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

Good day, and welcome to the First Industrial Realty Trust Second Quarter 2026 Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President, Investor Relations and Marketing. Please go ahead.

Thank you, Dave. Hello, everyone, and welcome to our call. Before we discuss our second quarter 2026 results and our updated guidance for 2026. 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 23, 2026. 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-K 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, supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call today will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, 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 the call over to Peter.

Thank you, Art, and thank you all for joining us today. Our team delivered another excellent quarter, building upon the momentum that took shape in Q1. Our confidence in leasing demand supporting new business growth has strengthened compared to earlier in the year and most certainly last year. We're seeing additional touring activity and enhanced decision-making overall, including for larger format spaces. Our team delivered some significant leasing wins in the quarter, including a full building lease for our 708,000 square foot building in Central Pennsylvania as well as for a few of our developments, which I'll detail shortly. On the strength of that leasing, we increased our FFO guidance midpoint by $0.02 per share. Scott will walk you through our guidance during his remarks. Turning to the overall market. Industry fundamentals are trending positively with respect to net absorption, while the pace of new deliveries continues to moderate as expected. According to CBRE, the national vacancy improved by 20 basis points to 6.5% at the end of the second quarter. Net absorption was strong at 85 million square feet nearly doubling Q1 and significantly exceeding new deliveries of 48 million square feet. The national construction pipeline ticked up modestly to 252 million square feet and is still well pre-leased at 38%. Turning now to our portfolio performance. We ended the quarter with in-service occupancy of 94.9% and up 60 basis points from the first quarter, primarily driven by the 708,000 square foot PA lease. Regarding our 2026 rollovers, we've now taken care of 80% by square footage and our overall cash run rate increase for new and renewal leasing for signed leases is 39%. Our cash run rate guidance for 2026 commencements is 35% to 40%, which is an increase at the midpoint and a tightening of the range. Moving now to development leasing. Since last quarter's call, we saw more broad-based success across several markets, inking an additional 433,000 square feet, bringing the total settings in the quarter to 643,000 square feet. First, we expanded our existing tenant into the remaining 31,000 square feet at First Pump and our Logistics Center in South Florida. In Dallas, we signed a full building lease for the just completed 176,000 square footer at First Park 121 to a wire and cable supplier that supports the data center industry. Lastly, we fully leased our recently completed 226,000 square foot building at First Park Newcastle in the Philadelphia market. With this full building lease, we're excited to announce the start of a second building in that park. The 613,000 square foot facility can accommodate up to 4 tenants with an estimated investment of $77 million and an estimated cash yield north of 8%. Now let me update you on our other investment and disposition activity since our last call. On the acquisition front, our regional team was successful in sourcing a recently completed development in the Great Southwest submarket of Dallas. The 161,000 square foot facility is 50% leased, giving us the opportunity to add value through lease up. The purchase price was $26 million with a targeted cash yield of approximately 6%. We also acquired a 58-acre infill development site in the middle of the BW corridor, the largest submarket in Baltimore for $39 million. The site is designed to accommodate three buildings totaling 629,000 square feet upon full entitlement and completion of infrastructure work. Regarding sales, as expected, we successfully closed on the $131 million land sale in Phoenix. Pricing was $30 per land square foot just shy of 3x industrial land values in that market. We also sold 4 buildings in Detroit, totaling 310,000 square feet for a total of $29 million. We have just on 16,000 square foot building remaining in that market. Before I turn it over to Scott, I'd like to thank everyone that invested the time to participate in the two property tours we recently hosted in Southern California and New Jersey. I know that you came away with a greater appreciation of our portfolio quality, value creation ability and the expertise of our regional leadership. With that, I'll turn it over to Scott.

Thank you, Peter. Let me recap our results for the second quarter. NAREIT funds from operations were $0.82 per fully diluted share versus $0.76 a year ago. Our cash same-store NOI growth for the quarter, excluding termination fees, was 6.7%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, contractual rent bumps and lower free rent, partially offset by lower average occupancy. Summarizing our leasing activity during the second quarter, approximately 2.6 million square feet of leases commenced. Of these, $1.1 million were new million were renewals and $500,000 were for developments and acquisitions with Lisa. Also, we wanted to share with you a positive update related to tenant credit. Debenhams formerly Boohoo, signing full building sublease for our 1.1 million square foot are in Pennsylvania. The subtenant is a 3PL that was already a valued FR tenant, so we are very pleased with this outcome. Now moving on to our guidance. As Peter noted, we increased our FFO midpoint guidance by $0.02 per share and narrowed our guidance range for 2026 NAREIT FFO to $3.08 to $3.16 per share. Recall that NAREIT FFO reflects $0.04 per share of advisory costs related to the contested proxy campaign incurred in the first quarter. Excluding these advisory costs, our 2026 FFO guidance range is $3.12 to $3.20 per share, which is also a $0.02 increase at the midpoint. Our other major guidance assumptions are as follows: average quarter-end in-service occupancy of 94% to 95%. This range reflects approximately 900,000 square feet of incremental development leasing out of an opportunity out of 1.7 million square feet. The development leasing is assumed to occur primarily in the fourth quarter. In terms of cadence, guidance assumed in service occupancy to dip to around 93.5% at the end of 3Q. We expect to end the year at around 95.5% due to the assumed development leasing plus other core portfolio leasing. Cash same-store NOI growth before termination fees of 5.25% to 6.25%, an increase of 25 basis points at the midpoint. Guidance includes the anticipated 2026 costs related to our completed and under construction developments and today's announced start. For the full year 2026, we expect to capitalize about $0.08 per share of interest. Our G&A expense guidance range is $42 million to $43 million which excludes the $5.6 million of costs related to the contested proxy campaign. Let me turn it back over to Peter.

Thank you to all of my teammates at First Industrial for your outstanding efforts this quarter. We continue to be optimistic about the activity levels we're seeing within our development and portfolio availabilities across markets and size ranges. We're excited about our new investment opportunities, and we maintain our focus on driving long-term cash flow and value for shareholders. Operator, we're ready to open up for questions.

[Operator Instructions]. First question comes from Craig Mailman with Citi.

Peter, your commentary is pretty consistent with peers and brokers that things are getting better and decisions are being made quicker. I'm just kind of curious, as we look from here and you have discussions with tenants and you see what vacancies you have up on the portfolio? Like from a market condition standpoint, how real is -- I don't want to call it formal, but just would some bigger boxes being taken off the market, You had success with Boohoo finding a sublease tenant, you got 708 done in Central PA, like some of the bigger availabilities have been taken off the market. How is this shaping the discussions you're having with tenants in terms of their mentality with less new supply coming on and the urgency they're getting. Like should we expect to see this continue to accelerate into the back half of the year? Or are there something that we're missing in terms of other dynamics in the market? Can you just kind of give us your thoughts on how this could play out over the next 2 to 3 quarters?

Sure. I'll start out and then Jojo and Peter can weigh in. Net absorption is up pretty significantly. That has a lot to do with the fact that we've got a lot more activity with the bigger spaces now. So $700,000 to $1.2 million, that activity is up 127%, north of $1.2 million, that's up 117%. So you definitely have a scarcity value at the bigger spaces now. Activity is up also across the other size ranges but a little less. They're a little bit more alternatives that have yet to be taken up in the smaller size rates. But the activity and the interest in investing in growth has definitely changed from a year ago. Jojo, you want to add anything?

Yes. I mean what Peter just mentioned is that dynamic is absolutely what's going on in the West markets, including Chicago and Dallas, the largest spaces as they decrease, I mean, tenants have fewer choices, and they have to make decisions quicker. So that's definitely happening. In the midsized ranges, there are still available product for tenants to choose. So I mean it's been a little bit more better than Q1, but that's robust as large as basis across the country.

And then by category, you look at 3PLs that activity. I mean they've been leading market share now for a while. That activity year-over-year is up 18%, manufacturing, food and bev, auto all up 25-plus percent. So it's not only across spaces but across categories that the activity has picked up.

And just one slight thing to add. I mean, if you look at the activity of, for example, Amazon, that has picked up as well. So they've taken a larger lot spaces. And then we have incremental additional demand that's happening over the past year or so from a data center-related aerospace and defense. And that also added to the demand and a lot of them have taken larger spaces as well.

Craig, it's Peter. Just to add to Jojo and Peter's comment to give you some color on the Boohoo outcome and our 701 Pennsylvania we had multiple prospects for both of those spaces. So clearly, there has been a pickup in the larger format as you commented and much fewer choices but also the development lease that we signed in the Philadelphia suburbs in our First Park Newcastle for 226. So just echoing the broad-based level of activity, but activity has certainly picked up on the bigger spaces where it's been a little thin up until recently.

That's helpful color. I guess, maybe a quick 2-parter to stay into the 2-question limit. But how does this kind of translate into what you guys have in terms of demand at First Aurora? And then also -- just what are your updated views on SoCal where you kind of follow the debate there where we are in that recovery cycle?

Let me take Aurora and then Jojo can comment on SoCal. So we continue to have activity at the building for partial and full building users. We have a couple of new prospects since our last call. There's been no real change in the competitive set what we really need are for some tenants to make decisions. Those that are in the market looking for more space, they need to decide if they're going to take more space or not -- but it's not a lack of prospects. We just want to see more definitive decision making. Jojo?

Craig, in terms of statistics for SoCal, if you look at Q2 compared to Q1 or earlier this year, it points to a market that's off the bottom. And it's the start of a recovery. And the reason is that if you look at the growth absorption and net absorption, it significantly exceeded the deliveries. If you look at starts in our contractor construction, it's still at historic lows. And if you actually compare to the base, it's de minimis. And also, rents are kind of just like flat. And so we are looking at that. It definitely did better than what we expected. So yes, so that's what's going on with SoCal.

And the next question comes from Nick Thillman with Baird.

Scott, maybe just wanted to comment a little bit on the occupancy guide and just timing, if there was any shift when it comes to just the assets from the lease-up standpoint? It seems as though you're somewhat running ahead, you guys did message second half for some of the leasing. I'm guessing it's more so to do with some of the larger boxes that you have available and actually getting occupancy, but I just wanted to clarify that first.

Yes. So I'll go into the development leasing first. So the 900,000 square feet is basically the pure math. You take the 1.7 million square feet we discussed in our fourth quarter call, and you deduct what we signed to date. So that number hasn't changed. It's gone down. We did make some adjustments to those -- some of the development leasing. It's all in the fourth quarter now. And the -- if we do not sign any of those leases, the FFO impact is a lot less than it was, say, last time that we had a call. It's only about $0.01 per share. And then Nick, we made some other slight adjustments to some of our other core portfolio leasing assumptions in a variety of our markets. But I think the key thing to discuss here is even with these adjustments, we are forecasting to end the fourth quarter at an in-service occupancy rate of 95.5%.

That's helpful. And then maybe curious on just the acquisition appetite with the Dallas acquisition and given the fact that where you kind of have the land bank today, there maybe is not as many opportunities as some of the markets where you've had some leasing success in development. So do you view that there is somewhat an opportunity here on some of the value-add from the acquisition standpoint in markets like the Texas and the Pennsylvania file world where you have been seeing some great activity on the leasing side?

Thank you. Yes, we're always -- acquisition is always part of our business. Our local teams are always caring for good quality acquisitions with good deals. In this case, in Dallas was in Arlington submarket of the great Southeast west market of Dallas, very, very infill, very active. And this was a likely marketed deal. We came in with certainty, and we were able to acquire an asset 50% leased, projected -- we are an active investor. We've owned product in the Great Southwest for some time. So we really know that market. To your point as we're always looking for opportunities in Dallas or you mentioned yes. And so we're going to continue to look for those. But they have to meet our functional investment quality and yield criteria.

And the next question comes from Dave Rogers with Raymond James.

I just got one clarification on the Newcastle lease. Was that in the numbers you just talked about? I thought that was in the third quarter, so I didn't know if you were adding that in or not. And then just a bigger picture question. You mentioned that you started Newcastle kind of the next phase of that project. I guess where else are you excited today about kind of putting money to work in the second half of the year as clearly you leased up a good amount of your speculative space here in the first half?

You take the first.

Yes. So Dave, so first part Newcastle, the lease start date on that was in June. So it was a second quarter start. First Park 121, that's a third quarter lease start date. We signed it in the second quarter, but it starts in August. So that lease, even though it starts in the third quarter, is factored in our guidance, and that's how you get to the 900,000 square feet of remaining development leasing.

Dave, for new starts, of course, our teams are actively pursuing new land acquisition opportunities like the one we just finished in the BW quarter. And with respect to perhaps more starts this year, we are evaluating opportunities in the portfolio in Pennsylvania and Florida, a smaller deal, right here in Chicago land. So we'll keep you posted.

And of course, just want to let's not forget the $70 million worth of projects or two projects, one in First Arlington -- we call it [indiscernible] in Arlington, Texas in our First Park Miami building, that's 2 projects tolling $70 million. That's not going to be completed until the end of this year and early next year. I'm looking excited about those.

The next question comes from Vikram Malhotra with Mizuho.

Maybe just first, I wanted to get -- see if there's any update on sort of the potential to sell more land or, I guess, data center conversion land? And how that pipeline may look. I think at NAREIT, you had mentioned there were a couple of opportunities. So that's just the first one. And then second, as we think about sort of any big renewals in the back half that may, I guess, make or break the top end of the guide. The same thing can call out that may be sizable, whether it's in SoCal or any other markets.

So with respect to our efforts in the portfolio with respect to trying to convert to data center use -- our teams continue to work on those projects. They're going to be long term, as I said at a rate, it's going to take a while. We are trying to pursue some power commitments, and there's really nothing else to report there. Nothing will happen, i.e., close this year for sure, but we'll keep you posted on that.

And then on the renewal front, Vikram, we've taken care of 80% of the expirations for 2026, we're taking care of the lion share of it. If you look at the budgeted renewals that we have in our guidance, there's none that are over 100,000 square feet, so it's pretty granular.

The next question comes from Blaine Heck with Wells Fargo.

So maybe just to add on to the questions on development. I guess, how are you thinking about the best time to deploy your $410 million roughly $410 million of spec capital into development. Is it now while some of the private players might still be on the sidelines given capital and land constraints or do you guys feel as if you have a solid window of time to kind of be patient without running into the problem of excess competitive supply once you do deliver these projects?

Yes. So that's -- with respect to the cap, that's a cap and not a target. We focus solely on profitability. And with respect to that, as we evaluate our land holdings and future land acquisitions. We're trying to deliver into the deepest part of the demand or unmet demand in a particular market. So that's how we evaluate where we're going to go next. We also -- as I think you probably know, don't really want to have too many projects in any one park going at the same time. I mean, first part Miami, we could start a couple of more buildings there, but we want to get some leasing as we go. So it's really not -- we don't sit here and say, do we need to use that $400 million. We sit here and say, where is the demand, where is it not being met? And where are we well positioned to deliver a property that's going to be competitive in that marketplace for the long term.

Yes, that's fair. I guess the correct of the question was just do you feel like you have any impetus to put the money out soon before you have a lot of competition kind of coming into the marketplace and starting development of?

Look, I think development is ticking up. In some markets, the demand right now for larger -- I mean, very large million footers is not being met. So with respect to that, that's something that we're looking at. I mean as you know, we have some land holdings that can accommodate very large format properties.

Very helpful. And just sneaking in a quick second one. Sorry if I missed this, but can you break out the driver or drivers of the increased same-store NOI given that occupancy guidance was held steady. Is that rent related, bad debt related, something else?

Yes. If you look at the -- where we performed a little bit better, just our average occupancy is up slightly. -- and cash rental rates benefited that. So that's really where the benefit is from.

And the next question comes from Caitlin Burrows with Goldman Sachs.

Maybe just to follow up to one of those recent questions. So it sounds like you guys are evaluating a few markets where you could start developments, you started one in the second quarter. I guess, what are you seeing the rest of the market do? It sound -- I imagine like land is competitive, so that would suggest maybe the rest of the market is trying to get active. But are they wondering if you can talk about what you're seeing kind of at the rest of the market, too?

Sure. I'll start and then Jojo and Peter can add. Look, land is very, very difficult to come by. It's not getting any easier to get entitlements. There are real barriers there. We have seen, again, a tick up in starts. But it's a tough slog in terms of, again, getting entitlements, et cetera. So the market is going to rebound according to the pace of lease take-up and we'll be there to take advantage of the opportunities that we see. Jojo?

Yes. Just to add to what Peter said, land continues to be competitive. They are active developers there. There's continue to be capital to support that development and that's the same through acquisitions. That's not really changed over for the longest time that we've been in business. What we focus on is we try to focus on off-market deals. We try to use our brokerage relationships to try to get deals that are early in the stage. We have tenant relationships. We can lean on to try to have tenant in those situations where we can you try to get a pre-lease in a property. So these are all platform strategies were in we use our portfolio and our tubes on the ground, which are great to try to uncover those opportunities, and that hasn't changed.

Caitlin, it's Peter. The other thing I'd just add to that is, as you look at where we own land and where we're focused on buying land to the earlier comments, those are generally more infill supply-constrained market. So there -- by definition, there's going to be a little less competition in some of those markets. But to your other point, Pennsylvania is seeing more new starts given the lack of availability of million footers. Nashville is seeing an increase in supply given how strong that market has been. And South Florida continues to see activity given the price of land developers can't really afford to wait and put that into production for the most part. But if you think about our Baltimore acquisition in the W Corridor, as an example, very infill, very supply constrained, and that's part of our strategy.

And so on that, I was wondering if you could talk a little bit about the sourcing of land. I think you guys mentioned earlier in the call that the Baltimore location didn't necessarily have the entitlements yet. So versus I know sometimes when you buy land, it's like contingent on the entitlement. So yes, can you talk about that, I guess, decision to move forward with that land purchase without the entitlements versus others when it's different?

Sure. So this is in the BW corridor, the largest submarket in that market. It's a very infill site. It was excess land as part of a horse racing track where they've been holding the Preakness while that track is under renovation. The owner of the land was more interested in getting a deal done quickly. So our view is we were able to secure the land at a discount. The entitlement process there is pretty straightforward. Our plan is a buy right plan, it's zoned industrial. So it's simply a matter of when, not if, going through the process. that site should be ready for construction probably end of '28 early '29 and to emphasize the point on our pricing, the initial yields are in the mid-7s.

That initial yield is like your expectation when you build?

Yes.