First Industrial Realty Trust, Inc. (NYSE:FR) Q4 2024 Earnings Call Transcript

First Industrial Realty Trust, Inc. (NYSE:FR) Q4 2024 Earnings Call Transcript February 6, 2025

Art Harmon: Good day, and welcome to the First Industrial Realty Trust Inc. Fourth Quarter Results Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist. There will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. 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.

Art Harmon: Thanks a lot, Dave. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2024 results, and our initial guidance for 2025, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management’s expectations, plans, and estimates of our prospects. Today’s statements may be time-sensitive and accurate only as of today’s date, February 6, 2025. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors which could cause this are described in our 10-Ks 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 firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccili, our President and Chief Executive Officer, and Scott Musil, our Chief Financial Officer, after which we’ll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Executive Vice President of Operations, and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me hand it over to Peter.

Peter Baccili: Thank you, Art. Thank you all for joining us today. The First Industrial team wrapped up a successful 2024 highlighted by delivering strong cash rental rate growth on leasing and achieving our second highest volume year for development lease signings since we relaunched our program in 2012. We’re equally excited about the impact this success is having on our 2025 FFO growth. Based on the midpoint of our guidance, we’re expecting to grow FFO approximately 10%. Scott will walk you through the details later when he addresses our guidance. Before getting into specifics of our performance, let me comment on the industrial market fraud. CBREEA reports US industrial market vacancy hit 6.1% at year-end, a 30 basis point rise from Q3 ’24.

New construction start volume is 62% lower than the third quarter 2022 peak with just 43 million square feet breaking ground in Q4 ’24. In our fifteen target markets, space under construction totals 143 million square feet, signaling future quarterly completions could fall well below the 46 million square feet delivered in the fourth quarter of ’24. On the demand side, net absorption nationally was 24 million square feet in the fourth quarter, 15 million of which was in our target markets. With the election behind us, we’re hopeful that this reduction in uncertainty will lead to a stronger commitment to growth investing and in turn, a more consistent pace and development leasing. From a portfolio point of view, we ended the year with in-service occupancy of 96.2% aided by some fourth quarter development leasing, which I will touch upon shortly.

Our team also delivered a cash run rate in which is the second highest in our thirty-year history. This marks back-to-back years of fifty plus percent for this metric. Looking at our 2025 lease expiration, we’re making solid progress and are now through 59% by square footage. Together with new leasing, our cash rental rate increased for leases signed with 2025 commencement date It’s 33%. Excluding the 1.3 million square foot fixed rate renewal in Central Pennsylvania, we discussed on our last call 2025 signed leases to date, had a cash rental rate increase of 42%. For the full year, we expect cash rental rate growth to range from 30% to 40% overall and 35% to 45% excluding the aforementioned Central PA renewal. We ended the fourth quarter on a positive note with about 1 million square feet of signed development leasing, on balance sheet and another 463,000 square feet in our Phoenix joint venture.

On balance sheet, we signed a full building lease for our 542,000 square footer in Nashville, with a repeat customer nine months ahead of the anticipated building completion, We also leased the remaining 350,000 square feet at our first logistics center at 283 building B in Pennsylvania and 100% of our 83,000 square foot First Elm building in the Inland Empire. As I noted at the start of the call, our team delivered an excellent year of development leasing. In total, for 2024, we signed 4.7 million square feet of development leases, inclusive of our joint venture. This compares to a budgeted number of 2.8 million square feet in our original 2024 guidance. Not only were we pleased with the amount of leasing, The signings were broad-based. Representing ten of our fifteen target markets which were Northern and Southern California, Nashville, Central Pennsylvania, Phoenix, Houston, Chicago, Seattle, Miami, and Denver.

Many thanks to our regional teams for this fantastic performance. We’ve also started two new developments which will contribute to our long-term growth. On the heels of the 542,000 square foot lease at our first Rockdale Park in Nashville, started at 317,000 square foot building. Our total projected investment is $33 million. Nashville’s long-term growth drivers and current fundamentals are strong as vacancy stands around 3%, and unleased new supply represents 1.7% of total stock. In the Lehigh Valley in the I-78/81 quarter, we started our first phase at first part 33. There, we’re constructing two buildings totaling 362,000 square feet with a total estimated investment of $63 million. The building sizes and depths will allow us to target the smaller tenant segment, which we believe is underserved by new construction.

As most availabilities are targeting tenants 200,000 square feet and up, The cash yield for each of the fourth quarter starts. Is expected to be north of 7%. We’re also well-positioned for future development opportunities as submarket conditions warrant. In the fourth quarter, we were pleased to close on the final land parcel at our First Park Miami project for $16 million. With this addition, we can now develop an additional 1.1 million square feet of product and what will ultimately be a 2.5 million square foot parking. In total, our land positions across our target markets can accommodate 15 million square feet of growth. Moving now to dispositions. We sold five buildings totaling 214,000 square feet for $25 million the fourth quarter to bring our total for the year to $163 million.

Since 2010, we’ve completed the sale of $2.4 billion of legacy assets achieving portfolio objectives for location, functionality, and growth prospects. Therefore, moving forward, you should assume property sales volume will be lower than prior years. For 2025, we expect asset sales of up to $75 million. Lastly, with respect to our dividend, Given our performance and outlook, our Board of Directors declared a dividend of 44.5 cents per share, This is an increase of 20.3%. Which is aligned with our anticipated cash flow growth. Before I turn it over to Scott, I’d like to express our heartfelt sympathies to the people of Southern California who have been impacted by the wildfires. The physical and emotional destruction is tragic and unprecedented.

And FR will continue to do what we can to support the impacted communities. With respect to our people and properties, we are fortunate and thankful to be able to say our teammates and their families are safe and sound and none of our buildings have been affected. With that, I’ll turn it over to Scott.

Scott Musil: Thanks, Peter. Let me recap our results. Day refunds from operations were $0.71 per fully diluted share, compared to $0.63 per share in 4Q 2023. For the year, NAREIT FFO per fully diluted share grew 8.6% to $2.65 compared to $2.44 in 2023. Our cash same-store NOI growth for the quarter excluding termination fees, was 9.3%. The results in the quarter were primarily driven by increases in rental rates and new and renewal leasing, better rate bumps embedded in our leases, partially offset by higher pre rents. For the full year 2024, cash same-store NOI growth was 8.1% excluding the third quarter 2024 accelerated recognition of a tenant improvement reimbursement in Central Pennsylvania, and a similar accelerated reimbursement in the first quarter of 2023 related to a tenant in Dallas.

We finished the quarter with in-service occupancy of 96.2% up 120 basis points from the third quarter and 70 basis points from year-end 2023. As we stand today, we have approximately 140 basis points lease-up opportunity from developments placed in service 23 in 2024. Summarizing our leasing activity during the fourth quarter, Approximately 1.9 billion square feet of leases commenced Of these, 600,000 were new, 800,000 were renewals, 500,000 were for developments acquisitions with Lisa. Now onto our 2025 initial FFO guidance. Our guidance range for NABRIT FFO is $2.87 to $2.97 per share. At the midpoint of $2.92 per share, this represents a 10% growth rate from 2024. Key assumptions are as follows. An average quarter-end in-service occupancy range 95% to 96%.

This assumes approximately 1.6 million square feet of development leasing during the year the vast majority assumed to occur in the second half. Cash same-store NOI growth before termination fees of 6% to 7%. Note that the same-store guidance excludes the impact of the accelerated recognition of a tenant improvement reimbursement in 2024 related to the aforementioned Central Pennsylvania lease. Guidance includes the anticipated 2025 costs related to our completed and under-construction developments at December 31. For the full year 2025, expect to capitalize about $0.09 per share of interest. And our G and A expense guidance range is $40.5 to $41.5 million. Let me turn it back over to Peter.

Peter Baccili: 2024 was an outstanding year, and I would once again like to extend my thanks to the entire First Industrial team. Your dedication to serving our customers and driving strong future cash flow growth from development leasing and rental rate increases are driving meaningful growth in shareholder value. And I know you share my excitement for the growth opportunities that lie ahead in 2025 and beyond. Operator, with that, we’re ready to open it up for questions.

Q&A Session

Operator: 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 two. Our first question comes from Ki Bin Kim with Truist. Please go ahead.

Ki Bin Kim: Thank you. Good morning. Can we first start off with maybe getting refresh your refreshed views on the Los Angeles and Inland Empire markets and if you’re seeing any green shoots for demand growth?

Jojo Yap: Sergio, you wanna take that? Sure. Sure. I’ll keep in high to Jojo. When you look at post-election, we’ve guided more tours more requests for proposals, So touring activity is up. The in terms in terms of ports, year to date, it’s up 22%. We haven’t seen a big impact of that. Although, as we’ve stated here, we’ve leased first l which is a low coverage site that might have impacted positively Our leasing of that asset We’re not gonna predict, you know, a big move because of the port activity Bank of Thieves did pick up for both LA and IE a little bit. But there’s couple of things that we’re watching closely, and the trend is good. Overall, under construction for LAIE is down. In terms of quarter to quarter. Completions were also down quarter to quarter. I’ll start to significantly doubt. So if that trend continues, and the market continues to absorb what’s been delivered in Q4 2024. Which should be, you know, the market should be firming up.

Ki Bin Kim: Okay. And on your development pipeline, roughly, like, how much square footage are you assuming that you’re leasing up at, I guess, at the midpoint for your guidance, please?

Scott Musil: Sure. It’s Heikki Mid, Scott. We’re assuming 1.6 million square feet of development lease-up. The vast majority of it weighted to the second half of the year.

Ki Bin Kim: Okay. Thank you.

Operator: And our next question comes from Nicholas Yulico with Scotiabank. Please go ahead.

Greg McGinniss: Hi. This is Greg McGinniss. On for Nick. Just hoping you could talk about the Denver market, what you’re seeing on leasing there as occupancy is is ticked down with the with the assets being placed into service there. Any updates on Aurora Commerce Center would be appreciated.

Peter Baccili: Sure, Greg. It’s Peter. So Deborah, as you know, has been working through a little bit of elevated that continues to get leased. Market occupancy improved a little bit. In the fourth quarter, Demand has been okay. Decision making continues to be elongated with some of the tenants or prospective tenants rather in the market. We have seen, as Jojo just commented about Southern California in the last couple of months, an increased level of of urgency and momentum from some tenants. That are that are in the market. But we still clearly have work to do in Denver. But we feel a little bit more optimistic with what we’re seeing today than we felt a good part of last year.

Greg McGinniss: Okay. Thanks. And then with regards to future development, which geographies do you plan on focusing on? Yeah. Just stop there.

Jojo Yap: Sure. We’re not gonna talk about volumes, but the markets right now that we would think about new starts, I’ll just go by state really. Pennsylvania Tech and Florida. Are are the places that we would focus on next.

Greg McGinniss: Okay. And sorry. Just just one final follow-up here. In terms of funding, with the decrease in dispositions, how are you thinking about funding the development?

Scott Musil: It it same formula as the past. We’re expected to spend $220 million and $25 million in development. Excess cash flow sales and borrowings on the line of credit are gonna be the sources.

Greg McGinniss: Thank you.

Operator: And the next question comes from Craig Mailman with Citi. Please go ahead.

Craig Mailman: Hey. Good morning. Scott, on the 1.6 million square feet development leasing embedded in guidance, can you go through maybe how much of that would be, you know, Oh, A portion of that hundred forty basis points of lease-up opportunity versus projects that are currently under construction.

Scott Musil: Let me do a quick calculation. I think it’s gonna be the the vast majority of it. So, Craig, the 1.6 million fee is basically comprised of our developments place and service not leased. So that’s already in the occupancy number. And then development’s completed not in service. So those are the two pieces that make up the 1.6 million. We’re not assuming any lease-up and any development completions in 2025.

Craig Mailman: Okay. So that that’s not only helping FFO, but also helping same store as well because that’s currently a drag on don’t know why.

Scott Musil: Developments placed in service, not lease, that could help same store NOI. It just depends what the free rent assumption is.

Craig Mailman: Okay. Because that’s not And okay. That that is helpful. And then just more broadly, I know development leasing has As you guys had a big year this year, and you kind of alluded to maybe things getting a little bit better on the ground. But just in in the context of maybe what’s some of your peers have been saying about know, demand kind of the trend bottoming and getting better and supporting maybe a second half 2025 reacceleration net absorption. Kind of where do you guys what are you guys seeing on the ground and and what’s your kind of most current thinking on when an inflection point could happen.

Peter Baccili: I’ll start with this, and then Peter and Jojo can jump in. You know, the you’re kind of looking at a classic U shape the way we look at this, not a V shape. So, you know, predicting How strong this rebound that you were referred to is going to be is not easy. What we have seen, even though development leasing times are a bit elongated, Assets are getting leased. In 2024, 863 million square foot of leases were signed across country? And that’s the third highest year in history. So while we see falling rents in some markets, or low rent growth rent growth in some markets. Leases are getting signed and little by little and slowly and methodically, that, you know, we always talk about tenant alternatives. When we talk about markets with additional space.

Those alternatives are beginning to shrink and equally helpful to that, obviously, is the fact that the national pipeline is now shrinking dramatically and new starts are staying pretty low level. So You know, hard to say, Craig, what that inflection is gonna look like We’re we’re pretty conservative on that front. But we see it coming and we feel good about the prospects.

Peter Baccili: Craig, it’s Peter. I’ll just give you two specific examples. The deal we Pennsylvania We’ve been working on that almost all of last year. So finally seeing some higher level of engagement The deal we reported in Nashville with our repeat customer and and the early lease up there. They’re in the manufacturing business. Of electrical components, and they had a lot more urgency to get that done. So things are a little better as we’ve said, and we’re seeing higher engagement and more momentum. What we really wanna see to Peter’s point is that momentum continue to be persistent. During the year.

Jojo Yap: One last thing I’ll add to that, while we’re on the subject of development, leasing and time frames, You know, some of the assets that we have, as you know, are completed in service, and and so are beyond the twelve month downtime. We also have leased assets like we did last year A million footer in Stockton at completion the five forty in Nashville at com at roughly completion I’m sorry. Nine months ahead of completion. And the three sixty in the Philly market at completion. So when you look at if you look at our vintages, we have to group them by vintages. That’s kind of the year we’ve started the project. So if you look at by vintage going back to 2018, every vintage had leased on average below nine months. So with less than nine months of downtime.

So some projects are simply gonna take longer. Maybe it’s the market they’re in Maybe it’s the depth of the demand for the particular size of the asset. And some are gonna happen quickly. And you know, that that those time frames are as difficult to judge today as they as they as they’ve been in the last couple of years.

Craig Mailman: Great. Thanks for the call.

Operator: And the next question comes from Vince Caboni with Green Street Advisors. Please go ahead.

Vince Caboni: Hi. Good morning. Are there any large move outs in 2025 that we should be aware of? And, generally, how do you think tenant retention rates could trend this year versus, you know, the 2024? Levels.

Chris Schneider: Chris, do we obviously, we talked about the pullout seven hundred thousand square foot move out. In Central PA, and we’re not aware of any other significant move outs. You know, tenant retention last year, we were one of our highest rates in the last three or four years. We’re at seventy seven percent. So we, you know, we expect that number to be, you know, very similar.

Vince Caboni: One more. No. That that’s helpful. Maybe just a quick related follow-up. How about bad debt? If you could share maybe where bad debt as a percentage of revenue came in for 2024, how are you thinking about 2025? Are you seeing any cracks in certain kind of categories? And any commentary along there would be great.

Scott Musil: Sure, Vince. It’s Scott. Bad debt expense was $700,000 in 2024. That was ten basis points of gross revenue, so a very, very low number. We’re assuming a million dollars assumption at 2025 like we have in the past several years. Far as material tenants on the watch list, we talked about boohoo. They have paid January rent. We’re expected February’s rent Any day based upon payment history. And keep in mind with that tenant, we do have a a security deposit in the form of a letter credit that takes care of twelve months of rent.

Vince Caboni: Great. Thank you.

Operator: And the next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas: Hi. Thanks. Good morning. I just wanted to go back to the 1.6 million square feet of development leasing in the guidance, which sounds like it’s mostly related to projects that are already in the in-service portfolio. Can you just comment on the four projects That will transition to the in-service portfolio during the first half of of 2025. You have a little lease First Park Miami, but can you provide an update on on interest for the remainder of that space and the the three inlet Empire assets and is there anything embedded in guidance for For those Properties as a transition.

Jojo Yap: Sure. Hi. It’s Jojo. Right now, scheduled for in-service data 2025 are four projects. Three of the four is in the end of the empire and one is in Miami. It ranged from three buildings are at a hundred forty to a hundred sixty thousand square foot range. One is a three hundred twenty five thousand Square floor.

Todd Thomas: Yeah. Can you just comment on on, you know, the interest level for for those assets and and whether there’s any Expected leasing. During the year as they as they transition?

Jojo Yap: Sure. Let me comment on the three building in the Empire, and I’ll turn it over to Peter on first park a building in first park Miami. For the three buildings, again, like I said, the class a, they’re all in the two fifteen corridor. Very, very state of the art facility. They’re looking at a hundred fifty five thousand feet, a hundred sixty thousand feet, square feet, and a three hundred and thirty five thousand square feet. And all of those projects were heading towards and we’re also responding to RFPs. In terms of leasing, based basically, we’ve assumed that they will be leasing in the second half of this year.

Peter Baccili: And then, Todd, it’s Peter for Miami. We have active RFPs out for all of the remaining space in that building.

Todd Thomas: Okay. And then just just curious if you could just provide an update if there’s any sort of forecast for 2025 for market rent growth across the portfolio across the portfolios, you know, markets that that you’re targeting or are or eyeing.

Peter Baccili: So generally speaking, we’re expecting modest rent growth. Some markets will be down. Some will be up a point or two, so maybe call it inflation plus a point. What we’re expecting this year. So Cal probably flat to down a little bit.

Operator: And the next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck: Great. Thanks. Good morning. I know it’s early on, but I was hoping you could talk about any change in tenant behavior you noticed in the Southern California market or even Houston or Phoenix given the increased tariffs on China and delayed but potential implementation on Mexico. I guess, are you seeing any hesitation to lease in those markets or on the flip side, any pull forward of activity?

Jojo Yap: Okay. It’s I’m gonna start with this and Jojo can jump into. It it is, like you said, at the beginning of your question, Very early. I think, you know, there’s a lot of chaos around this topic. The topic of tariffs. Clearly, if if very large tariffs were put in place for a very long for a long period of time, That’s a negative. But at this point, you know, who’s to say what’s really gonna end up being the case and for what kind of term? It could be negotiating ploy as you’ve you’ve seen It’s anyone’s guess on what’s gonna happen with this. We have not seen yet any reaction to this. No one has actually brought it up. In terms of the tours that we’re giving and and properties or conversations that we’re having. People haven’t stepped away on this because of this subject. So, again, it’s too early. And too unpredictable at this point Jojo, you wanna add anything to that?

Jojo Yap: Oh, glad to go ahead. Okay.

Blaine Heck: Okay. Great. That’s helpful. And then second question, you talk a little bit more about the economics on incremental development Just some color on on how you’ve seen construction cost trending and expectations on the cost side this year And given the slowdown in rent growth, what effects that might have on a expected yield, if any?

Jojo Yap: Sure. Hi. This is Jojo. Well, if you look at 2024 on average constructions cost came down in the ten percent range. It’s primarily driven by the decrease in contractor margins and a stabilizing and slight decrease on construction materials. Going forward 2025, we’re looking to flat to the slightly down I would say maybe zero to three percent down. And, you know, yeah, it it has a impact on, you know, our total investment. Whenever it’s if your land is anywhere to twenty to twenty five percent, of your investment, of course, it’s gonna, you know, have have a way of improving improving the yield slightly.

Peter Baccili: I just put some numbers around that You know, we talked earlier about having fifteen million square feet of growth in our our land holdings. Today, we could invest about two billion dollars that would pencil out to a high six yield. So and that’s for today. That includes today’s market rents, as well as our anticipated and expected costs framework for those projects building in that reduction in in some development cost.

Blaine Heck: And that’s very helpful. Thanks a lot.

Peter Baccili: The two projects we just started are gonna yield north of seven.

Operator: And the next question comes from Rob Stevenson with Janney. Please go ahead.

Rob Stevenson: Good morning, guys. I think you talked about a little bit, but can you give a sort of broader overview of which of your core marks markets you’re seeing the best operating fundamentals and tenant demand and which are the relatively weaker ones today besides Southern Cal?

Peter Baccili: Yeah. I mean, Nashville’s the best market right now. Vacancies are out three percent. Very limited new starts. It’s not so easy to get entitlements in from in in that market. We’re fortunate there to have a lot of growth opportunity. Pennsylvania is not bad. Lehigh Valley is decent. You know, South Florida has cooled from its blue hot phase, but we’re still very, very focused on South Florida. Texas, so Houston and Dallas, Doing very well. We’re certainly looking for more land opportunities in the state of Texas and in those two markets. Of course, the right sub markets around Dallas, that’s a very, very big market. Those would be the strongest markets and, you know, aside from SoCal, I would say, while Denver is improving, it’s still got some room to run.

Phoenix has a lot of vacancy, but we’re finding that we the product that we have on offer, or attracting good tenant traffic and lease signings there. So being there very early and being in great location and offering the right sized product benefited us greatly in that market. But that that would that’s how I would summarize the call it the pluses and minuses.

Rob Stevenson: Okay. That’s helpful. And then in terms of tenants today, are you seeing any better demand at certain size levels? Or is that what demand’s out there? Is fairly widespread across the various buckets square footage wise?

Peter Baccili: Peter, you’re on Good morning, Rob. It’s Peter. I would say smaller, midsize are more active generally speaking and larger. And as we’ve talked about on prior calls, that that varies by market. What’s small in Florida or Denver is different than what’s small or midsize in Pennsylvania as an example. Amazon had been pretty active in a couple of markets last year. There is demand for the larger sizes, but it’s not as robust as it is in the smaller mid sizes today.

Rob Stevenson: Okay. That’s helpful. Thanks, guys. Appreciate the time.

Operator: And the next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll: Yeah. Thanks. I wanted to follow-up on Blaine’s question. I mean, how difficult And mean, do current market rents really support those developments broadly, or does development only work in in the Pennsylvania, Florida, and Texas markets where you said that you’re actually

Peter Baccili: Well, the state of the existing opportunities in those markets that you just mentioned is is positive. So that’s why we’re focused on those markets and underwriting new deals there is you know, is it’s it’s fine. It’s not a problem. Projecting out which other markets like Southern California, for example, when those markets are going to be ready a little bit more difficult.

Michael Carroll: So in the Pennsylvania, Florida, and Texas market, you don’t need rent to go up or you’re not underwriting rents to go up to justify developments at the current market rents. You can get your seven ish percent yields that that you just discussed with the deals that you just broke ground recently. Correct.

Michael Carroll: K. Then just last one. I guess, Peter, can you talk about what’s going on with broader tenant I mean, has tenants been much more active making decisions after the elections? Or has it just been kinda steady state for you and and that wasn’t really a a driver?

Peter Baccili: This isn’t really a a light switch topic. Meaning, it it it didn’t exist on Friday, and on Monday, it does. This isn’t more of an evolutionary thing. What we have noticed is that there is a sense that being more entrepreneurial is gonna be rewarded. That means investing in growth, taking some risk, whereas whereas prior to Ben, definitely risk off Investing tens of millions of dollars into a new lease and equipment and product. There’s a lot more confidence around the fact that that product will move And so we’re seeing that right now, the result of that is more foot traffic We’re receiving a lot more RFPs, I would say prior to that, we were sending out more on solicitations proposals perhaps than than we were receiving RFPs that equation has changed.

Now, I wanna caution, you know, we’re cautious optimistic. We have not seen, as Peter mentioned earlier, what we wanna see is consistent and persistent development lease signings. And that you know, that is the question mark, and that’s what we’re keeping our eye on.

Michael Carroll: K. Great. Thank you.

Operator: And the next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Caitlin Burrows: Hi. Good morning. You mentioned earlier that retention has been quite high and you expect it to continue, but I think a concern some people have is that some tenants have too much space, so reducing what they have. Just wondering what’s your view. Are there tenants that have too much space that needs to be worked through? And how do you think automation could end up impacting space needs?

Peter Baccili: Yeah. I’ll take the first part of that. So, yeah, the the sublease space nationally is about 1.1% of existing stock. That’s approximately double the long-term average. Within our own portfolio, we have some sublet space. None of which is impacting us from a revenue standpoint. We have good leases with good tenants on almost all that space. So we’ll just have to work through that over time and And and we’re keeping an eye on that. Was the second part of automation? Automation. When you look across the board in our portfolio, we don’t see tenants massively massively investing in automation. That drives their utilization of space Of course, you have the big tenants tenants that are heavily automated. Like, the large ecommerce company, So but that’s part of their business plan for day one. And but now we’re not seeing a sea change.

Caitlin Burrows: Got it. Okay. And then I think this topic came up some point in the past, but in terms of the development projects that have taken longer to lease up, do you think that’s a case where reducing price would help, or is it not really an issue of price? It’s more just that somebody need that space or not?

Peter Baccili: Peter? Sure. Kayla, I would say it’s not really price. We’re market sensitive. It’s more about as we’ve talked about on the last several calls, just the the pace of decision making and and companies finally saying, okay, we we need this space. You saw that in our development leasing results throughout last year. Culminating in in what we announced in the fourth quarter. So we just want to see more of that. It’s a frustrating for sure that tenants aren’t making a decision that at the pace that we’ve all seen the last several years, but it’s not about price. We’re gonna do what we need to do at least as we always have.

Caitlin Burrows: Got it. Thanks.

Operator: And the next question comes from Nick Thillman with Baird. Please go ahead.

Nick Thillman: Good morning. Maybe you wanted to touch a little bit just the LA wildfire impact. I know it’s early days and the rebuilding efforts are just starting. But where where do you think what markets are most likely to benefit as kind of that rebuilding effort? Is it the IE, or is it LA County proper? Just some thoughts there would be helpful.

Jojo Yap: Talking about that, Georgia? Yes. Just Georgia, first of all, the timing is going to be very hard to predict predict. Depending on how the permit process, how the cleanup process and redevelopment process, design process all shakes in. But setting timing aside, I mean, a lot of investment will be dedicated to the infrastructure and the house construction. And if you look at what components needed for infrastructure and house disruption, that would need storage. Of building materials. And actual infrastructure that goes basically under underground. So going forward, I think we think that it will necessitate outside storage of materials closer in to where the fires tragic fires happened. So our you know, our thought is that LA LA, Cali might benefit the most. That’s helpful. And then just maybe top touching a little bit on development, maybe on build to suit opportunities. Have you seen any sort of increase in that at activity across your markets?

Peter Baccili: Not not really. Particularly given that tenants have choices today on the existing inventory. Unless it’s something really specific and unique. Certainly, there are some You know, we were glad to prelease the building in Nashville months ahead of completion. So in in essence, that somebody who wanted some influence over the design and specifications for them But tenants still have choices today in the market. So build to suit’s probably less. Less active.

Nick Thillman: K. Eight?

Operator: And our next question comes from Mike Mueller with JPMorgan.

Mike Mueller: Hi. I know you’ve addressed about sixty percent of the twenty five expirations. Looking at the remaining forty percent, is there anything that stands out in terms of geography or size, or is it kinda more of the same of as to what you’ve leased already?

Peter Baccili: Yeah. It’s pretty much, you know, broad based across, you know, our our typical make you know, our makeup of our the jack rate. So nothing stands on.

Mike Mueller: Okay. And then, Scott, I think you mentioned about two hundred twenty five million of development spend for the year. I mean, it looks like maybe half of that applies to projects that are already underway. So what is there a way you can kind of ballpark what you think development starts to be for the year?

Scott Musil: I’m looking at the computer now. Yes. And we’re not we’re not gonna give volume on development starts. You know, that that we we have certain opportunities that we think we’re gonna move ahead with, but you know, as as the global economy turns and as markets change, that could change. So that’s why we don’t talk about volume. You know, talking about location is fine. And as I mentioned, Pennsylvania, Texas, and Florida are the places we would go.

Mike Mueller: Okay. Appreciate it. Thank you.

Operator: And the next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra: Thanks for the question, guys. And congrats. Very strong execution in twenty four Just maybe first one, the if you can clarify the development lease up that you’ve done in twenty four. You may have addressed it. I just wanted get a better understanding of when this hits s s o any SFO, or cash flow in twenty twenty five and twenty six? Is it is it mostly baked for twenty five or is some of what you’ve used in twenty four actually hit next year?

Scott Musil: So I I if you look at the fourth quarter leasing, the two deals that are expected to start at twenty five are the joint venture deal, I think that’s first quarter Jojo. And then Peter’s deal in Nashville is a three q expected start date. Everything else started in two thousand and twenty four.

Vikram Malhotra: Got it. And then just in the model, as you’ve kind of looked at occupancy, you know, further lease up of the obviously, the development of one point six million. You also mentioned sixty percent of the expirations are covered. I’m just wondering, like, do you have higher than normal visibility or average visibility year than sort of prior years given all the development he’s up in the sixty percent you mentioned? Or kind of average?

Peter Baccili: It’s more average. We’re at a similar point with our rollovers as we always are at this time of the year. And respect to development leasing, I wouldn’t say we had it have any more visibility than we had last.

Vikram Malhotra: Got it. And then just lastly, the occupancy map. Of your peers have outlined of a dip in the first half you know, down to perhaps ninety four ninety four plus percent. And then a expectation of a pick back up. Can you just sort of walk through, like, how much of the guide is dependent sort of on a backup recovery?

Scott Musil: Yeah. If you look at our occupancy that we’re projecting for twenty twenty five, you know, you know, we’re gonna be down in the first and second quarter. You know, we’ve talked about the seven hundred thousand square foot move out in Central PA and the four developments are coming in service in the the first quarter and the second quarter. So the you know, we’ll definitely have a, you know, a pickup the documents in the last two quarters of the year.

Vikram Malhotra: Thank you.

Operator: And the next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead.

Tayo Okusanya: Yes. Good morning. Again, congrats on on a really strong outlook and really strong execution in twenty four. I wanted to go back to Jojo’s comment about Southern California. I think he mentioned that the rent growth in twenty five is expected to flat to maybe slightly down And I guess I’m trying to understand that number in the context of kind of brokers and even some of your peers talking about rental rates down know, anywhere from ten to twenty percent on a year over year basis in twenty four, And and even rental rates would be, you know, still above pre pandemic levels. So just trying to understand that flat to down comment relative to kind of some of all the other stuff going on in Southern California.

Peter Baccili: Yeah. I I mean, I’ll start out. Jojo can take provide more detail, but you know, portfolio composition matters. We all operate in several markets. And when I say we all, I mean, our our peers, whether public or private, delivering the product that meets the demand is always been one of our primary focuses. And delivering product that’s going to remain competitive in its submarket for the long term. Has been a key focus. So you know, we can’t create rent growth and tenants out of nowhere. But we can deliver a product that is so competitive that it’s amongst the first to lease. And that’s why we have maybe, perhaps, a slightly different view on rent growth for our markets as others do.

Tayo Okusanya: That’s helpful. Thank you.

Operator: And the next question comes from Brandon Lynch with Barclays. Please go ahead.

Brandon Lynch: Great. Thanks for taking my question. Maybe just follow-up on that, looking more broadly at other markets around the country, can you talk about your market pricing assumptions that are embedded in guidance?

Peter Baccili: We we we build up our budgets from the ground up lease by lease. So it’s a little bit different maybe than the question you’re asking. We don’t take inputs necessarily of all the economic metrics to decide that. We really go based on what the market leaders who are talking to the tenants in the market and the brokers in the market think about demand, and we match that up with the product that we have on offer. It’s a little tougher to comment your question with the stats I think, that you’re looking for.

Brandon Lynch: Okay. Thank you. That’s still helpful color to understand the process. Maybe you could also talk about different levels of demand that you’re seeing with between different types of tenants and in particular three p l’s.

Peter Baccili: Sure. Peter, you wanna talk? Peter, I would say the activity continues to be broad based as we’ve talked about for a number of quarters. Three PLs remain active. Certainly, they over leased some space over the last couple of years, but they’re still very active. On the prospectus. We’re seeing manufacturing autos, ecom, food and beverage, As we responded to Rob Stevenson’s comment earlier activity better in the smaller and midsize. Ranges, generally speaking, around the country, which varies by market. But it continues to be pretty broad based. And our smaller mid sized spaces, for the most part, our existing portfolio are highly leased and re leased fairly quickly. Should we have an availability.

Operator: And the next question comes from Ki Bin Kim with Truist Please go ahead.

Ki Bin Kim: Thanks for taking me back in the queue. Going back to your comments about dispositions being up to seventy five million, was curious, how much of that is a function of perhaps pricing not being quite there versus you know, after selling two point four billion, are we much closer to I guess, you know, if you’d learn there longer term ideal portfolio and perhaps going forward, should we expect this reduced disposition level to continue?

Peter Baccili: Yeah. It’s it’s it’s basically the latter. On key bed. We’re we’re happy with what we have. We have some trimming we’ll do. You’re you’re always going every year, you’re going to I guess, I’ll call it pull a GE. Right? They have to be at the bottom ten percent every year. We’re gonna always have something we’ll sell, but terms of any meaningful volume goals and targets, we don’t have those anymore.

Ki Bin Kim: Thank you.

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

Peter Baccili: Thank you, operator, and thanks to everyone for participating very good questions, and we appreciate that. If you have any follow-up from our call, please reach out to Art, Scott, or me. And have a great weekend.

Operator: The conference has now concluded. Thank you for attending today’s presentation.