Q3 2024 First Industrial Realty Trust Inc Earnings Call

Speaker Change: Good day and welcome to the first industrial reality trusting third quarter results call. All participants will be in a listen-only mode. Should you need assistance, please signally conference specialists by pressing the star key followed by zero.

Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-toe and phone. To withdraw your question, please press star, then two. Please note the event is being recorded.

Speaker Change: I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

Art Harmon: Alright, thank you Dave. Hello everybody and welcome to our call.

Art Harmon: before we discuss our third quarter results in our updated guidance for the year. Let me remind everyone that our call may include forward-looking statements as defined by federal security laws.

Art Harmon: the State Mentor Base on Management's Expectations plans and estimates of our prospects.

Art Harmon: Today's statements may be time sensitive and accurate only as of today's date October 17, 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 10K and other SEC filings.

Art Harmon: You can find a reconciliation of non-gap financial measures discussed in today's call in our supplemental report and our earnings release. To supplement our report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab.

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

Speaker Change: Also, with us today, our Jodoev 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 Asim Management, now let me turn to call over to Peter.

Peter Bacili: Thank you all for joining us today. The first industrial team delivered another great quarter with solid operating metrics along with some important new leases and capital deployment activity.

Peter: We continue to drive cash flow growth from our portfolio, be it contractual affiliations in our leases, capturing embedded rent growth, on rollovers, and continued development leasing, all of which position us to deliver strong growth and funds from operations.

Peter: Before getting into specifics, let me update you on the Industrial Market project.

Peter: According to CBREE EA, US Industrial Market, they can see increased a modest 10 basis points to 5.8% reflecting that most of last year's development starts have now come online.

Peter: Completions for third quarter total 87 million square feet. This is down approximately 30% compared to last quarter and the lowest quarterly completion number since the third quarter of 2021.

Peter: For our target markets, completions were 45 million square feet down 40% from the prior quarter.

Peter: New starts remain disciplined, totaling 36 million square feet in the third quarter, down 68% from the peak in the third quarter of 2022.

Peter: On the demand side, the third quarter was acted with net absorption nationally of 54 million square feet. This brought the year to date total to approximately 125 million square feet of which 75 million were in our target markets.

Peter: Renewal Leasing in particular remains strong.

Peter: Since our last call, we successfully renewed the last of the three large 2024 Southern California Explorations with a cash rental rate change of more than 150%.

Peter: As of the date of this call, we're now through 97% of our 2024 lease expiration by square feet. Our cash rental rate increase is 51% which is a strong follow-up to the 58% cash rental rate growth we delivered on our 2023 commencement.

Peter: Congratulations to our leasing teams for back-to-back years of outstanding performance on this metric.

Peter: Looking at our 2025 lease expiration, we're making good progress and are now through 37% by square footage, which is similar to our pace of progress last year.

Peter: Together with new leasing, our cash-round rate increase for leases signed with 2025 commencement date is 33%.

Peter: More than half of this population is comprised of the 1.3 million to our foot fixed rate renewal in Central PA we discussed on our last call.

Peter: We will give you a refined view of our thoughts on our estimated 2025 cash rental rate increase on our fourth quarter call with a benefit of budget reviews and incremental signings.

Peter: Regarding development leasing, as we highlighted on our last call in the third quarter, we are in your project, in the Inland Empire East.

Peter: to a 3PL plus a 61,000 square foot lease at our first 76 project in Denver.

Peter: Turning now to Capitol deployments, we continue to closely monitor demand and competing supply in our target investment markets. The term is potential incremental starts as we wrap up 2024.

Peter: Since our last call, we launched a 542,000 square foot development at our first Rockdale Park in Nashville.

Peter: Our total projected investment is 54 million with an expected cash yield of approximately 7%.

Peter: The current supply demand dynamic in Nashville is attractive, and we like the long-term drivers of this market, current vacancy stands at just 2.7% and only new supply represents about 2% of the total stock.

Peter: We also acquired a four building 211,000 square foot park in Houston, South East Submarket with closed proximity to the park.

Peter: The buildings are 100% leaf on a long-term basis.

Peter: are total investment is 29 million, and the in-place cash yield is approximately 6%.

Peter: Moving now to this position, as the scuffs on our last call, we sold the portfolio in New Jersey for $82 million.

Peter: In the fourth quarter to date, we sold three buildings in Pennsylvania, total 163,000 square feet per total of 19 million. This brings our year to date total to 157,000.

Peter: with that. Let me turn it over to Scott to walk you through further details on our results. And guys, thanks Peter. Let me recap our results for the quarter.

Scott Musil: Nary funds from operations were 68 sets for fully diluted share, compare to 62 cents per share in 32, 2023.

Scott Musil: are catch, same-storey growth for the quarter, excluding termination fees with 7.6%.

Scott Musil: The results of the quarter were primarily driven by increases in renovates on new and renew a leasing and renovate bumps embedded in our leases, partially offset by higher free rent and lower average occupancy.

Scott Musil: Excluded from the same story calculation is the accelerated recognition of a tenet improvement reimbursement related to our tenet boo-hoo which leases 1.1 million square feet in central Pennsylvania.

Scott Musil: Including this amount, our third quarter cashed same-ster when OI growth was 11.9%. I will have some additional comments on Google shortly.

Scott Musil: We've finished the quarter with in-service occupancy of 95 percent. Within the in-service portfolio we have approximately 200 basis points of lease-up opportunity from development's place in service in 2023 and 2024.

Scott Musil: Surprising our leasing activity during the quarter, approximately 3.5 million square feet of leases commets. Of these 500,000 were new, 2.2 million were renewables, and 900,000 were for developments and acquisitions with leased up.

Scott Musil: Turning back to our lease with Boohoo, as reported in the press, they are seizing operations that are building for which they have 10 years remaining on the release.

Scott Musil: Due to the cessation of their operations, we have written off the straight line rent asset and tenant improvement reimbursement liability, the net result of which is a penny per share reduction in our 2024 Navy FFO.

Scott Musil: They are current on the rent and have a short term sub-least to a 3PL for about 40% of the building. Also keep in mind that we have a security deposit in the form of a letter accredited which covers about a year's worth of rent.

Scott Musil: Let me quickly review our update in guidance for 2024.

Scott Musil: Our guidance range for Nae Reed FFO is now $2.61 to $2.65 per share, which is a tightening of the range and an increase at the midpoint of two cents per share since our last earnings call.

Scott Musil: Key assumptions have been tightened, as we only have one quarter remaining 2024.

Scott Musil: and the Ford Core occupancy range of 95% to 97% which implies a quarter-end average for the year of 95.2% to 95.7%.

Scott Musil: Our occupancy guidance now assumes about 800,000 square feet of development leasing we have previously slated from the fourth quarter will now take place in 2025.

Scott Musil: Ford Quiver Cache, St. Serenolid Growth, before termination sees of 8% to 10%.

Scott Musil: This implies a 7.75% to 8.25% range for the year, which is a 25 basis point increase at the midpoint sensor last earnings call.

Scott Musil: Note that the same story guidance excludes the impact of the accelerated recognition, tentative permits related to the Central Pennsylvania release in 2024, and the one-time tentant reimbursement in 2023 that we previously disclose.

Scott Musil: Guidance Includes the anticipated 2024 costs related to our completed and under construction developments at September 30th. For the full year of 2024, we expect to capitalize about six cents per share of interest.

Scott Musil: Energy and expense guidance range is $39.5 to $40.5 million dollars. Let me turn it back over to Peter.

Peter Bacili: Thank you again to the first industrial team for another solid quarterly performance through our focus strategy and capital allocation actions. We've created a high quality portfolio that is well-positioned to outperform through the business cycle.

Peter Bacili: We have embedded growth opportunities within our portfolio, and we have future growth opportunities from our current land holding on which we can build over 14 million square feet of highly functional and well-located logistics facilities.

Peter Bacili: Our balance sheet is strong and we have flexibility with no majorities in 1226 assuming the exercise of the extension option and our bank loss.

Peter Bacili: Operator with that, we're ready to open it up for questions.

Speaker Change: We will now begin the question and the answer session to ask you question, you may press star then one on your touch telephone.

Speaker Change: 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 and then too. Also, please limit yourself to one question and one follow-up, recue to ask additional questions.

Speaker Change: Our first question comes from Blaine Hack with Wells Fargo. Please go ahead.

Blaine Hack: Great, thanks. Good morning. So occupancy guidance implies upside from the third quarter but has a relatively wide range of outcomes between 95 and 97% at your end. I guess can you just talk about some of the biggest drivers in the Lisa portfolio that could kind of push you towards the upper end of that guidance? Are there any specific or large leases you're working on that you can maybe give us some color on?

Blaine Hack: Yeah, you know, this is Chris, and do you look at the documents you drive about half of it was from the development portfolio that we talked about

Blaine Hack: The other half is from the court portfolio.

Blaine Hack: You know as we stand here today, we certainly do have some activity or we're talking as tenets but we thought it was prudent to push back, but we've up with only two months left in the court.

Speaker Change: Hey, I think development leasing is the key to hit the high and frankly it could be going below the midpoint. We've got 400,000 square footed development leasing built into our guidance in the fourth quarter. That's about 60 basis points. If we get more than that, we'll be above our midpoint occupancy guidance.

Speaker Change: Great, that's very helpful and then maybe just a little bit more of a high level question I guess given that

Speaker Change: You know, you all have a relatively diverse portfolio geographically. It seems as though you're at a good position to talk about which markets you think are a poor, poor, soon, flex, sooner than others. I guess when you just talk about which markets you're feeling best about from the supply and demand standpoint and which you think might take longer to come back to seeing rental rate growth.

Speaker Change: Sure, let's take it kind of east to west. I think as you've seen, Rengrove was very, very strong in Southern California, other west coast markets near Jersey, South Florida.

Speaker Change: Those are the markets where the change in dynamic has happened first and the leasing progress that we've made in our portfolio you've seen largely that was stronger in the East.

Speaker Change: That whole dynamic is going to shift over time as the alternatives that are available in the marketplace for potential tenants begin to get absorbed and we're seeing that happen right now and we're seeing that additional traffic turn into more leasing activities.

Speaker Change: Peter, you want to comment? The only other thing I'd say is, because we think about Rental rate growth, we continue to see traction in Pennsylvania, Nashville, and Houston today generally speaking.

Speaker Change: It's gonna do you wanna comment on the list

Peter: Yeah, and in terms of cycling through taking time, taking more time to, like, I, in general, have to cycle through and digest the supply it has, but there's been increased activity in terms of offers and proposals.

Speaker Change: It's very helpful. Thank you.

Speaker Change: Our next question comes from Craig Mailman with City, please go ahead.

Speaker Change: Gordon, Scott on the boo-hoo lease. So you guys, I guess they're on the cash basis accounting now, is that correct and kind of how should we think about the impact of that if they continue to pay rent?

Speaker Change: You're in the next couple quarters or you guys playing, I'm taking back the security deposit and trying to go direct with the sub-telling kind of what's the game plan here to attack this.

Speaker Change: and Peter get it released or continue to cash while in the accident.

Speaker Change: Right, I'll take care of the accounting piece of it and I'll let Peter Schultz take care of the question about boohoo. So Craig, you're right, we're on cash basis, and again, as we mentioned in the script, they're current, they're right now, they continue to be current.

Speaker Change: Obviously, we'll reflect that at a while in our FFO.

Peter Schultz: If they stop paying rent, we do have the security deposit, the form of a letter of credit, so we can use that for about up to a year that covers about a year's worth rent.

Peter Schultz: So that's something that would help us out in the case that they stop paying rent. I'll turn it over to Peter to talk about the ten and more detail. Thanks, Scott. Good morning, Craig. So the boo-hoo is in the process of winding down their operations at the building, which should be completed by the end of the year. They then planned to put the entire building on the market for sublet. Thank you very much.

Peter Schultz: They will be re-crafting back to the UK to fulfill their orders.

Peter Schultz: Today, there are very few options for this quality of a building in Central Pennsylvania. So they feel pretty good about their prospects for subletting.

Peter Schultz: They also have a current subtenant in a portion of the building about 400,000 square feet or so.

Peter Schultz: Through their 3PL D.A.J.L. who's managing that, so that's...

Peter Schultz: Subsidizing, if you will, some of their rental payments, but they fully intend to honor their lease obligation and have some success with subletting the building. We'll keep you posted on that.

Speaker Change: Okay, and so if they do pay rent in the fourth quarter, kind of what could that be upside to the guidance, Scott.

Speaker Change: We have him paying rent, Craig. We have him paying rent in the goods. Okay, absolutely because they're paying for one, two, we've got the letter of credit. That's their security deposit. So even if they stop paying rent, I can keep accruing rent because I've got that letter of credit out there and keep in mind that's what they bank. It's not with the tenant as a result, the accounting rules will let me recognize. Thank you guys.

Speaker Change: That security deposit on a go-for basis if they stop paying.

Speaker Change: So that takes me to, that takes me to, if they stop paying now, that takes me to probably the end of third quarter, really fourth quarter next year.

Speaker Change: Project, and then just go back to Blaine's question on the Arc C side.

Speaker Change: So we're halfway through October here, the 400,000 square feet of development leasing.

Speaker Change: in the number. How does the activity on that 400-down square feet?

Speaker Change: Look and from an average, I can see in the fourth quarter versus anything I can see where to be thinking about that depending on when some of the stuff could hit is just going to be more kind of first quarter 25 impact from each perspective.

Speaker Change: Well, I would say the development, leasing, we have it baked in to our guidance at the end of the fourth quarter. So that's how we have it factor in.

Speaker Change: As far as what is included in that 400,000 correct that's a macro assumption there could be many different combinations of development leases with the properties that we have available. I would say the prospects we have for it is pretty decent at this point at time but we have worked to be done. There's only about two months left in the year.

Speaker Change: Alright, thank you.

Speaker Change: In the next question, comes from the Gramm Malhotra with Mizzujo, please go ahead.

Gramm Malhotra: What's the thing in the question? I guess just first of all, it's on the tenons. You might just sort of walking us through how it's sort of the watch list evolved and specifically, there is one known move out, I guess, in the first quarter of next year in federal mogul. You might just sort of talk about prospects for a reading that space, thanks.

Peter Schultz: Peter, sure, Victor, and we're morning as Peter Solves.

Speaker Change: Right, that's the 708,000 square foot building. That least expires at the end of March. Tenets are already out of the building, so we've done our make-ready work to position the building for marketing. We have seen some interest in it already, and we're encouraged by the limited number of options for that size space in Central Pennsylvania today.

Speaker Change: In Faker, what was your question again? Just to watch this, like the tenant watch list is given what kind of sublet volumes and bankrupt fees and certain segments, system economy, softening, mind giving some color on the watch list. Be sure, other than food, who nothing material on the watch list at this point of time.

Speaker Change: Okay, great, and then just last one, um...

Speaker Change: You did some, the few accusations, I'm just wondering from a capital deployment standpoint you mentioned.

Speaker Change: Charge, they've come down, they've started new development.

Speaker Change: You know, some of your peers who had, I guess, big development pipelines have walked it back. I'm just wondering from a development and acquisition standpoint, you know, what are you thinking as we headed to 25?

Speaker Change: So with respect to development, we continue to keep a close eye on the market submarkets where we have development opportunities. Obviously there are a lot of factors involved that impact the fundamentals of those submarkets.

Speaker Change: Whether it's the wars around the world, what's happening in the economy, the election we have been hearing from some big tenants that that's causing them to put their decision making off to the end of the year. When we look at the fundamentals around the country, the markets that we think are going to be most encouraging for new starts next year will be in Pennsylvania, Texas.

Speaker Change: South Florida, again, and of course Nashville, which again is one of the stronger markets in the country.

Speaker Change: Thank you.

Speaker Change: and the next question comes from Caitlyn Burrows with Goldman Sachs. Please go ahead.

Caitlyn Burrows: Hi, good morning everyone. I was wondering if you could talk a little bit more about new we seeing weather development or other vacancy, I guess, what do you think it will take for new we think to pick up and what you're taking on utilization and how that's impacting kind of the market today.

Speaker Change: Peter, you want to take it? Sure, Caleb, good morning, it's Peter Schultz. A couple of comments. In terms of space, your realization in our discussions and inspections with our tenants, generally pretty high.

Speaker Change: Sublet Space, other than the one we just talk about with Boohoo, not that material, in terms of the cadence and pace of book decisions and discussions, some tenants are operating with more urgency, but most of Peter just commented on or not for a variety of reasons. So, there's demand.

Speaker Change: and there's activity and I would say that the level of prospects in the market today are probably better than it has been for most of the year, but the pace of that decision making continues to be lumpy and somewhat deliberate.

Speaker Change: In a lot of other words, there's a lot of uncertainty out there with respect to the macro economy, geopolitical issues.

Speaker Change: The weather is now on people's minds so we need to work through these things, but we believe we see there's pent up demand. There are definitely larger tenants who have investment dollars for growth that they want to get going on and they're just waiting for...

Speaker Change: The fog declare a little bit on some minutes on certain cases.

Speaker Change: Got it. Okay. And then just maybe on the acquisitions versus position strategy at this point I could maybe imagine that you're looking to sell lower roast properties and buy higher growth ones. But I guess just like how possible is that and you mentioned the 100% leastrate for the Houston acquisition. So just wondering kind of what's the opportunity there.

Speaker Change: Yeah, so for us, we're kind of choosey about what we're going to buy, it has to be in the right place and have the right functionality and a lot of other factors.

Speaker Change: and so typically we do best when there are complications around deals called him hair on deals and so we don't participate in the...

Speaker Change: Yeah, broadly attended auctions by and large, and we're much better at acquiring assets, as I said, where there's work to be done. So that's the strategy there, and again, we're focusing on the sub-market that we think are going to show the most growth over the coming near to medium terms.

Speaker Change: And if I could just on the Houston one, it doesn't sound very hairy, given it's, well, at least was that one, maybe was just off market and it worked out or there's some other complication that is not to obvious.

Speaker Change: Joe's doing the inhaler right on the head, Gabriel of ace, and he was all parking in addition to that.

Speaker Change: The seller wanted certainty and we had a good portfolio in the Southeast sub-market, and they wanted to make sure that we worked with a buyer that used the sub-market could close pretty quickly, and we wanted a limited marketing. We were there very often.

Speaker Change: You know, a few competitors and we're very pleased with that acquisition, great product, new product, and a 5.9 bullet in cash yield. So, Kayla, I think you also asked about this position.

Speaker Change: You're right, as we have done for now quite some time, we're focusing on those assets that...

Speaker Change: have a lower growth trajectory going forward so that we can redeploy that capital into a higher growth opportunity. We'll keep doing that. But I think at a macro level you will see the volume of those sales going forward in much lower than it's been in the past.

Speaker Change: Hey, the next question comes from Rich Anderson with Wed Bush. Please go ahead. Hey, thanks. Good morning. First question is on the election, and you mentioned, you know, some tenants are holding off until they see what the outcome. What's the swing factor there? Like, is there like, I'm not doing anything if Harris wins, but I'm all in. I don't understand beyond tariff risk. Thank you.

Speaker Change: You know what it is that will change on November 6th with the election in the minds of your tenants.

Speaker Change: Yeah, so we don't get into the micro on any really detailed, I think generally speaking.

Speaker Change: It's about growth and the stability in the economy, and I can't attribute that to either candidate in terms of how that's going to grow.

Speaker Change: It's the new growth investment, not the renewals, the renewal activity is extremely strong as you've seen in our test-wrench increases if that's very, very strong. So it's really the new growth investment. People want to see what the landscape's going to look like either way regardless of who wins and what that's going to mean for...

Speaker Change: Anything from economic activities and social unrest to increase regulation or decreased regulation. So there are some pretty big.

Speaker Change: Factors involved in the outcome, and that's kind of did at a macro level. Is there any like red state, blue state, trump wins, you know, red states are going to do better or work. Is that to oversimplifying it in your mind?

Speaker Change: and I know.

Speaker Change: I don't have a view on that. That's a political one, you guys. The next question is, 8% same-store no-eye growth for 2024's your guidance. Do you have a read on what your earn-in is for 2025 based on, particularly what you've done in the second half of 2024?

Speaker Change: Are you asking for what we think in estimate of what it's going to be in 2025? Yes, I want guidance for 2024. I'm talking about what is baked in, so maybe there's three or four percent same store already baked into next year because of what you did in 2020.

Speaker Change: Work.

Speaker Change: Well, I think the, you know, the key driver's the same store, couple of different items, occupancy is one on the core, I'm not going to get into that, but

Speaker Change: Others are renovated bombs that's been pretty stable, and then it's the cash renovating crease on new and renewal leasing, what we're able to achieve next year, because that's been a real driver of cash same store growth.

Speaker Change: for the Industrial Peers. We gave you a look into what we think early when 2025 is. We signed 37% of the 25 at 8.

Speaker Change: 33% increase, increase in cash run rates, and that includes that.

Speaker Change: Sixth rate renewal action for the 1.3 million square footer in central Pennsylvania. So I think the number is going to be a pretty good number. We got to see how rounder rates flesh out when we do our final guidance. What we think it's going to be a good year.

Speaker Change: Okay, last for me.

Speaker Change: I don't know if you mentioned where you're seeing market rent growth in your areas of the country, how that's moving right now, maybe you can answer that. But also, how quickly can it change? Let's say, God willing, we get some recovering the geopolitical landscape and everyone's kind of happy with the political environment and macro stabilizes. All those good things happen. How quickly can you go from zero to 5% market rent growth in your business and perhaps what you've seen in history? I'm just wondering the speed by which we start to see real health bring back come back into the marketplace.

Speaker Change: We can't put a timeframe on that, but some math helps.

Speaker Change: Frame it, okay. So, now absorption is not bad, it needs to improve some. Completion, so the existing pipeline is way down. Completion's last quarter went from 72 million in the second quarter to 45 million this year and this is in our markets.

Speaker Change: The Construction Pike went from 170,000 to 135,000 feet and 28% of that 130,000 is pre-lease.

Speaker Change: So when you look at the fall-off and what it will call new alternatives for prospective tenants,

Speaker Change: Um, if we get some wind at our backs on the net absorption front to leave the demand side.

Speaker Change: You know, things can change. We don't think it's going to happen with any great speed. You're probably looking at the second half of next year.

Speaker Change: but aside from that it's difficult to handle you. And did you have a number from Mark Derenck wrote that you're seeing today?

Speaker Change: Yeah, so overall, rent their flat-ish to up a little bit. If you take so cow out of that number, they're probably up to a 3%

Speaker Change: Okay, great, thanks everyone.

Speaker Change: and the next question comes from Rob Stevenson with Janney. Please go ahead. Good morning, guys. Can you talk about the transaction market, given that you've been both buyers and sellers recently, given the first rate cut and the speculation leading up to that and sort of where cap rates are today versus six or 12 months ago, and how strong demand is and transaction volumes are that you're seeing out there ahead of the fourth quarter.

Speaker Change: Now at a high level, there is definitely significant capital chasing opportunities in the space.

Speaker Change: We're seeing some pretty significant prices paid, we would say some people are making some pretty big bets on the prior question about speed of recovery. We see a lot of bets on that being quicker rather than longer. Peter and Joe, do you want to comment on any specifics in your markets?

Speaker Change: Rob, I would just say as we monitored some of the widely marketed transactions earlier in the year, there were maybe 6-8 bidders, and now you're seeing over 20 bidders on some of these packages, so to Peter's point, a lot of interest in the space.

Speaker Change: In terms of, we are all few that second half will have more transactions than the first half.

Speaker Change: In addition, with both Peter said this has been talking to competing buyers. They feel like the decline and volatility of the 10-year-old health.

Speaker Change: The Lowering of Stardcturne, Internets, Raids, Health, their Carey

Speaker Change: They're more definitive now, what kind of fixed-rate financing they can get, all of those leads to more comfort and pricing. Overall, Caprice came in on 25B's points over the last.

Speaker Change: 3 months, I would say, and the IR expectation for Unleavened IRs also came in, so definitely overall the market is a bit more competitive.

Speaker Change: OK, that's helpful. And how aggressively are you guys looking to add to your land pipeline today and have you seen land pricing come down in any material manner across your core markets?

John Jones: John Jones

Speaker Change: Right now, I mean if you're looking at how we have a very good pipeline to continue to grow our...

Speaker Change: The girl, our platform in our company, of course, you know, we'll watch like Peter Baccile, he said, we'll watch the Submaric hits, and that'll want to make sure it didn't supply the men, dynamics are favorable. We'll continue to look for land sites.

Speaker Change: One thing that I want to mention is the land sites have a pricing is not a really significant decline if you compare it to the decline of rents so there is still quite a bit of disaster between buyers and sellers

Speaker Change: and the same talk in, there are more buyers found being more a little bit more aggressive, just a little bit more aggressive in buying landsides with lower yield expectations.

Speaker Change: Yeah, landowners, it seems to take the market to go back to 2022 price-ing lunch.

Speaker Change: We definitely don't, so that's why the bit as the Jojo references is pretty wide. So we are out there looking for land, but the transactions volume on that front-end kind of slope.

Speaker Change: Okay, that's all. Thanks, guys. Appreciate the time.

Speaker Change: but

Speaker Change: and the next question comes from Nick Filman with Beard. Please go ahead.

Nick Filman: Good morning, guys. Peter, you kind of mentioned just more recently, the weather becoming more of a factor in wanting to spend a tenet decision making. Is that hurt pain related? Are we talking like South Florida and like how recent is bad or like maybe how broadly is that comment?

Speaker Change: It's more of a broad comment about the frequency of the highly disruptive.

Speaker Change: Weather patterns, you know, they cause great economic damage.

Speaker Change: is probably has a big impact on consumption.

Speaker Change: So you can't ignore it. Now they are geographically confined, I guess you would say, but they're still big and they're not coming back to Bac. It's just something else that's on the mind of people who are looking at all the uncertainties that they have to wait through before they make investment dollars a new gross.

Speaker Change: That's helpful. And then on first we'll just the center. It seemed like the second building that's still in lease up. I seemed as though you guys are pretty bullish on the prospects there with boo who kind of listing that other spaces is simply space. Is that another competitive building you think are the different space needs and that's the second submarket.

Speaker Change: That's it for me, thanks.

Speaker Change: In the next question comes from Vince Toboun with Green Street. Please go ahead.

Vince Toboun: Hi, good morning. Could you share your views on the latest California legislation impacting industrial development AB 98? Particularly to this bill, impact.

Vince Toboun: You know, you're gisting land bank at all in California and your ability to build on that land and then also, you know, what impact do you think this, you know, legislation could have on industry-wide supply in California over the next.

Vince Toboun: for a few years. I mean, generally speaking, and then I'll end it over to Joe Dough for the details on our portfolio.

Vince Toboun: You know, this is going to be a talent.

Vince Toboun: It'll be a talent for our business, it'll be, you know, increased value for existing assets.

Speaker Change: And over time, it's probably going to put upward pressure on rent, but Jojo can talk more about our holding and how we're positioned with this. We're in pretty good shape. Sure, sure. That means that if the state law requires building upgrades and increased setbacks and buffer zones.

Speaker Change: All of our land under entitlement is exempt from AB 98 because this law is basically affecting development projects that have not started their permitting or entitlement process after 10-1-24. So after I think September 30 of this year, anything that you haven't started entitlement, you are subject to AB 98. So that's one thing I want to make clear.

Speaker Change: Just to add to what Peter has said is that, you know, again, there are view, is that there are going to be numerous sites that would be very difficult or nearly impossible to develop due to the constraints, put by AB98, and basically this has the effect of constraining the belt on land across the state. And you know, we all believe that anything may constraints supply the belt on land will increase the value or existing sites.

Speaker Change: Anything that decreases potential supply should be good for the fundamentals of the market I.E. Red Girls.

Speaker Change: So I will answer your question, please.

Speaker Change: No, that's really helpful color and we're just trying to think about how much, you know, versus the historical pace of development in an empire specifically, you know, how much this new legislation can impact that. This is all really helpful color. Thank you.

Speaker Change: problem

Speaker Change: Again, if you have a question, please press star and then one. Our next question comes from Michael Mueller with JP Morgan. Please go ahead.

Michael Mueller: Yeah, hi. I think you mentioned the go-forward asset sales could be considerably lower on a go-forward basis. And it seems like in the past you've normally pointed to 75 to 125 or 150 annual disposition targets. So I guess, you know, how should we read into

Michael Mueller: with that implies for development starts going forward, even relative to this year is it implying?

Michael Mueller: and you know, much lower, go forward pace and just health sensitive as dispositions to starts.

Michael Mueller: Yeah, they're disconnected, are they're not connected? Let me say it that way. The sales program over the last dozen years, as you've seen, and as you know, for us was to reallocate capital away from Lord Rufassas that's into higher growth opportunities.

Michael Mueller: We're now to a point where, um,

Michael Mueller: You know, that program is essentially over. And so, that really has nothing to do with developments. Now, yes, obviously those sales proceeds over the last decade or so have helped fund new development, but we'll just fund those developments in a different way going forward. We'll fund them through some sales but much lower numbers as well as retained cash flow and, you know, the right proportions of debt and equity. So it's not really going to impact the backstarts, they're not connected. [inaudible]

Speaker Change: God it. Okay. Thank you.

Speaker Change: And the next question comes from Nicholas Yuliko with Scotia Bank. Please go ahead.

Nicholas Yuliko: I just want to go back to Doohu and Andy.

Nicholas Yuliko: you know that accelerated tenant improvement reimbursement. Was that income? Was that already in the guidance or was that unexpected this quarter?

Speaker Change: That was unexpected because it was the accelerated recognition of that tenant improvement reimbursement liability. So, what the accounting rules tell you to do is you have to amortize that over the life of the lease.

Speaker Change: Well, at the end of the third quarter, we accelerated the unamortized balance, which I think was about $4.404.5 million. So that was a benefit, but that was netted against the right off of the straight line rent receivable of $5.5 million. So that's how you get the penny per share. So, again, it's all in conjunction with Buhu, and it was not anticipated when we issued guidance in the second quarter.

Speaker Change: Okay, and then the right off, which is the offset that also was an empire guidance.

Speaker Change: It was not in prior guidance, correct both pieces were not.

Speaker Change: Okay, great, thanks, appreciate it.

Speaker Change: In the next question comes from Caitlyn Burrows with Goldman Sachs, please go ahead.

Caitlyn Burrows: Hi, sorry, I just had one quick follow up that I figured was easier to ask this way. Before when you guys were talking about the rent growth, I think you mentioned market rent growth that it was about flatish, maybe up a little, and the next including Southern California might have been up 2 to 3%. Just for the time period, was that year over year in the third quarter or something else? Yeah, that's right.

Speaker Change: that year over here.

Speaker Change: And the next question comes from Brendan Lynch with Parkley's please go ahead.

Brendan Lynch: Great, thanks for taking my question. Just to follow up on AB 98, my sense is that there's a lot of gray area in the bill, and maybe there's some additional legislation that might be coming. Can you talk about whether you think the dynamics of what has been established with the AB 98 is actually finalized versus might be adjusted in the future?

Speaker Change: Sure, a very good question when you read through AB98, the certainly committed for work, clarification.

Speaker Change: At this point, they have investment criteria, setback criteria, and specific building upgrades, spending upon the size and how far each building would be under receptor.

Speaker Change: And there is enough detail wherein you can kind of ballpark what might happen in a building and what land site is available, but certainly there could be additional detail because even the building upgrades and how, for example, the building is laid out could be more specific but I can't but it's so hard to forecast what kind of changes might end up with that. But right now it is a state law and it has some detail in it. It's also fair to say the municipalities don't like this so it'll be litigated as well so we'll see there's definitely going to be some movement here.

Speaker Change: Great, that's helpful. Maybe just one other one on this topic. Did you submit kind of a flurry of entitlement request rate before the deadline to avoid some of the consequences of the bill itself?

Speaker Change: Not at all, all our sites were included within, you know, some are years into and we also have some entitled sites were ready. And so, yeah, I know, and none was done, you know, as a quick reaction to this AB-98.

Unknown Executive: Great, thanks for the call.

Unknown Executive: This concludes our question and the answer session.

Peter Bacilli: I would like to turn the conference back over to Peter Bacilli 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.

Unknown Executive: Have a great week.

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

Operator: You may now disconnect.