First Industrial Realty Trust Inc Q2 FY2020 Earnings Call

Thanks a lot, Shelby. Hello, everybody, and welcome to our call. Before we discuss our second quarter 2020 results and updated guidance, 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, Thursday, July 23, 2020. 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. 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 Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we will open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter.

Thanks, Art, and thank you all for joining us today. I hope that you and yours are maintaining your health as we all work through these challenging times. Before we discuss the quarter, we would like to express our gratitude and bid farewell to an important member of the First Industrial family. As we previously disclosed, Bruce Duncan has retired from our Board. As many of you know, Bruce has taken on a new challenge as CEO of another REIT. Bruce joined First Industrial as our CEO in 2009 during a difficult period and provided tremendous leadership to help stabilize and transform our business model and portfolio. We wish Bruce well in his new role. As you may also have seen, seasoned FR Director, Matt Dominski, has taken over as Chairperson. Matt has been a highly productive member of our Board since 2010. We are thrilled to have Matt as our new Chair and look forward to his continued counsel and leadership. Moving now to the quarter. We produced strong results demonstrated in several different areas, including collections, leasing, investment, and capital markets. Our regional teams have done a fantastic job in the second quarter on collections. I would like to thank them for their continued diligence in working with our tenants through these difficult times. As of yesterday, we have collected 98% of 2Q monthly rental billings and so far, we've collected 97% of July billings, which is ahead of the pace we experienced in the second quarter. If we include collections from government-related tenants that regularly pay at the end of the month, our collection rate for July would also be 98%. About 65% of the outstanding monthly rental billings in the second quarter were in jurisdictions that have moratoriums on the landlord's right to evict, which we believe are a contributing factor toward the open receivables for this group. To be clear, in our calculation of this collections percentage metric, the numerator reflects cash collections, and we do not give ourselves credit under our methodology for the application of security deposit. In addition, the denominator reflects the total monthly rental billings and is not reduced for any reserves for bad debt expense or rent deferrals. Including surrendered security deposits and bad debt reserves recognized in the second quarter, our outstanding accounts receivable related to our monthly rental billings in 2Q is only $550,000. Rent relief requests have tapered off to a minimum. During the COVID-19 crisis to date, we have established rent deferment agreements with 14 tenants totaling $750,000 or about 18 basis points of annualized billings. The average term for these deferrals is 1.3 months. It appears the government stimulus has helped a number of our customers and business leaders in general are more optimistic about their prospects. The industrial business continues to perform well as commerce continues to flow through logistics facilities. As you've seen, economic activity has improved since March and April and our customers and prospects are moving ahead with new space requirements albeit with caution, in some cases. In its second quarter preliminary flash report, CBRE reported 19 million square feet of net absorption versus 56 million square feet of completion. These figures should not be a surprise given the economic slowdown attributable to COVID and the resulting drop in Q2 leasing activity. However, we are optimistic about our long-term prospects given the acceleration of e-commerce adoption and the potential for additional safety stock, generating incremental demand for logistics space. This view is supported by CBRE's recent forecast that annual net industrial absorption will total more than 333 million square feet by 2022. If they are right, net absorption for the sector will exceed the high watermark post the great financial crisis of 324 million square feet in 2016 and the all-time mark of 329 million square feet in 2000. Despite completions exceeding net absorption nationally in the quarter, our portfolio occupancy increased to 97.7% at quarter-end. We also achieved a big leasing win at our Nottingham Ridge Logistics Center in the I-95 North submarket in Baltimore. We leased 100% of the 585,000 square foot Building A to a leading e-commerce provider on a long-term basis, which commenced in late June. Considering we purchased this asset in the first quarter, we leased this property significantly ahead of the 12-month lease-up budgeted in our guidance. With just 54,000 square feet remaining to lease, we are now 93% occupied at this 751,000 square foot two-building project. Looking more closely at our portfolio performance. As of July 22nd, we have signed 83% of our 2020 lease expirations at a cash rental rate increase of 8.6%. For the full year, we expect our cash rental rate change on new and renewal leasing to be approximately 10%. The investment market has begun to awaken after a fairly quiet period in which we saw the bid-ask spread widen a bit. Most offerings had been shelved as participants saw more clarity on the direction of the economy and asset values. The federal government stimulus actions certainly helped to quell some of those concerns and based on what we are seeing and hearing; pricing has returned to pre-COVID levels and in some cases is higher. We were able to make a few acquisitions during the quarter in some high barrier markets. We acquired a 39,000 square-footer in Fremont in Northern California and added an adjacent building comprised of 46,000 square feet. The aggregate purchase price was $17.8 million with a weighted average initial yield of approximately 4.6%. We also added a 9.7-acre covered land investment in the Inland Empire for $3.5 million. The site has a 3% in-place yield for the next several years, generating some cash for us as we entitled the site. The site will accommodate a 155,000 square foot development. Thus far in the third quarter, we have closed on a 6.6-acre site in Seattle for $6.1 million that can accommodate a 129,000 square foot building. We are also excited to launch a new build-to-suit development at our First Nandina II site in the Inland Empire. The building will be 221,000 square feet and it's leased on a long-term basis to a manufacturer of material handling systems. Total investment is $22.4 million, and the initial cash yield will be approximately 6.2%. We are proceeding with all of our developments in process, which totaled 1 million square feet and a total investment of $94.7 million at June 30th. In addition to our on-balance sheet developments, construction on the 643,000 square foot spec building in our Phoenix joint venture at PV303 is progressing well. Our portion of the investment is $21 million and our targeted yield is 7%. Our on-balance sheet land holdings will accommodate approximately 13 million square feet of future developments, the vast majority of which is entitled and ready to go. We continue to move ahead on infrastructure work at several sites so that we are prepared to launch when we think economic conditions in the specific submarkets justify new starts. Moving to dispositions. In the second quarter, we sold three buildings totaling 211,000 square feet for $14.6 million. These were comprised of a building in Detroit, one in Chicago, and our last asset in Indianapolis. Year-to-date, we sold 437,000 square feet for a total of $41.1 million. As a reminder, in the third quarter, we expect to close on the $55 million sale in Phoenix, in which the tenant exercised its purchase option in 2019. Moving to our recent capital markets activity. On July 7th, we entered into a private placement agreement to issue $300 million in total of 10- and 12-year notes with a weighted average interest rate of 2.81%. On July 15th, we closed on an extension of our term loan that was scheduled to mature in January of 2021. These two executions provide us additional capital for new investment and lengthen our maturity schedule. So all in all, a successful and very busy quarter with great execution by our team. With that, let me turn it over to Scott.

Thank you, Peter. I'll start with our EPS and FFO for the second quarter. Diluted EPS came in at $0.28, down from $0.31 a year ago, while NAREIT funds from operations were $0.46 per fully diluted share, compared to $0.43 per share in the second quarter of 2019. The FFO for the second quarter of 2020 includes about $500,000 in cash bad debt expense linked to tenant accounts receivable and $400,000 in non-cash bad debt expense associated with the write-off of certain deferred rent receivables. Pier 1 has paid its July rents, and we expect them to pay August rent, leading to a $500,000 increase from our earlier guidance. Our occupancy rate was solid at 97.7%, reflecting a 60-basis point increase from the previous quarter and a 40-basis point rise compared to the same time last year. In terms of leasing activity, we started around 2.9 million square feet of leases, with 600,000 square feet being new leases, 1.6 million square feet for renewals, and 700,000 square feet tied to developments and acquisitions that are in the lease-up phase. Tenant retention based on square footage stood at 88.7%. The same-store NOI growth on a cash basis, excluding termination fees, was 6.3%, supported by rising rental rates on new and renewed leases, a reduction in free rent, and built-in rental rate adjustments within our leases. This growth was somewhat offset by a rise in bad debt expense and a slight dip in average occupancy. Our cash rental rates saw an overall increase of 11%, with renewals up 8.9% and new leases up 16.7%. On a straight-line basis, overall rental rates rose 32.4%, with renewals up 30.6% and new leases climbing 37.5%. As Peter mentioned, we completed two capital market transactions in the third quarter that improved our maturity profile at favorable rates. First, we agreed to issue $300 million of fixed-rate senior unsecured notes in a private placement. This includes two tranches: $100 million with a 10-year term at a 2.74% interest rate, and $200 million with a 12-year term at a 2.84% interest rate. We anticipate closing this offering around September 17th. In the meantime, we plan to use these funds to reduce our line of credit, enhancing our liquidity for new investments and a secured debt maturity in 2021. Additionally, we refinanced our $200 million unsecured term loan, which was initially set to mature in January 2021. The new loan has an initial maturity of July 2021, with the option to extend to July 2023 through two one-year extensions. This loan features interest-only payments and has an interest rate of LIBOR plus 150 basis points. We also established new interest rate swap agreements to convert this loan to a fixed interest rate of 2.49%, effective February 2021. This refinancing will yield about a penny per share in savings in 2021. Following these transactions, one of our remaining debt maturities in 2021 is the $63 million secured debt due in the fourth quarter, which we can cover with our line of credit, bolstered by proceeds from our private placement offering. The other maturity is our line of credit set to expire in October 2021, which we can also extend for another year at our discretion. Our leverage remains well-managed, with our net debt plus preferred stock to EBITDA ratio at 5.2 times as of June 30th. Regarding our guidance communicated in our press release last evening, we are now projecting NAREIT FFO and FFO before one-time items to be within the range of $1.76 to $1.84 per share, with a midpoint of $1.80. This represents a $0.02 increase per share compared to the midpoint of our previous guidance from the first quarter. The increase is mainly due to the early leasing of the 585,000 square foot building at the Nottingham Ridge Logistics Center and two months of additional rental income from Pier 1. However, this is slightly offset by increased interest expenses based on our plan to reduce our line of credit with the private placement proceeds soon. We expect average quarter-end occupancy to remain in the 96% to 97% range, and our anticipated cash bad debt expense is set at $900,000 for both the third and fourth quarters. Please be aware that this guidance doesn’t account for any potential write-offs of deferred rent receivables from tenants facing financial challenges. Other key assumptions include same-store NOI growth on a cash basis before termination fees of 3.25% to 4.25%, an increase of 25 basis points at the midpoint, tightening the range. Our G&A guidance remains between $31 million and $32 million, which includes the expected costs associated with our completed and ongoing developments as of June 30th, as well as the planned launch of First Nandina II in the third quarter. For the entire year of 2020, we anticipate capitalizing about $0.04 per share of interest costs related to our developments. Our guidance does not reflect the impact of any future sales, acquisitions, or new developments beyond the anticipated sale of the building in Phoenix in the third quarter, for which the tenant has exercised its purchase option, nor does it include the effects of future debt issuances, debt buybacks, or repayments apart from the previously mentioned $300 million private placement expected to close around September 17th. The guidance does not take into account any potential gains from the final resolution of an insurance claim concerning a damaged property or the possibility of equity issuance. Now, I will turn it back over to Peter.

Thanks, Scott. Before we open it up to questions, let me say that I am incredibly proud of the way our team has performed in this difficult environment and thank them for their dedication to serving our customers well and doing it safely. Our company is built for the long term and we are well positioned to drive cash flow growth for shareholders by serving logistics needs of a range of essential and emerging businesses, while capitalizing on the secular drivers of e-commerce. With that, we will now move to the question-and-answer portion of our call. We ask that you please limit your questions to one plus a follow-up and then, you are welcome to get back in the queue. Operator, would you please open it up for questions?

Your first question is from Craig Mailman of KeyBanc Capital Markets.

Hey, good morning guys. Peter, just maybe circling back to your reference of the net absorption here in the second quarter versus the new supply. Clearly, a little bit of an imbalance but hopefully, a little bit temporary here. Just with that backdrop though, what are you seeing from tenants and tenant rent brokers in terms of where they think rent levels are? Are they pushing back? Are they asking for more concessions or is it a realization that supply could get choked off here and things could tighten up pretty quick?

Well, things are a lot different in the last 45 days than they were in the prior few months as you can imagine but it looks now, we do think there is going to be some rent growth, depends on the market, obviously. And in terms of concessions, we're just not seeing anything that's any different than what existed pre the virus. There may be certain areas where there is an oversupply of big boxes. You know that before the virus there were a few markets that had additional supply, so maybe there is some additional concession there but generally speaking, the markets are pretty strong. It's obviously still clearly a landlords' market and so, we are pretty optimistic about our opportunity to grow rents.

Okay. You had some good execution in Baltimore and the IE, but the rest of the development pipeline understandably didn't see much leasing activity. I'm curious about the status of those projects and what the pipeline looks like.

Sure. Looking at the recently completed projects at the end of last year in Dallas and Houston, I'll start with Houston. There's a great project in Katy along West I-10 and State Highway 99, featuring two buildings with freeway frontage, and we really like it. However, showings have been limited due to COVID, and we're currently at 15% leased. We will continue to focus on enhancing the leasing efforts there. In Dallas, there’s a project in Fort North Worth and another in Louisville. Louisville has a tighter market with less supply and significant demographic growth, making it an attractive area; it is currently 18% leased. This market has been more open for showings and RFPs, so we are excited to announce more deals there. Regarding First Fossil Creek, it's designed for one to two tenants, and we are searching for the right fit. For First Redwood and IE, we just finished a building at the end of last month, and we're already receiving RFPs, which is great as we are well within our 12-month lease-up period. Finally, regarding other developments like First Independence Logistics on Sawgrass, Redwood, and I-21 in Dallas and Miami, those projects are still under construction.

Thanks, Jojo. Good morning, Craig, it's Peter Schultz. On our project in Philadelphia, that was really just completed in the last couple of weeks. Pennsylvania, as you may know, had a construction halt for several months, so we're a little bit delayed there, which certainly also impacted inspections and activity but that's a submarket that's very tight with limited supply. And as Peter mentioned, a couple of minutes ago, we've definitely seen an increase in activity in the last 30 days broadening across industries and space sizes. Our other project in Central Pennsylvania, as you may recall, was the second of the two-building project there that's 75% leased and in the last 30 days, we've seen a pickup in inquiries, traffic, and RFPs there and more activity in the 200,000 square foot plus range than we'd seen in a couple of months. So clearly, work to do and we'll keep you posted on our progress.

Your next question is from Ki Bin Kim of SunTrust.

Good morning out there. When you guys mentioned improving customer dialog, what does that really mean? And can you put a little more details behind that?

Peter here. We have made a concerted effort to engage with our tenants and assist them in accessing PPP and similar support. Our main goals were to ensure they were aware of the available resources, guide them through the process, and help them establish banking relationships that would facilitate their applications and funding. We believe this initiative has been beneficial to some extent. While we do not have specific numbers on how many tenants received PPP funding, we know that around 30 did. However, we are uncertain about how they utilized the funds since part of it can be spent on non-payroll activities. Nonetheless, maintaining this dialogue has positively impacted our relationships with tenants. Additionally, we have addressed weather-related issues at some properties, such as flooding, despite the challenges posed by the pandemic-related shutdowns. All of these efforts contribute to tenant retention and strengthening relationships, which we believe will ultimately enhance value for our shareholders in the long term.

Okay. And if you take a step back and if I'm just incorporating everything you're saying now and kind of the improved outlook, how does that translate into your willingness for capital allocation, derisk your endeavors like development? And when is the right time to maybe reignite that?

Yes, we are exploring various opportunities. The Nandina II project is a notable example. We are currently engaged in the build-to-suit sector and responding to RFPs, so we are keen to expand in this area. Our main growth driver has been and will continue to be speculative development. We are focusing on two factors that will influence our decisions on new projects. First, we want to see the strong discussions we are having with several tenants on our projects translate into signed leases. When that occurs, it will give us confidence that this new activity is sustainable. The second factor we are monitoring is the ongoing situation with the virus and how it impacts activities and policies at both the state and national levels. We want to determine whether these elements will negatively affect the economy or if they will allow it to reopen, albeit potentially at a slower rate. If we observe sustainability in both tenant activity and the economic environment, we will feel confident moving forward with new projects.

Your next question is from Rob Stevenson of Janney.

Hi, guys. Any tenants of size that are likely or known move-outs when looking at the expirations through early 2022 at this point?

Rob, it's Scott. Looking ahead to 2021, our largest tenant expiration is approximately 477,000 square feet in Atlanta. That lease is set to expire in May of next year, and we haven't advanced much in discussions with that tenant. I would characterize our 2021 lease maturities as very detailed when considering both tenant industries and regional factors.

Okay. And then, can you guys talk about demand in the market these days for the non-core assets, do you expect to continue to sell in the back half of the year and is the pricing what you would expect for that and any urgency to get more of this done given the rhetoric on doing away with or limiting 1031 exchanges going forward?

Hi, this is Jojo. In terms of the sales market and investment market, we experienced a slowdown in March, April, and May. However, buyers have returned for all product types across the markets, driven by the pause and the continued leasing activity in the industrial sector, along with rising rents. For the quarter and throughout the year, we do not anticipate significant changes in sales activity. We have heard that some sellers have held back their portfolios and didn’t want to accept pricing during that period, but now those portfolios are coming back and our pipeline is expanding. We see our sales activity returning to pre-COVID levels. Regarding our strategy, there are no changes; portfolio management is ingrained in our approach, and we will continue to evaluate it asset by asset. We are not in a rush and are focused on maximizing value, as Peter mentioned in previous calls.

And how much of that is going to be driven by what you guys do on spec development and need to spend on the development pipeline? If you guys continue to have a lower development pipeline, does that mean that you're unlikely to sell as much in the back half of the year to fund construction cost in the early part or the end of the year or early 2021?

No. Those two decisions are not connected. We really want to maximize the value of both outcomes so if it's time, quite often what drives our decisions with sales is there may be a leasing opportunity in a particular asset, which we may hold off the market until we lease it up, but that all goes toward maximizing the value of that asset. That won't have anything to do with whether we think it's time to start a new development in a given high barrier market, those are two different decisions.

Your next question is from Michael Carroll of RBC Capital Markets.

Yes, thanks. Can you provide some color on, I guess, the small amount of uncollected rents that you have to date? I guess, are there any themes within that bucket, I guess, outside of that majority of the assets are located in jurisdictions that have restricted evictions, I mean, are these tenants concentrated in any certain sectors or anything like that?

I would say that the overall theme is that any business whose revenues depend on gathering people, such as tent rental companies, health clubs, sporting goods or fitness businesses, those that serve restaurant supply and entertainment, have not been performing well in the last quarter or so. However, aside from that, the situation isn't too bad.

Okay. Within the 2% of uncollected accounts that you mentioned in the second quarter and up to July, what have the tenants been saying? Have you had conversations with them, and what is their sentiment like? If you were to pursue evictions, do you think they would start paying, or would you just end up with lower occupancy and need to lease that space again?

Well, obviously, those that are behaving poorly, we're going to have further conversations with them but I would say that, of that 2%, some will become bad debt, some will be collected, some may be deferred, and it's hard to say right now. We're just happy it's a very small number and we're happy that our tenants overall are doing well and able to pay their rent.

And in some cases, there will be a negotiated move out because we have a number of cases where the in-place rents are well, well below market.

Yes. When we have tenants who are doing well where we know we can raise the rent, we'll be very active around swapping that out.

Your next question comes from Eric Frankel of Green Street Advisors.

Thank you. Just going back to your dispositions, do you still feel pretty good about your overall goal and have you seen pricing change at all or do you think your pricing is changing for the assets you want to sell?

From a timing standpoint, Eric, most of our sales are typically back ended, so taking a pause in the second quarter didn’t really disrupt our plans. We’re seeing solid activity now, with buyers returning to the market and engaging in meaningful conversations. We maintain a positive outlook for sales in the remainder of the year and believe we will remain within our guidance range.

Okay, thanks. I want to revisit your leasing results. You mentioned that for 2020, your cash and releasing spread was approximately 8.5%, which is slightly lower than what you reported in the first two quarters. You indicated that you anticipate the overall annual cash releasing spread to be around 10%. Is there anything we should take from that slight decrease in July, or is it simply related to the timing of specific leases?

Yes, I don't think there's anything to interpret from that. Overall, we're expecting it to be around 10% for the year. Sometimes it can be influenced by the mix of new and renewal leases, but we are still seeing strong rollover rent growth.

Your next question is from Mike Mueller of JPMorgan.

Yes, hi. In terms of lease duration, it looks like in 2019 your new leases were 5.6 years and the renewals were 4.3. If we look at 2020 year-to-date, and it looks like renewals are 7 to 8 years and the new is in the low-to-mid 4s. Can you just give us a little color on the changes there?

Overall, the average lease term is about 7.5 years, which is actually an increase compared to the current run rate. Renewals have seen a slight uptick, primarily due to a significant tenant renewing for a 10-year term, which affected the renewal figures. Generally, we expect new leases to be slightly higher while renewals may be a bit lower, but the large tenant renewal has influenced the overall numbers.

Your next question is from David Rodgers of Baird.

Yes, good morning, guys. I wanted to ask specifically about kind of blend and extend and how you guys have maybe tackled some of that with respect to deferrals. And maybe a broader question then around just the leasing activity. A great commencement in the second quarter, and would we expect to see the commencement volume slow a little bit in the third quarter just as kind of COVID catches up to the numbers that you report?

Yes. As far as the one in extend, under deferrals we talked about it in the script. So the deferrals, we've deferred in total about $750,000 of rent, all of those agreements that we've entered into, they'll repay that deferred rent by the end of '20. So we really haven't done much on the one in extend.

And it's too early to tell but they've all been paying so far, so...

Yes. And Dave, you contacted us this morning about the methodology for same-store. As long as the deferrals are repaid or there are agreements to repay within 12 months, there isn't really a timing difference in same-store. For instance, if we bill $100 in June and the tenant repays us over the third quarter, we record that revenue in June for same-store purposes. However, our deferrals are quite minimal, only about $750,000.

Regarding the lease commencements in the third quarter and the activity observed in the second quarter, I acknowledge that the commencements in your reported figures were quite strong. Do you anticipate that the activity from the second quarter signings will reflect in the third quarter, or should we not expect to see that?

David, you're asking about the 83%, the expirations we'd taken care of for 2020. Yes, I'm guessing by the end of the third quarter that number is going to be pretty close to 100%, except to the extent that there are any move outs. And then, in the third quarter on our call, we should have a pretty good idea of the lease signings for 2021.

And we're actually not behind on developments, because as you know, we didn't have any new starts and much of the pipeline isn't finished yet and except for the asset that we leased in Baltimore almost immediately. So from that standpoint, we're kind of caught up if you will too with prior year performance.

Your next question is from Omotayo Okusanya of Mizuho Securities.

Yes, good morning. Could you talk to us specifically about what you're seeing in the Houston market?

Sure, we discussed our portfolio earlier. Currently, it’s performing well at about 98% occupancy, with nearly full rent collection at 99.7%. In terms of development, I mentioned earlier that our Grand Parkway Katy project with freeway frontage has had limited showings. Overall, the market is experiencing more construction than absorption, particularly in the North submarket, which is facing a significant imbalance of supply and demand. While growth in PV and Houston is positive, there needs to be more absorption before rents stabilize again.

Got you, that's helpful. And then, your same-store cash NOI calculation this quarter are you including the rent deferrals or excluding them from that number? There seems to be a wide range of practices happening this quarter across the industrial space?

Well, in my example, we are including rent deferrals in it. Again, for us, it's an immaterial number. If you look at the industrial peer group, many of us got together a couple of years ago to standardize definitions and we're all doing it that way.

Your next question is from Jon Petersen of Jefferies.

Thanks for that. Could you provide more context on how tenant behavior has evolved, particularly in terms of demand across different regions and building sizes? It would be helpful to know what trends you've observed in the last three to four months and what your expectations are for the remainder of the year.

Peter Schultz, you want to start with that and then Jojo, you can provide your thoughts that would be great. Sure. Good morning, John. It's Peter Schultz. First, I would say, during the first half of the second quarter, the majority of the activity was concentrated in large tenants, large spaces, food and beverage, e-commerce, 3PLs, and medical, most notably. As an example, the deal that we commented on in our remarks at our Nottingham Ridge project in Baltimore. The second half of the quarter, we saw activity broaden across industries and space sizes and in fact, the majority of the leases that we signed for a vacant space in the second quarter was 75,000 square feet or less. In the last 30 or 45 days, we've seen a noticeable uptick in requests for proposals, tours, inquiries and again, a broadening of industries, home improvement, paper and packaging, building materials, some home building-related and communications. And in Pennsylvania alone, as an example, since the beginning of June, we've seen a couple of dozen new requirements; the average square footage is about 350,000 feet. So it's been broad-based across the country, we've seen activity accelerate across size, ranges and we continue to be encouraged by the increase in confidence and the overall activity from prospective tenants. We'll see how much of that gets converted into signed deals in the coming months and we'll certainly update you on that on our next call.

That was a very comprehensive answer by Peter. The only thing I will add is that, in addition to the 3PL, the e-commerce, and food-related industries, other activity that Peter mentioned includes anything related to the supply chain for businesses, which has been quite active from small to large. For example, the material handling equipment tenant that we had in First Nandina II is really focused on helping tenants improve their warehouse management solutions, contributing to what I believe is the growth part of our industry. We are also observing some signs of on-shoring. Although it’s not as significant as what we’re seeing with e-commerce and our 3PLs, there are now some on-shoring companies attempting to relocate their foreign operations to the U.S.

Can you expand what sort of geographies are we seeing in the onshoring?

Basically, across the U.S. favoring markets where you have a lower cost of doing business.

Got it. That's really helpful. And then, I was just looking at your top tenant list and unlike, or I guess, very similar to all of your peers, Amazon finds themselves on the top; I think it's 4%, a little over 4%. I'm just curious, industrials have historically been a sector, always been a sector with very diversified tenant basis but Amazon is a huge part. I mean, at what point do you worry about having too much tenant concentration or do you kind of put some certain tenants like Amazon in a different bucket where you don't mind if it's a high percentage?

Right. So we do pay attention to the concentration in our portfolio. We don't want too heavy a concentration with any particular tenant. Obviously, Amazon is a fantastic company with a tremendous growth trajectory and from a competitive standpoint, we like their position in their world. So that plays a big factor in how we look at Amazon, yes, they're about 4% of our annual base rent at the end of 2Q. We certainly do more business with Amazon, I don't know that I can sit here today and tell you what the cut-off would be but we certainly have additional appetite capacity for Amazon.

Your next question is a follow-up from Eric Frankel of Green Street Advisors.

Thank you. Scott, maybe you could just walk us through how you're thinking about your same-store forecast. Obviously, you increased the low end a little bit but you're still essentially guiding to roughly flat NOI growth for the second half of the year. So I'm just wondering are there any assumptions in there that we might be missing.

Yes. The increase in our guidance by 25 basis points is related to a few factors. One reason is our updated expectation of receiving additional months of rent from Pier 1; we've already received rent for July and are assuming we'll receive it in August as well. Another factor is our reduced cash bad debt expense in the second quarter. However, it’s important to note that same-store metrics do decline in the second half. A significant portion of this decline, approximately 4 percentage points, is due to the impact of free rent. In the first half of 2020, we benefited from free rent burn-off on our Nandina Building in Southern California, which we won't see in the second half of 2020. Additionally, in the latter half of 2020, some new leases included in our projections have free rent associated with them, unlike the previous year. This free rent impact is substantial, and there's also about a 1 percentage point decline in occupancy, largely due to Pier 1 moving out, along with our reassessed bad debt assumption. We accounted for $800,000 in cash bad debt expense in the first half of the year, but we expect it to rise to $1.8 million in the back half. These three factors are the key reasons for the decline in same-store performance when comparing the first half of the year to the second half.

Thank you for that information. I have one last question. Your outlook seems much more positive than it was a few months ago. Are you considering any speculative development opportunities? Are there any markets where the supply and demand dynamics might support that?

Yes. I mentioned this earlier, but we are evaluating our portfolio at our land bank today, which has the potential for about 13 million square feet of development, most of which is entitled and ready to go. We are currently exploring opportunities both within our existing portfolio and potential acquisitions for growth outside of it. Once we are confident that the current business environment is stable, we will be prepared to initiate new speculative developments. We would like a bit more time to ensure that the positive discussions we are having with tenants translate into actual leases for the assets we are currently discussing, and to avoid a return to the shutdown conditions we experienced in March and April.

There are no other questions in queue. I'd like to turn the call back to Eric Baccile for any closing remarks.

Thank you, operator, and thanks to everyone for participating on our call today. Please feel free to reach out to Scott or me with any follow-up questions. We wish you and your loved ones a healthy and safe summer.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.