Q1 2025 First Industrial Realty Trust Inc Earnings Call
Speaker Change: Good day, and welcome to the First Industrial Realty Trust Inc. 1st quarter, 2025 results call. All participants will be in listen-only modes. Should you need assistance, please signally conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity task question.
Speaker Change: To ask a question, you may press star then one on a touchstone phone. To withdraw your question, please press star and then two. Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Art Harmon, Senior Vice President, Investor Relations and Marketing
Art Harmon: Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our first quarter of 2025 results at our update guidance for the year, please note 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.
Art Harmon: Today's statements may be time sensitive and after it only as of today's date, April 17, 2025.
Art Harmon: We assume no obligation to update our statements or the other information we provide. 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.
Art Harmon: You can find a reconciliation of non-GAF 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 Change: Our call will begin with remarks by Peter Bacillie, our President and Chief Executive Officer, and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions.
Speaker Change: Also with us today are Jojo Yap, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Executive Vice President of Operations, and Bob Walter, Executive Vice President of Capital Markets, and Asset Management. Now let me hand the call over to Peter.
Speaker Change: Thank you, Art, and thank you all for joining us today. We're off to a solid start in 2025, advancing our leasing objectives and closing on a few attractive new investments.
Speaker Change: On the capital side, we renewed our line of credit and $200 million term loan further pushing out their maturities. Scott will provide additional detail during his run.
Speaker Change: Top of mind for everyone is the evolving landscapes surrounding tariffs. Like all of you, we are closely monitoring the developments and their potential impact on business activity and the leasing market.
Speaker Change: We are all operating in unfamiliar territory, and whether we like it or not, we're being included in the geopolitical and economic sausage-making.
Speaker Change: We have ringside teeth to what looks to be an ongoing and volatile negotiation with our international trading partners. [inaudible]
Speaker Change: It stands to reason that if more clarity is slow to develop, it could further impact the operating environment and decision making on new investments in growth.
Speaker Change: At this point, it is too early to assess the specific impacts on leasing, as I'm sure there will be further developments in this area in the coming days, weeks and months.
Speaker Change: Before getting into specifics of our performance, let me comment on the industrial market broadly.
Speaker Change: Based on co-star data, they can see in Tier 1 US markets was 5.9% at the end of the first quarter unchanged since your end.
Speaker Change: On the demand side, net absorption was 56 million square feet, 24 million of which was in our target markets.
Speaker Change: In our 15 target markets, new starts were 29 million square feet and completions were 39 million [inaudible]
Speaker Change: Base under construction totals 200 million square feet, and that is 38% pre-least.
Speaker Change: From a portfolio standpoint, our in-service occupancy at quarter-end was 95.3% in line with our expectations.
Speaker Change: Since our last earnings call, we made further progress on our 2025 rollovers.
Speaker Change: We have now taken care of 73% by square footage and our overall cash renovate increase for new and renewal leasing is 30%.
https://www.kenhub.com
Speaker Change: If you exclude the large fixed rate renewal and central PA, you previously disclosed the cash rental rate increase is 36%.
Speaker Change: For the full year, we continue to expect overall cash rental rate growth of 30 to 40% and 35 to 45% excluding the fixed rate renewal.
Moving now to development leasing.
Speaker Change: We successfully expanded one of our tenants at our first 76 project in Denver by 99,000 square feet, bringing that 200,000 square foot building to 100% occupancy [inaudible]
Speaker Change: On the new construction front, in the second quarter, we plan to break ground on a 176,000 square foot facility at our fully leased 1.2 million square foot, first part, 121 in the Northwest Dallas Submarket of Louisville.
Speaker Change: Vacancy rates in this market have ranged from 4 to 5 percent. [inaudible]
Since year end, 2022. 2022.
Speaker Change: The building can accommodate one or multiple tenants and will feature auto and trailer parking capacity above sub-market standards Estimated investment is 23 million with a target cash yield of approximately eight percent
Speaker Change: The site is near our successful first day crossing project that we lead last year shortly after completion.
Speaker Change: It's located within a mile of a full I-95, I-495 interchange. In total, we can develop 830,000 square feet.
Speaker Change: In the second quarter, we will start construction of a 226,000 square foot facility that is divisible and targets the 50 to 100,000 square foot tenant segments where vacancy is around 5% today.
Speaker Change: Total projected investment is 31 million with a target cash yield of approximately eight percent.
[inaudible]
Moving on to investments.
Speaker Change: We acquired two fully-leased developments from our joint venture at Phoenix, the 375,000 square foot building A, and the 421,000 square foot building B.
Speaker Change: There 100% lease to 3 tenants with a weighted average lease term of approximately 7 years. [inaudible]
Speaker Change: These highly functional buildings include 40-foot clear heights, 200-foot truck courts, multiple access points, and prime frontage on Loop 303 in the Southwest Valley Submarket
Speaker Change: Our basis in the buildings is $120 million, adjusted for our share of GB profit with a cash yield of 6.4%, significantly exceeding market cap rates.
Speaker Change: But that, I'll turn it over to Scott. Thanks, Peter. For the first quarter, they read funds from operations for 68 cents per fully-deleted share, with the grant of 60 cents per share in 1Q2024. Our cash-sync-store-renolide growth for the quarter, excluding termination fees, was 10.1%.
Speaker Change: The results in the quarter were primarily driven by increases in rental rates, a new and renewal leasing, contractual rent bumps, and slightly higher average occupancy.
Speaker Change: We finish the quarter with in-service occupancy of 95.3%, down 90 basis points from year end and 20 basis points from year ago quarter.
Summarizing our leasing activity during the quarter.
Approximately 1.3 million square feet of leases commenced.
Speaker Change: All of these 400,000 were new, 800,000 were renewals, and 100,000 were for developments and acquisitions with Lisa.
Speaker Change: On the Capitol side, we renewed and upside our senior on secure revolving credit facility by $100 million, bringing the total commitment to $850 million. [inaudible]
Speaker Change: including our extension options, the maturity date has been extended to March 2030. [inaudible]
Speaker Change: Pricing for the new facility removes the incremental 10 basis points over adjustment that was part of the previous facility's pricing structure. [inaudible]
Speaker Change: We also renewed our $200 million unsecured term loan with an initial maturity date of March 20, 2028.
Speaker Change: With two one-year extension options available, we can extend the maturity date to March 2030. There was no change to the pricing structure of this renewal. We'd like to thank our banking partners for their continuing commitments and support.
Speaker Change: Lastly, we have given notice to our lenders that we are exercising a one-year extension option and a $300 million term load which will push its maturity to August 2026.
Speaker Change: We still have another extension option available by which we can push the maturity to August , 2027.
Speaker Change: Post these transactions and assuming we exercise the remaining extension option available to us in our $300 million term loan, our next step maturity is in 2027.
Speaker Change: Now moving on to our guidance. Our FFO and key guidance assumptions are unchanged compared to our last earnings call. Guidance range from Navy Read FFO for the year remains $2.87 to $2.97 per share.
Speaker Change: Our assumptions are his follows. Average quarter end in service occupancy of 95% to 96%. This range reflects approximately 1.5 million square feet of development leasing, soon to occur in the fourth quarter.
Speaker Change: Given this assumption and the fourth quarter leasing assumption for a 708,000 square foot building at Central PA, the expect in service occupancy to trough in the second quarter at that increased by year end [inaudible]
Speaker Change: Cash, same-store NOI growth before termination fees of 6% to 7%. As a reminder, our same-store guidance excludes the impact of the accelerated recognition of intended improvement reimbursement in 2024.
Speaker Change: Guidance includes the anticipated 2025 costs, weighted to our completed and under construction developments at March 31st, plus the two new future development starts and now it's on this call.
Speaker Change: Well, the full year 2025, we expect to capitalize about 9 cents per share of interest. [inaudible]
Speaker Change: Energy Day, expense guidance range is $40.5 to $41.5 million. Let me turn it back over to Peter.
Speaker Change: We're off to a good start in 2025. However, like all of you, we will continue to monitor the situation around tariffs and their impact on the levels and timing of tenant demand.
Speaker Change: We hope to have a more complete picture of its impact on our business in the next several months. As always, we will be focused on executing on our objectives to drive long-term cash flow growth.
Speaker Change: We will now begin the question and answer your session. To ask a question you may press star then one on your touchdown phone. If you're using a speaker phone, please pick up your handset before pressing the keys.
Our first question comes from Keyden Kim with Truist [inaudible]
Please go ahead.
Speaker Change: Thank you, good morning. So, going back to the terrif question or topic, if these trade negotiations end up taking just an extended amount of time to resolve, you know...
Speaker Change: Does this post any kind of near-term tangible risk for your Tennessee perspective? For example, I'm not sure how many Chinese 3PLs you have and what this would mean for that $1 million bad that reserves. Thank you guys.
Speaker Change: Dr. Judge, do you want to talk about our exposure to Chinese three pills? Yes, Ki Kim, this is Jojo. Basically, if you...
Speaker Change: Toil all of our spaces, there's leads to Chinese repeal, they're approximately 450,000 square feet, so they're pretty diminimous.
Speaker Change: We actually have not done a lot of use with Asian 3PLs in the past, and turn them down because of credit.
Speaker Change: So in terms of auto-pandence, we don't have any tennis right now with this art [inaudible]
Speaker Change: involved significantly in heavy, heavy manufacturing. There's a lot of design and assembly. And so right now, we have not really heard any big impact or any concern from our existing tenants. [inaudible]
Okay, thank you [inaudible]
Speaker Change: The next question comes from Craig Mailman, but city, please go ahead [inaudible]
Craig Mailman: Hey, good morning. Just wanted to clarify, Scott, you said the 1.5 million square feet of development leasing is now 4Q. Recall was second half 25, maybe that's just a nuance, but did you guys shift that out at all? [inaudible]
and maybe what's the visibility on that? [inaudible]
Craig Mailman: Yeah, so it was second half when we discussed it on the last quarter's call, but the vast majority of it still was in the fourth quarter. We made some slight adjustments to development leasing but nothing material.
Craig Mailman: So as we stand now, the 1.5 million square feet is in 4Q, that's the assumption. Another material assumption is the 708,000 square footer in central PA is 4Q as well.
Craig Mailman: And if you want to do a sensitivity analysis of what the impact is of not leasting any of that up, it's only about two cents per share
For more information visit www.FEMA.gov
Craig Mailman: Okay, and what did this ability look like on that leasing pipeline today?
Peter: Gerardo, Peter Jojo. Good morning, Craig, it's Peter. So activity continues to be, the market continues to see good activity.
Peter: As we talked about on our last call, we continue to see deals getting made. A fair amount of tenants are obviously concerned about the impact of the timing and the resolution of the terrorists. [inaudible]
Peter: So some of those are going slower and some have pause but in general [inaudible]
Peter: We have more prospects today for the majority of spaces than we had had 16, 90, 120 days ago. In terms of this building in Pennsylvania specifically,
Peter: We've been marketing that and we've seen some interest from partial and full building users but nothing really actionable today.
Peter: Now, this is pre-tariff, but at the same time, one thing I only add is that in Archicago asset, recently we've been seeing also an increase of our piece from manufacturers.
Okay, and then
Peter: Maybe Peter, bigger picture. I know you guys are playing on starting two developments in the second quarter and that yield on the development, Dallas start seems. [inaudible]
Peter: Pretty high at 8%. Could you walk through just kind of thoughts here on incremental starts beyond these two and how you guys are kind of underwriting with the potential upward kind of push and input and labor costs? Let's go.
Peter: Yeah, so big picture, Craig, in terms of new investments for growth, why don't we look at it that way because that could be developments or cash flowing deals.
where we're going to remain opportunistic, clearly the tariff questions.
Peter: So we're going to be cautious with that from that standpoint. [inaudible]
Peter: But where we have these new starts that we've just talked about, we're really going to be serving some pockets of unmet demand in those markets. So that's the focus in terms of the geography. We've said a couple of times in the past couple of calls.
Peter: It's still going to be places like Texas Florida and Pennsylvania, Nashville, excuse me.
Peter: So yeah, we're going to continue to focus there and look to make good risk of just returns but also factoring in what we're learning as we all learn about the way forward with the discussions on tariffs.
Great, thank you.
And the next question comes from Todd Thomas.
Speaker Change: I don't have the dollar amount in front of me, but you're exactly right that the increase in the GNA had to do accelerated stock based comp due to tenured employees that was forecasted in our guidance as you saw.
Peter: Virginia guidance for the year was unchanged compared to last quarter, but I can get back to you on the exact amount after the call.
Peter: Okay, perfect. And then on the on the on the larger picture, are you seeing any short-term activity on vacant warehousing related to inventory stocking and what if anything are you hearing about larger spaces in the inland empire?
Peter: Okay, on terms of short-term, there's continues to be requests on short-term leasing. We typically do not like to do short-term leasing so we don't have much of that. In terms of larger requirements, I think you asked about larger requirements. Okay.
Peter: The 750,000 to 800,000 square feet and up in Inland Empire is actually pretty active. In fact, just in the first quarter, there were two big leases.
Peter: Over a million feet, this is the first quarter that's got signed in the first quarter for the UN Empire.
I'm sorry, I'm sorry, I'm sorry, I'm sorry, I'm sorry
Alright, thank you.
And the next question comes from Rob Stevenson with Janie. Please go-
Go ahead.
Rob Stephenson: Good morning, guys. Are there any markets today that you're seeing notable change either up or down operating fundamental wise over what you would have expected three or six or nine months ago? Of note?
Rob Stephenson: Nope, not really, you know, we continue to like South Florida and Nashville. [inaudible]
Certain submarkets in Dallas, even Houston, Lehigh Valley, et cetera. Let's get started.
Rob Stephenson: And there's been a few too many alternatives for our taste in market like Denver. That hasn't really changed. Denver's getting better, having said that. But no, there's been no big change in the dynamics around any of the 15 target markets that we're focused on.
Okay, so nothing in Southern California especially.
I mean, Jojo can come in, it's...
Slowly getting better. [inaudible]
Rob Stephenson: Masonically and slowly, the alternatives are becoming lace, but go ahead. Yeah, for the first quarter, the under construction pipeline for IE and LA came down. Vacancy actually picked down 30 basis points for IE, so that's good. Deliveries are actually a very small at under two main square feet.
for Large Market.
Rob Stephenson: For IE, the starts were very small, for the Q1, it was only 1.1 million square feet, so all the stats in terms of...
Rob Stephenson: Supply is trending the right way. In terms of sorption, the island empire is like a three-minute square feet net absorption, which is also good. Let's go ahead.
trending the right way.
IE West was particularly stronger.
and then i.e. Trump. Rob, Rob.
Oh, it really feels like we're in a trough.
Uh, you know...
Rob Stephenson: No, depending on what happened in tariffs, but right now, where it seems like where it is...
Speaker Change: Okay, and then I guess sort of deltelling with that, in terms of tenant demand today, are you seeing, you know, better demand at certain square footage levels, or is the demand fairly even spread across the various buckets?
Speaker Change: Rob, it's Peter. I would say smaller mid-size tenants as we've commented about previously continues to be active.
Speaker Change: And as Jojo said, there's demand for the larger buildings in Southern California, but the ban continues, brought to be pretty broad-based.
Speaker Change: Our smaller spaces release quickly. We're not seeing any weakness there. [inaudible]
Speaker Change: So we feel overall good about the level of activity, we just need more persistent decision making and hard for all of us to forecast when will that be given the terror of turbulence and headwind that that's creating.
Okay, thank you.
Thank you.
Event moderator: And the next question comes from Vikram Malhotra from Morgan Stanley . Please go ahead.
Thanks for the question.
Event moderator: I wanted to do two things. This first of all, so one of your peers has said,
Event moderator: Leasing the last year volumes kind of were down 20% the first two weeks of April .
Event moderator: And then they sort of carried out a stress test, including GFC-type scenarios, and said they can kind of hit the low end. So, two parts, I know, kind of, what have you seen, kind of, velocity or volume-wise in your markets the last two or three weeks?
Event moderator: And then have you done any sensitivity analysis on like if we have a fairly steep drop-off in occupancy events in the next few quarters? What happens to your assessor?
Event moderator: Scott, you want to take the sensitivity question? Right, so Vikram, it's Scott, I think for us, when you looked at the material leasing assumptions that I talked about before.
Event moderator: If that doesn't just get leased up, that's about two cents per share. [inaudible]
so not a material impact work items. [inaudible]
Event moderator: I'd say the other thing we looked at was bad, that expense when we looked back to COVID, that was about $1.8 million, compared to our guidance of $1 million million.
Event moderator: You have to realize that back during COVID that was two tenants, and the reason that that number was that high is because of the restrictions the government put on us in California to evict tenants. So, you know, that's what we've done from a stress test point of view, and I think we stack up pretty well. [inaudible]
Event moderator: Peter. And from a tone standpoint, look, we, you know, we came into this year with, um...
Good momentum, a lot more foot traffic. We're back.
Event moderator: and fewer alternatives for tenants and more tenants looking at spaces, just in terms of gross numbers, that hasn't changed what isn't going to be helpful for decision making now is all the uncertainty around tariffs. It's just another...
Event moderator: Edwin, I suppose, on top of all the headwinds we've had in the past were...
Event moderator: Built for this. It's fine. We're going to all get through this and we're going to come out looking good in the end. So the tone is still positive, but the conversations, a lot of the conversations have paused until people have more clarity on what's going to go forward with the terrace. [inaudible]
Speaker Change: Got it. So just sort of building on that in terms of pause I mean I guess
Speaker Change: You keep the guide intact, but when you say the concessions pause, does that mean, like a new leasing that you anticipated in the second quarter, kind of get, might get pushed out in the third, is that something?
Speaker Change: You've baked in and can you just clarify like when you say pause, have any have been folks who kind of have the finish line and have just sort of walked away. Thank you.
Speaker Change: So, first of all, our objectives for the first half of the year were a hundred thousand feet and we've done that already. The rest of the leasing is in the end of the year, as Scott mentioned. So, none of that has changed our forecast on that remain the same. [inaudible]
with respect to pause. [inaudible]
Largely, that's a general comment. We are seeing.
Speaker Change: Some of the conversations pause in our own portfolio. We're hearing about it from the brokerage community and other players that we talk to in the business. It doesn't necessarily mean those requirements have gone away.
Speaker Change: It just means that with respect to pulling the trigger on investing in growth, some of the prospects have decided to await.
Speaker Change: You got it? Okay, and then just last quickly, a clarification. Can you remind us the, so both the federal mobile and the boohoo space? When did you get the federal mobile space back? Was it the end of one queue or the beginning of two queue and then just prospects for both those spaces? Yes, it is.
Speaker Change: Vikram, it's Peter, so the federal mobile lease expired at the end of the first quarter, so it is now vacant in the second quarter.
Speaker Change: We've seen some interest in full and partial building, building users for that space. Nothing specific to comment on this morning. The Boo Boo Building, as you know, they are marketing that entire building for sublet.
Speaker Change: You have a sub-tenant in about a third of the building today, and that duration is a couple of years with the ability of boo-hoo to terminate that
Speaker Change: We continue to view that building very favorable where it's positioned in the market, not a lot of competition, great location in terms of proximity to parcel hubs. And there's not a lot of options for users of that size.
Speaker Change: They are current on their rent and as a reminder, we have a security letter of credit that covers us for another 12 months of rent or so, so we don't do that as a risk today.
Great. Thank you.
And the next question comes from Michael Carroll with Art.
Michael Carroll: I want to circle back on some of your earlier comments on current tenant activity. I know you said that activity seems to be pretty healthy right now, but some tenants have decided to pause.
Michael Carroll: I mean, should we assume from that that the majority of tenants are still kind of actively moving forward and there's a much smaller percentage that's kind of delaying and not making a decision? I mean, is there a possible to kind of quantify or provide some guidelines on how many tenants have decided to pause?
Michael Carroll: No, can't quantify how many. All I would say is that the interest that the head-up demand to invest in growth that we came into the earwind still exists.
The question for them now is... [inaudible]
Michael Carroll: When? You know, what's the world going to look like? How much product are they going to need to store and ship? [inaudible]
and that all depends on the tariff outcome.
So some conversations have paused.
Michael Carroll: It's a little too early to say whether those conversations or those tenant requirements have gone away. We can't say that now, but right now it looks like a pause. Not all of them, I'm not going to get into how many that's...
Michael Carroll: That's just not something we're going to track. I can say renewal tenants. Are we still renewing about six months in advance?
Michael Carroll: And that's a good time. They want to get their transactions done, they're confident in their business.
Michael Carroll: This tariff thing doesn't impact everyone, don't forget, and in fact the majority of the business that we do is not impacted by this . . . .
Michael Carroll: So, this is just another factor on the margin that impacts development, leasing for sure and we're going to work through it.
Speaker Change: No, appreciate that now. We're related to the few tenants or some tenants who decided to pause or any common themes, like are they in specific industries or specific markets or anything like that?
Speaker Change: No, I would say to echo some of Peter's comments, Mike.
Speaker Change: A number of tenants are continuing to move forward irrespective of the terrible turbulence, but the pace continues to be somewhat measured.
But no, we haven't really seen [inaudible]
Speaker Change: Annie's specific concentration, if you will, and I think it's still too early to tell.
Speaker Change: A lot of our tenants, let's use the example of the lease we just signed in Denver. [inaudible]
Speaker Change: That company is in the heavy crane and rigging business. They have nothing to do with.
Speaker Change: with tariffs. It's all domestic-based, so we have plenty of examples of companies who are moving forward, it just might take a little bit longer, just given some of the noise in the world today. Thank you very much.
For more information visit www.FEMA.gov
Speaker Change: Okay, great. And then just last for me, I know that you've already addressed about 73% of your 2025 explorations. I mean, can you kind of describe what's remaining, is there anything lumpy within the remaining 27%?
Speaker Change: Chris, yeah, now what we have in the remaining is they're basically under 100,000 square feet really don't have anything bigger than that rolling, so pretty, pretty great in home. [inaudible]
Okay, great, appreciate it.
Nicholas Ulico: And the next question comes from Nicholas Yulico with Scotiabank. Please go ahead
Nicholas Ulico: Thanks. I'm just going back to the guidance and it's a difficult time to be trying to forecast the world, but you talked about the impact in the second half or in the fourth quarter if you don't get certain leasing done. It's going to be two pennies.
Speaker Change: on the year. So I mean, should we assume then that that's sort of the bottom end of the FFO guidance range? Reflects that? I'm not sure what else…
Nicholas Ulico: sort of reflects that, just as we're thinking about potential downsides scenarios for your guidance which didn't change this quarter.
Nicholas Ulico: Nicket Scott, those are the material lease-up assumptions. There's other new leasing we have baked in guidance. That could be another upside or downside and also bad debt expense. I think we had a question about that earlier. So those are two other items that could be variables as well. Let's go ahead and see what we can do.
Nicholas Ulico: Okay, but, and just again going back to, I mean, the idea here is that if, if things stay tough, if things were to stay tough on the leasing market, you guys still feel good about hitting
Nicholas Ulico: The bottom end of your SSO guidance, right? Yes, yes, correct.
Nicholas Ulico: Okay, great. And then you just also just remind us in terms of sort of what's assumed for retention in your expirations for the remainder of this year. I've read just a lot of them. And also just a reminder on the moveouts that are assumed.
Nicholas Ulico: You know, as far as retention, you're anticipating the year to be about 70 to 75 percent, that's pretty much what we've been averaging the last several years, so no surprises there. And again, we have very little, you know, under 100,000 square feet, more of the majority that are remaining in that role over so, very little, you know, pretty, very little variability there.
Okay, thanks [inaudible]
Speaker Change: Okay, the next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead [inaudible]
to the Thursday video.
Speaker Change: Caitlin, good morning, it's Peter Schultz, so that site has been under contract for a number of years.
Speaker Change: An infill location across from the Newcastle County Airport, what we had to get it re-zoned and fully entitled as well as deal with all the agency approvals.
Speaker Change: and as you can appreciate that continues to take longer pretty much anywhere around the country.
Speaker Change: We were happy to close on that when we did. We thought it would have been sooner but that process continues to be elongated.
Speaker Change: and given what it is and where it is. The infill nature of the site, the population density, the road access, Delaware being a lower cost market. [inaudible]
Speaker Change: compared to some of the competition, the buildings designed to be single or multi-tenant, and as Peter said, this is a pocket of underserved demand, so we're happy to proceed with that now, and close and we're going to start on the first of the two buildings.
Speaker Change: Got it. Okay, so that makes sense. Okay, and then on development yields, it seems like the average yield for recent and under construction projects is in the six to seven percent range. Thank you mentioned, the two two starts would be targeting around eight percent. I feel like we hear a lot about higher construction costs, maybe land costs, and rent growth not necessarily keeping up. So just wondering if you could comment on how sustainable you think that six to seven plus percent yield is.
Speaker Change: and recognizing a backdrop of higher costs and possibly lower rents. [inaudible]
Speaker Change: So Caitlin is Peter. We on a regular basis look at our land holdings and evaluate new opportunities building in current day construction costs and rental rates.
Speaker Change: Our most recent update shows that we can put out about a billion nine.
Speaker Change: at over a seven yield on what we have today. Of course, you're not going to do that into markets where there are too many alternatives right now, but that's the opportunity that we have. That's so.
Speaker Change: Yeah, we have a great opportunity to grow going forward just on the on the property that we own.
Speaker Change: Peter talked about the Pennsylvania Transaction, where we can, and that's a good example, we tie up real estate that we don't have to necessarily buy until all of that
Speaker Change: Hard work is done that takes you know in some cases several years to get done and that's a good example and one of the reasons the yield on that deal is so high.
I got it. Thanks
Speaker Change: And the next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Blaine Hecht: Great, thanks, good morning. Just another kind of big picture question. In conversations you're having with tenants that might have hit the pause button on leasing, given the uncertainty around tariffs...
Blaine Hecht: Do you get the sense that a near-term resolution of trade agreements could bring about enough confidence to get them kind of to return to normal leasing activity quickly? Or do you think the indecision and mixed messages from the administration could cause a delayed leasing recovery even if agreements are reached? [inaudible]
Blaine Hecht: That pace, as you know, from all these calls over the past couple of years has been slow or methodical and probably on every call we say that decision making is slow.
Blaine Hecht: Not sure that that means that all of a sudden we're going to break the dam and leeches are going to get signed left and right if the tariff thing clears up.
in the short term. [inaudible]
Blaine Hecht: So when you say go back to where we were, we may still go back to a market where the pickup is methodical. And now, as I said a bit earlier, the number of alternatives. [inaudible]
Blaine Hecht: Does continue to shrink, and that's a very good thing. So, you know, predicting the pace of uptake once the tariff question has been settled is a pretty tough thing to do. Thank you.
you know, head towards a potential impact to 26 numbers.
Blaine Hecht: I'll get back to you on there, but I think an easy way to do it is I would just take that impact.
Blaine Hecht: that $2 million and just times by 10 or 11 months and you're probably get pretty close to the potential impact in 2026. That would be the easiest math.
Great. Thank you.
I think they said me, Richard Anderson here with Web Bush.
Speaker Change: So getting back to the impact from leasing and particularly development, at least looking at your development chart on page 21 of the supplemental, if you were to...
Paul, get this 1.5 million done.
Speaker Change: What is the pre-leasing, or what does the percentage least look like in looking at those seven projects in isolation? If it's 43% today, you got four of them that are 0% least. Do you see activity across the board? And would that number be...
Speaker Change: 70-80% if you get it all done or more or less, just curious what your thoughts are there. Thank you.
Speaker Change: So you're looking at the developments under construction? Yes, at March 31st. And none of that is embedded in our 2025 guidance. That is what I asked for post that time. So any lease up that impacts 25 would be incremental to FFO.
Speaker Change: Rough Math, about 10% of your enterprise value. At what point do you start? [inaudible]
Speaker Change: sort of reconsidering that, have you reconsidered that and is that sort of the way you look at that 800 as a 10% number or how do you get to it and under what circumstance would you start to consider reducing it?
Speaker Change: Yeah, so it is a formula. It is based on our equity in debt market cap. It is a cap and not a target.
Speaker Change: We are going to operate according to the strength of the markets and not because we have cap space.
Speaker Change: I think the good thing about the cap is it in...
Bull Markets, you don't get out over your skis. [inaudible]
Speaker Change: But we're only using about 470 million of it today, including the two new developments. And so reducing it is not really a topic of discussion for us.
Speaker Change: And as we continue to grow, obviously you've seen us in the past increase it, so yeah, there's not really no reason to reduce it because we don't execute our new starts.
Speaker Change: Based on how much availability we have, we do it based on the opportunity to earn great risk-adjusted returns in the submarkets that we're targeting.
Speaker Change: Okay, great. And let me reformulate my first question because I butchered it. The exposure that you have there, even though it's apples to oranges, to the two cents that you talked about.
Speaker Change: Does it give you any pause at all in this environment, and does it lead you to think more about more in the way of built the suits versus speculative development? Again, is any of that sort of entering your...
Your mind at this point. [inaudible]
So we are... [inaudible]
Speaker Change: We are in a place where we will execute on start again, where the markets are strong and where there's unmet demand in those markets. In terms of volume,
Speaker Change: Okay, we're not going to get into a position where we would somehow impair our balance sheet.
for otherwise being a rough capital position. [inaudible]
Speaker Change: Hey, Rich, the other thing I'd add more, maybe more granular to your question is, as you look at each of those projects, we're all designed for multi-tenant as well as single-tenant so we have a lot of flexibility, so it's not a binary output.
Speaker Change: Okay, fair enough. Thank you very much. We're always open for business on the build to suit front. You've seen us execute on those and we have some in the hopper house, so. Okay, thank you.
https://www.youtube.com
Thank you.
Speaker Change: And the next question comes from Mike Mueller with JP Morgan, please go ahead.
Mike Mueller: Yeah, hi, and if there's a lot of background noise here, I apologize. I'm not in like an ideal situation for this, but um...
Mike Mueller: Two questions on development. One, number one, for the land parcel that you bought. How do you think pricing has changed for that over the past year or so? And then the second question is...
Mike Mueller: Was there any consideration to pausing the 2Q development starts just given what's been going on in the past couple of weeks or do you think you know they just made sense regardless of the current environment. Yeah.
Mike Mueller: And as we talked about earlier, we had to work through some prolonged rezoning and entitlement in agency approvals.
Mike Mueller: And these two projects are not necessarily going to be trade-related tendencies These are going to be smaller tenants [inaudible]
Local Regional Guys, and so, yeah, that's. [inaudible]
[inaudible]
Anything else like?
Finally, we last night.
Thank you.
Speaker Change: And the next question comes from Vince Tibone with Green Street Advisors. Please go ahead.
Vince Tabone: Could you just clarify the cap rate on the Phoenix Acquisitions? In the 6.4 cap rate based on the net purchase price of 120 or the gross purchase price of 140 if you were to add back the incentive fees you would have earned. Imagine otherwise.
Vince Tabone: And so we basically had third party, market opinion on the asset, and then the resulting 6.4 is net of our profit, JV profit.
Vince Tabone: I think that's what I figured. Are you able to share kind of when that five-three valuation would set, just given all volatility in terms of a, you know, re-drewed other deals?
Vince Tabone: Sure, when that valuation was said, it was Q1 of this year, we had a good amount of comms that point into a valuation or a fight.
Vince Tabone: 525CAP, and it's really hard to tell, going forward on this situation with tariffs, there's very few trades to market it.
Vince Tabone: But again, this is a, you know, when you look at the valuation of Q1, there's a lot of long-term investors who are investing in Phoenix today at high-force low bias, because of, you know, the location of the asset and the market. [inaudible]
Speaker Change: I think it's safe to say based on the trading environment a month ago, the market clearing cap rate was five and a quarter. Yeah, absolutely. So that's pretty recent, Vince.
Yeah, no, that's helpful. Um.
Speaker Change: And then just switching gears to the development, both the projects you announced seem to care to smaller tenants, multiple tenants, more sweet sizes.
Speaker Change: Were those, you know, just more kind of idiosyncratic, or is this, you know, potentially his first industrial doing, you know, going to pursue more light industrial development, you know, going forward, the maybe hat, you know, the company has historically.
Speaker Change: No, I think it's first of all we always try to deliver the size and amenities to the market that are going to meet the deepest part of the demand in that market.
Speaker Change: These particular submarkets are suited to this kind of demand and that's really what drives it. We're going to continue to...
Speaker Change: to do that across our 15 target markets and sometimes that's going to mean a hundred thousand feet and sometimes it's going to mean a million feet. Now, this is not light industrial space. You mentioned that. It's...
So, uh...
Speaker Change: Maybe you're using that term just to reflect the size, but it's not light industrial. You know,
Speaker Change: Also, just to add, we actually over invest in some of our product, give you an example for the 175,000 footer, which is the last building on a fully inspired or 1.2 buildings, which comprise five buildings. [inaudible]
Speaker Change: There are fully least buildings exceeding single tenet that exceeding 175. The reason we always move the tenet designer buildings is for future proofing.
Speaker Change: and added flexibility. And you know what happens is that as we have the highest functional building there and we can demise of multiple standards, that actually increases the functionality of the building. [inaudible]
No, thank you for clarifying that, that's helpful. Appreciate it [inaudible]
Brendan Lynch: And the next question comes from Brendan Lynch. Which part please, please go ahead.
Brendan Lynch: Great, thanks for taking my question. There are some press reports about Amazon having a $15 billion expansion plan.
Brendan Lynch: I wonder if you're seeing any difference in their approach to requesting RFPs or if they're doing anything different than they had in the past, and if you get any sense that maybe they're changing their approach to warehousing, perhaps like bringing more capacity in-house.
So they want to fulfill same day? [inaudible]
Brendan Lynch: So they're very focused on that and that's what this big investment that you've read about is about.
Brendan Lynch: You might recall a few, a number of years ago, they did a similar thing looking at multi-story . . .
Brendan Lynch: and put it out to bid. We'll see what they get back on this in terms of economics, whether they like it or not. But the thrust for this is just to build out their same day delivery capability. We'll see what they get back on this in terms of economics, whether they like it or not.
Brendan Lynch: Brenda, this is Peter, the other thing I'd add is we are seeing them very active in several markets today.
Brendan Lynch: And that's just the inclusive leaping space and not actually having, you know, doing a financial transaction just like the 15 billion that you mentioned.
Speaker Change: Okay, great. That's helpful. Maybe a second question. Can you talk us through what is the minimum percent of rent that you'd ideally like to drive in any of your given markets to kind of drive some of the local scale that you've talked about in the past? Yeah, that's right.
[inaudible]
Speaker Change: Fort South Florida is a great example. We had maybe 1% of our space there, and you know that's heading to double digits, and it's because it's a great market with...
Speaker Change: Obviously natural barriers to entry with the Atlantic on one side and the Everglades on the other. [inaudible] I'm sorry, I'm sorry, I'm sorry
Thank you.
Speaker Change: So no, we don't have a minimum now. We have one building in Salt Lake. I wouldn't say that that's a primary market for us, but we really like the building so we're keeping it. So we do want to have some kind of critical mass wherever we go. So, bye.
Speaker Change: We don't have a minimum percentage target for the portfolio allocation. Also just to add to what the Peter said, you know, we also mentioned skill in terms of our organizational capabilities. All of the 15 target markets, we have full management, asset management, leasing, development and acquisition abilities. Thank you.
Great. Thank you for the call.
Caitlin Burrows: And the next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows: Hi again. Just back to the developments in land acquisition. Maybe this is just a question that's not for now, but I was curious so figured I would ask. So you mentioned on that silly project how the land value probably doubled over the past few years. So whether it's that one in particular or just...
Caitlin Burrows: A general example. Can you go through how that land purchase works and that you can agree to a price being contract for a few years? Maybe the market changes, but then the terms don't change. It seems like it works out great for you. So I'm just wondering what indicates the timing of closing in that sort of situation? Is it up to you? Part of the original agreement? Is it more of like an option? I guess I'm wondering also like how the seller agrees to that seeming uncertain situation. So I'm just wondering, what's going on here? What's going on here? What's going on here?
Vince Tabone: So Caitlin, our local team, this is our expertise, and this was an off-market deal with a relationship that we cultivated.
Caitlin Burrows: with the owner of the property, and that's typically how we like to approach it where we buy subject to getting all the entitlements indeed risk that process.
Caitlin Burrows: It took longer and we were able to negotiate some extensions as well. So I give a lot of kudos to our team on how they structure that.
Got it. Okay, that makes sense. Thanks
Caitlin Burrows: This includes our question and the interest session. I would like to turn the conference back over to Peter Bacilli for any closing remarks.
Peter Baccile: Thank you, operator, and thanks to everyone for participating on our call today. If you have any follow-ups from the call, please reach out to Art, Scott, or me.
Have a great weekend. Thank you.