Q2 2024 First Industrial Realty Trust Inc Earnings Call
Sure.
Jay and welcome.
To the industrial real Itchy Trust, Inc.
Second quarter results call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. You ask a question you May Press Star then one on a touchtone phone.
Draw. Your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to Art Harmon Senior Vice President of Investor Relations and marketing. Please go ahead.
Thank you very much Dave Hello, everybody and welcome to our call before we discuss our second quarter results and our updated guidance for the year, Let me remind everyone that our call may include forward looking statements as defined by Federal Securities laws. These statements are based on management's expectations plans and estimates of our prospects today's statements.
It may be time sensitive and accurate only as of todays date July 18th 2024, we assume no obligation to update our statements or the other information we provide.
Actual results may differ materially from our forward looking statements and factors, which could cause. This are described in our 10-K and other SEC filings you can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release, the supplemental report earnings release, and our SEC filings are available.
Alible at first industrial Dot com under the investors tab, our call will begin with remarks by Peter <unk>, Our President and Chief Executive Officer, and Scott Musil, Chief Financial Officer, After which we'll open it up for your questions.
With us today are Jojo Yap, Chief investment Officer, Peter Schultz Executive Vice President, Chris Schneider Executive Vice President of operations, and Bob Walter Executive Vice President of capital markets and asset management now, let me hand, the call over to Peter.
Thank you art and thank you all for joining us today.
As we discussed on our last earnings call 2024 is all about leasing.
Since that call. Our team has delivered some big leasing win both in our core portfolio and within our development projects.
We're also excited to discuss the three new development starts that we kicked off in the second quarter.
More on all of this shortly.
Looking at the industrial market broadly fundamentals are slowly improving although as expected U S. Industrial market vacancy ticked up by 40 basis points to five 7% as last year starts continue to come online.
New starts remain disciplined totaling 50 million square feet in the second quarter down 55% from their peak in the third quarter of 2022.
With respect to demand the market saw an uptick in tenant requirement being converted into leased spaces.
Year to date net absorption nationally with 70 million square feet with $48 million within our target markets.
Yes, the pace of demand continues to improve and new starts remained muted.
We could see slower increases in vacancy near term.
Potential declines in 2025.
Turning now to our leasing wins.
For 2024, we're now 288% of our explorations by net rent with a cash rental rate change of 45%.
This population now includes the renewal of the 221000 square footer in the inland Empire West we spoke about on prior earnings calls.
Our 2024 guidance range for the increase in cash rental rates on new and renewal leasing remains at 40% to 52%.
The lease extension for the other significant inland Empire West rollover that 300000 square footer.
Well in progress.
Note that the midpoint of our <unk> and cash same store NOI guidance does not include any benefit from this potential renewal.
We're also beginning to see some early decision, making on our 2025 lease expirations.
I am pleased to report that we recently inked the renewal of our largest 2025 exploration a one 3 million square footer in Pennsylvania.
Yes.
Well provide you an update on our progress for next year's rollovers on our third quarter call as we have done in prior years, but we're off to a strong start.
As I mentioned at the beginning of my remarks in the second quarter and third quarter to date, we signed six speculative development leases across several markets, including southern California, which totaled approximately $1 1 million square feet.
This is almost half of the $2 3 million square feet of speculative development leasing that was included in our updated 2024 <unk> guidance provided on our first quarter call in April.
In the third quarter, we ate a full building lease for our 461000 square foot first pioneer project in the inland Empire East two or three P. M.
We also just signed a 61000 square foot lease at our first 76 project in Denver.
In the second quarter, we signed a lease for the entire 359000 square foot first aid crossing project and the Philadelphia Airport market to a leading food and beverage company.
We also leased the remaining 64000 square feet at our first Steele asset in Seattle, and 120000 square feet at first Park 94 in the <unk> Submarket of Chicago.
In South Florida at first Park Miami building 12 that we just completed in the second quarter, we've already leased a third of the 136000 square foot building.
The South Florida market continues to outperform and given our success. There we are starting two new projects.
First Park Miami building three is now underway.
The latest phase of the 13 building two 5 million square foot Park.
Since 2021, we have successfully leased and placed in service one 1 million square feet of building that on average leased up well within our pro forma.
Building three will be a 198000 square foot or serve one or multiple customers and the total investment is estimated at $50 million.
In a highly infill location in Pompano Beach, and Broward County, We started a 60000 square footer with an estimated investment of $15 million. The site is located directly between $9 95 in the Florida Turnpike and attractive location for businesses and serving the Tri County area of Broward Palm.
Beach in Miami Dade.
Our combined estimated yield at least two south Florida project is approximately 7%.
We're also starting a 425000 square foot development in the North East side of Houston at our infill site with fronted frontage on Interstate 610, the first loop beltway.
Total investment is expected to be approximately $44 million with a cash yield of 7%.
Prior to beginning construction, we eat the lease for 50% of this building.
Moving to dispositions in the second quarter and third quarter to date, we sold an incremental $90 million of assets to bring our year to date total to $138 million.
I'll turn it over to Scott. Thanks, Peter Let me recap our results for the quarter NAREIT funds from operations was <unk> 66 per fully diluted share compared to 61 per share in <unk> 2023.
Our cash same store NOI growth for the quarter, excluding termination fees was five 6%.
Speaker Change: The results for the quarter were primarily driven by increases in rental rates on new and renewal leasing rental rate bumps embedded in our leases and lower free rent, partially offset by lower average occupancy.
We finished the quarter with in service occupancy of 95, 3% and we have approximately 200 basis points of opportunity from developments placed in service in 2023 and 2024.
Summarizing our leasing activity during the quarter, approximately $2 9 million square feet of leases commenced.
These 500000, where new $1 2 million were renewals and $1 2 million work for developments and acquisitions with lease up.
Before I touch on guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in two of our bank loans.
Also the incremental funding required to complete our current development projects will be covered by our third quarter sales proceeds to date and our projected excess cash flow after dividends and capital expenditures during the construction period.
Moving onto our updated 2024 guidance for our earnings release last evening.
Our guidance range for <unk> is now $2.59 to $2 67 per share, which is <unk> <unk> higher at the midpoint than our prior guidance.
This is primarily due to the progress we have made in leasing up our development since last quarter's earnings call.
No as we detailed on our fourth quarter earnings call. Our guidance excludes approximately <unk> <unk> per share of accelerated expense related to an accounting rule that requires us to fully expense the value of granted equity based compensation for certain tenured employees.
Including this two cents per share of expense, our NAREIT <unk> guidance range is $2 57 to $2 65 per share.
Key assumptions for guidance all of which are unchanged since our last earnings call are as follows.
Speaker Change: Quarter end average occupancy of 90, 575% to 90, 675%.
Same store NOI growth on a cash basis before termination fees of seven 5% to $8 two 5%, primarily driven by increases in rental rates on new and renewal leasing along with rental rate bumps embedded in our leases.
Note that the same store calculation excludes the 2023 onetime tenant reimbursements that we previously disclosed.
Guidance includes the anticipated 2020 for costs related to our completed and under construction developments at June 30 for the full year 2024, we expect to capitalize about <unk> <unk> per share of interest.
Our G&A expense guidance range is $39 $5 million to $45 million.
This includes the roughly $3 million or <unk> <unk> per share and accelerated expense I referred to earlier.
Lastly guidance does that reflect the impact of any future sales acquisitions development starts debt issuances debt repurchases or payments, nor the potential issuance of equity. After this call. Let me turn it back over to Peter.
Thanks Scott.
Congratulations again to our team for several significant leasing wins since our first quarter earnings call.
But the development leasing progress we have achieved we're excited to allocate incremental capital to our south Florida portfolio as well as our new Houston project, which is already 50% lease.
Our team has steadfastly focused on delivering on the remaining development leasing opportunities in our portfolio, which will contribute to our cash flow growth in 2025 and beyond.
Operator was that already to open up for questions.
Sure.
Okay.
Dave We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two alright.
Our first question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys.
You saw 90 million of properties recently can you talk about the health of the disposition market today versus last year, given that we still yet to see any rating of rate cuts and the banks have become more conservative on lending on industrial in 2024 to some of these potential buyers of your dispositions.
Yeah, I mean, we.
On the assets that we're bringing to market, we're getting a significant number of NDA and a significant number of bids. So theres a lot of capital out there remember that the assets that we're selling are most appealing to local buyers users and.
The 10 31 buyers are back so there's significant capital searching for new opportunities to invest in this space.
Okay.
Then Scott the 200 basis points of occupancy upside from leasing.
The second half 'twenty three in first half 'twenty four developments that you guys talked about in the release is that inclusive of the leasing that you've announced in the release and on the call today or is that in addition to those announced leases.
That's in addition to that Rob so its the one 2 million square feet of development that we still have in our guidance for 2024, all assumed to happen in the fourth quarter.
Okay, and then what is the difference yield wise today, you guys leasing and asset on a multi tenant basis versus a single tenant basis.
That material.
Hey, Rob, It's Peter Schultz, I would say it depends on market and asset.
Some cases it.
It would be a little bit better, but not a wide margin today, Joe Joe anything you want to add to that yes, I would agree and then to the extent that the dependents.
Smaller here's a little bit higher rent, but then you have to offset that but the increase in mining costs. So overall, just like Peter said, it's not a material difference.
Okay. Thanks, guys. Appreciate the time this morning.
The next question comes from Craig Mailman with Citi. Please go ahead.
Hey, good morning.
Peter I want to circle back up on your commentary that you know demand is starting to at least get a little bit better here and put that in the context of the the one 1 million square feet of development leasing guys have done since QQ I mean as you look at those deals.
What was the mix of deals that had been in the works for a couple of quarters versus maybe some that popped up more recently because people are trying to start to make decisions at this point, yes, yes. So good question.
We have seen a good mix of both.
I'll say longer term gestation periods and shorter gestation periods.
Larger deals.
One surprise you have been in discussion for a while.
Yeah.
That is continues to be the case across the board across the country that those deals take longer to do.
We have the best the.
Examples of the shorter gestation periods the lease we signed in Denver The lease we signed at our recently completed building at first Park Miami.
Those were not prospects in Q1, so those came in got done within the second quarter.
Another. Good example is the partial build to suit in Houston, the gestation period on that was about three months.
No.
I guess you when you look at this you would say that for smaller deals.
That timeframe is a little bit shorter than for the larger deals.
Been the case for several quarters now.
Those are taking longer.
No. That's helpful and you know the first pioneer leased to the three P M.
Been a tenant segment, that's been a little bit slower there can.
Can you just talk a little about that tenant their needs and.
Just in terms of kind of the final returns on that given concession driving that market was it materially different than what you guys had underwritten or was it.
Or just any detail on that would be helpful.
Jojo you want to take that sure.
Thank you.
So overall this is a three P. L that has business in both the U S and Canada and this is a this market was a growth market and this was a gross need.
For our 461st Pioneer base.
Basically the need was to establish a state of the art facility that is DNA technology are very narrow aisle and some robotics.
With a lot of green kind of initiatives. So that's basically the need our facility perfectly fit that and that was why our facility was chosen <unk>.
In terms of yield it exceeded the ranch area exceeded our original underwriting and I will not quote you the exact yield but I would tell you is in the low to mid seven yield with.
It should be basically creates a lot of value.
That's helpful. Then just one more just slip it in here.
Speaker Change: The one 3 million square foot renewal in P. A I know you guys arent, giving a ton of details but is the the spread on that.
Where do you guys have signed the average in 24 or is that materially different.
Craig Good morning, It's Peter Schultz.
Youre right, we have a confidentiality agreement with that tenant so we're not able to disclose much information I will tell you that they exercised a fixed rate renewal option that was negotiated.
The second half of 2017.
Alright, thank you so much.
And the next.
And the next question comes from key been Kim with Truest. Please go ahead.
Thanks, Good morning could.
Could you start off by commenting on what you're seeing from a leasing demand standpoint.
Youre seeing I know you mentioned some of it.
I was just curious about the sustainability of that.
And the pick up in leasing congrats on it.
Was it back end weighted in the quarter, because Peter I know you have a good poker face, but I didn't get the sense that there was this much activity from our call last NAREIT meeting.
I'll start with this and then Peter and Jojo should chime in look.
Obviously as we achieve some progress here with leasing.
<unk> become more clear.
Decision, making on the whole still remains fairly deliberate.
Speaker Change: It's still early to determine the resiliency and the pace of demand.
Even though we see today indicators are pointing in the right direction. So we wouldn't we would suggest not to draw.
Potentially long term conclusions from one quarter of activity.
But we can say that that things are feeling a little bit better Peter Keith.
David I would just add that we're seeing more inquiries more inspections.
More rfps and as we've talked about now and the answer to a couple of questions.
Notably we were pleased with the decision making timing of several deals that we've that we've just announced and our development deals, whereas Peter said the larger deals continue to move slower than that that hasnt changed and we don't really see any indication that that it will change, but it's a little bit more.
A buoyant.
Then it was earlier in the year, let me say one more thing on this there.
There are still several alternatives.
To each space for the prospects that are available and until that changes the sense of urgency and deliberate.
Pes aren't going to change.
Having said that the national pipelines down to about 289 million square feet from a high of over 600, So we're getting there.
Hopefully not absorption will continue to improve as the year goes on.
Okay and in terms of the acquisition markets.
What does the opportunity look like for you in pricing.
I know you bought a small deal in L. A this quarter.
Had a good yield if I was just curious how you might compare some potential yields that you might get an op con acquisitions versus development yields you are getting.
So the Mark is key.
<unk> remained to be competitive there's a lot of buyers. Both is a one off asset acquisitions and even land for development and across most markets capital is abundant.
There is actually a more active investment pace now compared to Q1 and definitely compared to Q4 of last year. So the investors are back.
The.
We're very pleased with the acquisition, we did in the diverted sub market overlay.
Hi, This is Mike is there with abundant power.
And but the way we got that was an off market deal, we actually closed the deal with large tire manufacturer.
And they enjoy doing business with us and then that led to another piece of property that we ended up transacting with them. So it did have hit the market.
Okay. Thank you guys.
Okay.
The next question comes from Nick <unk> with Baird. Please go ahead.
Hey, Good morning, guys wanted to go back to development and kind of just touch on <unk>.
The activity Youre seeing on the space it remains to be leased.
Any change material change here it sounds as though actually is a little bit better and then have you changed kind of the concessions are willing to offer on lease up here.
Speaker Change: Peter you want to start with Im sure. So let's talk about Denver, one we have our largest.
Building there are 588000 square feet, we continue to see activity from partial and full building users I would say more activity with full building users at this time.
Supply picture has improved in Denver.
The competitive set has been reduced by half for that building as a result of a large <unk> leasing 1 million fee.
And our corporate occupier, putting a building under contract.
To buy so thats certainly a good backdrop.
For decision, making there as we've talked about the larger deals.
Moving slower.
For a number of reasons, including that they have more choices. So fewer choices is a good thing.
The smaller building in Denver, we continued to see pretty good activity. We're pleased with the lease we just did.
That got done start to finish from when we first.
Started discussions with that tenant.
In less than 90 days, so that was a.
Good indication of some urgency.
Pennsylvania, the building that we put into service a 50% occupied we're in discussions with them with a prospect for the balance of that building.
And then in Orlando.
Fourth building on our first loop project.
We have some activity there, we'd like to see a little bit more Joe Joe Yes.
Joe: On the renewal activity.
<unk> been most active.
In I E.
And all of <unk>.
It has not materially changed a lot.
Like Peter facility, you had mentioned there are some options. So the market is competitive but we're very very pleased about the renewal rates that we got not much change in.
And free rent Rti's and as you know we leased the first pioneer.
That was done card market terms long term with market tea ice and Mike and free rent.
I would say that.
Looking at activity the only development that we have constructed in 'twenty three and the Socal Marika that's not been leases are 83000 footer.
<unk> is a low coverage site in inland Empire, West and that kind of facility right now is somewhat slow because it has a lot of the surface use so we expect when the port activity.
Gross more in the future I think that would be.
An asset that everybody would be interested in taking and then.
Still we just finished the other buildings in Socal and though early in the process and like we said we did one year lease up on those and we just compete with us.
That's helpful and then going back to dispositions kind of with what you've completed year to date, your kind of near or above the upper end of our range for this year is there more opportunity there or kind of gets viewed as youre well formed Ed anything I also kind of inbound core sort of sales.
I think youre correct.
Got plenty of funding and we will continue to dispose of assets, where we think the growth opportunity is.
And we can take that capital.
And redeployed and better use.
The volume of sales is likely to be lower going forward.
Okay.
That's it for me thanks.
And the next question comes from Rich Anderson with Wedbush. Please go ahead.
Thank you good morning, and great quarter.
Question on market rents versus cash releasing spreads.
I don't know if you mentioned, what you are seeing nationally or in your portfolio in terms of mark around let's say, the number's flat or up a bit.
Are down a bit.
And you have 40%, 50% cash releasing spreads at what point do you think we get to.
A situation, where because of that sort of imbalance in those numbers that we get closer to a cash leasing spread that's more pedestrian in nature more like a 10% ish number that happen based on that math anytime soon.
We've looked at that.
And the resilience of that Mark is pretty good. So it has some duration.
Obviously, it depends solely on whether rents you called them flattish, let's go with that.
If they were to fall significantly then the resiliency of that Mark goes away, but.
Under what you might say, one or two derivatives analysis.
That Mark has some resiliency it will clearly come down each year.
Joe: Because we're not growing like we were in 'twenty, one 'twenty two.
Okay Fair enough and then.
In terms of your conversations with tenants I would say election year.
Could very easily.
Or more.
Conversation around tariffs and what not depending on who wins.
What is what does how does that play into.
The mindset of your tenants.
And be in the mindset of you guys in terms of.
Does that become an opportunity or does it create disruption like where are you at on sort of the political landscape in 'twenty five and beyond.
Yeah, I think obviously the biggest question around that is the tariff question.
Interestingly both candidates are.
For tariffs.
Joe: <unk> that Trump is.
For much higher tariffs.
Tariffs generally arent going to be great for the country assay and created a ton of inflation.
Getting more specific to our space and our prospects.
The tariff rates right now are on an increasing on semiconductors evs lithium batteries solar shells sells the ship to shore Crane things like that those are not the kind of products.
That generate demand for our warehouses.
Toys furniture, that's a different conversation that product is in our R&R periods warehouses. So it really depends a lot of the discussion is around manufacturing. We don't have manufacturing tenants by end of March we don't want to have manufacturing tenants. So.
We'll see where this goes clear.
Clearly the management of the economy is key to our process.
And key to consumption so we'll see.
But you may not want manufacturing, but suppliers to those manufacturers you might think that.
This could push for more of a near shoring re shoring type of phenomenon is that is that a fair statement correct. Yes. It is and those vendors for those manufacturers would be our tenants.
Depending on where the near shoring is and right now it looks like Mexico.
In March.
That's going to help market and Dallas Houston.
And depending where in Mexico, maybe even Phoenix so.
That would be a tailwind to demand for us.
And just to follow up with tenants.
Turned about this talking to you about it anything of any at any level at this point in terms of our conversation.
You cannot really know.
Because we're not we're not really spending a lot of time with the manufacturing time.
Fair enough okay. Thanks very much.
Okay.
The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Maybe on the development side I think you guys talked about and it shows in the supplement 7% yield on.
Our in process developments, including the new Florida, one so I guess as you guys think about.
It makes sense going forward, where rates are where your costs are what kind of yields do you think you're you need in order for projects today test pencil.
Yes.
Speaker Change: It's going to depend on where it is and the size and the growth prospects for a total return investor.
Sure.
So yields could be lower where growth is going to be higher but generally speaking, we're going to want to get a six handle on our developments at a minimum.
And a eight eight and a half IRR.
Got it Okay and then on.
I think when I asked you about it in the past on I.
Future starts you talked about that they could happen in Florida, which we've now seen so going forward do you think there could be additional starts in the second half or again, what would it take for you to start more projects.
I mean, we had a bit of an.
The improvement here in the second quarter and that's great. We want to see that this improvement is sustainable.
Clearly more development leasing we came into the year with $4 7 million square feet of development developments, whether they were in process completed are completed and in service and on lease.
We leased two 6 million and a 56% that looks good that's encouraging but we want to make sure that that tempo is sustainable and if it is then we will absolutely engage in new starts with some of the other land holdings, we have in places like South, Florida, and Nashville, and in northwest Dallas.
Got it and maybe one other quick one.
On the development leases that you signed in the second quarter do you have any overarching comments on what you think drove those decisions whether it was combining locations splitting existing locations, just a business growing or anything like that.
When I talk about show our Taylor, it's Peter Schultz.
Several of them were.
Processing and fulfillment and upgrading from existing facilities.
Some of them were expansions.
And some were just the need to establish a new location none of them were.
A lateral move or downsizing.
Got it thanks.
Okay.
And our next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, just wanted to get a little bit more color on the southern California market and some of the trends you're seeing there can you just touch on any change in the pace of leasing activity in that overall market over the past quarter and whether you've seen any notable weakness or strength from specific submarkets tenant profiles or sizes.
So no.
Overall I mean.
Like we've discussed and I've said Q2 was much more robust in Q1 lot more transactions.
They were comprised of.
New deals that came that needed to take space quicker on Q2, and some that probably look for deals in Q1, but it has to take space.
I would say in terms of size range.
The <unk>.
400000 square feet and up.
Is very active.
And then with <unk>.
Less active is about 150 to 400.
That size range.
Theres quite a bit of supply there.
Go below 100 and that's.
Active again, because that's how the size range in terms of Rcs and Socal like you said L. A is very very it's sub 4% vacancy so Pat.
Tenants have fewer choices and if youre in AIE and Ie West and east both have.
Similar dynamics, if you wanted to save a little bit more and could get further into your supply chain and you go to ie.
A bigger bigger space, but ies and then.
And so forth and ie.
So.
Our renewal also in our disciplined portfolio shows you that there's a lot of tenants that are renewing in their spaces.
In our portfolio, we have a high renewal rate kind of tells you that.
Tenants want to stay put and not.
Moving a lot.
Great. That's really helpful color and then several quarters ago, you guys talked about a few opportunistic acquisitions on development projects that have capital needs, where you guys could step in to help with funding are you guys seeing any more of those opportunistic or just stressed opportunities on the market or you kind of.
Speaker Change: Expect those deals to be few and far between.
Yes, there are few and far between Theres lots of capital most of the sponsors are deep pocket and can weighed out.
Our long elongated leasing periods.
We've done a couple we're looking we're making offers but they are few and far between but theres really no distress.
Great. Thank you guys.
Okay.
Yeah.
And the next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Good morning, Thanks for taking the question sorry, if I missed this but.
Did you comment or give an update on sort of.
The federal mogul lease on the property that I think comes up for our expires next year.
Sure.
Good morning, It's Peter Schultz know, we havent yet so that's the 708000 square foot building in Central Ta Youre correct. The lease does expire at the end of March of 2025.
We know that they are vacating so we're marketing the building now.
We've seen some preliminary interest there I would share with you that the mark to market is probably in the 40% to 50% range and we will keep you up to date on our progress.
Okay, Great and then.
Just wondering I understand the impact of leasing has been great. So congratulations.
Just the impact on 24 versus obviously full year 'twenty five.
All the leasing that you've kind of in the second quarter just roughly.
Can you give us a sense of like when does that you get excess cool.
Got it.
Vikram I don't have a calculation of that so I don't know what the incremental impact is going to be for 2025, but a lot of these leases are set.
Second or a third quarter start dates that we sign so quick.
Quick math youre going to get a doubling impact in <unk> from them in 2025% to 24.
Real quick math, though.
Got it and then just last one you mentioned the and sorry I joined late.
<unk> achieved one renewal on in Socal, there was another one which I believe there was more variability.
On that can you just remind us sort of where you are in those discussions and are there any other.
Sort of larger leases that you may be dealing with in the second half that where there's more variability.
Yes.
<unk> of the 300000 foot lease maturity is still in progress.
At this point this renewal is not included in our guidance and.
And we'll give you an update on our next earnings call.
Okay.
And the next question comes from Todd Thomas with Keybanc capital markets.
Hi, Thanks. Good morning, just two quick follow ups I guess first on regarding the the last question you know just the one point too.
Square feet of development leasing that's assumed in the fourth quarter, what's the impact that that leasing has on on 2024 guidance are those leases assumed to commence in the fourth quarter or will they be mostly 2025 commencements.
Todd It's Scott there assumed to commence in the fourth quarter.
So if you assume a mid fourth quarter start day on all of the leasing at average the impact to 2024 is about a penny per share.
Okay got it and then.
In terms of the 200 basis point occupancy opportunity that you have from the 23 and 'twenty four developments placed into service.
The two leases that you announced in the third quarter or 660000 square feet, that's about 100 basis points, a little bit more I believe.
That's a that's included I'm, assuming so there's really an incremental 90 to 100 basis points from here or is there a 200 basis point opportunity that you see more near term on on top of that 660 of.
Commencements that that Youre anticipating.
There is a 200 basis point opportunity and that opportunity is that $1 2 million square feet of development leasing keep in mind. The vast majority of that number is already placed in service. So when it gets leased up it's going to really positively impact occupancy.
Okay got it that's helpful. Thank you.
Okay.
Again, if you have a question. Please press Star then one our next question comes from Jessica Zhang with Green Street. Please go ahead.
Oh good morning, just wanted to follow up on your Ie, whilst versus Ie comment.
You said leasing dynamics are similar between the two sides are you see one market experiencing greater ran decline than another or are they also are pretty similar.
It's not too different I would say that a year over year Q2 24 in Q2.
'twenty three ie threads declined 5% more.
Overall, but that's about it.
Okay, Great West.
Okay.
And the next question comes from Michael Mueller with JP Morgan. Please go ahead.
Yeah, Hi, Thanks, just.
Two questions. One first I may have missed it but on the <unk> disposition activity.
You didn't mention the cap rate can you give us a sense of what that is and the types of buyers and then as it relates to I guess, new developments that you could potentially see yourself starting over the next year year and a half or so should we be thinking of projects, let's say the size of Houston and smaller for the bias or could you see.
Some larger projects as well do you think.
I'm going to take the second half of that and then Jojo can talk about the first half as.
As far as projects we have.
We deliver projects and the size of those projects depends on what the market demand So new development in South Florida are going to be.
60.
60000, 200000 square feet.
And Nashville, and they can be three or four or 500000 square feet.
We have smaller opportunities for example in northern California.
40, or 60000 square feet, we own.
Land and Socal, which clearly is not ready and this environment and then youre talking $1 million for.
So it ranges based on where it is.
It really depends on what the alternatives are for tenants in any given market and what what size range that market.
The biggest deepest demand for that market.
The bulk of this sale is the sale of New Jersey that is so substantial portion if you combine Q2 and what's happened in Q3, and that's the New Jersey portfolio sold at a six three cap rate.
But the stabilized cap rate is five eight and the reason is that just like Peter Schultz had mentioned earlier is that we.
We're going to experience kind of the rents have peaked out and potentially the rents were above market and the cash flow yield on that is a sub five.
Speaker Change: Got it okay I appreciate it thank you.
Yeah.
The next question comes from Nick <unk> with Scotiabank. Please go ahead.
Hey, this is Greg mcginniss on with Nick.
So on development.
We can appreciate the seven handle target on a development with where market rents stand today, how much of the land bank could actually be developed to that level and then what are your plans for inland Empire Atlanta that may no longer makes sense given.
Some of the rent declines there.
Yeah. So on average and this is across the whole.
All of our land holdings Youre still about 7% there are some holdings where that yield is in the five.
And those are going to wait obviously.
And with respect to Orlando in Socal.
We are.
Strongly committed to Socal is the fourth or fifth largest economy in the world.
Speaker Change: We have we are we are absorbing and digesting.
The space that was overbuilt and over leased because of Covid and once we work through that youre going to see that that market is once again, one of the best markets in the country don't forget that while we are we are.
Speaker Change: Living through this dive.
A digestion period.
It remains the toughest market in the country to get entitlements.
And that's only going to get worse, so that means the value of our holdings will continue to increase over time rents will again rebound and increase and we are excited about the landholdings that we have there.
Okay. Thank you and then which markets are you kind of looking to add to the land bank today and specifically in southern Florida, where you guys are obviously building more and it seems to be one of the strongest markets in the U S. What have you seen in terms of land pricing over the last year.
Let's talk about the land price shorter land pricings come down a little bit I would say south Florida are less so.
But where we're seeing spec.
The development.
Development yields today are generally with <unk>.
<unk> handles.
Land has not come down as much as.
Rents and costs have come down Joe Joe anything you want to add to that.
The land pricing has not come down commensurate with the maintained as of yields cost of capitals come up in some cases rents flatten or come down and the land is not adjusted so there is very land is.
Still pricey, but like Peter said, the only only thing I'll add is that we see developers.
Speaker Change: Tuning for a total return with a seven handle seven IRR.
Okay. Thank you and just one more question for me on the tenant recovery of operating expenses, they improved meaningfully quarter over quarter and as a percentage of expense was similar to last year. Despite lower occupancy. This year was there any seasonal component there or unique items benefiting the quarter.
I think first quarter of 'twenty four had the impact of that.
Uh huh.
Equity compensation expense item I spoke about before that impacts the operating expenses or the property expenses of the portfolio because our regional.
People are included in that as well so that's probably the vast majority of the improvement of that recovery.
Okay, and then year over year. It was basically the same as last year, but with lower occupancy. So I was just trying to see if there's any any extra information we could glean on that also.
Okay.
Nothing I could I can think of Chris.
Possibly in the first quarter is a little bit still rose a little bit higher.
I think there's a little seasonality in it but.
It's more what Scott referred to.
Okay. Thank you.
Speaker Change: Okay.
And the next question comes from Brendan Lynch with Barclays. Please go ahead.
Great. Thank you for taking my questions.
Maybe just to touch on South Florida. It does seem like that is a very strong market for you and your peers, maybe you could just walk through some of the dynamics, which are causing the increase in demand there.
I wouldn't say, it's an increase in demand I would say it's consistent demand.
Certainly the ports play.
Play a role.
Population growth in South Florida plays a role as you know, it's very land constrained theres just not a lot of.
New opportunities in Broward County, where we're starting the smaller building there is essentially no new construction.
At all today so.
Difficult to get entitlements.
They take a long time.
Supply constraints.
Two land keep that market in Czech although there's a little bit more supply there today, we continue to see pretty consistent demand.
Forget geographic.
Geographically you got the ocean on one side the Everglades on the other end.
North to south that market's about 115 miles east to West is about 21 miles. So you have.
Barriers to entry that are significant.
Okay.
Great. Thank you that's helpful.
You've referenced earlier, the very narrow aisle racking systems can you talk about what percentage of your assets would have similar infrastructure and what the cost is for customers to implement that type of solution and maybe how that would impact your ability to drive renewal rates when leases roll.
Yes.
It's a big capital investment.
It just means more writing and you do that when you have robotics.
And that is.
A minority part of the market, meaning that.
It takes a lot of investment to do that in a lot of users still need that in this case.
We have a 40 clear building at first pioneer and dependent loved the idea of.
Being able to use the cubic.
The potential of that is true.
Significant stacking.
So we're excited for them, but that's a more of a state of the art, that's not being used by a lot of tenants in the marketplace.
Yes.
Great. Thanks for the color.
Okay.
This concludes our question and answer session I would like to turn the conference over to Peter but silly for any closing remarks.
Thank you operator, and thanks to everyone for participating on the call today.
If you have any follow ups from our call. Please reach out to art, Scott or me have a great week.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.