Good day, and welcome to the Industrial Realty Trust, Inc. Second Quarter Results Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead.

Thank you very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our second quarter results and our updated guidance for the year, 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, July 18, 2024. 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, 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. As we discussed on our last earnings call, 2024 is all about leasing. Since that call, our team has delivered some big leasing wins, both in our core portfolio and within our development projects. We're also excited to discuss the three new development starts that we kicked off in the second quarter. More on all of this shortly. Looking at the industrial market broadly, fundamentals are slowly improving, although as expected, U.S. industrial market vacancy ticked up by 40 basis points to 5.7% as last year's starts continue to come online. New starts remain disciplined, totaling 50 million square feet in the second quarter, down 55% from the peak in the third quarter of 2022. With respect to demand, the market saw an uptick in tenant requirements being converted into leased spaces. Year-to-date net absorption nationally was 70 million square feet with 48 million within our target markets. As the pace of demand continues to improve and new starts remain muted, we could see slower increases in vacancy in the near term and potential declines in 2025. Turning now to our leasing wins. For 2024, we're now through 88% of our expirations by net rent with a cash run rate change of 45%. This population now includes the renewal of the 221,000 square footer in the Inland Empire West, we spoke about on prior earnings calls. Our 2024 guidance range for the increase in cash rental rates on new and renewal leasing remains 40% to 52%. The lease extension for the other significant Inland Empire West rollover, the 300,000 square footer is still in progress. Note that the midpoint of our FFO and cash same-store NOI guidance do not include any benefit from this potential renewal. We're also beginning to see some early decision-making on our 2025 lease expirations. I'm pleased to report that we recently inked the renewal of our largest 2025 expiration, a 1.3 million square footer in Pennsylvania. We'll provide you an update on our progress for next year's rollovers on our third quarter call as we have done in prior years, but we're off to a strong start. As I mentioned at the beginning of my remarks, in the second quarter and third quarter to date, we signed six speculative development leases across several markets, including Southern California, which totaled approximately 1.1 million square feet. This is almost half of the 2.3 million square feet of speculative development leasing that was included in our updated 2024 FFO guidance provided on our first quarter call in April. In the third quarter, we inked a full building lease for our 461,000 square foot first pioneer project in the Inland Empire East to a 3PL. We also just signed a 61,000 square foot lease at our first 76 project in Denver. In the second quarter, we signed a lease for the entire 359,000 square foot First State Crossing project in the Philadelphia airport market to a leading food and beverage company. We also leased the remaining 64,000 square feet at our First Steele asset in Seattle and a 120,000 square feet at First Park 94 in the Kenosha submarket of Chicago. In South Florida, at First Park Miami Building 12 that we just completed in the second quarter, we've already leased a third of the 136,000 square foot building. The South Florida market continues to outperform, and given our success there, we are starting two new projects. First Park Miami Building 3 is now underway. This is the latest phase of the 13 building 2.5 million square foot park where since 2021, we have successfully leased and placed in service 1.1 million square feet of building that on average leased up well within our pro forma. Building 3 will be a 198,000 square footer to serve one or multiple customers and the total investment is estimated at $50 million. In a highly infill location in Pompano Beach in Broward County, we started a 60,000 square footer with an estimated investment of $15 million. The site is located directly between I-95 and the Florida Turnpike, an attractive location for businesses serving the Tri-County area of Broward, Palm Beach and Miami-Dade. Our combined estimated yield on these two South Florida projects is approximately 7%. We're also starting a 425,000 square foot development in the Northeast side of Houston and our infill site with frontage on Interstate 610, the first loop Beltway. Total investment is expected to be approximately $44 million with a cash yield of 7%. Prior to beginning construction, we inked a lease for 50% of this building. Moving to dispositions. In the second quarter and third quarter to date, we sold an incremental $90 million of assets to bring our year-to-date total to $138 million.

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.66 per fully diluted share compared to $0.61 per share in 2Q 2023. Our cash same-store NOI growth for the quarter, excluding termination fees, was 5.6%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, rental rate bumps embedded in our leases and lower free rent, partially offset by lower average occupancy. We finished the quarter with in-service occupancy of 95.3%, and we have approximately 200 basis points of opportunity from developments placed in service in 2023 and 2024. Summarizing our leasing activity during the quarter, approximately 2.9 million square feet of leases commenced. Of these, 500,000 were new, 1.2 million were renewals and 1.2 million were for developments and acquisitions with lease-up. Before I touch on guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in two of our bank loans. Also, the incremental funding required to complete our current development projects will be covered by our third quarter sales proceeds to date and our projected excess cash flow after dividends and capital expenditures during the construction period. Moving on to our updated 2024 guidance for our earnings release last evening. Our guidance range for FFO is now $2.59 to $2.67 per share, which is $0.03 higher at the midpoint than our prior guidance. This is primarily due to the progress we have made in leasing up our development since last quarter's earnings call. Note, as we detailed on our fourth quarter earnings call, our guidance excludes approximately $0.02 per share of accelerated expense related to an accounting rule that requires us to fully expense the value of granted equity-based compensation for certain tenured employees. Including this $0.02 per share of expense, our NAREIT FFO guidance range is $2.57 to $2.65 per share. Key assumptions for guidance, all of which are unchanged since our last earnings call are as follows: quarter end average occupancy of 95.75% to 96.75%, same-store NOI growth on a cash basis before termination fees of 7.25% to 8.25%; and primarily driven by increases in rental rates on new and renewal leasing, along with rental rate bumps embedded in our leases. Note that the same-store calculation excludes the 2023 onetime tenant reimbursement that we previously disclosed. Guidance includes the anticipated 2024 costs related to our completed and under construction developments at June 30. For the full year 2024, we expect to capitalize about $0.05 per share of interest. Our G&A expense guidance range is $39.5 million to $40.5 million. This includes the roughly $3 million or $0.02 per share in accelerated expense I referred to earlier. Lastly, guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or payments nor the potential issuance of equity after this call.

Thanks, Scott. Congratulations again to our team for several significant leasing wins since our first quarter earnings call. For the development leasing progress we have achieved, we're excited to allocate incremental capital to our South Florida portfolio as well as our new Houston project, which is already 50% leased. Our team is steadfastly focused on delivering on the remaining development leasing opportunities in our portfolio, which will contribute to our cash flow growth in 2025 and beyond. Operator, with that, we're ready to open up for questions.

Our first question comes from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. You sold $90 million of properties recently. Can you talk about the health of the disposition market today versus last year, given that we still yet to see any rate cuts and the banks have become more conservative on lending on industrial in 2024 to some of these potential buyers of your dispositions?

We are seeing a strong response to the assets we are bringing to market, with a significant number of non-disclosure agreements and bids. There is a considerable amount of capital available. The assets we are selling are particularly attractive to local buyers, and 1031 buyers have returned, which indicates there is robust capital looking for new investment opportunities in this area.

Okay. And then, Scott, the 200 basis points of occupancy upside from leasing the second half '23 and first half '24 developments that you guys talked about in the release. Is that inclusive of the leasing that you've announced in the release and on the call today? Or is that in addition to those announced leases?

That's in addition to that, Rob. So it's the 1.2 million square feet of development that we still have in our guidance for 2024, all assume to happen in the fourth quarter.

Okay. And then what is the difference yield-wise today for you guys leasing an asset on a multi-tenant basis versus a single-tenant basis? Is that material?

Hey, Rob, it's Peter Schultz. I would say it depends on market and asset. In some cases, it would be a little bit better, but not a wide margin today. Jojo, anything you want to add to that?

Yes. I would agree. And then to the extent that the tenants get smaller, there's a little bit higher rent, but then you have to offset that with the increase in rising costs. So overall, just like Peter said, it's not a material difference.

Okay. Thanks, guys. Appreciate the time this morning.

The next question comes from Craig Mailman with Citi. Please go ahead.

Hey, good morning. Just, Peter, I want to circle back up on your commentary that demand is starting to at least get a little bit better here and put that in the context of the 1.1 million square feet of development leasing you guys have done since 2Q. I mean as you look at those deals, what was the mix of deals that had been in the works for a couple of quarters versus maybe some that popped up more recently because people are trying to start to make decisions at this point?

We have experienced a mixture of both longer and shorter gestation periods for deals. As you might expect, the larger deals have been under discussion for an extended time and continue to take longer to finalize across various locations. However, we've also had examples of shorter gestation periods, such as the lease we signed in Denver and the lease in our newly completed building at First Park, Miami. These were not prospects in the first quarter but were completed in the second quarter. Another example is the partial build-to-suit in Houston, which had a gestation period of about three months. In general, you can say that the timeframe for smaller deals is shorter, while larger deals have been taking longer, consistent with trends from previous quarters.

That's helpful. Regarding the first pioneer lease to the 3PL, this tenant segment has seen some delays. Can you elaborate on the needs of that tenant? Also, in terms of final returns, considering the concessions impacting that market, was it significantly different from what you had initially projected? Any details you can provide would be appreciated.

Jojo, do you want to take that?

Sure. Thank you. Overall, this is a third-party logistics company operating in both the U.S. and Canada. This market was characterized by growth, specifically for 460 First Pioneer. The requirement was to create a state-of-the-art facility featuring VNA technology, very narrow aisles, some robotics, and numerous green initiatives. Our facility was ideally suited to meet that need, which is why it was selected. In terms of performance, the rents achieved surpassed our initial projections. While I won't provide the exact yield, I can say it falls within the low to mid-7% range, which adds significant value.

That's helpful. And then just one more to slip in here. The 1.3 million square foot renewal in PA, I know you guys aren't giving a ton of details, but is the spread on that consistent with where you guys have signed the average in '24? Or is that materially different?

Craig, good morning. It's Peter Schultz. You're right. We have a confidentiality agreement with that tenant. So we're not able to disclose much information. I will tell you that they exercised a fixed-rate renewal option that was negotiated in the second half of 2017.

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

Thanks, good morning. Could you start off by commenting on what you're seeing from a leasing demand standpoint, the improvement you're seeing? I know you mentioned some of it. I was just curious about the sustainability of that. And the pickup in leasing, congrats on it, was it back-end weighted in the quarter? Because, Peter, I know you have a good poker face, but I didn't get the sense that there was this much activity from our kind of last NAREIT meeting?

I'll start with this and then Peter and Jojo should chime in. Look, obviously, as we achieved some progress here with leasing, the data become more clear. Decision-making on the whole still remains fairly deliberate. It's still early to determine the resiliency and the pace of demand even though we see today, indicators are pointing in the right direction. So we would suggest not to draw potentially long-term conclusions from one quarter of activity. But we can say that things are feeling a little bit better. Peter, do you want to add to that?

Ki Bin, I would just add that we're seeing more inquiries, more inspections, more RFPs. And as we've talked about now in the answer to a couple of questions, notably, we were pleased with the decision-making timing of several deals that we've just announced in our development deals, where, as Peter said, the larger deals continue to move slower. And that hasn't changed, and we don't really see any indication that it will change. But it's a little bit more buoyant than it was earlier in the year.

Let me say one more thing on this. There are still several alternatives to each space for the prospects that are available. And until that changes, the sense of urgency and the deliberate pace aren't going to change. And having said that, the national pipeline is down to about 289 million square feet from a high of over 600. So we're getting there. And hopefully, net absorption will continue to improve as the year goes on.

Okay. And in terms of the acquisition markets, what does the opportunities look like for you in pricing? I know you bought a small deal in L.A. this quarter had a good yield. It's also curious how you might compare some potential yields that you might get on acquisitions versus development yields you're getting?

Jojo?

The market remains competitive. There are many buyers for one-off assets, acquisitions, and land for development, and capital is plentiful across most markets. Currently, there is a higher pace of investment compared to the first quarter and definitely in comparison to the fourth quarter of last year. Investors are returning. We are very pleased with our acquisition in the Vernon submarket of Los Angeles, which is one of the tightest markets with abundant potential. We acquired this property as an off-market deal, closing with a large tire manufacturer who enjoys working with us. This partnership led to another property transaction that did not go on the market.

Okay. Thank you, guys.

The next question comes from Nick Thillman with Baird. Please go ahead.

Hi. Good morning, guys. I wanted to go back to development and kind of just touch on the activity you're seeing on the space that remains to be leased. Any change - material change here? It sounds as though activity is a little bit better. And then have you changed kind of the concessions you're willing to offer on lease up here?

Peter, do you want to start with that one?

Sure. So let's talk about Denver first. We have our largest building there, 588,000 square feet. We continue to see activity from partial and full building users, I would say, more activity with full building users at this time. The supply picture has improved in Denver. The competitive set has been reduced by half for that building as a result of a large 3PL leasing a 1 million feet and a corporate occupier putting a building under contract to buy. So that's certainly a good backdrop for decision-making there. As we've talked about, the larger deals have been moving slower for a number of reasons, including that they have more choices. So fewer choices is a good thing. The smaller building endeavor, we continue to see pretty good activity. We're pleased with the lease we just did that got done, start to finish from when we first started discussions with that tenant in less than 90 days. So that was a good indication of some urgency. In Pennsylvania, the building that we put into service at 50% occupied. We're in discussions with a prospect for the balance of that building. And then in Orlando, the fourth building and our first loop project, we have some activity there. We'd like to see a little bit more. Jojo?

Yes. Regarding renewal activity, we have been very active in this area, and it has not changed significantly. As Peter Baccile mentioned, there are some options available. The market is competitive, but we are quite satisfied with the renewal rates we achieved, with little change in free rent or tenant improvements. We successfully leased the first pioneer building under current market terms, with long-term agreements that included market standard tenant improvements and free rent. If you look at our activity, the only development completed in 2023 in the Southern California market that remains unleased is our 83,000 square foot building located in Inland Empire West, which is a low coverage site. This type of facility is currently experiencing slow interest due to its extensive surface use. However, we anticipate that as port activity increases in the future, it will attract more interest. We have also just finished construction on other buildings in Southern California, and we are in the early stages of the leasing process. As noted, we have budgeted for a one-year lease-up period for those newly completed buildings.

That's helpful. And then going back to dispositions, kind of what you've completed year-to-date, you're kind of near the upper end of the range for this year. Is there more opportunity there? Or should we kind of just view it as you're well funded, anything else kind of being noncore sort of sales?

I think you're correct. We've got plenty of funding and we'll continue to dispose of assets where we think the growth opportunity is passed and we can take that capital and redeploy it in better use, the volume of sales is likely to be lower going forward.

That's it for me. Thanks.

And the next question comes from Rich Anderson with Wedbush. Please go ahead.

Thank you. Good morning and great quarter. A question on market rents versus cash releasing spreads. I don't know if you mentioned what you're seeing nationally or in your portfolio in terms of market rent let's say the number is flat or up a bit or down a bit. And you have 40%, 50% cash leasing spreads. At what point do you think we get to a situation where because of that sort of imbalance in those numbers that we get closer to a cash leasing spread that's more pedestrian in nature, more like a 10 percentage number. Does that happen based on that math anytime soon?

We've looked at that. And the resilience of that mark is pretty good. So it has some duration. Obviously, it depends solely on whether rents, you call them flattish, let's go with that. If they were to fall significantly, then the resiliency of that mark goes away. But under what you might say one or two derivatives analysis that mark has some resiliency, it will clearly come down each year because we're not growing like we were in '21 and '22.

Okay, that's understandable. Regarding your discussions with tenants, we might hear more about tariffs during an election year, depending on the outcome. How does this impact your tenants' mindset, and how do you view it in terms of opportunity or potential disruption? What are your thoughts on the political landscape in 2025 and beyond?

Yes. I think, obviously, the biggest question around that is the tariff question. Interestingly, both candidates are for tariffs seems that Trump is for much higher tariffs. The tariffs generally aren't going to be great for the country if they create a ton of inflation, but getting more specific to our space and our prospects, the tariff rates right now are on an increasing on semiconductors, EVs, lithium batteries, solar cells, ship-to-shore cranes, things like that. Those are not the kind of products that generate demand for our warehouses. Toys, furniture, that's a different conversation. That product is in our - or in our peers' warehouses. So it really depends a lot of the discussion is around manufacturing. We don't have manufacturing tenants by and large. We don't want to have manufacturing tenants. So we'll see where this goes. Clearly, the management of the economy is key to our prospects and key to consumption. So we'll see.

But you may not want manufacturing, but suppliers to those manufacturers, you might think that this could push for more of a near-shoring, re-shoring type of phenomenon. Is that a fair statement?

Correct. Yes, it is. And those vendors for those manufacturers would be our tenants. And depending on where the near-shoring is and right now, it looks like Mexico by and large. That's going to help markets in Dallas, Houston and depending where in Mexico, maybe even Phoenix. So that would be a tailwind to demand for us.

And just to follow up, have the tenants raised any concerns about this during your conversations?

Again, not really, no, because we're not really spending a lot of time with the manufacturing tenants.

Fair enough. Okay, thanks very much.

The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi. Good morning, everyone. Regarding development, you mentioned it and it's indicated in the supplement, showing a 7% yield on the in-process developments, including the new Florida 1. As you consider the future, taking into account current rates and costs, what kind of yields do you think are necessary for today’s projects to be viable?

That's going to depend on where it is in the size and the growth prospects were a total return investor. So yields could be lower, where growth is going to be higher. But generally speaking, we're going to want to get a six handle on our developments at a minimum and an 8.5 IRR.

Got it. Okay. In the past, when I inquired about future starts, you mentioned that they might occur in Florida, which we have now observed. Looking ahead, do you anticipate there could be additional starts in the second half? Or what conditions would need to be met for you to initiate more projects?

I mean, we've had a bit of an improvement here in the second quarter, and that's great. We want to see that this improvement is sustainable. Clearly, more development leasing. Now we came into the year with 4.7 million square feet of developments whether they were in process, completed or completed in service and on lease. We've leased 2.6 million of that, it's 56%. That looks good. That's encouraging. But we want to make sure that, that tempo is sustainable. And if it is, then we will absolutely engage in new starts with some of the other land holdings we have in places like South Florida and Nashville and Northwest Dallas.

Got it. And maybe one other quick one. On the development leases that you signed in the second quarter, do you have any overarching comments on what you think drove those decisions, whether it was combining locations, splitting existing locations, just the business growing or anything like that?

Do you want to talk about...

Sure. Caitlin, it's Peter Schultz. Several of them were processing and fulfillment and upgrading from existing facilities. Some of them were expansions and some were just a need to establish a new location, none of them were a lateral move or downsizing.

Great. Thank you for taking my questions. Maybe just to touch on South Florida. It does seem like that is a very strong market for you and your peers. Maybe you could just walk through some of the dynamics, which are causing the increase in demand there?

I wouldn't say it's an increase in demand, I would say it's consistent demand. Certainly, the ports play a role. The population growth in South Florida plays a role. As you know, it's very land constrained. There's just not a lot of new opportunities. In Broward County, where we're starting the smaller building, there's essentially no new construction at all today. So very difficult to get entitlements. The supply constraints to land, keep that market in check, although there's a little bit more supply there today, we continue to see pretty consistent demand.

Yes. I don't forget geographically, you've got the ocean on one side and the other layers on the other, and north to south, that market is about 115 miles and east to west is about 21 miles. So you have barriers to entry that are significant.

This concludes our question-and-answer session. I would like to turn the conference over to Peter Baccile for any closing remarks.

Thank you, operator, and thanks, everyone, for participating on the call today. If you have any follow-ups from our call, please reach out to Art, Scott or me. Have a great week.