Q2 2025 First Industrial Realty Trust Inc Earnings Call
Good day and welcome to the first industrial Realty. Trust Inc, second quarter 2025 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.
To ask a question, you may press star then 1 on your telephone keypad to withdraw your question. Please. Press star then 2
Please note this event is being recorded.
I would now like to turn the conference over to Art, Harmon, senior vice president of investor relations and marketing. Please go ahead.
Thank you, Michael. Hello everybody and welcome to our call. Before we discuss our second quarter, 2025 results and our updated 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, today's statements may be time-sensitive and accurate only, as of today's date. July 17th 2025. We assume no obligation to update our statements or the other information. We provide
Factors. Which could cause this are described in our 10K 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 at first industrial.com under the investors table.
Speaker Change: Our call Will begin with remarks by Peter bacilli, our president and chief executive officer and Scott musil, our Chief Financial Officer after which we'll open it up for your questions. Also with us today are JoJo, Yap Chief investment officer Peter Schultz, Executive Vice President, Christian Schneider, Executive Vice, President of Operations. And Bob Walter Executive Vice President of capital markets in Asset Management. Now, let me hand the call over to Pete.
Peter Bacilli: Thank you, art, and thank you all for joining us today.
Speaker Change: Our portfolio.
Speaker Change: continues to perform well producing strong, cash rental rate growth with a solid pace of renewals
Speaker Change: Tenant leasing activity and Investments to support New Growth. Continue to move at a deliberate pace.
Speaker Change: the uncertainty around terrorists, whether they will be applied where, and when and to what degree continues to dampen momentum around decision making
Speaker Change: That said, we have a couple of success stories to share in the form of new development, leases that I will review shortly.
Speaker Change: As we said on prior calls, a positive for our business is with new starts at a 10-year low.
even with modest, net absorption, the available alternatives for new class, A Space continue to diminish
Speaker Change: This trend is reflected in the most recent metrics on the broad industrial Market reported by coaster.
Vacancy and Tier 1 US markets with 6.3%. At the end of the second quarter and up 30 basis points compared to the prior quarter.
Speaker Change: On the demand side according to co-star. Net absorption year-to-date totaled. 16 million, 16 million square feet, nationally and 5 million square feet in our Target markets.
Speaker Change: We should also point out that there is a wide variation in reported net absorption depending upon the source you use year to date, net absorption ranges from negative -4 million square ft to positive 63 million square ft.
Speaker Change: Nationally, new construction start by um with 62 million square feet in the second quarter versus 66 million in the first quarter of 2025 and 72%, lower than the peak of third quarter of 2022.
In our 15 Target markets. New starts were 37 million square, ft and completions were 38 million.
Speaker Change: Space under construction totals, 204 million square ft and that is 42% pre-release.
Speaker Change: For our portfolio standpoint. Our in-service occupancy at quarter end was 94.2% in line with our expectations reflecting, the known 708,000 square foot, move out in central Pennsylvania in the impact of 2 developments placed in service, partially offset, by some new Leasing.
We've now taken care of 88% of our 2025 rollovers by square footage.
Speaker Change: Our overall cash rental rate, increase for new and renewal leasing is 33%. And if you exclude, the large fixed rate, renewal in Central PA, we previously disclosed, the cash rental rate increase is 38%
this puts us on track to achieve our overall cash rental rate growth, expectations of
Speaker Change: 30 to 40% and 35 to 45% excluding the fixed rate renewal.
Moving now to development.
Speaker Change: We are pleased to report that after we issued our press release. We leased the remaining 501,000 Square ft of the 968,000 square foot building in our Camelback 303 joint venture in Phoenix.
Speaker Change: That brings the entire 3 building 1.8 million square foot project to 100% lease.
Speaker Change: Per our press release. We also least 58,000 Square ft at our first Loop project in Orlando.
Speaker Change: As discussed on our last call for underway on 2, new starts in the quarter.
Speaker Change: The first is a 176,000 square foot facility at first Park 121 in Northwest Dallas.
The second is a 226,000 square footer at our first Park Newcastle project in the Philadelphia Market.
Estimated investment for both of these projects is 54 million with Target, cash deals of approximately 8% for each.
Speaker Change: For both of these opportunities are located in infill locations with low submarket, vacancies and Target the 50 to 100,000 square foot tenant segments.
Returning to our Capital markets activity, we reached 2 important Milestones during the quarter. First, we are upgraded by fytch to triple V plus in early. May that upgrade was timely as shortly thereafter. We launched our first public Bond offerings since 2007 in the form of 450 million of senior unsecured notes,
Speaker Change: a Koopa at a coupon rate of 5 and a quarter percent demand from fixed income, investors was strong and we appreciate their support for the offering.
Let me conclude by saying, thank you to my teammates around the country, who are executing on our plan and taking care of our customers.
Speaker Change: With that, I'll turn it over to the sky. Thanks Peter, let me recap our results for the quarter. They refunds from operations where a 76 cents per fully diluted share, compared to 66 cents per share in 2q 2024.
Our cash seems to win a wide growth for the quarter. Excluding termination fees was 8.7%, primarily driven by increases in rental rates and new and renewal Leasing and contractual rent bumps partially offset by lower average occupancy.
Speaker Change: We finished the quarter with in-service occupancy of 94.2% down 110 basis, points from the quarter.
Speaker Change: Peter noted our occupancy change, reflects the impact of the known, move out in central, Pennsylvania and 2 developments entering the inservice pool offset in part by some new Leasing.
Speaker Change: Summarizing our leasing activity during the quarter approximately 2.5 billion, Square ft of leases commenced.
Speaker Change: Of these approximately 400,000. Renew 2.1 million were renewals. And 100,000 were for developments, and acquisition with Lisa.
On the capital side is Peter, noted we were very pleased with our return to the public bond market for the first time. Since 2007, our 450 million dollar unsecured notes issued in this offering of maturing January 2031 and carry a coupon rate of 5.25%.
We remain strongly positioned on the Capitol Front with our next maturity coming in 2027, assuming all available extension options are exercised on 1 of our bank loans.
Speaker Change: We would like to thank our banking partners for their outstanding execution and support in this transaction.
Speaker Change: Now, moving on to our guidance.
Speaker Change: Our guidance range for neighborhood, ffo for the year remains $2.92 per share at the midpoint with the range narrowed to $2.88 to $2.96 per share.
Speaker Change: Our assumptions are as follows.
Speaker Change: Average quarter end in service, occupancy of 95% to 96% this range, reflects approximately 1.5 million square feet of development, leasing assumed to our in the fourth quarter of this year.
Speaker Change: Cash same store, noi growth before termination fees of 6 to 7%.
Speaker Change: As a reminder, our same store guidance, excludes the impact of the accelerated recognition of a tenant Improvement reimbursement in 2024,
Speaker Change: Guidance includes the anticipated 2025 costs related to our completed and under construction developments at June 30th.
Speaker Change: For the full year, 2025 we expect to capitalize about 9 cents per share of Interest.
Speaker Change: And our GNA expense guidance range is 40.5 to 41.5 million. Now, let me turn it back over to Peter.
Thanks Scott.
Our Diversified operating portfolio continues to perform strongly generating cash, rental rate growth on new and renewal leasing amongst the top performers in our sector.
When the Tariff picture becomes more clear, we expect improved confidence, more timely decision, making and an increase of investments in New Growth initiatives.
Speaker Change: We remain focused on securing and serving existing and new customers to drive long-term cash flow growth.
With that, we're ready to open it up for questions.
Michael: Michael. Now, begin the question and answer session.
Press Start. Then 2 at this time, we will pause momentarily to assemble our roster.
And we also ask that you limit yourselves to 1 question and 1 follow-up.
Speaker Change: In your first question comes from Rob Stevenson with Janie.
Speaker Change: Please go ahead.
guys, um, Peter incremental development starts from here more or less attractive today than they were 3 or 6 months ago and how is construction pricing, um, you know, in terms of flavor materials today versus
Speaker Change: In past.
Speaker Change: take the first part of that Joe, you can talk about construction pricing,
Speaker Change: Uh, like we said on the last call, you know, in order to really get deeper into new starts, we'd like to see more consistent developmentally signings.
Speaker Change: There's a lot of activity in the market. Um, the the amount of gross leasing activity. In the first half of the year was pretty strong relative to 2024.
Speaker Change: But we need to see more investment in New Growth more take up of development space. Uh, as you've seen, we have uh, executed a new starts in certain markets and in those markets that we think continue to show good fundamentals and where there's demand that is going unmet will continue to execute starts there. Joe, do you want to talk about the cost? Yes, uh, First Construction cost uh, from the second half of last year costs are down 5-10% depending upon the market from the start of the year. The adjustable construction cost is
It's been pretty flat.
Speaker Change: Um, the contractor is have been more aggressive. So the more their margins have compressed
sight increase in construction costs.
Speaker Change: Are keeping an eye on steel. There's some talk that steal might go up, but we haven't seen it contractors though. Are able to keep their pricing for 30 to 60 days, which is good. Uh, and if you you probably all follow this, uh, there's been a tariff increase on Topper. So, uh, you know, you're looking at an electrical, uh, the electrical supply to switch gear. And, uh, but these, uh, items have a small impact on the cost, uh, maybe total charge of cost under 1%.
Speaker Change: Okay, that's helpful. And then Scott, anything abnormal or not recurring in the second quarter, um, ffo or anything expected to be sequentially. A drag in the back half of the year. Just trying to figure out you guys, did 76 cents and just doing a flat 76 and 76 in the next 2 quarters, put you at the very high end of your current guidance range and just wanted to uh, get a feel for what's coming up here.
So I I would say in the third and fourth quarter of recognizing more interest expense than in in the second quarter and Rob that's driven by 2 items. We have to continue to fund our development pipeline that's about 110 million dollars of spend for the last 6 months of the year. So that's driving interest expense higher. Also, the Met Bond offering was slightly diluted
Speaker Change: We use the funds to pay down our line of credit uh, in the line of credit had a lower interest rate than what the what the bond offering rate was. So on the back end of the year, you're going to see a little bit higher interest expense, which will knock down our ffo, in the third and fourth quarter.
Speaker Change: Okay, that's helpful, guys. Thanks appreciate the time this morning.
Vic: And your next question comes from Vic, vicram meheula with meizuo please go ahead.
Vic: Uh, morning, thanks for being the question. I just want to, um, understand the the new leads you just announced that was not
Speaker Change: In the 1.6 million Target. Um, and if if you can just sort of maybe walk us through some of the bigger pieces in the 1.6, like how how do the prospects look for CQ and 4 q?
Speaker Change: Here you want to talk about what's happening in your markets? Sure on the 1.6 million square feet, uh, that we have in our guidance at year end. The largest component of that is our building at first Aurora Commerce Center in Denver,
Speaker Change: We continue to have active prospects for all or portions of the building.
Uh, in fact, a couple of the prospects have a need for rail, which we can accommodate on this site.
Speaker Change: Difficult to Peg, exactly when uh, those get signed, but we continue to be pleased with the level of activity.
Remaining in the west would be under the west region. It would be 120,000 square foot in Chicago. We like the, like East Side e, we're be, we've been getting tours and we're responding to requests for proposals but uh don't have at least to announce yet.
Okay. And then um, can you just clarify the 2 cent impact? You had mentioned prior. Like, if you don't do any of the 1.6, is that still, uh, the 2 cents is still in the guide or have you pushed that out? And then and so, if you could just clarify, that new 500,000 square foot, lease, that was not part of the original 1.6.
Speaker Change: Well, with with with the good news is with the benefit of of that lease that Peter just announced in the call coupled with, you know, the lease that we didn't first Loop earlier than what we projected Vic from that that 2 cents a share is now 0 cents a share. So what does that mean the 1.5 million square feet of development leasing that we still have in our guide and I'll also throw in the 708,000 square foot on central Pennsylvania. Now, effectively there are, uh, that have a 1231 lease up. So they're assumed to be leased up on 1231.
Speaker Change: Great. Thank you.
Speaker Change: In the next question. Comes from Nick delman with beard. Please go ahead.
Nick Delman: Hey, following up, maybe I'm at Camelback and the lease up there is the plan there to kind of take that out like you did similar in 1 Q.
Nick Delman: Make the plan there is to, uh, like every time is to maximize value. We have a couple of executions we can take into Market. Uh, we can, uh, acquire the product we can, uh, look at the holding it pretty all about sensor. Again about maximizing value. Also, we're very pleased about that execution because uh, that JB project delivers uh, returns exceeding, our expectations. I also want to remind you, there's an another 71 Acres left with great land freeway Frontage and that we're focused on getting maximized value there, either. Developing it either doing a higher and better use deal like we've done before and all of that.
Speaker Change: maybe, maybe Doug tailing on that, just on you guys have outlined, maybe the potential opportunity for
Speaker Change: Monetizing some of the land Banker existing portfolio for data centers. I guess, is there any update there or the the size or scope of what that opportunity set is?
Not really um that's a pretty big project. It's going to take some time. Uh we have to look into power of course. Without that you really don't have much to talk about and these things are going to. They're going to take several months to get to the answers on some of this.
That's it for me. Thank you.
And your next question comes from Craig mailman with City. Please go ahead.
Hey, good morning. Um
Speaker Change: Peter, maybe, can you just give some context around? Um, the 5001000 square foot lease? Is that was that a, a longer kind of burn on the demand there? Is that more recent, um, just to give us a sense of, you know, how quickly some of these can come together. You know, having some bigger ones, like, first Aurora left to left to take care of
Speaker Change: Yeah, sure, that was on the shorter. End of the spectrum. Joe, you want to talk about that? Sure, sure. Uh, basically the building was just completed. Uh, so basically, the the, uh, building was released at completion. Uh Craig, we had a number of showings, as you may recall too, that building has been 48% least. So we've leased already basically half the building. Uh and then so we had continued showing some remaining
Speaker Change: Vacancy and uh, we actually had 3 interested parties, uh, in this party, wanted to uh, really they needed to grow and they wanted to control the space. Pretty quick, tell them how long from beginning to now that discussion. Uh, the discussion, uh, I would say would be about 45 days.
Speaker Change: Um, and when does that work commenced?
Speaker Change: Right now, yeah, right now. Oh, immediately. Okay. Um, yeah. Immediately. And then
Nick Delman: okay and then just I I guess more, broadly, Peter you're you're
Aurora has been 1. That's been vacant for 2 years. Like it's are some of these
No 1 call them stubborn vacancies, but kind of longer tailed lease UPS is are these in your opinion? Like is it a a leasing strategy issue? Is it a product issue or is it just a market issue? Um, that you guys are contending with on some of these that are taking a little bit longer to lease up.
Nick Delman: It's a demand side issue. It's finding the right fit at the right time for the particular uh uh candidate or potential candidate.
Nick Delman: Um, you know, people make decisions this particular tenant that took the Phoenix property or the other half of the Phoenix property um made some business decisions that cause them to need it pretty quickly.
Nick Delman: Uh it's really just finding the right fit Greg and having having the right size space at the right time. And so, you know, we've had as you point out Endeavor, uh, several Tenants, come by there and and have and actually you've traded proposals with several tenants,
Nick Delman: um,
Speaker Change: Look, there's definitely pent up demand, there's frustration to some degree.
Uh, the Tariff thing has really caused people to pause. And yet, there are also other tenants who are less tariff sensitive, who are going to do deals. And, and that in fact, include the 1 that signed the lease in Phoenix
Great. Thank you.
Blaine Heck: And your next question comes from Blaine. Heck with Wells Fargo please go ahead.
Blaine Heck: Great. Thanks. Good morning. Um,
Blaine Heck: So 1 of your competitors mentioned, that their bill to suit pipeline is very strong. I guess. Are you seeing Demand on that side as well? Uh what's your general appetite for Bill to suits and how do those returns compared with what you might be able to generate through spec development?
Blaine Heck: Yeah, the returns are always going to be a little bit lower, unless there's a special circumstance.
Uh, we do execute on uh, on the bill to suit, you you see us do that, but it's also not ever been a very high volume component of our business. Um uh, our platform is set up and our land housings are such that we're more targeted to the speculative development business, but we do like to build the suit business depending on what we can earn. And uh obviously we're trying to maximize returns for shareholders so we're going to evaluate the kinds of returns. We can earn on a bill to sue relative to the risk and taking on a speculative project risk and return of taking on a speculative impressive.
Great, that's helpful. And then maybe a little bit more high level, it seems as though there are a few different strategies we're seeing from tenants uh, those that are continuing on with their business plans and leasing despite the uncertainty. You've got those that are strategizing more but still in the market. Uh, but taking a little bit longer to make decisions and those that are are completely on pause and and waiting for clarity. I guess, would you agree with that characterization? And and how would you kind of characterize the relative size of each of those groups today in your markets?
Blaine Heck: I would agree with it. Um, we've had some conversations, we're close to, you know, trading paper and they've said Gee, we want your building but we've just got word from HQ that we have to pause now and that was a, you know, a post April 2nd.
So there's definitely a large group there. There is definitely a large group of window shop because they know they need space. They're just not sure when
Blaine Heck: and then there are the ones who are a bit more bold and and and some of them who say, hey, we see what Amazon is doing spending 15 or at least they're announcing to spend 15 billion dollars on
On new centers largely in rural areas and they're going to build out their same day, delivery from the city to the suburbs to to the rural areas and they can't afford to sit and watch. So they're going to go ahead and sign Lisa. So I think you outlined it pretty well. You've got tenants kind of active across the Spectrum in terms of of objectives.
And do you think those those, uh, different strategies are, are roughly equal in size? Or would you say, you know, 1 or another are are more prominent here?
Blaine Heck: Okay.
Blaine Heck: Fair enough. Thank you guys.
Caitlyn Burroughs: In your next question, custom Caitlyn Burroughs with Goldman Sachs. Please go ahead.
Caitlyn Burroughs: Agencies, um, like have you seen this work in some places, but not others?
Speaker Change: You know, uh, Caitlyn. We'd really rather, you know. First of all, we focus on the npv of that discussion if you want to call it. That there are lots of different inputs. Uh, certainly raises 1, uh, TI's, free rent, and and move in dates. Some people want to sign leases and not move in for 6 or 8 months.
Speaker Change: So there's a lot of variable there. Um lowering the rate doesn't create new demand and uh it's really you know then you then you subject yourself to a big hit to that and the npv model. And so that's always the thing. You try to hold steady on his rate.
Speaker Change: Got it. Um, okay. And then just on the decision to issue the unsecured bonds, I was wondering if you guys could go through, um, I don't think you had talked about it before but maybe you had, but, um, kind of like, what drove that is it based on your size today, efficiency of the market, um, that you're not doing dispositions or like what was different now versus the last 18 or so years.
Speaker Change: Sure Caitlyn, it's Scott. Um, I I think we we saw that we had a path to Be A Serial issuer in the public bond market. We've got maturities coming up the next 5 years. And you, if you look over the majority of the years in the last 20 years, the pricing in the public bond market is is inside of this pricing and uh in the private placement Market from a spread point of view. So that that was the rationale for doing it as far as the home.
Speaker Change: For the offering offering, we had about $500 million in our line of credit. So we utilized the proceeds to pay down our line.
Got it.
Speaker Change: Like what was different now versus like 4 years ago or something to not do it, then any comments on that? We we have the well now we if you look at our maturity schedule over the next 5 years, we've got enough maturities to be a, a somewhat of a serial issue, we're in the public bond market which is what the investor base wants to see and 4 years ago. We just didn't you know we might if we did something then we might not have been back to the market for a couple of years and the public Bond investors like you to be back in a more reoccurring basis and decides that the offering back 4 years ago was smaller than it is today. It wasn't, it wasn't benchmarked size. And in some cases the private place in Arco was cheaper actually than the public market, 17 and 18.
Speaker Change: Yep.
Speaker Change: Got it, okay. Thanks.
Speaker Change: And your next question comes from, Jessica Zhang with Green Street. Please go ahead.
Jessica Zhang: Uh, good morning. Um, I was wondering if you have any insights around how private industrial developers or behaving in the current environment. Um, I just wonder if
Jessica Zhang: You know, the firms that are sitting on on that aspect developments. Are they, uh, you know, start to offer, uh, elevated concession packages or are they materially cutting, uh, the safe space runs to try to secure a tenant?
Either in Georgia, you guys want to talk about what you're saying. Sure, I would say, generally speaking, where there are more choices you've seen, concessions, dripped up,
Jessica Zhang: uh,
Speaker Change: because tenants have a lot of choices. So, developers are are responding in, in that way, um, but I wouldn't say there's a material difference, uh, across the landscape for developers JoJo. Yes, uh, I would agree and then it starts starts their cautious. Uh, hard to get that. That is expensive, uh, and they're sitting a lot of developers are sitting on their land because they've got still some vacancies on their new developments.
Speaker Change: Okay, thank you.
Speaker Change: And your next question comes from Nick ulo with Scotia Bank, please go ahead.
Victor speaker: Hello. This is Victor speaker on with uh, Niko, uh, now that the focus is shifted to addressing 26, 27 expirations. Uh, we see that expiring rents are rather on the lower end for 266 and 27 as well are those assets indicators, and comparable to the types of assets, you lease in 2025, just trying to understand here, the demand and potential rent spread.
Victor speaker: so asking about 26 and 27 at expirations and how the rent uh Stack Up
Victor speaker: Well, so so 26 compared to 25. I, I would say.
Victor speaker: Pretty consistent. But in 26, we do have a higher proportion of expirations, uh, in Dallas and Atlanta, which have been very good markets over the last several years. So I would say that's, um, pretty much the difference between 26 and 25, 27, I don't know. Right off hand, I can get back to you after the call.
Victor speaker: Thank you. And then uh, quick follow up on your uh current um development leasing any types of of tenants that you might highlight that are that having a kind of higher interest in in your assets at this point? Or there is no kind of particular Trend, we can highlight
I would say generally we're seeing a lot of activity from food and beverage and 3pls uh some Automotive, some Manufacturing.
Speaker Change: Uh, some consumer products, e-commerce continues to be very busy as Peter mentioned, a couple of minutes ago. Amazon in particular, has a range of requirements in a number of markets, uh, they're very very active, so activity, overall continues to be pretty broad-based. We're pleased with the breadth of that.
Speaker Change: Got it. Thank you.
Speaker Change: again, if you have a question, please press star then 1
Speaker Change: And your next question comes from Brendan Lynch with Barclays. Please go ahead.
Brendan Lynch: Great. Thanks for taking my questions. You mentioned the interest rate drag on ffo in the back half. Can you also discuss the drag on same store that's implied in guidance, um, for for the second half as well.
Yeah, if you look at the same sort, you know, kind of the second half, that's primarily due to, you know, lower average occupancy in the second half of the year compared to the first half of the year. You know, a little bit less contribution of the cash rental rate increases. And then we have some, uh, assuming you know, increased free rent concessions on, uh, on releasing. So, that's really. What's driving? That uh, you're a little bit lower in the second half of the year.
Speaker Change: Okay. Thanks, that's helpful and can you also discuss what what, um, dictates when you grant a fixed rate, renewal option for tenants, where does that kind of fall in your list of priorities when negotiating a lease and it should, we expect any more of these in the remainder of 25 or to 26? It's not on page 1 of the list, let's put it that way. It's obviously, you'd rather not do that, but sometimes, there is a benefit that particular case, very large tenant, very uh, good credit and it makes sense for that deal and and Brandon the timing of that that was done in 2017 as part of a lease renewal at that point. So it should you should not take that as reflection of market conditions in the current environment. Yeah, we know it rarely very rarely
Brendan Lynch: Okay, very good. Thank you.
Speaker Change: And your next question comes from Todd Thomas with keybanc capital markets, please go ahead.
Todd Thomas: Hi, thanks. Um, first question, just from from your comments earlier around the Camelbak lease. Um, you know, you mentioned that a replaced the lease up assumptions on the 1.6 million square feet that you had in Guidance, the, the 2 cents. Um, and and that you're now assuming a 1231 lease up, essentially. But, um, 2 questions, do you actually feel different, um, or less confident in the timing of the lease up on that 1.6 million square foot bucket? Any any different than you did last quarter? And then, you know, I suspect this, um, means that the 95 to 96% occupancy assumptions. Um, you know, if you're pushing out some of that leasing that that should sort of be disregarded, I guess to some extent as it pertains to 25. Um, you know, we can do the math but just wanted to ask about that. Also, since this, you know, sort of hit after the release, it sounds like
Speaker Change: Scott. So for the um, you know, the occupancy assumptions, don't change Todd because both the 1.65 million actually, and and also that includes the 708,000 to resume the lease up on 12:31. So that, that impacts, uh, positively impacts our 4 quarter average on that. And I'm sorry, what was the other question you had? I think I took care of the last part first. What whether or not, you actually feel different, um, at all around the
Timing of that. 1.6 million square foot lease up right Camelback. Um, you know, helps in in the sense that it, you know, your your kind of pushing back that assumption, but, um, you know, in terms of traffic and, you know, the leasing, uh, prospects that you're working on to, to to, you know, feel any different than you did last quarter.
Well look we've got 5 and a half months left in the year traffic around. Those assets is decent. They happen to be uh most of them happen to be at this someone earlier pointed out that this is available for a while. So the risk of getting those done is not zero.
Uh, so generally, we felt that it was more reflective of the probability uh to push those to the end of the year.
Speaker Change: Okay, got it.
Michael Mohler: Question comes from Michael Mohler with JP Morgan. Please go ahead.
Michael Mohler: Yeah. Hi, uh, 2 questions and 1's. Probably like really dumb clarification question, but on the first 1, um, was there anything to note out of the ordinary with either, you know, property operating expenses or recoveries this quarter? Because it just looks like the ratio the expense ratios were
Michael Mohler: Kind of lighter compared to where they've been running and especially compared to last year and stuff.
Michael Mohler: Like, it's Scott. I I was explaining it this way. Um, it has to do with our 10 year policy related to equity based compensation. If you remember in the first quarter, our GNA was a lot higher because of that. 10 year based policy, what does that mean? Gaap accounting requires us to expensively Awards, issued to folks, that reach a certain point of age and have a certain point of service in accordance with our policy.
Michael Mohler: You saw that, it it increased our GNA that quarter. It also increases our property expenses because our people that manage our properties. Their compensation is reflected down in that line item. So what happens is, it causes a depressed margin in the first quarter. And then in the second, third and fourth quarter of the margins are elevated. And if you were to look back in the first quarter of 24 and compare it to the following quarters that same Dynamic happened. And my bet is, if you look back further years, that Dynamic has happened. So I would say that's that's the cause of the the differential in margins between 1 Q, 255 and 2 q25.
Speaker Change: Got it. Okay. Yeah. I just thought it was a little bit bigger even compared to last year, but maybe not in that context. And then the second 1, and this is kind of the Dumber question when, when you talk about the development leasing because in my mind, I think development external growth development pipeline when I think of same story, I think of occupancy. The inservice portfolio.
Speaker Change: How much of this like is all the million 6 development leasing you're talking about doing or the million 5 is all that related to the in-service portfolio. So it just happens to be
Speaker Change: um, stuff that you developed at some point in time, that is in there. So, you know, you can have development leasing, that's impacting your occupancy guidance for the inservice portfolio, or as a portion of that kind of true development, leasing where it's not in the in service portfolio. It just, it's just getting a little kind of confusing in my from my standpoint.
Speaker Change: Like, I mean, the way that we look at it, it it relates to what's already in service, that's the 1.65 million. And if you want to walk through those projects after the call, I'd be willing. Uh, definitely be willing to do so. Now, life isn't perfect and development leasing though, we saw that last year as well, there might be 300,000 square feet of projects that we've completed that not aren't in service that our inner guidance. That we lease up this year, that have a positive impact that make up maybe for not leasing up some of the 1.5 million square feet. But what we have in guidance is in service and again, I'd be glad to walk through the projects with you after the call. If you'd like to
Speaker Change: Got it. Uh, that, that helps appreciate it. Thank you.
Speaker Change: In your next question is a follow-up from Caitlyn Burroughs with Goldman Sachs. Please go ahead.
Caitlyn Burroughs: Oh, hi again. Um, I feel like there hasn't been much talk about specific markets. So I figured I would follow up on it. Um, could you talk a little bit first about SoCal, how you saw it evolved during the quarter, maybe from a demand perspective and on the rent side and whether there are any differences to call out by submarkets.
Caitlyn Burroughs: No. No, I sure. Okay then let's start with the rest rest. Uh I would say the uh from q1 to Q2 to uh there was 5% decline in uh Market rents.
Caitlyn Burroughs: Uh in terms of but it's still rents today are probably about 100% or double uh the preco address. So that's the way we look at it. So if you look at it it's about 13 and a half 14% kegger
Now, let's move on to activity, uh, gross leasing activity. Uh in Q2 was kind of comparable the q1
Caitlyn Burroughs: Uh, vacancy increased about 10 basis points in both. IE West, and ie East.
Caitlyn Burroughs: Um IE West is a little bit lower uh lower vacancy. Rate is performing better than IE East.
Caitlyn Burroughs: In terms of net absorption is somewhat flat. Uh because that despite the the positive gross leasing activity, there's been a little bit higher, give back of space.
Caitlyn Burroughs: IE core because we don't invest in the high desert, I in North, Which is less than 4% of the market. Anyway, I hope that helps in terms of rents and absorption and activity.
Uh it does thanks and then I guess as you think about the other markets you guys are in are there any to call out as being, uh, strongest versus weakest today?
Kayla's Peter Schultz, I would say, Nashville continues to be among the strongest uh, in the country. Uh, little new Supply. Good demand. Rights continues to grow up.
Caitlyn Burroughs: Uh, we've seen some increased activity in Florida uh, recently. Uh, so all the markets are doing pretty well but those would be 2 of 2 of the stronger Caitlin. I just had certain sub markets in Dallas and Houston. Uh, we like right now they're doing well,
Caitlyn Burroughs: Thanks.
Speaker Change: This concludes our question and answer session, 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, if you have any follow-ups from our call, please reach out to Art Scott or me.
Caitlyn Burroughs: The conference has now concluded, thank you for attending today's presentation. You may now disconnect