geopolitical issues and Peter touched on in the script, we have seen a little bit of.

Speaker 6: You know, we have seen a little bit of increase in activity coming out of the summer.

Increase in activity coming out of the summer.

Speaker 6: Activity levels are better in the smaller mid-sized spaces.

Activity levels are better than the smaller and mid sized spaces and they are in the biggest spaces for the most part but the primary headwind is just the lack of and the slower cadence of decision, making by tenants Joe Joe anything else you want to add.

Speaker 4: than they are in the biggest spaces for the most part. But the primary headwind is just the lack of and the slower cadence of decision making by tenants. Joe, do you have anything else you want to add? Yes, so for me, you know, kind of bottom line, it's like, you know, in 2019, businesses are focusing more on growth.

Yes.

So for me kind of bottom line in sight.

In 2019 businesses are focusing more on growth.

Speaker 1: and they're focused on where their expansion is because of new business coming in. Today, they're more securing their current commitment and making wine to make sure they got good enough space to run their business and that's focus and growth.

And their focus on what we're doing.

Spansion is because of new business coming in the day, there are more securing their client commitment and making wanting to make sure. They got good enough space to run their business and Thats focused on growth.

Speaker 5: In 19, there was a little bit more of fear of missing out on space because they're being gobbled up quickly. Today, on hands, I have a little bit more choices that they're more deliberate and they're shopping around a little bit more.

19, there was a little bit more of a fear of missing out on space, because they're being gobbled up quickly today.

As I have.

A little bit more choices, because theyre more deliberate and they're shopping around a little bit more.

Okay.

So.

Speaker 5: How does that impact your strategy in terms of leasing up your development space or I guess any space?

How does that impact your strategy in terms of leasing up your development of space or I guess any space.

Is cutting rent.

Speaker 5: a practical solution or if the pool of new pool of customers is a smaller maybe cutting rent doesn't do the trick uh... you know maybe leave increasingly some commissions uh... how are you trying to handle that

A practical solution or if the pool of new like the pool of customers. So it's a small maybe cutting rest doesn't do the trick.

You know maybe leave increasing leasing commissions I guess how.

How are you trying to handle that.

Speaker 3: You know, right now, concessions are not increasing meaningfully. And I say, usually we're meaningfully because here and there, we are seeing some sponsor owners increase free rent a little bit. We typically offer call it half a month.

No right now concessions are not increasing meaningfully and I think he used the word meaningfully because here and there we are seeing some spa.

Sponsor owners incur.

Increased free rent a little bit we typically offer call it half a month.

Speaker 3: free run per lease year and we're seeing that in some cases at a month.

Free rent per lease year, and we're seeing that in some cases at a month.

Speaker 3: But again, not, you know, other than that, that's about it. TIs or standard packages, et cetera.

Again not not.

Other than that that's about <unk> of our standard packages et cetera.

Speaker 3: You know, the other thing that I would point out is that we have developed properties that are incredibly competitive relative to the set of primarily merchant build the top.

The other thing that I would point out is that we have developed properties that are incredibly competitive relative to the set of primarily merchant build that's out there.

Speaker 3: So from a functionality standpoint, we are superior and You know when we talk about having more competition that's not we don't mean there are six or eight other opportunities There might be two or three so it's not that the market isn't flooded

So from a functionality standpoint, we are superior and.

When we're talking about having more competition. That's not we don't mean, there are six or eight other opportunities there might be two or three so it's not that the market isn't flooded so right now the market is holding pretty steady occasionally youll see somebody has a little extra free rent.

Speaker 3: So right now the market's holding pretty steady. Occasionally you'll see somebody get a little extra free rent.

Speaker 7: But right now it's holding steady. Keepin' the other thing I'd add is...

But right now it's holding steady keeping the other thing I'd add is over.

Speaker 6: You know, over the last several years, we've seen a lot of our developments, least the single tenants. As you know, we take a lot of...

Over the last several years, you've seen a lot of our developments leased to single tenants as you know we take a lot of.

Speaker 6: A lot of time in the design making sure these are functional can be demied for multiple tenants. We're seeing as I said a few minutes.

A lot of time in the design, making sure. These are.

Functional can be demand for multiple tenants.

We're seeing as I said, a few minutes ago better demand from smaller mid size of the buildings are ready and prepared to be.

Speaker 6: better demand from smaller mid-size and the buildings are ready and prepared to be demised from multiple tenants.

Demand for multiple tenants office multiple office stock packages.

Speaker 6: Office multiple office pods, stock packages, in some cases, in demising. So we have the flexibility given the quality point to Peter made to accommodate that. So you might see us do more multiple tenants.

Some casing devising so we have the flexibility given the quality point that Peter made.

To accommodate that so you might see us do more multiple tenants.

Speaker 6: then what we've done the last several years, which has really just been a function of the market.

Then what we've done the last several years, which has really just been a function of the market.

Thank you guys.

The next question comes from Nicholas You'll look Ho with Scotia Bank. Please go ahead.

Speaker 1: The next question comes from Nikolas Yulukal with Scotia Bank. Please go ahead.

Speaker 8: uh... how you can want everyone at first i just want to ask about you know the development projects that you know i guess already delivered this quarter and and still a comment next couple quarters and and little and then empire uh... you just talk a little bit more about

Good morning, everyone. Yeah first I just wanted to ask about you know the development projects that you know I guess already delivered this quarter and still to come in the next couple of quarters and in the inland Empire.

If you could just talk a little bit more about.

Speaker 8: you know what sort of competitive level of supply you're dealing with there you know relative to those projects you know we do see just that's in here commentary in lennem part east is where there is more that supply impact but just want to hear your thoughts on that

What sort of competitive level of supply you're dealing with there you know.

Relative to those projects, we do see just stats in her commentary the inland Empire East is where there is more of that supply impact, but just wanted to hear your thoughts on that.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions.

Speaker 5: I'll start showing the Indian Empire. Overall, the Indian Empire still has a historically very low vacancy of 3.5%.

So Joe do you want to.

Sure I'll touch on the inland Empire overall.

Unknown Executive: To ask the question, you may press star then one on a touchdown phone. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up.

Empire has.

Historically very low vacancy of three 5%.

Speaker 5: We do expect a long term to have part in red growth. In terms of our developments, we have five.

We do expect.

Our long term digital still had positive rent growth in terms of our developments we have five.

Unknown Executive: Please note this event is being recorded.

Arthur Harmon: I would now like to turn the conference over to Art Harmon, Vice President of Investor Relationship, questions and marketing. Please go ahead. Thank you, Dave.

Speaker 2: In the IE2 we just completed in 300 construction.

In.

The E. Two we just completed and three under construction.

Speaker 5: They're all of different size ranges in different submarkets namely Montana 215 corridor and in redlands, so we're not over investors or overbuilt or any markets

Theyre all different size ranges and in different submarkets, namely on Pan.

Peter Bacilli: Hello, everybody and welcome to our call.

Peter Bacilli: Before we discuss our third quarter results, and our updated 2023 guidance, let me remind everyone that our call may include forward looking statements as defined by federal securities loss. 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, October 19, 2020. 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 10K and other SEC filings.

215 corridor, and then read lengths so were not over investors are overbuilt on any more I guess, if you look at each of these properties. There are no more than two competing properties in terms of quality and location of these properties to add there.

Speaker 9: If you look at each of these properties, there are no more than two competing properties in terms of quality.

Speaker 9: on location with these properties and there are even two properties where we couldn't find really comparable property. We feel really good about these projects.

Even the two properties, where we couldnt find really comparable property.

We feel really good about these projects.

Speaker 9: Roughly, they're about $200 million and today we're projecting a 9.3 yield, which is a little bit under a 90% margin. So we feel really good about of course our job is to lease those, but we feel very good in creating the eye for shareholders to go forward.

Roughly there are about $200 million and.

They were projecting a $9 three yield.

A little bit under 90% margins. So we feel really good about of course, our job is to lease those but we feel very good in creating value for shareholders going forward in those.

Peter Bacilli: You can find a reconciliation of non get 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.

Speaker 8: Thanks, that's helpful. This second question is, I want to see, how we should be thinking about the pace of...

Thanks, that's helpful.

Second question is I want to see you know, how we should be thinking about the pace of development.

Peter Bacilli: Our call will begin with remarks by Peter Bacilli, 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, our Joe Joe, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walters, Senior Vice President of Capital Markets and Affed Management.

Development projects leasing up over the next year just in terms of a time frame from when it gets delivered to.

Speaker 3: delivered to a, you know, ideally a more stable occupancy level. And then the other question is related to capitalized interest. If you know, seems like there could be some sensitivity there over the next year based on how long projects take place. And, you know, any, any, any thoughts or reminders you can tell us about how to think about, you know, the capitalized interest impact in the development pipeline. These, if you have long buildings can really stay within capitalized interest after being delivered. So I'll cover the first part of that. Scott will talk about capitalized interest in terms of lease up timing.

Ideally a more stable occupancy level and then the other question is related to capitalized interest. If you. It seems like there could be some sensitivity there over the next year based on how long projects take police and you know and he just any any thoughts of reminders you can tell us about how to think about the capitalized interest.

Peter Bacilli: Now, let me hand the call over to Peter. Thank you, Art, and thank you all for joining us today. We continue to deliver strong cash rental rate growth on new and renewal leasing, and we're making good progress on our 2024 explorations, which I will touch upon shortly. We also achieve some leasing wins at our developments in Pennsylvania, Northern California, and Orlando, and we're capturing significant value from the sale and ground lease of our unbalanced sheet land sites in Phoenix.

Packed into the development pipeline.

This would be how long buildings can really stay within capitalized interest after being delivered.

Speaker 3: So I'll cover the first part of that. Scott will talk about capitalized interests in terms of lease up timing for next year. Obviously we're going to be spending a lot of time on that topic when we sit down to do our budgets for next year. At this point in terms of new developments, we're not anticipating changing our 12 month downtime assumption.

Yeah. So I'll cover the first part of that Scott talked about capitalized interest in terms of lease up timing for next year, obviously, we're going to be spending a lot of time on that topic, when we sit down to do our budgets for next year.

This point in terms of new development, we're not anticipating changing our 12 month downtime assumption.

Peter Bacilli: As expected, our quarter-end occupancy metric was impacted by a few recently placed in service developments that remain in lease up. As we noted on our last call, prospective tenants continue to be deliberate in making significant commitments for new space in the face of the uncertain interest rate, economics, and geopolitical environment. This is being reflected broadly in the national vacancy figures as new supply continues to come online. National vacancy was up 50 basis points in the third quarter, but still at an overall low 4.2%.

Speaker 3: But with respect to the projects that have been completed and gone into service, we'll be focused on what we think. When we think those are going to lease next year, based upon the level of dialogue that we're having with our prospective tenants today. So I can't really give you much more than that on that question.

But with respect to the projects that have been completed and gone into service will be focused on what we think when we think those are going to lease next year based upon the level of dialogue that we're having.

With our prospective tenants today, so I can't really give you much more than that on that question. Scott you want to cover the capitalized interest sure Nick.

Speaker 2: Scott, you want to cover the capitalized interest? Sure, Nick. So we stop capitalization of interest once the development is completed. So we've got a handful of developments that our schedule would be completed up until the second quarter of 2024. So we will have capitalized interest for the first six months of that period. For the back half, for the last six months of the period, that'll be dependent upon new start.

So we stop capitalization of interest once the development is completed so we've got a handful of developments that are scheduled to be completed up until the second quarter of 2024. So we will have capitalized interest for the first six months of that period for the back half.

Peter Bacilli: In our 15 target markets, vacancy is 4%. As we discussed on our last call, there is a fair amount of new supply expected to be delivered nationally in roughly the next 12 months. Based on TBRE's analysis, there is approximately 475 million square feet under construction across the U.S., 30% of which is pre-leaf, focusing on our 15 target markets, completions are expected to be approximately 325 million square feet. New starts nationally have trended downward, with third quarter 2023 starts down more than 60% compared to third quarter 2022.

Last six months of the period that will be dependent upon new starts.

Speaker 1: The next question comes from Craig Mailman with Fiddy. Please go ahead.

The next question comes from Craig Mailman with Citi. Please go ahead.

Speaker 10: Good morning. Just what does it on the the data center ground least in Phoenix here? Just had a couple quick questions on this just first got from a run rate perspective. Is the full run rate in the 3Q number or do we need to think about additional revenue coming in the fourth quarter to the annual?

Hey, Good morning, just wanted to hit on the data center ground lease in Phoenix Fear just had a couple of quick questions on let's just first from a run rate perspective is the full run rate.

E <unk> number or do we need to think about additional revenue coming in in the fourth quarter to annualize it.

Speaker 2: Yeah, Craig. So there's a little bit of a lease income in the third quarter. I think it might be just a half of a month. And then obviously we're going to get a full quarter in the fourth quarter of 2023. Take a look at our NAV footnote, Craig. We have some more information on the ground lease that you can get some of the economics. Thanks.

Yeah, Craig so.

Peter Bacilli: This market response is being driven by the rapid increase in the cost of capital and the uncertain economic environment. In our portfolio, we're capturing strong rental rate increases on our renewals, realizing the benefit of the healthy market red growth we've seen for the past several years. Tens continue to renew well in advance of their lease expiration dates, reflecting continued confidence in their core business. Overall, leasing market dynamics continue to favor the landlord, particularly with renewals given the low vacancy levels I discussed earlier.

There is there is a little bit of lease income in the third quarter I think it might be just a half of a month.

And then obviously, we're going to get a full quarter in.

For the fourth quarter of 2023 and take a look at our.

Footnote Craig we have some more information on the ground lease that you can get some of the economics.

Okay.

Sorry, I apologize I didn't see that footnote.

Speaker 10: Did you guys put in what the purchase option is?

Did you guys put in what the purchase option is.

Speaker 10: there in terms of pricing and how that compares to what the value would have been if you had just kept this as industrialized.

And there are the terms of the pricing and how that compares to what the value would have been if you just kept us as industrial labs.

Peter Bacilli: Through yesterday, with 97% of our 2023 lease expiration in the books, our cash rental rate increase is 60% with average annual rental rate escalators of 3.8%. A big driver of our cash rental rate increases has been the outperformance of our Southern California assets, where we've achieved the cash rental rate increase of 151%. Looking ahead to 2024, we've taken care of 40% of next year's lease expiration at a cash rental rate increase of 38%, which is similar to our pace of progress at this time last year.

Speaker 3: We have a pretty strict confidentiality agreement with this counter party. So no, we can't talk a lot about the terms and values and things like that.

We have a pretty strict confidentiality agreement with this counterparty. So no we can't talk a lot about the terms and values and things like that.

Okay.

Speaker 3: I can say generally speaking the value of data center land is much higher than the value of industrial. So that's all we can really say. Let's put this way. We like the economics a lot.

I can say generally speaking the value of data center land is much higher than the value of industrial so, but that's all we can really say.

Let's put it this way we like the economics a lot.

Speaker 11: Are we witness done? Happy slavery. Yep, go ahead. You know, fuchsia, fuchsia, fuchsia, fuchsia.

Or we wouldn't have done it obviously, yes go ahead.

Fisher pretty sure sure yourself alright.

Alright.

Speaker 3: No, no, I mean, it's a great sight. And we went into that years ago with big plans for, you know, selling to users, developing ourselves, build the suits, et cetera. For us to be tempted to let that 100 acres go, you can imagine it's gotta be a pretty good deal.

I mean, it's a great site.

And we went into that years ago with big plans for.

Selling to users developing ourselves build to suits et cetera.

For us to be tempted to less than 100 acres go you can imagine it's got to be a pretty good deal.

Peter Bacilli: Our 2023 rental rate increase has benefited from slightly more than 25% of rental income coming from leases signed in Southern California. Due to a few Southern California leases that expired in 2023 that are assumed to lease up in 2024, we expect the Southern California portion of lease signing by rental income in 2024 will be roughly the same. As 2023, at a little over 25%. We will give you a refined view of our thoughts on our 2024 cash rental rate increase on our fourth quarter call with the benefit of our budget reviews. We anticipate our cash rental rate increase that new and renew leasing will be an excess of the 38%, we currently achieved unleased signing related to 2024 expiration.

Speaker 10: I guess that was my other question. Should we take this between the occasion of your concern about overbuilding and scenics and doing this deal rather than building it out, industrial length, the seams are going to come off for you guys since you got involved in this.

Well I guess that was my other question.

Should we take this as an indication of your concern about.

We're building in Phoenix and doing this deal rather than.

Building it out.

Because it seems to have been a good market for you guys. Since you got involved in a few years ago.

Speaker 3: This in no way is an indication of our confidence in that market. We spend a lot of time deliberating whether we want to do this. At the end of the day.

This in no way is an indication of our confidence in that market.

We spent a lot of time deliberating, whether we wanted to do this.

At the end of the day.

Speaker 3: The economics of this trade pretty much equal the economics of building that side out

The economics of this trade pretty much equaled the economics of building that side out.

Speaker 10: And then just one, one quick follow up or a separate question just got on the mark to mark you said You're not even got in chat on spreads, but you anticipate You know next year won't be an excess of that 38% is the 40% you lease this year just a mix issue of You know outside of the law or other market

And then just one one quick follow up or separate question just got on the Mark to market, you said youre not giving guidance yet on spreads.

You anticipate.

You know next year won't be in excess of about 38% is the 40% you're at least this year just a mix issue of outside of that a lot of your other markets with.

Peter Bacilli: Moving on to development leasing. Since our last earnings call, we lease half of our 699,000 square foot first logistics center at 283 Building B in Central Pennsylvania. We also leased our 37,000 square footer in Northern California and a 17,000 square feet at our first loop park in Orlando. With these leased signings, the capacity on our self-imposed $800 million speculative leasing cap today stands at 108 million. We continue to monitor tenant demand for new growth to determine the appropriate time to start new developments.

Speaker 6: Smaller mark to mark. It can detail maybe what's in that 40 versus what's remaining in the 60 from a market exposure Chris you want to take that? Yeah Craig this is Chris. Yeah it is definitely a mix issue. So if you look at what's been taken care of It's only 6% from Southern California. If you look at the rest of the 2024 rowovers, you know that mix is 56% coming from Southern California.

Smaller mark to market, if you could give details, but maybe wasn't that 40 versus what's remaining in the 60 from our market exposure.

Do you want to take that yes, Craig This is Chris yes. It is definitely a mix issue. So if you look at what's been taken care of it's only 6% from southern California. If you look at the rest of the 2024 rollovers.

Mix is 56% coming from southern California.

Perfect. Thank you.

Peter Bacilli: As I discussed earlier, Tenant's decision making on space for new growth continues to be deliberate. When we do decide on new starts, we're well positioned with our existing, post-delete oriented land bank that can accommodate 15.2 million square feet. This represents approximately 2.4 billion of potential new investment based on today's estimated construction cost and the land at our book basis.

Speaker 1: Again, if you have a question, please press star then one. Our next question comes from Becrum Malhotra with Mizzouho. Please go ahead.

Again, if you have a question. Please press Star then one our next question comes from B Crumb Malhotra with Mizuho. Please go ahead.

Speaker 12: Thanks for the questions. So just first following up on development, I guess some of your peers may be seeing this as, if development starts or who are very low, by the end of 24, there's probably little product to offer. And if the mod's sort of picking up, and there's this probably share to be had. So I'm just wondering, how do you balance?

Thanks for taking the questions.

Just first following up on development I guess some of your peers, maybe seeing that says it's development start ups, who are very low.

At the end of 'twenty, four there's probably little product to offer.

Three months' sort of picking up and there's probably share could be had so I'm. Just wondering how do you balance the two other specific markets you can cite where you do feel you might pause in <unk> like you said, but then ramp back up because in general there to be a dearth of quality product.

Peter Bacilli: Moving now to this position, since our last call, we completed a significant sale of 39 acres of land at our PB303 project in Phoenix for 41 million to a data center user. We also entered into a ground lease with that buyer for the remaining 100 acres of land at this project. The ground lease is for five years and includes a purchase option, exercisable beginning in year three. Our year-to-date sale total 61 million.

Speaker 12: The two other specific markets you can cite where you do feel you might pause in four queue like you said but then ramp back up because in general there will be a to

Speaker 3: Yeah, I mean, one of the big indicators for all of us is going to be development lease-up. And we have product in the market now. We're having good conversation.

Yes, I mean, one of the big indicator for all of US is going to be development lease up and we have product in the market now we're having good conversations.

Speaker 3: As we've said in various many different ways, tenants are taking a while. You know, at least the $500,000 square foot building, that's about a $50 million in decision.

As we've said in various in many different ways tenants are taking a while at least a 500000 square foot building, that's about a $50 million and decision.

Peter Bacilli: We now have expect sales for the full year to be 75 to 150 million.

Scott Musil: With that, I'll turn it over to Scott for some additional commentary and updated guides. Thanks, Peter. Let me recap our results for the quarter. Near refunds from operations were 62 cents per fully diluted share, compared to 60 cents per share in 3Q 2022. Our cash same-store NOI growth for the quarter, excluding termination fees was 7.4%. The results of the quarter were driven by increases in rental rates, a new and renewal leasing, rental rate bumps embedded in our leases and lower free rents, partially offset by slight increase in sales.

Speaker 3: And the current economic outlook and what's going on around the world, that causes people to pause before they put down that 50 million. So...

And the current economic outlook and what's going on around the world that causes people to pause before they put down that $50 million. So.

Speaker 3: Yes, it's possible that toward the end of next year, there's not enough supply. That would be fine by us, obviously. And we really think that the market will be particularly strong in 2025. So with respect to us looking at what we're gonna start and potentially start next year, really it's gonna depend upon how we feel about these.

Yes, it's possible that toward the end of next year.

There's not enough supply that would be fine by us, obviously, and we really think that the market will be particularly strong in 2025, so with respect to us looking at what we're going to start to potentially start next year really it's going to depend upon how we feel about Lisa.

Speaker 12: Okay, that makes sense. And just following up on the, you know, in an empire comment you made around the competitive state being being small in terms of your project.

Okay that makes sense and then just following up on the inland Empire comments, you made around the competitive set.

Scott Musil: We finally lower average occupancy and an increase in real estate taxes. We finished the quarter within service occupancy of 95.4%, down 230 basis points compared to 2Q 2023, primarily due to completed developments placed in service in the third quarter. Summarizing our building leasing activity during the quarter, approximately 1.4 million square fee of leases commenced. Of these, 300,000 were new, 500,000 were renewals, and 500,000 were for developments and acquisitions with lease up.

And in terms of your project.

Speaker 12: Maybe just help us think about how you're seeing, what you've seen in terms of market rent growth in so-cal in general, what the variability in that region looks like quarter to quarter any numbers you can share with us.

Maybe just help us think about how youre seeing.

How what you've seen in terms of market rent growth in Socal in general what the variability in that region looked like quarter over quarter any number you can share would be helpful.

Speaker 9: Yes, so I'm kind of addressed a little bit because of the little big and CLA of sub two and then IE at about three and a half long term we would think that it would be minimum mid single digits going forward but today, you know as you may recall SoCal has has the highest rent growth of any market in the US for the last three years straight

Hi, Joe, Yes, so kind of addressed a little bit because of the low vacancy of L. A and sub two and then.

I E at about three and a half long term, we would think that it would be a minimum of mid single digits going forward, but today as you may recall.

Scott Musil: As a reminder, we are strongly positioned with no debt maturity about until 2026, assuming the exercise of extension options in two of our bank loans.

Socal headsets, the highest rent growth of any market in the U S for the last three years straight.

Speaker 9: So right now what the market is doing is suggesting the supply in the marketplace along with a little bit of decline on the inbound T use that affected the demand. And I'm not going to be surprised. We're not going to be surprised. In a very near term, the rent is flat through the end of the year. And maybe...

So right now what the market is doing is digesting.

Scott Musil: Moving on to our updated 2023 guidance per our earnings release last evening. Our guidance range for name read FFO is now $2.40 to $2.44 per share. Excluding the two cents per share income item discussed in our first quarter call, our guidance range is now $2.38 to $2.42 per share, which is a one penny increase at the midpoint.

Supply.

In the marketplace, along with a little bit of a decline on the.

Inbound teus that affected the demand and I'm.

And I'll give you some price we're not going to be surprised in a very near term. The rent is flat through the end of the year and maybe <unk>.

Speaker 9: first quarter next year. Move to maybe slightly negative. But that doesn't mean we can't create value because our point out to you are developers, for example, just a sub-task about a nine-three, based on current market rents, nine-three yield.

First quarter next year.

Slightly negative, but that doesn't mean, we can create value because like I pointed out to you. Our developments for example, just a subset it's about a 93 based on current market rents 93 yield.

Scott Musil: Key assumptions for guidance are as follows. We are projecting year in occupancy of 94.25% to 94.75%. This range assumes that the $644,000 square foot old post road asset is leased up in 2024. We have made this assumption based upon our experience with the asset and the delays in the final governmental award process experienced by our prospective 3PL tenant. Your end occupancy guidance also assumes the lease-up of our developments placed in service and the third and fourth quarters will now occur in 2024 due to prospective tenants' measured pace in making significant commitments.

Thank you.

Speaker 1: Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Yeah.

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

Speaker 13: Hi, good morning. Maybe somewhat related to the last question. But on the development yields, it looks like today, they're expected to be 7.2% for the under construction set of properties, which is up from like 6.5% a year ago. So how are you thinking about your cost of capital today and what yields are required to make development attractive? And I guess to what extent is that impacting your activity?

Hi, good morning.

Maybe somewhat related to the last question, but on the development yields it looks like today. They are expected to be seven 2% for the under construction set of properties, which is up from six 5% a year ago. So how are you thinking about your cost of capital today, and what yields have required us to make development attractive I guess to what extent is that impacting your activity.

Yes, Thanks Kaitlin.

Speaker 3: So sure, the caustic capules certainly got up. When we look at that though, and compare it to what we think we need to make, to make reasonable margins and profits here, the yields on new developments need to be north of six and a half.

So sure the cost of capital has certainly gone up.

When we look at that though and compare it to what we think we need to make to make reasonable margins and profits here the yields on new development needs to be north of six and a half.

Scott Musil: I would note that if you excluded the impact of these developments being placed in service, our midpoint for year end occupancy would be approximately 97%. Our 4Q occupancy assumption implies a quarter end full year average of 96.5% to 96.6%.

Speaker 3: expected IRRs, you know North of 8.5 closer to 9. And you know, our on a weighted average base.

Expected IRR is north of eight and a half closer to nine.

And.

Or on a weighted average basis, our pipeline projects hurdle those returns. So we're excited about the opportunity as soon as we have digested more of this.

Speaker 3: our pipeline projects hurtled those returns. So we're excited about the opportunity. As soon as we've digested more of this additional supply coming to the Pike Nationals, we've got a lot of great projects that are ready to go in the best markets in the country.

Scott Musil: Moving on to other guidance components. 4Q are same-store and a wide growth on a cash basis before termination fees of 6 to 7.5%. This implies a full year quarterly average growth for this metric of 8 to 8.5%. Note that the same-store calculation excludes 1.4 million of income related to insurance claims settlements recognized in the fourth quarter of 2022. Guidance includes the anticipated 2023 costs related to our completed and under construction developments at September 30th for the full year 2023. We expect to capitalize about 10 cents per share of interest. Our GNA expense guidance range is 34.5 to 35.5 million dollars in increase of a half of a million dollars at the midpoint.

Additional supply coming too on pipe nationally.

Got a lot of great projects that are ready to go and the best markets in the country.

Speaker 13: Got it. Okay. And then maybe on the acquisition side, I know it's historically not been as much of a driver for you guys and Transaction volumes are down significantly this year across CRE. But are you seeing any attractive acquisition opportunities come to market or do you expect Attractive opportunities to come up either of stabilized properties or even lease up properties?

Got it Okay, and then maybe on the acquisition side I know, it's historically not been as much of a driver for you guys and transaction volumes are down significantly this year across CRE, but are you seeing any attractive acquisition opportunities come to market or do you expect.

Attractive opportunities to come out either of stabilized properties or even lease up properties.

Speaker 9: I mean, economics certainly make a difference in terms of what's attractive, but Joe, do you want to talk about some of the things you've seen and the reasons we've taken a path? Sure, yeah. So we're on a look out for those. We're trying to see if there's stress in like, you know, merchant developers or older, middle of their projects, or meet capital or just sellers. So I want to get our real estate. The reality is that there's not a lot of those that fit our quality or geography. And in those situations.

I mean economics certainly.

Make a difference in terms of whats attractive, but Joe do you want to talk about some of the things you've seen in the reasons, we've taken that path sure yes. So.

For those who are trying to see if there is stress in the merchant developers or owners or middle of their projects or need capital or just sellers, who want to get a real estate. The reality that there's not a lot of those that fit our quality, our geography and in those situations that meet our.

Scott Musil: And guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances that repurchases or repayments, nor the potential issuance of equity after this call.

Speaker 9: that meet our geography and...

Geography.

Speaker 9: It doesn't mean our financial criteria, meaning that there are some buyers who are still worrying real estate prices don't make sense to us. So there are a few small ones who are in a situation where the developer didn't have the funds and that they had the tight-up good build-to-suit. We're stepping in and we think that's a great deal. And then we have another situation, not a large deal, a one-off.

It doesn't meet our financial criteria, meaning that there are some buyers who are still.

Hawaii real estate and price.

Peter Bacilli: Let me turn it back over to Peter. Thanks, Scott, and thank you to all my teammates for all that you have accomplished thus far this year. Together, we're focused on delivering strong cash flow by pushing rental rates on new and renewal leasing and the continued lease-up of our development pipeline.

All makes sense to us, but there are a few small ones were in a situation where in developed or it didnt have the funds and then.

Hi, good build to suit, we're stepping in and we think Thats a great deal and then we have another situation not a large deal on one off waiting to develop our needs to fund their speculative project in south of the lender commitment unless the.

Unknown Executive: Operator with that, we're ready to open it up for questions. Dave?

Speaker 9: where the developer needs to fund their speculative project and fund the lender for the commitment unless the developer comes up with more equity. And so we're buying one of their buildings, their nice building, much lower price figures. They need to squeeze out equity on that very, very quickly. So those are just examples of what we're trying to look at.

And this developer pumps out with more equity and so we're buying one of their buildings that are nice building lower much lower price because they need to squeeze out equity on that very very quickly. So those are just examples of what we're trying to look forward.

Unknown Executive: We will now begin the question and answer session. To ask a question, you may press star, the one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.

Unknown Executive: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Also, please limit yourself to one question and one follow-up, re-cute to ask additional questions.

Speaker 3: got it and just to clarify those are things that you're looking for or have already been like decided on and are moving forward. Can we give you my first visit as those are pursuing? We're pursuing. We're chasing it. They're not by any means. We may not get up. We're pursuing. Got it. Thank you.

Got it and just to clarify those are things that youre looking for or have already been decided on and are moving forward.

I can't really give you much more specific than those are pursuing we're pursuing we're chasing they're not by any means we may not get them. We're pursuing got it okay. Thank you.

Unknown Executive: At this time, we will pause momentarily to assemble our roster.

Rob Stevenson: All right, first question comes from Rob Stevenson with Janie. Please go ahead. Good morning, guys. A couple of questions on development. Are you expecting to start any new developments in the fourth quarter or early first quarter at this point? And then first state moved from a first quarter completion to a fourth quarter completion. Can you update us what's going on there? Now I'll take the first part of that rub. Look, development starts are going to be a function of, you know, market strength, tenant velocity, economic outlook, and of course, lease up of our completed developments.

Yeah.

Speaker 1: The next question comes from Todd Thomas with Keybank Capital Markets. Please go ahead.

The next question comes from Todd Thomas with Keybanc Capital markets. Please go ahead.

Speaker 4: Thanks, good morning. This is AJ on Pratad. Just going real quick back to the capitalized inter discussion.

Thanks. Good morning, this is AJ on for Todd.

Real quick back to the capitalized interest discussion.

Speaker 4: You say that you stop capitalizing interest when development completed. As you look at your construction pipeline today and everything under construction, do you see any potential delays or anticipate any delays for what's currently supposed to be delivered over the next few floors?

You say that you stopped capitalizing interest when developments completed.

As you look at your construction pipeline today and everything under construction do you see.

Any potential delays or anticipate any delays for what's currently I was supposed to be delivered over the next few quarters.

Speaker 2: I would say that's our best thinking as at this point of time. So if you're asking about developments under construction, we've got estimated building completion in our supplemental. That's our best thinking at this point in time. That's when those developments will be completed.

I would say and Thats, our best thinking is at this point of time, so if you're asking about developments under construction. We've got estimated building completion in our supplemental that's our best thinking at this point in time that that's one of those developments will be completed.

Rob Stevenson: Given our desire to operate with additional capacity under our self-imposed cap, so that we can take advantage of potential stress in the market, it's unlikely we're going to have any additional starts this year. And, as you know, we don't give guidance on starts, so I won't comment on 2024. Thank you. Good morning, Rob. It's Peter Schultz to your question on first day crossing. Our construction schedule has gone well. We've had great weather.

Speaker 6: Okay, perfect. And then just one question regarding old post road. Is the 3PL tenet, are you still engaging, or is there any update around that contract that was gonna be awarded, or are you moving on and looking to market the asset to a new tenet altogether? So AJ, it's Peter Schultz. We continue to market the...

Okay Perfect and then just one question regarding old post road as the three PL tenant are you still engaged or are they still engaging or is there any update around that contract that was going to be awarded.

Moving on and looking to market the asset to a new tenant altogether.

Rob Stevenson: So the building is a little bit ahead of schedule. And that's what allowed us to move it from first quarter of 25. I'm sorry, first quarter of 24 into fourth quarter 23 for completion. Okay. And then, Peter talked about the macro in the core market as a whole supply picture. Which of your core markets, are you seeing the least amount of new supply and relative to size? Yeah, there are a number of markets that didn't have any starts in the third quarter, starts are down pretty significantly across the country.

So a J, it's Peter Schultz, we continue to market the asset.

In terms of.

Speaker 6: The 3PL group, we continue to talk with them. The government continues for whatever reason to postpone the final decision on that contract award. The latest information is that they're supposed to issue that award sometime later this quarter. Given our experience with this process over last year.

The three PL group, we continue to talk with them. The government continues for whatever reason to postpone.

The final decision on that contract award.

The latest information is that they are supposed to issue that award sometime later this quarter.

Given our experience with this process over the last year.

Speaker 6: You know, our confidence level, I would say, is not high, which is why as you heard from us earlier, we decided to push the lease up into 2024. It's certainly possible that this could get done this quarter, but our probability is that it's less likely just given the way this process has gone.

Rob Stevenson: In some markets 100% in the 90% range. I'm not going to go market by market, but many, many markets have seen little to those starts. A couple of markets have started to up into three Orlando and Denver would be two markets that happened, but by and large, the vast majority of the market, you're down significantly. Okay. That's helpful. Thank you, guys. All right.

Our confidence level I would say is not high which is why as you heard from US earlier, we decided to push the lease up into 2024, it's certainly possible.

This could get done.

This quarter, but our probability is that.

Plus likely just given the way this process has gone.

Okay. Thank you.

The next question comes from Michael Carroll with RBC capital markets. Please go ahead.

Speaker 1: The next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Speaker 4: Yep, thanks. Just following up on Old Coast Road, I know this has been taking a couple years to get done. I mean, at what point do you just decide to kind of go multi-tenant and try to at least it to some smaller tennis that might want that space?

Ben Kim: Next question comes from key Ben Kim with truest. Please go ahead. Thanks.

Yes. Thanks, just following up on an old post road I know this has been taking a couple of years to get done I mean at what point do you just decided to kind of go multi tenant and try at least to some smaller tenants that might want that space.

Joe Joe: Good morning. Can you help us better understand your commentary about new leasing demand being deliberate? Maybe you can put it in. Maybe you can frame it versus 2019 in terms of type of feedback. You're hearing or the number of prospects that you're feeling. I just kind of get a better grasp of how things might be changing. I'll take the front of that Joe, who in Peter should chime in too. You know, I think when we talk about 2018, 2019, when we had a perspective, when we had a space available, we were usually talking to one or two, maybe three tenants in 21 and 22.

Speaker 6: And might that be a good question, Peter Schultz again. So we're certainly have been and are open to that.

Hey, Mike Thats, a good questions Peter folks again, so we're certainly have been and are open to that.

Speaker 6: As we've talked about on some of these paracalls, demand from larger users in this sub market and others has been slower, where historically that size range was very active along that quarter. That's something we're open to and it's really about.

As we've talked about on some of these prior calls demand from larger users in this submarket and others has been slower where historically that size range was very active.

Along that quarter.

That's something we are open to and it's really about the timing of market demand and how tenants make decisions.

Speaker 6: the timing of market demand and how tenants make decision.

Joe Joe: Maybe it was five or six. So we're back down to a smaller number of prospects. Obviously, with the increase in development deliveries, we also have a little bit more competition than we had in 21 and 22 for new space. Peter, do you want to talk about your reason? Sure, Kevin, Peter Schultz here. I would say a couple of things. The overall level of activity to Peter's point has been generally consistent. But what we are seeing is tenants being cautious and really delaying their decision making.

Speaker 4: Okay, thanks for that. And then just real quick on your comments on the smaller blocks of space. I know for the past few quarters, you've highlighted the tenant activity for those smaller to mid size blocks as we're still pretty healthy. Means that still a fair comment today or has that changed over the past three plus months given kind of the slowdown that you've seen in demand?

Okay. Thanks for that and then just real quick on your comments on the smaller blocks of space I know for the past few quarters.

Highlight if the tenant activity for those small to mid size blocks as we are still pretty healthy I mean is that still a fair comment today or has that changed over the past three plus months given kind of the slowdown that you've seen in demand.

Speaker 6: So I would say it's consistent. If you look at our in-service portfolio occupancy is very, very high. We continue to see good demand and backfilling spaces quickly, but for the old post road building that we just talked about in a couple of our developments that are larger demand continues to be very active. I mean, there's, and those tenants operate with more urgency and diligence than some of the bigger commitments.

So I would tell you it's consistent if you look at our in service portfolio occupancy is very very high we continue to see good demand and back filling space as quickly but for the old Post road building that we just talked about in a couple of our developments.

Joe Joe: We've seen a number of deals where they had a targeted commencement date only to see those pushed back as tenants are hesitant to make those commitments given some of the macroeconomic. And geopolitical issues of Peter touched on in the script. You know, we have seen a little bit of increase in activity coming out of the summer activity levels are better in the smaller mid-size spaces than they are in the biggest spaces for the most part.

That our larger demand continues to be very active.

And those tenants operate with more urgency.

And diligence and some of the bigger commitments.

Speaker 6: to our earlier points where they're just not in a hurry to make those decisions and commitments today given the broader macro factors that are impacting everybody.

Our earlier points, where they're just not in a hurry to make those decisions and commitments today, given the broader macro factors that are impacting everybody.

Okay, great. Thank you.

Joe Joe: But the primary headwind is just the lack of and the slower cadence of decision making by tenants. So for me, you know, kind of bottom line is like, you know, in 2019, businesses are focusing more on growth and they're focused on where their expansion is because of new business coming in today. They're more securing their current commitment and making mine to make sure they got good enough space to run their business and less focus on growth.

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

Speaker 1: The next question comes from Nick Bellman with Baird. Please go ahead.

Speaker 5: Good morning. Question on the land bank, it looks like the fair value of the land bank was marked down like 10% quarter of a quarter. Some of that could be related to some landfills, but just curious if you did make some changes in your estimates for fair value of the land and maybe which markets in particular saw the bigger tear cut.

Hey, Good morning question on the land bank it looks like the fair value of the land bank was marked down by 10% quarter over quarter some of that could be related to some land sales, but just curious if you did make some changes in your estimate for fair value of the land and maybe which markets in particular saw the bigger haircut.

Speaker 2: Yeah, Nick, it's got a couple of things happen is from the land bank we remove the land and phoenix related to the land sale and then we remove the land that's being groundless.

I'll take that yes, Nick its Scott a couple of things happened as from the land Bank, we've removed the land in Phoenix related to the land sale and then we removed the land thats being ground lease so thats going to cause a fair value drop alone and <unk> compared to <unk>, because it's no longer in the population and I'll have Joe Joe talk about adjustments we made.

Joe Joe: In 19, there was a little bit more of a fear of missing out on space because they're being gobbled up quickly. Today, tenants have a little bit more choices that they're more deliberate and they're shopping around a little bit more. How does that impact your strategy in terms of leasing up your development space, or I guess any space? Is cutting rent a practical solution or if the pool of new, if the pool of customers is just smaller, maybe cutting rent doesn't do the trick?

Speaker 9: So that's going to cause a fair value drop at loan in 3Q compared to 2Q, because it's no longer in the population. And I'll have Jojo talk about adjustments we made to the exist, what's left over on our name. And then on top of the addition of what's got there, we added of course the national land acquisition. And then we made some adjustments to all land values, those were in Chicago and Florida. And then we also slightly adjusted

The exist, what's leftover sure and then.

In addition to what Scott said, we added of course, the land Nashville Land acquisition, and then we made some adjustments to our land values.

Those who are in Chicago and Florida.

And then we also slightly adjusted some lands. So we did it asset by asset some land we started to make improvements.

Speaker 9: some lands. So we did it as it by asset. Some land we started to make improvements.

Joe Joe: You know, maybe increasing leasing commissions, I guess, how are you trying to handle that? You know, right now, concessions are not increasing meaningfully, and I say, usually we're meaningfully because here and there we are seeing some sponsor owners increase free rent a little bit. We typically offer call it half a month, a free rent per lease year, and we're seeing that in some cases at a month. But again, not, you know, other than that, that's about it, TIs or standard packages, et cetera.

Speaker 9: Where there's off-site improvements and therefore that added to the value. So we added our cost to those Additional investment in the land. So if you took all that together that resulted in different

Letters Offsite improvements and therefore that added to the value. So we added our cost to dose.

Additional investment into the land. So if you took all of that together that resulted in the difference.

Speaker 4: Was there any specific markets that were haircut like significantly in this process or not real?

Was there any specific markets that were haircut like significantly.

And this process or not really.

Speaker 9: No, I would say that if we didn't do it market by market, we did it property by property. I would say the change was anywhere from five to 15%. And then Chicago, we, for example, took down Orlando, we took down in terms of value, we adopted it. So yeah. So I mean, we did it.

I would say that we need to do it market by market. We did it property by property I would say the change was anywhere from 5% to 15%.

Joe Joe: You know, the other thing that I would point out is that we have developed properties that are incredibly competitive relative to the set of primarily merchant buildings out there. So from a functionality standpoint, we are superior and you know, when we talk about having more competition, that's not, we don't mean there are six or eight other opportunities, there might be two or three. So it's not that the market isn't flooded. So right now, the market's holding pretty steady.

And then Chicago for example took down.

Orlando, we took down in terms of value.

We adjusted it so yes.

So I mean, we did it property by property.

And then quick one for Scott, maybe just an update on how bad debt is tracking year to date and any updates on that.

Speaker 4: The men quick one out for Scott, maybe just an update on how bad debt is tracking your today and then he updates on the tenant wash.

The tenant watch list.

Speaker 2: Sure, bad debt's very low for the third quarter. It's about $100,000. And that's compared to our guidance assumption of $250,000. So still in very good shape. If you look year to day third quarter, we've expense about $275,000 compared to our original guidance for those first three quarters.

Sure.

That's very low for the third quarter, it's about $100000 and thats compared to our guidance assumption of $250000. So still in very good shape. If you look year to date third quarter.

Joe Joe: Occasionally, you'll see somebody get a little extra free rent. But right now, it's holding steady. Keep in the other thing I'd add is, you know, over the last several years, you've seen a lot of our development, at least the single tenants. As you know, we take a lot of, a lot of time in the design, making sure these are functional can be demise for multiple tenants. We're seeing, as I said a few minutes ago, better demand from smaller mid-size and the buildings are ready and prepared to be demise for multiple tenants, office, multiple office pods, stock packages, some casing, demising.

Joe Joe: So we have the flexibility given the quality point that Peter made to accommodate that. So you might see us do more multiple tenants than what we've done the last several years, which has really just been a function of the market.

We've expense to about $275000 compared to our original guidance for those first three quarters of 750000, so doing very well against our forecast as far as tenants on the watch list no material tenants are on the watch list at this point in time.

Speaker 2: 750,000 so doing very well against our forecast.

Speaker 2: As far as tenets on the watch list, no material tenets are on the watch list at this point of time.

Great. Thanks.

Speaker 1: Our next question comes from Rich Anderson with Wet Bush. Please go ahead. Hey, thanks.

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

Hey, Thanks, and good morning, So what I was kind of looking back in time Peter back in 2019 I asked the question of you what trigger points are you looking for as it relates to build to suit versus spec development you talked a lot about it here on this call one of the things you said then not to put you on that.

Speaker 8: So when I was kind of looking back and time, Peter, back in 2019, I asked the question of you, what...

Speaker 8: Trigger points are you looking for as it relates to build a suit versus spec development and you talked a lot about it here on this call.

Joe Joe: Thank you guys.

Speaker 8: One of the things you said then, not to put, you know, not put you on the spot is the so-called musical chairs phenomenon where tenants have the ability to move around from one asset to another because they can and that that to you would be an indication of market weakness. You talked about the hesitancy of tenants and so on that's going on today.

Carlos: The next question comes from me, Carlos, you look out with Scotia Bank. Please go ahead.

On the spot is this so-called musical chairs phenomenon, where where tenants have the ability to move around from one asset to another because they can.

Peter Bacilli: Hi, you can morning, everyone. First, I just want to ask about, you know, the development projects that, you know, I guess, already delivered this quarter and still will come in the next couple quarters in the inland empire. If you just talk a little bit more about, you know, what sort of competitive level of supply you're dealing with there, you know, relative to those projects, you know, we do see just stats and here commentary the inland empire east is where there is more of that supply impact, but just want to hear your thoughts on that.

And that to you would be an indication of market weakness you talked about the hesitancy of tenants and so on that's going on today, but are you also seeing that with the elevated level of deliveries is.

Speaker 8: But are you also seeing that with the elevated level of deliveries is?

Speaker 8: you know, creating optionality, is that another sort of dynamic that you're seeing happen in your space?

Creating optionality is that or is that another sort of dynamic that you're seeing happen.

In your space.

Speaker 3: Who goes to your rich for remembering that? Bringing that up. That's good. Good question.

Kudos to you rich remembering that bringing that up.

Good question.

Peter Bacilli: Sure, I'll touch on the inland empire. Overall, the inland empire still has a historically very low vacancy at 3.5%. We do expect a long term that you'll still have bottom red growth. In terms of our developments, we have five in the II, we just completed in 300 construction. They're all of different size ranges in different top markets, namely Montana, 215 corridor and in red lens. So we're not over investors or overbuilt or any markets.

Speaker 3: No, we're not seeing that. What we're seeing, someone, and we have an current example in the portfolio, where a tenant moved out to consolidate into bigger space. And that's still the scene. If we lose the tenant, it's because we can't accommodate their additional growth needs.

No we're not seeing that what we're seeing and we have a current example in the portfolio, where a tenant moved out to consolidated into bigger space and that is still the theme if we lose a tenant it's because we can't accommodate their additional growth needs.

Speaker 3: And in terms of people leaving buildings, you know, it's very expensive.

And in terms of people, leaving buildings its very expensive to move so the deal and quotes that they can achieve somewhere else has to be pretty outstanding and that is not reflective at all of where we are right now even with the additional supply coming to the market as we pointed out vacant.

Speaker 3: to move so the deal in quotes that they can achieve somewhere else has to be pretty outstanding and that is not reflective at all of where we are right now even with the additional supply coming to the market. As we pointed out vacancy rates at

Peter Bacilli: If you look at each of these properties, there are no more than two competing properties in terms of quality on location with these properties and they're even two properties where we couldn't find really comparable property. We feel really good about these projects. Roughly, there are about $200 million and today we're projecting a 9.3 yield, which is, you know, a little bit under a 90% margin. We feel really good about, you know, of course, our job is to lease those, but we feel very good in creating that eye for shareholders to go forward.

See rates at 4% in our markets, that's still a very very low vacancy rate, that's not going to generate the kind of financial arbitrage that is going to have to cause it tended to lead to go to another building. So good very good question and but we're not seeing that phenomenon right now.

Speaker 3: 4% in our markets, that's still a very, very low vacancy rate. That's not going to generate the kind of financial arbitrage that is going to to cause a tenant to lead to go to another bill.

Speaker 3: So a good, very good question, but we're not seeing that phenomenon right now. Okay. Second question.

Second question for me is.

Speaker 8: Scott, you gave your guidance that 94.5% occupancy at the midpoint and 97% if you did include the development deliveries. So 250 basis points spread. How does that compare to when everything was white hot and you kind of got further along in the leasing process by the time buildings were delivered? Is 250 significantly higher than that time? I assume it's...

You gave your guidance a 94, 5% occupancy at the midpoint and 97%. If you didn't include the development deliveries. So $250 50 basis point spread how does that how does that number compare to when everything was white hot.

Scott Musil: Thanks, that's helpful. This second question is, I want to see, you know, how we should be thinking about the pace of, you know, development project leasing up over the next year, just in terms of a time frame from when it gets delivered to a, you know, ideally a more stable occupancy level. And then the other question is related to capitalized interest, if, you know, seems like there could be some sensitivity there over the next year based on how, you know, long projects take place and, you know, any just any, any thoughts or reminders you can tell us about how to think about, you know, the capitalized interest impact and the development pipeline, vis-a-vis how long buildings can really stay within capitalized interest after being delivered.

You kind of got got.

Further along in the leasing process by the time buildings were delivered its $2 50 significantly higher than that time I assume it's it's above it and where do you think it's headed from here when you kind of take a pulse.

Speaker 8: It's above it. And where do you think it's headed from here when you kind of take your pulse of things going forward?

Pulse of things going forward.

Speaker 2: Yeah, it's definitely significantly higher our placed in service policy is 12 months after development completion. And we've generally, if you look year, three, five years ago, we've leased up everything inside of that 12 months. So that spread is definitely higher. We did have a little bit of that type of dynamic during COVID with a couple of our development.

It's definitely significantly higher are placed in service policy is 12 months after development completion and we've generally if you look year three five years ago, we've leased up everything.

Inside of that 12 months, so that spread is definitely higher we did have a little bit of that type of dynamic during COVID-19 with a couple of our developments.

Speaker 2: So I would say at this point in time it's higher on a go-forward basis rich It really depends on an asset by asset basis what we what we get least up and you know We'll go through a budget process here at the end of the year We'll give you a little bit more color on our fourth quarter call Okay

So I would say at this point in time, it's higher on a go forward basis, Richard It really depends on an asset by asset basis, what we what we get leased up and we will go through our budget process here at the end of the year and we'll give you a little bit more color on our fourth quarter call.

Scott Musil: Yeah, so I'll cover the first part of that. Scott will talk about capitalized interest in terms of lease up timing for next year. Obviously, we're going to be spending a lot of time on that topic when we sit down to do our budgets for next year. At this point in terms of new developments, we're not anticipating changing our 12 month downtime assumption. But with respect to the projects that have been completed and gone into service, we'll be focused on what we think, when we think those are going to lease next year based upon the level of dialogue that we're having with our prospective tenants today.

Okay. Good enough thanks very much.

Speaker 1: Our next question comes from Vince Taboni with Green Street Advisors. Please go ahead.

Our next question comes from Vince to bony.

With Green Street Advisors. Please go ahead.

Speaker 14: Hi, good morning. Could you discuss how 3PL 10 interperforming in your portfolio? And do you have a sense of where their current volumes are relative to peak activity 12, 18 months ago? I'm just trying to understand how much kind of excess capacity there may be among 3PL, and that how that dynamic could potentially impact near-term demand.

Hi, good morning could.

Could you discuss how three PL tenants are performing in your portfolio.

Do you have a sense of where their current volumes are relative to peak activity. You know 12 to 18 months ago I'm, just trying to understand how much kind of excess capacity. There may be among three PL didn't know how that dynamic could potentially essentially impact near term demand.

Scott Musil: So I can't really give you much more than that on that question. Scott, you want to cover the capitalized interest? Sure, Nick. So we, we stopped capitalization of interest once the development is completed. So we've got a handful of developments that are scheduled to be completed up until the second quarter of 2024. So we will have capitalized interest for the first six months of that period for the back half or the last six months of the period that'll be dependent upon new starts.

Speaker 6: Peter, you want to take that? Sure, Vincent. Peter Schultz. First, I would say that our teams report high utilization of all of our spaces around the country. 3PLs continue to be the top most active prospect that we're seeing for new buildings and existing availability. And in general, they're all looking for more space, not less space.

Peter you want to take that sure Vince It's Peter Schultz first I would say that our teams report high utilization of all of our spaces around the country.

<unk> continued to be.

The top most active prospect.

Craig Mailman: The next question comes from Craig mailman with city. Please go ahead. Hey, good morning. I just want to hit on the data center ground lease and scenic here. Just had a couple of quick questions. That's just first got from a run rate perspective. Is the full run rate in the free queue number or do we need to think about additional revenue coming in the fourth quarter to annualize it? Yeah, Craig. So there's there's a little bit of a lease income in the third quarter.

That we're seeing.

For new buildings and existing.

Availability and in general, they're all looking for more space not less space.

Speaker 6: So I would simply tell you that we're not seeing really any stress.

I would simply tell you that we're not seeing really any stress.

Speaker 6: The Air Tuscott's question, nobody on the watch list and no bad debt, but they continue to be an important and active.

They're to Scott's question nobody on the watch list.

And no bad debt, but they continue to be an important and an active component of demand Joe Joe anything you want to add to that the only thing is that definitely the CPL and our experienced <unk> business not recession proof, but it is a business, we're in where things slow down with the companies that are not in the fulfillment business. They go to sleep.

Speaker 9: component of demand to judge or anything you want to add to that? The only thing is that definitely the 3PL, an Irish-spirited 3PL business is not a recession proof, but it is a business where things slow down with companies that are not in the fulfillment business, they go to 3PL. Because 3PLs are more efficient and more cost effective than doing fulfillment themselves.

Craig Mailman: I think it might be just a half of a month and then obviously we're going to get a full quarter in the fourth quarter of 2023. Take a look at our NAV footnote. Craig, we have some more information on the ground lease that you can get some of the economics. Okay, and I apologize. I didn't see that footnote. Did you guys put in what the purchase option is in there in the terms of the pricing and how that compares to what the value would have been if you had just kept it as industrial.

These details are a more efficient and more cost effective.

Then doing it doing fulfillment themselves.

Speaker 14: Thank you, that's really helpful. And then one more industry, kind of a wide question for me. Could you just discuss trends, among subly space within your markets, any notable changes there?

Thank you that's really helpful. And then one more industry wide question for me could you just discuss trends amongst sublease space within your markets any notable changes there.

Speaker 6: That's a pretty, yeah, that's an intricate topic because not all subly spaces created equal Peter and Jojo you want to come in with some tea? Sure, so if it's Peter Schultz I would first say that sublet space.

That's a pretty that's a intricate topic because not all sublease space is created equal Peter and Jojo you want to come in sure Peter Schultz I would first say that sublet space.

Craig Mailman: We have a pretty strict confidentiality agreement with this counter party. So no, we can't talk a lot about the terms and values and things like that. I can say generally speaking, the value of data center land is much higher than the value of industrial. So that's all we can really say. Let's put this way. We like the economics a lot. We wouldn't have done it, obviously. Yep, go ahead. No, no, it's a great sight and we went into that years ago with big plans for selling to users, developing ourselves, build the suits, etc.

Speaker 6: at the headline is certainly up a little bit, but I think you have to break it down. And it's a couple of different buckets. One is...

At the headline is certainly up a little bit, but I think you have to break it down.

And it's a couple of different buckets, one is corporate occupiers, saying, a 700000 square foot building gets an edict from from their corporate to sublet, two or 300000 square feet. That's a hard deal to make for tenants and generally doesn't happen, we don't really view that as competitive sublet.

Speaker 6: uh... corporate occupiers saying a seven hundred thousand square per building get the need to come from their corporate to sublet two or three hundred thousand square feet that's a hard deal to make for tenets and generally doesn't happen we don't really do that as

Speaker 6: competitive sublet space. Some of the sublet space has a time or term limit of only a couple of years.

Space some of the sublet space has a time or term limit of only a couple of years.

Speaker 6: and most tenants are not going to take advantage of that.

And most tenants are not going to take advantage of that we've also seen some sublet space come on the market and be pulled back.

Craig Mailman: For us to be tempted to let that 100 acres go, you can imagine it's got to be a pretty good deal. Well, I guess that was my other question. Should we take this between the occasion of your concern about, you know, overbuilding and scenics, and doing this deal rather than, you know, building it out. Condustrelics, it seems like it's not for you guys since you got involved in it a few years ago.

Speaker 6: We've also seen some sublet space come on the market and be pulled back.

Speaker 6: by the prime tenant because they need this space again. So yes, there is some sublet space. We don't view it.

By the prime tenant because they need the space again, so yes, there is some sublet space, we don't view it.

Speaker 9: as high concerns today. And then I would just end with, as I said a couple of minutes ago, the space utilization in our portfolio was very high. We're not really seeing any change in sublet space across our portfolio. Joe, Joe? Yes, I just wanted to just add to Peter, when we surveyed really our teams, that we haven't really lost.

As a high concern today, and then I would just end with as I said, a couple of minutes ago. The space utilization in our portfolio is very high we are not really seeing any change in the public space.

Craig Mailman: This in no way is an indication of our confidence in that market. We spent a lot of time deliberating whether we wanted to do this. At the end of the day, the economics of this trade pretty much equal the economics of building that side up. And then just one, one quick follow up or separate question just got on the mark to mark you said, you're not giving guidance and on spreads, but you anticipate, you know, next year won't be an excess that 38% is the 40% you lease this year, just a mix issue of outside of the law or other markets with smaller market marks.

Across our portfolio so Joe.

Just wanted to just add to Peter when we survey our team said, though we haven't really lost.

Speaker 5: anything close to anything significant does help we space just like Peter said

And in close to anything significant the sub lease space just like Peter said.

Speaker 5: And if we did, these are the sub-leases are long-term, a long-term sub-leases, very good for a long-term user. But the problem is that most of leases don't fit that. Most of leases are short-term, and therefore, you know, Maggie speaking with electrical beaves of lease, these a lot of times, you know, the tenants that we're pursuing.

And if we did decide to sell these are long term.

Our long term sub leases very good for a long term user but the problem is that most of the leases don't fit that most of leases are short term and therefore revenue speaking we'd like to go be with sublease. These a lot of times. The tenants that we are pursuing can freely operate Ottawa short term leases.

Peter facility said is positive.

Craig Mailman: It could detail, but maybe what's that 40 versus what's remaining in the 60 from a market exposure? Chris, you want to take that? Yeah, Craig, this is Chris. Yeah, it is definitely a mix issue. So if you look at what's been taken care of, it's only 6% from Southern California. If you look at the rest of the 2024 rowovers, you know, that mix is 56% coming from Southern California. Perfect. Thank you. Again, if you have a question, please press star then one.

Great. Thank you.

Speaker 1: Our next question comes from Mike Muller with JP Morgan. Please go ahead.

Our next question comes from Mike Mueller with JP Morgan. Please go ahead.

Speaker 15: Yeah, hi. So for the two questions, the first one is for the development leases, you signed in 3Q and 4Q, how did the rents compare to the original underwriting and the second question is a little bit more of a clarification. When you were talking about 24 leasing, did you say 56% of the remaining expressions were in Southern California? And if so, how does that compare to what the mix was of what you signed all ready?

Yes, so for the two questions. The first one is for the development leases you signed in <unk> and <unk>, how did the rents compare to the original underwriting and the second question is a little bit more of a clarification.

When you were talking about 24 leasing did you say, 56% of the remaining explorations, where in southern California, and if so how does that compare to what the mix was of what you signed already.

Vikram Malhotra: Our next question comes from Vikram Malhotra with Mizuho. Please go ahead. Thanks for the questions. Just first following up on development, I guess, you know, some of your peers, maybe seeing this as if development starts to are very low. By the end of 24, there's probably little product to offer. And it's the mod sort of picking up and, you know, there's this probably share to be had.

Speaker 16: Chris, take the first part. Yes, let's start first. Yeah, so correct. The remaining 2024 lease expiration is 56%. And again, the ones that have been signed already, the mix with Southern California was only 5%. So obviously, it's going up quite a bit. You want to cover the.

Chris take the first part yes.

Yes, so correct. The remaining 2024 lease explorations that are 56% and again the ones that have been signed already mixed with southern California. It was only 5%. So obviously that has gone up quite a bit.

You want to cover the first part of that question.

Can you remember the first the.

Speaker 6: remember the first you hired it. Give the first part of the question again please.

Peter Bacilli: So I'm just wondering, how do you balance the two other specific markets? You can cite where you do feel you might pause and fork you like you said, but then ramp back up because in general, there'll be a death of quality product. Yeah, I mean, one of the big indicator for all of us is going to be development Lisa. And we have product in the market now. We're having good conversations. As we've said in various in many different ways, tenants are taking a while, you know, at least a 500,000 square foot building, that's about a $50 million in decision.

First part of the question again please.

Speaker 15: Yeah, it's for the development leases signed at 3Q and 4Q. How are the rents versus what you originally under wrote? Significantly ahead of what we under wrote.

Yes, it's for the development leases signed at <unk> and <unk>, how are the rents versus what you originally underwrote.

Significantly ahead of what we underwrote.

Got it okay. Thank you.

Right.

Speaker 1: Next question comes from Anthony Powell with Barkley's. Please go ahead.

The next question comes from Anthony Powell with Barclays. Please go ahead.

Speaker 17: Good morning. This is a question on data centers. And I just looked at your land bank. Are there any of the obvious abstinence for you to do additional venture to develop?

Hi, Good morning, just a question on data centers.

Your land bank are there any obvious opportunities for you to do additional joint ventures or development deals in the space.

Peter Bacilli: And the current economic outlook and what's going on around the world, that causes of people to pause before they put down that 50 million. So yes, it's possible that toward the end of next year, there's not enough supply. That would be fine by us, obviously. And we really think that the market will be particularly strong in 2025. So with respect to us looking at what we're going to start, potentially start next year, it really is going to depend upon how we feel about Lisa. Okay, that makes sense.

Speaker 5: So we are in land positions? Well, in terms of, we're very, you know, we're very pleased that we were able to get a high-end best use for this piece of land that we have in Phoenix, so we're very excited about that. When you look at all across the board, in terms of what we all, we're always looking for higher and better use.

So we aren't land positions.

Well in terms of we're very or.

Very pleased that we were.

We're able to get the highest and best use for this.

A piece of land that we have in Phoenix. So we're very excited about that when you look at all across the board in terms of what we are and we're always looking for higher and better use. So if we come to a situation we're in.

Speaker 5: So if we come to a situation, we're in up.

Speaker 9: We are offered a price that doesn't make any sense to build an industrial building or exceeds our profit, then why are you potential, a professional, a professional development? We would consider selling.

We are offering AC price it doesn't make any sense to build an industrial building or exceeds our profit and margin potential across potentially on a development. We would consider selling so that's basically a rule in our brands will be doing that are now in terms of obvious candidates for a future day.

Peter Bacilli: I'm just following up on the, you know, in an empire comments you made around the competitive state being being small in terms of your project. Maybe just help us think about how you're seeing, how what you've seen in terms of market rent growth and so talent general, what the variability in that region looks like quarter to quarter any numbers you can share would be helpful. Yes, so I'm kind of just a little bit because of the low vacancy of LA of sub two and then IE at about three and a half long term, we would think that it would be a minimum mid single, they just go forward, but today, you know, as you may recall, so Cal has has the highest rent growth of any market in the US for the last three years straight.

Speaker 9: So that's basically a rule and a practice that we do in FR. Now, in terms of obvious candidates for future data centers right now, I will say that we don't have any pending offers or pursuits of additional data center situations.

This interest right now.

I will say that we don't have any pending offers our pursuits of additional data center situations.

Got it.

Speaker 17: And I guess these are all these sales and joint ventures. You wouldn't do development on your own bouncy data centers as that pair.

And I guess these are all the sales and joint ventures, you wouldn't do development on your own balance sheet data centers is that fair.

Speaker 3: I'm just trying to say yes, we're gonna stick to our red and butter.

So it's fair to say, yes, we're going to stick to our bread and butter.

Alright, thank you.

Speaker 1: Our next question comes from Kate Linberos with Goldman Sachs. Please go ahead.

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

Peter Bacilli: So right now with the market is doing is digesting the supply in the marketplace along with a little bit of decline on the Inbound T use that affected the demand and I'm not going to be surprised we're not going to be surprised if the very near term, the rent is flat through the end of the year and maybe First quarter next year move to maybe slightly negative, but that doesn't mean we can't create value because I point out to you our developments, for example, just a subject about a nine three based on current market rents, nine three yield. Thank you.

Hi, sorry, just one follow up which is similar to the question that was just asked but in terms of the mix of explorations in 'twenty four I think you had previously said.

Speaker 13: Hi, sorry, just one follow up, which is similar to the question that was just asked. But in terms of the mix of explorations in 24, I think you had previously said on other calls that 2024 would have less soCal than 2023. So I'm wondering as you compare 24 to 23, if that changed or just that kind of exposure that you were talking about, that might be confusing. I'm just wondering how the 24 soCal exposure compares to 20.

Call. It that 2024 would have less Socal, then 2023, so I'm wondering as you compare 24 to 23, if that changed or just that.

Kind of exposure that you were talking about.

That might be confusing I'm, just wondering how the 24 cell count exposure compares to 23.

Speaker 16: Yeah, Kevin's is Chris, so if you, you know, because there was a couple of leases that originally were going to, you know, the Experien 2020, 23 year, not going to leased up in 2024, the allocation between the two years is both around 25% plus. Yeah, we're talking about a couple of months difference. Right. So very, very similar between the two years.

Yes, Kevin this is Chris.

Because there was a couple of leases that originally we were going to the expired in 2023, youre not going to lease up in 2024 the allocation between the two years is both around 25% plus we're talking about a couple of months difference. So.

Caitlin Burrows: Our next question comes from Caitlin Burrows with Goldman Sachs, please go ahead. Hi, good morning. Maybe somewhat related to the last question, but on the development yields, it looks like today they're expected to be 7.2% for the under construction set of properties, which is up from like six and a half percent a year ago. So how are you thinking about your cost of capital today and what yields are required to make development attractive, and I guess to what extent is that impacting your activity?

Alright, so very very similar between the two years.

Speaker 13: Got it. So it was some that had originally been thought of to be 23, but now they'll be 24 making them more even. Correct.

Got it so it was something that had originally been thought to be 23, but now there'll be 24, making them more even.

Correct.

Got it okay. Thank you.

Speaker 1: Our final question comes from Craig Mailman with City. Please go ahead.

Our final question comes from Craig Mailman with Citi. Please go ahead.

Speaker 10: I'm not trying to make the call a little longer in each two, but...

Got it.

Trying to make the call go longer it needs to but.

Just there's a lot of focus on market rent growth. These days and it just feels like a lot of the stats being put together by brokers and talked about our kind of asking rents which are sub market is being driven by just new product that's coming on the market.

Speaker 10: There's a lot of focus on market rent growth these days.

Caitlin Burrows: Yeah, thanks Caitlin. So sure the cost of capital has certainly gone up. When we look at that, though, and compare it to what we think we need to make to make reasonable margins and profits here. The yields on new developments need to be north of six and a half expected IRRs, you know, north of eight and a half closer to nine. And you know, our on a weighted average basis, our pipeline projects hurdle those returns.

Speaker 10: feel like a lot of the stats being put together above brokers and talked about are kind of asking rents, which are some markets being driven by just new product that's coming on the market versus maybe where taking rates are. And I'm just kind of curious is you guys go through your market exposure is.

Versus maybe we're taking rates are and I'm just kind of curious as you guys.

I'll go through your market exposure as it.

Speaker 10: And there are a rosier picture on the taking rate side of things versus...

Is there a.

Rosier picture, taking rate side of things versus the trend in asking right.

Speaker 10: and asking great who we can talk about, or

If you could talk about or.

Caitlin Burrows: So we're excited about the opportunity as soon as we've digested more of this additional supply coming through the pipe nationally. We've had a lot of great projects that are ready to go in the best markets in the country. Got it. Okay. And then maybe on the acquisition side, I know it's historically not been as much of a driver for you guys and transaction volumes are down significantly this year across CRE. But are you seeing any attractive acquisition opportunities come to market, or do you expect attractive opportunities to come up either of stabilized properties or even lease up properties?

Speaker 3: Yeah, it's a complicated subject because market rent growth is tracked differently by a lot of different brokers. Taking rents right now, the report are more like 15%.

Yes, its a complicated subject because market rent growth track differently by a lot of different brokers, taking rents right now they report are more like 15%.

Speaker 3: We don't quote that. We think the asking rent number is more accurate. You know, our expectation for rent growth for 2023 was mid to high single digits. That was the asking rent in mind. So far, year over year, CBRE reports to the third quarter. That number seven and a half. So it's right in the middle of what we expected.

We don't quote that we think the asking rent number is more accurate.

Our expectation for rent growth for 2023 was mid to high single digits that was with asking rents in mind.

So far.

Year over year CBRE reports for the third quarter that number seven and a half so it's right in the middle of what we expected.

Caitlin Burrows: Yeah. I mean, economics certainly make make a difference in terms of what's attractive, but Joe, do you want to talk about some of the things you've seen in the reasons we've taken a path? Sure. Yeah. So we're on a look out for those. We're trying to see if there's stress in like, you know, merchant developers or older middle of their projects or meet capital or just sellers who want to get our real estate.

Speaker 3: So yeah, we're looking more to 7.5% rental rate increase across the markets that we're active in. We don't look at the taking rents are higher because of all taking rents by definition have to include some amount of market market as opposed to just what's happened in that quarter or that year. So we don't pay attention to that.

So yes, we're looking more at a seven 5% rental rate increase across the markets that we're active in.

Look at the.

Take the taking rents are higher because of all taking rents by definition have to include some amount of mark to market as opposed to just what's happened in that quarter or that year. So we don't pay attention to that.

Caitlin Burrows: The reality is that there's not a lot of those fit our quality or geography. And in those situations that meet our geography and it doesn't meet our financial criteria, meaning that there's some buyers who are still, you know, acquiring real estate and prices don't make sense to us. So there are a few small ones who are in the situation where and the developer didn't have the funds and that they had tied up a good bill to suit.

Okay great.

Speaker 1: This concludes our question and answer session. I would like to turn the conference back over to Peter the silly for any closing remarks.

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

Speaker 3: Thank you operator and thanks to everyone for participating on our call today. If you have any follow-ups from our call, please reach out to Art Scott or me. We hope to connect with many of you in person in the coming months. Be well.

Thank you operator, and thanks to everyone for participating on our call today. If you have any follow ups from our call. Please reach out to art, Scott or me, we hope to connect with many of you in person in the coming months.

Caitlin Burrows: We're stepping in and we think that's a great deal. And then we have another situation, not a large deal, a one off. We're in a developer needs to fund their speculative project and fund a little lender for the commitment unless the developer comes up with more equity. And so we're buying one of their buildings that are nice building lower, much lower price biggest. They need to squeeze out equity on that very, very quickly.

Speaker 1: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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

Caitlin Burrows: So those are just examples of what we're trying to look at. Got it. And just to clarify those are things that you're looking for or have already been like decided on and are moving forward. Can we give you my first visit as those are pursuing or pursuing? We're changing it. They're not by any means. We may not get it but we're pursuing. Got it. Okay. Thank you.

Scott Musil: The next question comes from Todd Thomas with Keybank Capital Markets. Please go ahead. Thanks. Good morning. This is AJ on for Todd. Just go in real quick back to the capitalized interest discussion. You say that you stopped capitalizing interest when development completed as you look at your construction pipeline today and everything under construction. Do you see any potential delays or anticipate any delays for what's currently supposed to be delivered over the next few quarters?

Scott Musil: I would say that's our best thinking as at this point of time. So if you're asking about developments under construction, we've got estimated building completion in our supplemental. That's our best thinking at this point in time. That's when those developments will be completed. Okay. Perfect.

Peter Schultz: And then just one question regarding old post road. Is the 3PL tenet? Are you still engaging or is there any update around that contract that was going to be awarded? Or are you moving on and looking to market the asset to new tenet altogether? So AJ is Peter Schultz. We continue to market the asset in terms of the 3PL group. We continue to talk with them. The government continues for whatever reason to postpone the final decision on that contract award.

Peter Schultz: The latest information is that they're supposed to issue that award sometime later this quarter. Given our experience with this process over the last year, our confidence level I would say is not high, which is why as you heard from us earlier, we decided to push the lease up into 2024. It's certainly possible that this could get done this quarter, but our probability is that it's less likely just given the way this process has gone. Okay. Thank you.

Michael Carroll: The next question comes from Michael Carroll with RBC capital markets. Please go ahead. Yep. Thanks. Just following up on old post road. I know this has been taking a couple years to get done.

Michael Carroll: I mean, at what point do you just decide to kind of go multi tenet and try to lease it to some smaller tenants that might want that space? I might add to a good question. Peter Schultz again. So we're certainly have been and are open to that. As we've talked about on some of these protocols, you know, demand from larger users in this sub market and others has been slower, where historically that size range was very active along that quarter. That's something we're open to and it's really about the timing of market demand and how tenants make decisions. Okay. Thanks for that.

Peter Bacilli: And then just real quick on your comments on the smaller blocks of space. I know for the past few quarters, you've highlighted the tenant activity for those smaller and midsize blocks. Those were still pretty healthy. Is that still a fair comment today or has that changed over the past three plus months given kind of the slowdown that you've seen in demand? So, I would say it's consistent. If you look at our in-service portfolio occupancy is very, very high.

Peter Bacilli: We continue to see good demand and backfilling spaces quickly, but for the old post road building that we just talked about in a couple of our developments that our larger demand continues to be very active. I mean, there's, and those tenants operate with more urgency and diligence than some of the bigger requirements to our earlier points where they're just not in a hurry to make those decisions and commitments today given the broader macro factors that are impacting everybody. Okay, great. Thank you.

Nick Thillman: The next question comes from Nick Thillman with Fared. Please go ahead. Good morning. Question on the land bank. It looks like the fair value of the land bank was marked down by 10% quarter of a quarter. Some of that could be related to some landfills, but just curious if you did make some changes in your estimates for fair value to land and maybe which markets and particulars are the biggest haircuts. Yeah, Nick, it's got a couple of things happen is from the land bank.

Nick Thillman: We removed the land and Phoenix related to the land sale, and then we removed the land that's being ground leased. So that's going to cause a fair value drop alone in 3Q compared to 2Q because it's no longer in the population. And I'll have Jojo talk about adjustments we made to the exist what's left over. Sure, and then on top of an additional what's got that we added of course the land national land acquisition and then we made some adjustments to all land values.

Nick Thillman: Those were in Chicago and Florida and then we also slightly adjusted some lands. So we did it as it by asset. Some land we started to make improvements where it's offside improvements and therefore that added to the value. So we added our cost to those additional investment in the land. So if you took all of that together that resulted in the difference. Was there any specific markets that were haircut like significantly in this process or not really.

Nick Thillman: No, I would say that if we didn't do it market by market we did it probably by property. I would say the change was anywhere from 5 to 15% and then Chicago we for example took down Orlando we took down in terms of value. We adopted it. So yeah, so I mean we did it probably by property.

Scott Musil: And then quick one for Scott maybe just an update on how bad debt is tracking your today and then he updates on the tenant watch list. Sure, bad debt's very low for the third quarter. It's about $100,000 and that's compared to our guidance assumption of $250,000 so still in very good shape. If you look year to day third quarter we've expense about $275,000 compared to our original guidance for those first three quarters of 750,000 so doing very well against our forecast.

Scott Musil: As far as tenants on the watch list no material tenants are on the watch list at this point in time.

Scott Musil: Great, thanks.

Rich Anderson: Our next question comes from Rich Anderson with Wedbush, please go ahead. Hey thanks and good morning. So when I was kind of looking back and time, Peter, back in 2019, I asked a question of you, what trigger points are you looking for as it relates to build a suit versus spec development? You talked a lot about it here on this call. One of the things you said then, not to put you on the spot is so-called musical chairs phenomenon where tenants have the ability to move around from one asset to another because they can.

Rich Anderson: And that that to you would be an indication of market weakness. You talked about the hesitancy of tenants and so on that's going on today. But are you also seeing that with the elevated level of deliveries is creating optionality? Is that another sort of dynamic that you're seeing happen? And in your space? Kudos to you Rich for remembering that and bringing that up. That's good. Good question. No, we're not seeing that what we're seeing someone and we have an current example in the portfolio where tenants moved out to consolidate into bigger space.

Rich Anderson: And that's still the theme. If we lose the tenant, it's because we can't accommodate their additional growth needs. And in terms of people leaving buildings, it's very expensive to move. So the deal in quotes that they can achieve somewhere else has to be pretty outstanding and that is not reflective at all of where we are right now, even with the additional supply coming to the market. As we pointed out vacancy rates at 4% in our markets, that's still a very, very low vacancy rate. That's not going to generate a kind of financial arbitrage that is going to cause a tenant to leave to go to another building. So good, very good question.

Peter Bacilli: But we're not seeing that phenomenon right now. Second question for me is you gave your guidance 94.5% occupancy at the midpoint and 97% if you did include the development deliveries. So 250 basis points spread. How does that compare to when everything was white hot and you kind of got further along in the leasing process by the time buildings were delivered? Is 250 significantly higher than that time? I assume it's above it.

Peter Bacilli: And where do you think it's headed from here when you kind of take your pulse of things going forward? Yeah, it's definitely significantly higher our placed in service policy is 12 months after development completion. And we generally if you look year three, five years ago, we've leased up everything inside of that 12 months. So that spread is definitely higher. We get to have a little bit of that type of dynamic during COVID with a couple of our developments.

Peter Bacilli: So I would say at this point in time it's higher. On a go forward basis rich, it really depends on an asset by asset basis what we get leased up and we'll go through a budget process here at the end of the year and we'll give you a little bit more color on our fourth quarter call.

Peter Bacilli: Okay, good enough. Thanks very much.

Vince Tibone: Our next question comes from Vince Tibone with Green Street Advisors. Please go ahead. Hi, good morning. Could you discuss how 3PL tenants are performing in your portfolio? And do you have a sense of where their current volumes are relative to peak activity 12, 18 months ago? I'm just trying to understand how much kind of excess capacity there may be among 3PLs, and that how that dynamic could potentially impact near-term demands. Peter, you want to take that?

Vince Tibone: Sure, Vince, it's Peter Schultz. First I would say that our teams report high utilization of all of our spaces around the country. 3PLs continue to be the top most active prospect that we're seeing for new buildings and existing availability. And in general, they're all looking for more space, not less space. So I would simply tell you that we're not seeing really any stress there to Scott's question. Nobody on the watch list and no bad debt, but they continue to be an important and active component of demand to judge or anything you want to add to that.

Vince Tibone: The only thing is that definitely the 3PL and I experience 3PL business not recession-proof, but it is a business where things slow down with companies that are not in the fulfillment business, they go to 3PLs. Because 3PLs are more efficient and more cost effective than doing fulfillment themselves. Thank you.

Peter Schultz: That's really helpful.

Peter Schultz: And then one more industry, you know, kind of wide question for me. Could you just discuss trends, you know, among doubly space within your markets, any notable changes there? That's a pretty, yeah, that's an intricate topic because, you know, not all subly spaces created equal. Peter and Judge, do you want to come in with some tea? Sure. So if it's a Peter Schultz, I would first say that, you know, sublet space at the headline is certainly up a little bit.

Peter Schultz: But I think you have to break it down. And it's a couple of different buckets. One is a corporate occupier saying a 700,000 square foot building gets an edic from from their corporate to sublet two or 300,000 square feet. That's a hard deal to make for tenants and generally doesn't happen. We don't really view that as competitive sublet space. Some of the sublet space has a time or term limit of only a couple of years.

Peter Schultz: And most tenants are not going to take advantage of that. We've also seen some sublet space come on the market and be pulled back by the prime tenant because they need the space again. So yes, there is some sublet space. We don't view it as high concerns today. And then I would just end with, as I said, a couple of minutes ago, the space utilization in our portfolio is very high. We're not really seeing any change in sublet space across our portfolio.

Peter Schultz: Yes, I just want to just add to Peter when we survey really our teams is that we haven't really lost anything close to anything significant to the sublet space. Just like Peter said, and if we did, these are the subletes that are long term, long term subletes is very good for long term user. But the problem is that most subletes don't fit that. Most of leases are short term and therefore, you know, frankly speaking, we'd like to compete with subletes because a lot of times, you know, the tenants that we're pursuing can't really operate out of a short term lease. Like Peter, but he said, it's constantly moving.

Peter Schultz: Great, thank you.

Mike Mueller: Our next question comes from Mike Mueller with JP Morgan. Please go ahead.

Chris Schneider: Hi, so for the two questions, the first one is for the development leases you signed in 3Q and 4Q, how did the rents compare to the original underwriting and the second question is a little bit more of a clarification. When you were talking about 24 leasing, did you say 56% of the remaining expirations were in Southern California and if so, how does that compare to what the mix was of what you signed already?

Chris Schneider: Chris, take the first part. Yeah, so correct. The remaining 2024 lease expirations are 56% and again the ones that have been signed already, the mix with Southern California was only 5%. So obviously it's going up quite a bit. You want to cover the first part of that question? Do you remember the first part of the question again, please? Yeah, it's for the development leases signed in 3Q and 4Q. How are the rents versus what you originally underwrote? Significantly ahead of what we underwrote. Okay, thank you.

Anthony Powell: Next question comes from Anthony Powell with Barclays, please go ahead. Good morning. This is a question on data centers and I just looked at you a land bank.

Peter Bacilli: Are there any of them obvious obscenities for you to do additional venture development builds in the space? So we are in land positions? Well, in terms of, we're very, you know, we're very pleased that we were able to get the highest and best use for this piece of land that we have in Phoenix. So we're very excited about that. When you look at all across the board in terms of what we all, we're always looking for higher and better use.

Peter Bacilli: So if we come to a situation where we are offered a price that it doesn't make any sense to build a industrial building or exceeds our profits, then margin potential, price potential of development, we would consider selling. So that's basically a rule and a process that we do in FR. Now, in terms of obvious candidates for future data centers right now, I will say that we don't have any pending offers or pursuits of additional data center situations.

Peter Bacilli: And I guess these will all be sales or joint measures. You wouldn't do development on your own bouncy data centers is that fair? That's fair to say, yes. We're going to stick to our bread and butter.

Caitlin Burrows: Thank you.

Caitlin Burrows: Our next question comes from Kate Lynn Burrows with Goldman Sachs, please go ahead. Hi, sorry, just one follow up, which is similar to the question that was just asked, but in terms of the mix of explorations in 24, I think you had previously said on other calls that 2024 would have less so Cal than 2023. So I'm wondering as you compare 24 to 23 if that changed or just that kind of exposure that you were talking about, that might be confusing.

Caitlin Burrows: I'm just wondering how the 24 so Cal exposure compares to 20. Yeah, Caitlin is a script, so because there was a couple of leases that originally were going to, you know, the expired in 2023 or not going to leased up in 2024, the allocation between the two years is both around 25% plus. Yeah, we're talking about a couple of months, different stuff. Right. So very, very similar between the two years. Got it. So it was something that had originally been thought of to be 23, but now they'll be 24 making them more even. Correct. Got it. Okay.

Caitlin Burrows: Thank you.

Craig Mailman: Our final question comes from Craig Mailman with city. Please go ahead. Yeah, it's not a not trying to make the call a little longer needs to, but just, you know, there's a lot of focus on on market rent growth these days and it just feels like a lot of the stats being put together above brokers and talked about are kind of asking rents, which are, you know, some markets being driven by just a new product that's coming on the market.

Craig Mailman: Versus, you know, maybe where taking rates are, and I'm just kind of curious, is you guys go through your market exposure? Is there a, a rosier picture on the taking rate side of things versus the trend and asking rate. Yeah, it's a complicated subject because market rent growth is tracked differently by a lot of different brokers taking rents right now. The report are more like 15%. We don't quote that. We think the asking rent number is more accurate.

Craig Mailman: You know, our expectation for rent growth for 2023 was mid to high single digits. That was a asking rents in mind. So far year over year CBR reports to the third quarter that number seven and a half. So it's right in the middle of what we expected. So yeah, we're looking more to seven and a half percent rental rate increase across the markets that we're active in. We don't look at the taking the taking rents are higher because of all taking rents by definition have to include some amount of market as opposed to just what happened in that quarter or that year. So we don't pay attention to that. Okay, great.

Peter Bacilli: This concludes our question and the answer session.

Peter Bacilli: I would like to turn the conference back over to Peter the Philly for any closing remarks. Thank you operator and thanks to everyone for participating on our call today. If you have any follow ups from our call, please reach out to Art Scott or me. We hope to connect with many of you in person in the coming months. Be well.

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