First Industrial Realty Trust, Inc. (FR) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Citi's 2025 Global Property CEO Conference. I'm Craig Mailman with Citi Research, and we're pleased to have with us First Industrial and CEO, Peter Baccile. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC25 to submit questions. Peter, I'm going to turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons that investors should buy your stock today, and then we can jump into Q&A.

Fantastic. Well, thanks, Craig, and thanks to all of you for joining us today. And congratulations to you, Craig, and the Citi team for your 30th anniversary of hosting this industry-leading conference. With me today are Scott Musil, our Chief Financial Officer; Art Harmon, SVP of Investor Relations and Marketing. So we just wrapped up a very successful 2024, and we're really excited about the opportunities for growth in 2025 and beyond. Last year, we signed 4.7 million square feet of development leases. This was our second highest volume of development lease signings since we relaunched our development program in 2012 and significantly surpassed the 2.8 million square feet we had contemplated in the original 2024 guidance. The leasing was broad-based as well, representing 10 of our 15 target markets, including 2 signings in Southern California and a 1 million square footer in Northern California. Our portfolio continues to perform very well with many key metrics at or near the top among our industrial REIT peer group. We finished the year with in-service occupancy of 96.2%, up 70 basis points from year-end '23. Our cash same-store growth was 8.1%, excluding tenant improvement reimbursements. Contributing to the same-store performance was the 51% increase in cash rental rates on new and renewal leases delivered by our team. This was the second highest annual result in our 30-year history and marks back-to-back years of 50-plus percent. We're again off to a good start for 2025. As of our earnings call, we were through 59% of lease expirations by square footage. Combined with our leasing, our cash rental rate increase for leases signed with 2025 commencement dates is 33%. If you exclude a key 1.3 million square foot fixed rate renewal in Central PA, that's part of that population, 2025 signed leases to date had a cash rental rate increase of 42%. For the full year, we expect our cash rental rate increases to be 30% to 40% overall and 35% to 45%, excluding that Central PA renewal. Our success is having a strong impact on our ' 25 FFO growth. Based on the midpoint of our guidance, we're expecting FFO growth of approximately 10% as we look to build upon the 8.6% growth last year. Quickly turning to the fundamentals. They are solid on a historical basis and stabilizing, helped by a slowdown in deliveries as well as new starts, which are off over 60% from their peak in the third quarter of '22. All eyes are now on new growth-related demand. We, like others, are hopeful that the election behind us, we will see more businesses ready to commit to additional investment in growth, which should result in a more consistent pace of development leasing. As we discussed on our earnings call, leasing traffic has ticked up a bit, and we're focused on converting that traffic into new lease signings. Looking to external growth, speculative development continues to be our primary vehicle. We do it with a disciplined approach to drive appropriate risk-adjusted returns. In the fourth quarter, we started 2 projects with a total investment of $96 million. The first is a 317,000 square footer in Nashville, a market that is showing good fundamental strength and as evidenced by our 2 recent 500,000 square foot lease signings there. We've also started a 2-building 362,000 square foot project in the Lehigh Valley in the 78/81 corridor, targeting the 200,000 square foot and under customer segment. We're also well positioned for future development opportunities as submarket conditions warrant. Our land positions across our target markets can accommodate 15 million square feet of growth. This includes an additional 1.1 million square feet at our First Park Miami project that many of you may have visited last year. Our primary focus is to drive future cash flow growth and outperform through the cycle. That cash flow growth aligns with our dividend growth. And for the first quarter, our Board of Directors declared a dividend, which represents an increase of 20.3%. Moving to the reasons to own FR. First, the quality of our portfolio and platform. 44% of our in-service square footage today was developed by our team since 2012. That quality, functionality and competitive market positioning also contributed significantly to our development leasing success last year with the 4.7 million square feet that we did sign in 10 of our 15 markets. Our cash rental rate increases on leasing were the highest of the peer group in '24 as well. Second, the strong cash flow growth we've delivered and continue to deliver, driven by our cash rental rate growth, rental rate escalators and development lease-up. Strong cash flow growth is also reflected in our 5-year FFO per share CAGR forecast through December 31 of this year of 10%, presuming we hit the midpoint of our '25 FFO guidance. And lastly, the opportunity for future growth by deployment of our landholdings, which we believe today are worth $810 million or 1.7x book. Those sites are developable, as I said, to 15 million square feet, which supports a total of over $2 billion of investments that we're projecting to yield in the high 6% range at today's rental rates and construction costs. With that, Craig, back to you.

Perfect. So you had mentioned it again today, you and your peers have all seen a pretty good uptick since the election in leasing. How has that pace continued over the last month since your earnings call? Has it been pretty consistent or any changes?

Yes. I wouldn't say a lot has changed in the last 3.5 weeks, but to put the uncertainty in the rearview mirror of the election, whether one like the outcome or not, at least we know now. And that has been helpful to the decision-makers looking to invest in growth in the conversations that we're having with many of our tenants, definitely a change in attitude, a feeling that it's time to invest in growth and behave a little bit more entrepreneurially. That was clear right after Thanksgiving last year, and that momentum has continued. And from a physical standpoint, while I'm not going to say that we see a lot of new signed leases or at least not at the same consistent pace we're looking for, the number of prospects for each of our properties, our availabilities have increased significantly from 1 to 2 prospects to 3 to 5 in some cases. And while leasing pickup and net absorption has not been super strong nationally, the national pipeline has come down considerably and the number of alternatives that tenants have is shrinking. So as the number of alternatives shrinks and the number of prospects goes up, that's obviously a good sign for the future for the discussions that we're having with prospective tenants.

And I know there's a lot of talk at the conference about tariffs and the uncertainty that brings in and what that could do to the unthawing of the leasing markets that you guys have seen. But maybe -- I know it's hard to prognosticate about the impact you can, if you would like. But just in the conversations you're having with tenants, as we sat here last year, there was a lot of optimism that rate cuts would start to spur demand. It obviously didn't play out that way. But at the same time, you had a lot of supply still delivering. Fast forward to today, as you're sitting here seeing leasing improve, as you mentioned, the pipeline is dwindling, right? And so are you having those conversations where people have been out of the market for 3 to 4 years as they consolidate space, GDP growth has been pretty decent. And now to your point about being more entrepreneurial and investing in growth, like this may have more legs just because of the timing and the fact that you know what's available. And so you need to make a decision, you kind of get off the sidelines, otherwise, you may miss it.

It's very -- it's obvious to us the message that the larger tenants are getting from their represent -- the tenant reps, the brokerage community has changed from wait, you'll get a better deal later to you better sign now, it's the best deal you're going to get. That's definitely happened. The other thing that -- and I should have mentioned this earlier, it seems that everybody in their cousin is on Fed watch all the time, and that's created a ton of volatility in the markets. And I would say that the decision-makers that run the entities that we're looking to sign leases with are now comfortable with the rates as they are today. And so if rates don't move, that's not really impacting their willingness to jump in and invest in new growth. They're feeling more confident that the economy can sustain this level of interest rates and continue to crank along. We haven't had a single tenant bring up the tariff subject now. They went in place today. We'll see. We'll talk in 30 or 60, 90 days, and maybe that's different. But no one has brought that up. And when you think about the industries that will be impacted most, #1 on that list is automobiles for sure. A lot of the automobiles that are sold here are either made or assembled at least in Mexico and Canada. So that's going to have an impact. If these tariffs remain in place for term. Otherwise, maybe it's a blip like we had during COVID when you couldn't get the chips for the cars, et cetera. Furniture will be impacted and appliances will be impacted. Now nobody knows. It certainly looks like these are all negotiating tactics. And even when you look at the decisions that have come out in the month of February, February 1, there was a decision on tariffs, and it's changed 3 times since then. So one might think that this is all about border security and drug trafficking. And at the end of the day, this is going to go away, too, but we'll see. So far, it hasn't had a big impact on the leasing outlook.

And you had mentioned that the pool of potential bidders on spaces is improving. I guess 2 questions off of that. Number one, is it still too early to see market rent growth? Could it be asset specific where -- are you seeing people bid up that space? Or is it just you'll probably get the asking, the asking will probably be the taking versus maybe slightly below?

Market rent -- we don't anticipate market rent growth is going to be anything meaningful this year. In some markets, it will be up slightly 1 or 2 points and SoCal will probably be flat to down 1 or 2 points. The discussions now, you do get some lowball offers where people want big free rent or way above standard TIs. But -- and there will be some markets where rent growth will be higher. Nashville has enjoyed 6% and 9% rent growth the last couple of years. Nashville is a great market. We wouldn't be surprised to see 4%, 5% rent growth in Nashville, for example, Dallas and Houston will probably do better than the national average as well. The terms haven't changed a whole lot that we're agreeing to. And certainly, if somebody wants a few extra months of free rent, we have to balance that against the cost of downtime, and we're looking to maximize the NPV of all those leasing discussions. But the flow is still -- we want to see these leasing conversations happen on a consistent basis. And then we're going to feel much better about going longer in terms of new developments.

And you guys embedded in guidance. Scott had laid out how much impact there is from leasing vacancy and a lot of that was back-end weighted. What's the activity like on those spaces that are included in the lease-up in guidance, particularly some of the ones that are completed in the operating portfolio, but not yet leased, which would seem to be the ones that you get the most impact immediately.

So we've got decent activity around most of those spaces. We've had that before, though, in some of those spaces. The bigger spaces, we have the 588 in Denver, we have a few buildings in Paris in the Inland Empire. And the foot traffic is good around those assets. We are having conversations that go beyond just visits on some of them. So we'll see. They're in the budget for later in the year, and that is primarily because you have a pretty good sense about when you start a conversation and when it might end. And if you haven't started a conversation by January, it's probably not going to end by June. So that's why most of that new development assumption is in the back half of the year.

And I know Aurora, in particular, you guys have talked to NAREIT about potentially the post office being there or another tenant. Does -- what's going on with DOGE and Trump wind to put the post office in another -- I mean, does that derail some of these conversations you may be having with more government or quasi-government type users?

They are one of the prospects, not the only one there. Overall, just for what it's worth, we only have 258,000 square feet to government tenants in our 70 million square foot portfolio across 6 buildings. So it's -- they can shut them all down and it's not going to show up for us. And it's certainly -- look, anytime there's a government involvement, it causes us to pause. I'll just say that. It's difficult to work with them.

And you kind of mentioned you guys aren't expecting much on the rent growth kind of nationally and called out Nashville and Dallas. But as you kind of look at your target 15 market, what are kind of the best and worst markets within that grouping? And how does SoCal fit into that discussion?

Through this whole, I'll call it, down cycle, let's say, from when Amazon announced they were shrinking their footprint in April of '22 and the markets fell off the table and they ended up taking more space. But since that point in time, and I'm going to put Texas in the eastern half, the eastern half of the country has fared pretty well. And it's really the western part of the country that while it rose the most and rents more than doubled, obviously, since then, rent certainly in SoCal are off probably 25 plus percent. So when you look at it today, the markets that rose the most are falling the most. And in the eastern part of the country, and again, I'm counting Texas in that, the markets are pretty good. I would say that on the list of places where we may not invest in development for a while, Denver is high on that list. We have great sites in SoCal, and we are very bullish on SoCal. The one conversation that's easy to forget when everyone is super focused on leasing the vacancies, which we are, is that every day, every week, every month, it gets more and more difficult to build in that state. And you all know about AB 98, which prohibits the development of warehouses within 900 feet of a sensitive receptor, a neighborhood, a school, et cetera. That's going to have a big impact on a lot of those sites that might otherwise be there to compete with us. One of the things that we've always done, we buy only unentitled land in SoCal. We immediately go into entitlement when we buy land there. We don't wait because we're making a judgment on the existing conditions. So to sit and wait for 2 years until we think we're ready to go doesn't make any sense. Well, if you didn't start that process when AB 98 came in, you're not grandfathered. So that's going to definitely put a dent in the competitive properties out there for us. So it's going to limit new growth. What's that going to do? That's going to increase the value of what we have. it's going to encourage rent growth because there's not enough space eventually, not today, but eventually. And we'll see if it sticks. It may not be long term. There's a heck of a lot of pushback from the local municipalities who are very unhappy that their ability to raise taxes has gone away. So we'll see. But nonetheless, even with or without that, it's just going to become more and more and more difficult to build there. So with the passage of time as these spaces get leases and the sublet space gets dealt with, you're going to be back to a really pretty solid market out there.

Anyone in the room have a question you want to ask? Do you want to ask a question? No. You mentioned, right, development starts. You guys have freed up some capacity under the speculative cap with some of the recent leasing kind of mentioned Texas, Florida, Pennsylvania is target markets for new builds. But what's the trigger that gets you to want to put shovels in the ground in those different sites?

So one of the things that we don't really do is take big concentration. So for example, First Park Miami, we could build 3 buildings. The buildings are all about 200,000 square feet. So we're not going to do that. We're finishing up Building 3. We're in the final stages of leasing Building 12. Don't follow the numbers. They don't make any sense. But -- and when Building 3 is finished and partially completed, we'll start Building 4. But -- so we don't want to take a big concentration risk, especially with buildings that are same size in the same market. So not having leasing exposure is a big trigger, if you want to say that. We now need -- because we just started our new project in Nashville, we now need new land, more land in Nashville, which we are working on. And with any good luck at all, that situation will move to our benefit in the not-too-distant future. So in the Dallas submarkets, there are certain submarkets in Dallas where we have a couple of sites that we would go ahead and move on now. We are waiting for some final permitting on one of them. So look, all the while, of course, we're looking at the local submarket fundamentals. We're paying attention to what's going on nationally and globally from an economic standpoint. And at the most -- at the submarket level and the local level, it's about what kind of exposure do we have and how many alternatives are there for tenants to choose from in a given size range because we always try to deliver the size range that has the least amount of availability and the most demand, and that's been pretty beneficial to us over the years.

And how do you think about funding the additional starts, right? You said on the call, you're kind of done with the noncore sales. And so now it's more strategic dispositions based on -- I guess, give us a sense of what would qualify something for the strategic disposition as you go forward. And Scott, just maybe how much capital do you think you need a year? What are the most attractive sources?

Same formula as prior year's excess cash flow after dividends and CapEx, it's about $85 million. We will have property sales this year. We can draw on the line of credit as well, and we also can borrow the fixed income market. So those are going to be the basically 4 areas that we obtain our capital to fund our development program.

And Peter, you...

You asked about sales.

About sales. What's going to be the criteria going forward now that most of your noncore stuff has been addressed.

Yes. Obviously, if somebody makes us an offer, we can't refuse on a particular asset, we're going to look to maximize value. We still have some, call it, noncore assets here and there. We have half a dozen or 8 assets in Detroit, for example, that will be sold. It's -- none of this is going to amount to big volumes, and that was really my point on the call. It wasn't that we aren't going to sell assets in Detroit, for example, or in some of the other markets. We might have an asset that comes up in Houston or Dallas or some place that we've had a while where the growth opportunity is behind it and we can get good value. It's just not going to be a lot of volume going forward, unlikely to be a lot of volume going forward.

And you had mentioned the land bank is about 1.7x book is your estimation of it. Are any more of those data center land opportunities that you had in Phoenix that you're putting in an industrial book, but could be well in excess of that?

So we've looked pretty closely at all of our land. The power topic has become the overriding factor now. When we did those initial deals in Phoenix, power wasn't really -- is there power there? Yes. Okay, done. Now it's the leading issue in these conversations because most of the power authorities don't have excess power. We haven't built new transmission lines in this country in decades. It's a real problem. But -- and I'll give you an example on our own portfolio, some of the land we have up in Kenosha outside Chicago could certainly be used for data centers. Microsoft came up and bought 1,000 acres, not too far from us and soaked up all the power from the local power authority. So we're continuing to look at potential opportunities, but increasing power capacity is going to be necessary. We're also looking at every cash flowing asset that we have to see whether it would make sense to fit it up for a data center use. We have a couple of warehouses in Northern Virginia that one of the big well-known entities fit up as data centers. So if that's out there, we'll take 3x industrial value for a higher and better use, sure. But we're looking at it. I'm not sure that it will result in big volumes, but it certainly has been great. We've been able to take value out of Phoenix during a time when we really didn't want to have to access the capital markets. It was just very well timed.

I know you guys are generally at a land in Phoenix. I know there's difference between infill and sort of the exurbs. But over time, do you -- would you want to backfill the land positions there? Or do you just feel like the other markets that you're focusing on more are higher on the list of priority?

Yes. So Phoenix is fairly high vacancy rate these days. We were there -- I'll say we were there first. We were certainly there before the bulk of the capital came. So we did get the best location there on 303. And our assets are still highly desired. We had 3 under construction. We leased 2 before completion and half of our 940,000 square footer, this is in the face of 35 million feet coming to that market. So our assets are well positioned to say the least. We right now expect that we will have some land coming off of the lease soon. So we'll figure out what we're going to do with that. Again, that's another market where getting power for data centers has become a problem. Arizona Power doesn't have enough capacity for all the demand. So we'll have some land in all likelihood to deal with that can probably hold 2 or 3 sizable buildings. And that's good enough for now, given all the supply there.

I get a lot of questions from investors about mark-to-markets and what's embedded in the portfolio. I know you guys don't give a mark-to-market. But as you think about, right, the longevity of having that positive spread because the feedback is, oh, the escalators have gone to 3% to 4% if market rents are flat, you're going to be negative mark-to-markets. But can you talk about the dynamics of having a development pipeline and the length of some of those leases at the outset, how that factors into how the mark-to-market, the longevity of it?

Yes. So you're looking at -- I mean most of our development leases are 10 years. So we're not anywhere near -- if you want to look at peak, so peak was '22. We signed a bunch of leases in '20, '21. Those 10-year leases obviously aren't coming due for a long time. So let's put that on the side and talk about a 5-year lease, a 5-year lease that was signed in SoCal in '21 before the peak and the peak was in late '22, not the beginning of '22. So signed before the peak in '21 coming due in '26. When you look at how much California rents went up, more than double. Now they're off 25% or so from that. So they're still up meaningfully on the order of 10% or 11% CAGR over that 5-year period. There won't be rent roll down when that 5-year lease comes due. There ought to be pickup. And that's also true, but on obviously, a much narrower band in the eastern part of the country. So we're not concerned about rent roll downs given what's happened with rents with those leases. You might have a different outcome in late '22 leases. And then in '23, you won't. So this is a small percentage of the possible rollovers. I'm going to say sector-wide because everybody is working in the same time frames here. That might be subjected to a possible roll down. For the most part, no. The longevity, so you look at our cash rent growth, 58%, 2 years ago, 51% take that one big renewal out because that's more indicative. So 35% to 45% is what we're seeing. That's decent longevity right there in the face of rents coming off hard. So yes, there's still longevity beyond, okay, in that number. And I guess that's the way to answer the question is to say, just look at the pattern and the slope of how it's changed. Now that might be different from others, people who reported mark-to-market in the 60s, and now we're looking at 15. I mean that's a different dynamic, but we don't face that falloff like that.

Right. And I'm not trying to get you guys to give long-term guidance. But as you think about just the math of the high-level buildup, right, your bumps are now probably low 3 to mid-3 and...

Our portfolio average is 3.3%. And for the last few years, including this year's '25, we're getting 3.7%. We're getting a lot of pushback now, as you can imagine, on that because inflation is, call it, 3.31%, whatever. So we're getting a lot of pushback, but the team is doing a great job. Those are great bumps. That's a lot.

Right. And so you have that piece of it. And even if rent spreads moderate and they're still slightly positive, I mean, and with the volatility in occupancy, it shouldn't be out of the question to have 4% to 5% same-store as a kind of normalized base level here in the next couple of years?

Yes. I think for the sector, this is one of your things -- your rapids I'm hitting here now. But for the sector, I'm going to say 5% to 6% next in '26 is not out of the question.

Yes. Yes. No. It's -- that's been one of the big pushbacks I get is -- are valuations toppy because you may have some of this rollover, but on a stabilized basis...

So if you just look at our portfolio, okay, we've got, call it, 13%, 14% rollover on average. So say, 87% gets 3.3% and 13%, we're projecting 35%, 45% this year. Just do that math, that's pretty strong growth before we've leased 1 square foot of development.

Yes. And there's a question coming in. So it's a little bit asking it again, but the question is rents on expiring leases in '26 are below 2025 expiring rents, so on a nominal basis. Does that portend to potentially stronger rent spreads next year?

I'm sorry.

The base rents of expiring rents on a per square foot basis are lower in '26 than they are in '25.

It's more of a mix issue, correct.

Yes. Right. Any questions from the audience?

As far as mix goes to, the rollover, everyone wants to know the proportion of SoCal because it does drive the outcome even now. Last year, we renewed all 3 of those leases. We thought we'd only renew 2. They contributed greatly to that 51%. The mix this year for SoCal is a little bit lower than the proportion that SoCal has in the portfolio, whereas last year, it was higher. And that is contributing to the slight drop-off in cash rent expectations.

And given the blended rent, you would -- you could surmise that 26% is even lower SoCal proportion than 25%.

I actually don't know what that number is.

Jump over to the rapid fire questions. You already gave the same-store number. So we'll give the M&A question, right? So next 12 months, will there be less more of the same amount of public industrial REITs.

The same.

Perfect. Well, thank you guys so much.

Thank you. Thank you.