First Industrial Realty Trust Inc (FR) June 2, 2026 Conference Transcript

Welcome everyone to the first industrial session. I'm Nick Tillman, a senior analyst at Baird covering office and industrial rates, and today I'm joined by Peter Basile, president and CEO of FR, along with Scott Musil, CFO, and Peter Schultz, EVP of the East Region. I'm going to hand it over to Peter for some remarks, and then we can proceed with the Q&A after.

okay thanks for those of you who aren't familiar with us we're a u.s only focused industrial developer owner and manager we've got about 70 million square feet plus or minus 12 or 13 billion of total value our primary growth engine is speculative development we do acquire as well but not on a volume basis not as much over the last 10 years we've created 1.3 billion dollars in value through our development pipeline generating 7 cash yields and about 50 margins

turn it back over to you nick yeah so um feel free to come up to the mics if you have like specific questions but i'll kick off with a couple of them for you peter has there been any noticeable impact on tenant activity due to the recent conflict in Iran and or rise in oil prices or interest rates?

So when we first saw that at the end of February, we thought, here we go again. Last year it was tariffs and that cooled demand for our space and now this, but I have to say that we've seen no discernible impact on tenant activity or tenant demand since the beginning of the war back in the end of February. maybe you know the the input prices for most of our customers transportation and labor are the highest and those have grown the most over the last 20 years or so interestingly enough I did a little math this morning a gallon of gas 20 years ago on average was 263 today it's 431 I know it's much higher in some places but that's about a two and a half percent CAGR on gas prices which is exactly equal to inflation over that same time period. So that might explain why it's kind of been a yawner for all of the tenants that are prospects for our space.

And then maybe dovetailing that a little bit to the leasing demand for some of your developments and your larger vacancies, including the 700,000-square-foot vacancy in Pennsylvania.

I guess demand seems as though we have to be a little bit of stop-start post-Liberation Day, and it started to pick up some volume and we saw some momentum in fourth quarter and the first quarter. but maybe what you're seeing from that element on those the last six months we've seen a big pickup in tenant activity and traffic in fact the last six to eight weeks it's gotten even better that traffic is around much larger spaces as well as the smaller spaces in many markets there are still let's just say several alternatives for tenants in the kind of 250 to 750 range activity. Peter Schultz is our east region head and is responsible for our 708,000 footer in PA. Why don't you talk about what's going on there?

Sure. Pennsylvania is probably the most active market we have in the country today together with our Texas markets. But Nick, to your question on our largest vacancy, the 708,000 square foot building in central PA, we have a couple of active prospects we're in discussions with for the full building as well as some interest from a couple of other tenants our recently complete completed project our first 33 project in lehigh valley just in the first quarter which is two buildings of 150 000 and 211 000 square feet we've seen really great demand for that 50 to 200 range and in fact we already signed the lease for 54 000 square feet in that building within just a couple of months of completion but activity as Peter said is good across the country and a lot of the prospects we're seeing today including the couple that we're actively working with weren't even on our radar screen at the beginning of the year so that's giving us some more encouragement about the pace and cadence of demand and some tenants making decisions with more urgency and you maybe just touched a little bit on it from Pennsylvania standpoint but from overall best best markets today and and most challenged as look at the portfolio so uh look best markets nashville is still one of the best markets certain sub markets in dallas houston south florida socal we would say is stable stabilized so rents will be flattish we think this year there

again there are still some alternatives in terms of lease up there more alternatives than we'd like to see Denver remains a market that's behind in this recovery it is the one market in our 15 markets where new starts didn't stop starts didn't stop for probably three or four quarters behind when the rest of the markets around the country did so there's a little bit more alternative there for tenants as well so weaker call it denver stable socal and then those bigger eastern markets are doing pretty well including as peter said central pa very well maybe outlining some of the embedded growth within the portfolio and cash leasing spreads overall you guys are guiding to 30 to 40 percent for 2026 and what are your thoughts on 2027 and beyond just for rental spreads given the embedded run-up we've had since covid sure so we don't forecast the leasing spreads what i can say is a couple of things first we've got a lot of development leases that we signed pre the peak that's one of the good things about our our strategy through this cycle is we have assets that we leased pre-peak because we built them new and so you can see that that rent growth should have some legs at least for a while secondly our mix for rollovers in 2027 approximate is approximately the same as the representation of them those markets in our portfolio with a slight overweight in Dallas and Atlanta and those two markets have done very well did not have quite the same amount of rent run-up and therefore rent fall or rent decline as say the West Coast markets did so um again that's another tailwind if you will to our cash rents in the future that's helpful and then maybe on the capital deployment and priorities today you guys put in the buyback recently um just just ranking and what you're seeing between new development starts acquisitions and repurchases today so it's all about economics um as i've said in the past we're a profit shop and not a volume shop, so we take the precious capital that we do have and consistently evaluate where best to use it. Our growth engine, as you know, over the last decade or more has been through speculative development. That will still be the case. We have land holdings today that are about 75% entitled, where we can invest about $2 billion at about a 6.9 yield, so very, very healthy yields and returns. Of course, we're not going to build into markets where there are already too many alternatives, so we need to see some sustained leasing for developments in these markets before we're going to get going in some of them. We have had new starts, as you've seen, in Pennsylvania, in South Florida. We've built out our land in Nashville. We're looking for more land in Nashville. we continue to love that market and as far as the uh you mentioned the stock buyback so um you know over time our board has considered that topic many times we have always had great opportunity and continue to invest dollars in high growing real estate assets but as we looked at at some of the market dislocations over time and we thought well gee we have a very strong conviction on our stock over the long term when the markets swoon by 10 20 15 you know 25 percent maybe we should think about taking some shares off the table so that's what we're going to do

with that allocation that 250 million would be very opportunistic we don't really have a target it's just about when we see an inflection point that we think just ignores the value of our long term portfolio and as a reminder if anyone has any questions feel free there's a mic over there um but maybe touching on rents a little bit uh and just you talked a little bit on denver and and the starts there as you look at the competitive landscape for for starts today are you seeing any markets where you're starting to see ramping of starts and i guess from a just overall that standpoint like where you mentioned nashville where do you feel like you have the land uh to develop in today's market?

So in terms of starts, there will be more starts for us this year. We're not going to quantify that. It'll be in some of the stronger markets that I highlighted earlier. We are looking for land, as I said, in Nashville. Hopefully we will tie some down soon. It's very, very, very competitive market. We compete, you know, not really necessarily with the other public industrial REITs it's more with private capital where the capital is priced very in our opinion very thinly so what we do is we leverage our platform we have about a dozen offices around the country we have people in these offices that have been around for 15 20 years or even 30 years in these markets and have great relationships they're making hundreds of unsolicited offers a quarter we have to have a lot of balls in the air because by definition the success rate is not super high we're trying to find those opportunities that come few and far between where we can make a lot of money for shareholders and not get caught up in any kind of broadly distributed bid process and that process can take a while but once we get to know those landowners who might be reluctant sellers at the beginning and they get to know us they have a level of comfort with us and therefore we're able to tie up those deals perhaps with minimal competition there's always some competition but perhaps with minimal competition in many occasions our teams are able to tie up land and have it get entitled while the seller still owns it so that means we're not our capital is not burning while that process is going on so it's a pretty involved process it allows us to have a very very low basis relative to most of our peers we also build a different product than than the private market tends to build we don't over build the sites maybe we cover 36 or 7 or 8 percent whereas others are in the high 40s we make sure we have ring roads our ability to secure truck courts 180 foot truck courts we go we spend the extra dollar and a half and build taller buildings so not only is our basis in a very good place. That allows us to offer the best product, the most competitive product in the marketplace. And that's really why we benefited during this cycle. You know, 10 years ago, we said we're going to build a portfolio that outperforms through the cycle. You've probably seen if you paid attention, our cash rental rate growth for the last few years has been really large 58 50 35 so that we attribute to the way we do business and that portfolio that we wanted to build that would outperform through the cycle maybe touching a little bit on market cap rates uh what are you seeing for market cap rates uh in your markets today so cap rates vary um for class space newish new space five to five and a half would be the range doesn't mean you won't see some transactions take place in the fours you will but the bulk of the capital is in that five

to five and a half range and i know you guys have been evaluating some of your land purposes and even some of your operate your operating portfolio for data center related uses you completed a large data center sale this quarter are there are there any other opportunities you've identified in the portfolio or seeking out on your land bank today?

So we've been, we've been very pleased with what we've been able to do in Phoenix. We had two joint ventures there. We bought, combined between the two JVs, about 1,100 acres. We ended up, it wasn't part of the initial plan, but those, both of those JVs are wrapped now, wrapped up. We ended up selling 500 acres for data center use, and we got three times industrial value, so not three times our cost, three times industrial value for those sites. We could have developed those sites, leased the buildings, and not made as much money as we did selling the land for data center use. So we've taken a very detailed look at the rest of our portfolio, land and cash flowing properties. We boiled it down to as you can imagine it's not an easy process first and foremost power if you're in jurisdictions where power is not available those assets aren't going to work so you gotta be have to you have to be able to get power number two you have to be able to get power in a reasonable period of time 2030 is reasonable beyond that's not so reasonable number three if the building or the land is tied up by a 10 for the next 10 15 20 years take that off the list so we've narrowed it down to about a handful of potential opportunities on one in particular we're going to put put a full court press on trying to get power soon probably if something happens you're not going to see that happen between 2020 before 2027 in terms of monetizing those opportunities the upside you already heard on the land is kind of three times industrial value with cash flowing buildings it can be it's a very wide range for a lot of different reasons it can be 50 to 100 percent higher than industrial value so that's a process that we're going through and we're hopeful that we're able to monetize some of those assets that way scott maybe uh touching a little bit on what you're seeing on the overall tenant credit and the health of just your overall tenant base today you did have something with a 3pl tenant but overall credit within the portfolio

What are you seeing there?

Very healthy. Our bad debt expense in the first quarter was only $100,000. That's about 10 basis points of total revenues, lowest in our sector. As far as tenants on the watch list, these are the couple of tenants we've been discussing over the last year. A tenant called Boohoo. They lease a million square feet. They're paying timely. We also have a letter of credit that covers about a year's worth rent. The 3PL tenant, we entered into an agreement right before our first quarter earnings call. They paid back 60% of their arrearage. They were required to pay the rest back by the end of the year, and they're current on their plan as well. Nothing else material on the watch list. So from a credit point of view, looking pretty good in it.

One more thing to add on the data center opportunity. So the data center business, which we are not in and don't want to be, is also providing a bit of a tailwind for demand for our space. So the entity that we sold 300 acres to in Phoenix ended up leasing half of a 940,000 square foot building we have there because they intend to build 14 data centers over That's going to be a very long-term tenant. They use that space for staging and storage of equipment. And so the more manufacturing that happens in the data center business, the power business, as you know, everyone's trying to figure out how to generate more power. That is also a tailwind for demand in our space. Together, these aren't as strong as e-commerce.

As we know, e-commerce has been a huge tailwind for our space for a long time and will be for a long time to come. but but for now and probably for the next 10 years or so it will be a nice tailwind and then for some that aren't as familiar with the story the broader rotation from the the midwest markets to the coasts and these core population hubs from a distribution side you're mostly wound down with that but what percentage of the portfolio do you view as somewhat non-core in the recycling of that capital and is that program mostly complete And where do we go? What's the next five to ten years look like?

So the last dozen years or so, we have sold about $2.5 billion. Now, remember, ten years ago, our total market cap was about $4 billion. So we've sold two-thirds of what we had at the time. Today, two-thirds of what we have is new, newish, since 2010. And then the other third is what I call legacy. So we're – and that's the best of the best of what we had. So we're pretty much through that – we are through that transformation. And, again, you've seen the results in our great cash leasing spreads and our growth trajectory, same store, et cetera. We will continue and we'll always be looking to maximize the value of our dollar invested. And if we see an asset or certain assets in a certain market that aren't going to – that don't have the growth future that we want to see, we will continue to of course just to pair off that bottom of the portfolio but the transformation was done completed really at the end of 23 and it's been quite dramatic and you'd say growth into other markets as you look at the portfolio today do you feel that you're you got enough capacity to develop and or acquire in your existing footprint or do you think there's new markets that you look to evaluate longer term you know nashville is a market that i would say is quote new now we've always had space there but very very small percentage of the portfolio and uh about 10 years ago we said hey let's go bigger in nashville the demographics look really good and it's been a great move we did the same thing in south florida we had 1.2 percent of our portfolio there it's up to a little over six percent today and maybe heading to a top three or four market for us soon uh that's been a great move you know you talk about high barriers it's 21 miles from the atlantic ocean to the everglades and about 115 miles from homestead to jupiter so not a lot of room there and it's very very tough to buy land there and that's a market we continue to to uh love so um you know that'll be the focus going forward peter how much is that is your

responsibility then going forward most of that yeah okay jojo's not here to defend himself so but I figured I'd have to chime in. Scott, maybe going back to, you guys did your first bond issuance last year, a while back. As we look at like funding needs and going forward, I guess what are your preferred sources of capital to fund the continued development?

The next three quarters of remainder of the year, the development expenditures projected are about 90 million. We generate about $85 million of excess cash flow a year. So that's number one on the list. We also disclosed in our first quarter call a land sale in Phoenix, which actually closed, I think, last week. So that's a source. And if we need other funds, we can obviously tap the bond market as well.

And what's pricing today for?

I would say it's probably about 100 basis points for a five-year and around 120 basis points for a 10-year. Those are the spreads.

And then as we're just thinking about the balance of the year, I guess, what keeps you up at night, Peter, from a demand standpoint? It seems as though conditions are still humming along despite some geopolitical uncertainty and some macro headlines and maybe a potential weakening consumer. I guess, what are you monitoring most right now to see?

It's always leasing. That's our lifeblood. In good times and in bad, you lose sleep over that. Everything else creates volatility. You know, we're in the forever ownership business. That's why we pursue the business the way we do. why we're focused on the 15 higher barrier markets where it's more difficult to build. Rents are going to grow the fastest. It doesn't mean you can't make money in other markets and in other ways, but in our view, they require market timing. And we think over the long term, you're probably going to lose if maybe come out 50-50 at best. So we like to be in the forever markets, and we think that's going to lead to the greatest appreciation of the share price.

And maybe just lastly, on just upside, you think, on rents here, relative to maybe when you're rolling your second-gen leases, relative to where replacement rents are for new deals, I guess, how much room is there on that?

So there's, I mean, we can build in a lot of markets, I would say, even some of our land in SoCal pencils today, but, you know, if there are already alternatives, they're not going to build. Rent growth, we think, is going to be 0% to 5%. SoCal probably flat. You could have markets like Nashville and Dallas grow higher than that, maybe as much as 8%. So these markets are beginning to get better. That loss to lease factor is going to go to zero in a lot of places where it isn't right I can't really project when you're going to get there for SoCal. Not for you guys? not you or the market it seems like 27 is still a pretty good setup 27 is a good setup I think here's the thing I said this earlier we're now in a more predictable stable growth trajectory in this sector one that goes back to pre 2000 pre the great recession since then I mean it's 20 years but you've had the great recession nothing was built in this space for three years you had a big run-up to 19 and then when covid everybody brought out the hockey sticks everything grew like crazy now we've come down the back side of that so we've had these big volatility creating events for 20 years but if you go back to the 2002 to 6 period this business grew at a pretty steady decent rate and a reliable rate and i think we're about to enter into that part of the cycle again and that's good for business any questions from the audience construction costs and impacts from what else yeah so construction costs okay sorry construction costs since from the peak have come down you know at the peak you know we like to bid three to three uh gc's potential gc's and you know we got to the point at the peak where they would refuse they wouldn't do it um that that's changed 180 degrees now so um people are asking for business costs have come down there's been no real impact from the conflict in the middle east we haven't seen a rise in the cost of anything really steel concrete nothing so you know it's been pretty stable though the last couple of years so that drop happened that drop

in expenses a cost happened 24 and 25. the other thing I'd add to that is with less development and construction underway subcontractors and laborers got a lot more competitive because are chasing for chasing work now compared to what peter said where they would refuse to bid previously maybe maybe a follow-up on that just are you guys seeing competition when it comes to just data center development like bidding for a new start we're not having any difficulty getting multiple general contractors and highly qualified subs to bid our projects certainly data centers are absorbing more land which is reducing the supply of land available for industrial development that's good as an owner of assets but we've not had any difficulty at all getting people to bid our projects competitively anyone else yeah so that completely depends on the pace of take

up of the existing inventory you know we said a couple of years ago that decision-making was taking a long time and you know everybody wants to know why it takes a long time it continues to be somewhat slow in that market because there's no cost to waiting what's the cost to waiting the cost to waiting is you can't get the building you want or you can't get it at the rent that you want or competitively you're not investing in growth like your peers are and you're going to fall behind those dynamics need to be in place for rents to start to really grow and in particular size range and so cal there are 80 buildings available now it's a two billion square foot market so it's not it sounds like more than it is but 80 is still 80 and we need those buildings absorbed and they're it's happening that number was a lot higher a couple years ago and the new starts in that market are literally so the inland empire is about 700 million square foot market new starts are in the single digit millions so there's almost no new starts so i can't put a time frame on when you're going to see real rent growth there but it's certainly not that far away i'll conclude uh thanks everyone for showing up um and feel

free to reach out if you have any follow-ups with the team.

Thank you