Thank you, everyone, for joining the First Industrial Realty Trust session. My name is Ki Bin Kim, Senior Realty Equity Analyst and Managing Director at Truist. It is my pleasure to introduce the First Industrial Management Team, starting with my left, Peter Baccile, CEO, and Art Harmon, Head of Investor Relations. To my right, we have Scott Musil, Chief Financial Officer. We'll start off the session with some opening remarks before opening up the Q&A. Peter, the floor is yours.
Thank you, Keeban, and thank you all for joining us today. Our first quarter call, only 6 weeks ago, but it seems like ages ago with all of the claims, reclaims, threats, and accommodations in the ongoing tariff discussions that have dominated the headlines. They have also driven significant swings in the capital markets, as well as wreaked havoc on those responsible for making decisions regarding new investments and growth. We, our customers, and I am sure all of you, look forward to a day where there is more clarity on that subject. Stepping away from all that noise, the underlying picture for our business remains strong, with a national vacancy rate of 5.9% and net absorption in the first quarter of 54 million sq ft We continue to digest some of the post-COVID construction boom and the excess space leased by users fearful at the time of not having enough.
Since then, the market has reacted with discipline as development starts are down 60-70% from the peak. E-commerce, supply chain diversification, and reshoring continue to drive demand for logistics space, and we're well positioned to capitalize on these long-term drivers. Looking specifically at new tenant demand, we entered 2025 with the number of tenant inquiries and tours picking up. Today, prospect activity levels remain roughly the same, although decision-making remains deliberate given the tariff saga, along with the volatility in the capital markets. Renewal activity continues to be good. At the time of our call, we had taken care of 73% by square footage, and our overall cash rental rate increase for new and renewal leasing was 30%. If you exclude the large fixed-rate renewal in Central PA that we previously disclosed, the cash rental rate increase is 36%.
For the full year, we continue to expect overall cash rental rate growth of 30-40% and 35-45% excluding that fixed-rate renewal. This would be an excellent follow-up to back-to-back years of 50% plus cash rental rate growth. Our portfolio continues to perform very well with many key metrics at or near the top among our industrial peer group. Our occupancy at quarter-end was 95.3%, and our cash same-store NOI growth was 10.1%. We had a tremendous year in 2024 with 4.7 million sq ft of development leasing across 10 of our 15 target markets. Per our call, in which we maintained our FFO per share guidance with an implied growth rate of approximately 10%, our development leasing target for this year is an incremental 1.5 million sq ft, all slated for the fourth quarter, plus lease-up of our 708,000 sq footer in Central PA.
The dip from 4.7 million to 1.5 is because all we have left is 1.5 million sq ft of developments to lease. We continue to see future growth opportunities from disciplined development investments supported by our strategic land positions and through select acquisitions. We have recent starts, each with their own story, in Nashville, where we signed 2 500,000 sq ft leases last year, the Delaware submarket of Philadelphia, as well as the Lehigh Valley and Dallas. The acquisition market for the types of properties we want to own remains competitive. We were pleased to acquire 2 fully leased developments from our Joint Venture in Phoenix in the Southwest Valley submarket, the 375,000 sq ft Building A and the 421,000 sq ft Building B. They're 100% leased to three tenants with a weighted average lease term of approximately seven years.
Our basis in the buildings is $120 million, adjusted for our share of JV profit, with a cash yield of 6.4%. We're also well positioned for future development opportunities as economic and submarket conditions warrant. Our land positions across our target markets can accommodate 15 million sq ft of growth. Our balance sheet is strong, as evidenced by our manageable debt maturities, low leverage of 5.2 times net debt to adjusted EBITDA, high fixed charge coverage of 5.1 times, and solid credit ratings. We also just reached an important milestone with the completion of our first public bond offering since 2007 in the form of a $450 million senior note at a coupon rate of 5.25%. Since 2010, as we transformed and grew our company, private placement transactions have generally been the most efficient and cost-effective means of raising long-term debt capital.
Given the size and quality of our asset base, our laddered maturity schedule, and our path for future asset growth, accessing the public markets is now a beneficial form from a cost and market depth standpoint. Demand from investors was strong, and the recent upgrade of our rating to BBB+ by Fitch was quite timely and helpful. To wrap up our comments, our primary focus is to drive future cash flow growth and outperform through the cycle. That is being reflected in our dividend growth of 20.3% in the first quarter. With that, Keeban, I'll turn it back to you.
Thank you, Peter, for that great overview. With tariffs on everyone's mind post-April 2nd, how has leasing activity behaved overall? Maybe you can touch on development leasing as well.
Yeah, I mean, overall, certainly with renewals and new leases, that part of the business has been very strong. We have a lot of tenants who are continuing to grow in their space. It takes about, I'm sorry, tenants are tending to renew 6 or seven months in advance. We see a lot that shows us that our tenants are highly confident in their business. On the development leasing side, it's a little bit different. To make a decision to invest or lease a 500,000 sq ft building, that's a $50 million or $60 million investment between the lease itself, the equipment and racking, all of the product and material that goes into the building, hiring people, so labor costs. It's a very big investment. With all of the uncertainty in the world today with respect to tariffs, that decision-making has now been bogged down.
On the development front, it's still a very methodical process. Yes, leases are getting done, but they're getting done here and there. There isn't really a consistent flow of development leasing happening. We would like to see the tariff issue settled. It doesn't really matter how it's settled, as long as it's settled. Once people know the rules of the game, they know how to invest either in, around, or through whatever those rules are. They need to be set. Right now, that uncertainty is causing people to stay on the sidelines.
If we stick with that topic, do you feel like there is a wall of demand, maybe call it shadow demand, building while we're in this period of uncertainty? Once we do have some certainty, do you think there could be a maybe more noticeable acceleration in demand?
Yeah, I mean, you know, a lot of the same tenants have been hanging around the hoop now for a year. We do see new tenants come and go. I would say that based on what we see, there is some pent-up demand. What will be interesting, you might remember in 2020, Amazon leased more square footage than the next 30 most active tenants combined. In 2021 and 2022, now there's a very heavy COVID influence here. It is not necessarily apples to apples. In 2021 and 2022, all the other players got very active and leased up space. In fact, some leased space they did not really need, as it turns out. Either way, Amazon was a catalyst at that time for activity because most businesses, in some way, are competitors of Amazon. When they do something, it cannot be ignored by their competitors.
Now we see they have expressed an interest in investing $15 billion, largely in more rural locations in industrial, which is fine. That is still helpful to the business. We will see as they try to build out, and I will call it the knockout punch, same-day delivery. You call them by 10:00 in the morning, or you go online by 10:00 in the morning, and you have your product by 3:00 in the afternoon. They have figured out that we are a very we like to have things yesterday in this society. If they can do that, that is going to be an incredibly powerful competitive weapon. We are hoping, and perhaps like 2020, this move will cause other tenants to react. Right now, there is no cost to waiting. That could end up being a cost to waiting. We need there to be a cost to waiting.
That'll create a higher sense of urgency for tenants to lease new space.
there any particular industries that are more or less active today?
The 3PLs are very active. In fact, this year, they've leased about 35% of the space that's been leased. I don't know if that's a record, but it's the highest I remember. General retail and wholesale would be next at about 19%. Food and bev is very active in manufacturing. Those would be the top four active sectors.
What does this all mean for rent growth? Maybe you can share your forecast and maybe early thoughts on rent growth in 2025 and 2026.
We've all been guessing around that now for a while. Rent growth this year, you know, look, there are some markets where there's definitely rent growth. Nashville is the best market in the country. Rents are definitely growing there, probably in the 5% range, maybe a little bit higher. South Florida was similar. I would say rents are flattish there now, still one of the strongest markets in the country. There has been a little bit of a pause there in terms of rent growth. You have SoCal, where rents continue to come down, but in small increments, 1%-2%. We feel very much like that market has hit the bottom. It's certainly a U-shape, not a V-shape. That market has been stabilizing, let's say, for the past 6 months or so.
Overall, next year, I don't know, but probably you're looking at rent growth nationally of about the rate of inflation, 2%, 2.5%, 3%, something like that. Nothing to really blow the doors off. That's logical when you consider that we have pretty high availability rates in many markets, and we need to lease up that space.
On the Los Angeles market, you touched on the point that maybe we're at the bottom. Is that enough to entice potential customers that may have left the market due to high rents to come back?
We have seen some tenants leave, I'll call it less expensive properties to go into nicer properties. A little, some of that has happened. Right now, again, the port activity is good. We just have, you know, the Inland Empire, where rents grew 200%. You know, by definition, you got too much space now. People see rents growing that fast, and they put shovels in the ground, and they build buildings that eventually maybe they shouldn't have. Rents went up about 200%, and they've come down about 35%. Still, over that 5-year, 6-year period, you've got about a 12% CAGR on rent growth. Still very good, but we have space that needs to get absorbed.
You started 2 new development projects in Dallas and Philadelphia. What gives you the confidence to launch these projects, given some of the tariff-related uncertainty?
The project is in Lewisville, just outside Dallas. There, we have a number of buildings that we've already built. We bought 2 parcels. On the back of one of the parcels is a stream that cuts off a sizable chunk of the land. We never contemplated the possibility of building on what I call the island or the piece that was behind the creek. Anyway, we looked into it, and lo and behold, we got approval to bridge that stream. Now that land was all, from an expense standpoint, expensed through the other four or 5 buildings that we built there. It is, quote, "free land" in a market that is, again, very, very tight. We'd love more land there, can't find it. We started a 171,000 sq ft building on that found land.
It's going to be a nice yield of about 8%.
Can we talk about the Strategic Land Bank, which you can develop 16 million sq ft on? Do you expect to announce additional starts this year? Are you possibly looking to add more land?
We are looking to add land in what I'll call the Eastern half of the country, and I count Texas in that, not the Western half. We have enough there. In terms of starts, it really depends on what happens. We want to see consistent flow of development leases happen nationally, whether it's in our portfolio or wherever. I just want to see it happening. Right now, it's in and out, in and out. We need to see that pick up. That will give us the confidence that we can deliver into some of these markets that we've got targeted. We always target markets where the deepest part of the demand is. That's why we're doing deals like we do in Lewisville. If we had more land in Nashville, which we are looking for, we would do it there too.
South Florida is a great market, Lehigh Valley, et cetera. I do not know if we will have more starts this year. We will have to see what happens with the tariffs.
Maybe we can take a step back and just talk about the development pipeline and that platform overall. You've been able to deliver some pretty remarkable yields over time. Can you just remind us just broadly what that looked like? If I remember correctly, it was more spec than build-to-suit. Is that changing at all?
No, it's by far and away more spec. Maybe I can summarize this way. Since 2010, by approximate value, we've now built 49% of what we own. We acquired another 17%, and we own the very best of what we started with, but we only own 34% of what we had in 2010. We have completely changed the company. The development yields on that and the margins have been 40%-50% on average. The yields have been in the 7% range on average. We have built the right product in the right markets with the right functionality, targeting the deepest part of tenant demand. Now it's all pretty brand new. In fact, if you look at from an age standpoint, our portfolio is the youngest against the peers that we compare ourselves to.
That's interesting. Let me pause there to see if anyone in the audience had a question. Are you seeing any attractive acquisition opportunities in the market? Maybe you can give an indication of where pricing is coming in.
There have been some deals out there. The deal flow has slowed considerably since April 2. I would have said this pre-April 2, and this is going to sound low, but cap rates were kind of 4.75%-5.25% in the best markets. I do not know what that number is now because there have not been meaningful trades in the best markets since April 2. I am sure it has moved. I am sure the people that own are going to figure they are going to wait for this to blow through and think about accessing the market later. Deal flow is down considerably. You know, we look at things, but we are very choosy. We want to buy real estate that is just like what we build. Number one, that does not come to market often. And number 2, when it does, it is usually eBayed, and the price is silly. But we look.
Scott, you recently did a $450 million public bond offering, your first since 2007. Can you explain the rationale behind it and why public versus private?
Sure. We were very pleased with the results of the offering. I actually worked on the last deal in May of 2007, 18 years ago. The order book was enormous for our first deal back. It was $2 billion. Based upon our $450 million deal, it was over four and a half times oversubscribed. The rationale was a couple of points. One, the pricing is better in the public market. We've generally been a private placement issuer between 2017 and 2020. Private was better. Looking at it now, and generally over the long run, public pricing is better. It is probably 20-25 basis points inside. 2, when you're a public issuer, you have to have enough deal flow. We felt we had the size to be able to do that.
Maybe you can just recap for us your leverage ratio and your debt maturity profile.
Sure. The first debt maturity we have coming due, we've got a couple of pieces. Bank term debt is in 2027. We've got a private placement coming due as well. We've got a couple of years before that comes out. We've got maturities, I think, all the way going through 2032. As far as leverage is concerned, we've been hovering around 5 times or a little under 5 times. We're at 5.2 times at the end of one Q. We plan to keep it in that range over the next long term. I would say if we saw a large acquisition that we really liked, maybe we'd increase leverage a little bit with the idea of reducing it at a later date.
How is tenant credit or bad debt trending? Any material tenants on the watch list?
Sure. I'll take that one again. Bad debt expense since COVID, so 2021, 2022, 2023, 2024, and I would even say this year has been very low. If you look, I've got a statistic here. If you look over the last 10 years, our bad debt expense has been about 12 basis points of total revenues. In the first quarter, that came in at about $250,000, which is about 14 basis points of revenues. As far as the watch list is concerned, it's the one we've been talking about for a year. It's a company called Boohoo. They paid their June rent. If we have issues with them, we do have a letter of credit that covers about a year's worth rent. That's the only material tenant.
Maybe tied to that, you know, why has the bad debt been so low for you guys over so many years?
You know, we have a really good credit underwriting process. So any tenant, a new tenant that has a base rent of $200,000 or higher or TI package of that has to go through the corporate office for review. Goes through that team. It goes to me for a credit recommendation. Then it goes out to the field. I would also say our 2 EVPs, Jojo and Peter Schultz, do a great job with credit as well. We work together to craft the best deal.
Turning to FFO, if you hit the midpoint of your FFO guidance this year, you'll deliver about 10% FFO per share growth year over year, one of the fastest growing REITs out there. What are the primary swing factors in meeting or exceeding that figure?
You want to take that?
Yeah. As Peter mentioned, it's development leasing. We've got 1.5 million sq ft in the forecast. It's all soon to lease up in the fourth quarter. Then we've got one other big core lease up of 700,000 sq ft. That's, I would say, the biggest factor. If we don't lease up any of that, it's only $0.02 a share of FFO impact, though, so de minimis. Hopefully, we'll have more to report on that over the next quarters on that lease up.
Peter, you touched on the strong rent growth historically and currently that you're having today, leading to great lease spreads of, I think you said, 35%-45% cash lease spreads this year. You know, one question I get all the time is, how long does that last? Can elevated lease spreads stay here into 2026 or 2027? How do you think about that?
We were asked that question a couple of years ago. I said, you know, that has some legs based on the duration of our leases. Obviously, you've seen it. We had a record for our own portfolio in 2023 at 58%, and last year 50%. This year, it's going to be, like you said, 35%-45%, excluding that one fixed rate renewal. It's going to have a little bit more legs to it. That's all I can say. We expect. Now, with rents generally falling or being flat in certain markets, obviously, that number is going to come down. We just can't defy gravity when rents are coming down.
Let me pause here again to see if anyone had a question.
How do you...
Can you hear me?
Yeah, I can hear you.
How do you think about managing capital spend on acquisitions, development starts, dispositions with the way the stock trades, and the spread between private and public markets?
Yeah. When we look at new developments, we have a requirement, obviously, to make money. And we're total return investors, IRR investors. On new developments, if we were to start new developments, and that's an if, we'd require about a 6.5% yield with an IRR in the 8.5% plus range. The 2 deals that we just started are more like 8% and 10% plus. That's how we look at that. We fund it largely through either drawings off our line or out of free cash flow after the dividend. We raised our dividend quite a bit in the first quarter because we're making a lot of money. The REIT rules tell us we have to pay it out. I suppose that's a rich person's problem. That's how we look at our requirements. On acquisitions, obviously, those numbers are a little bit lower.
There's less risk, but not if they're empty. If they're empty, the requirements are about the same.
Anyone else? Peter, what do you think about the growth in e-commerce? Do you think it continues? Maybe you can also talk about some of the different things that are happening in the sector in terms of technology, robotics, and EV. I mean, that's a lot of different topics. Ultimately, how do you see that potentially impacting the industrial business?
To the first part of your question.
E-commerce continue to grow?
E-commerce, it's interesting. When COVID came, the percentage of retail sales that were happening via e-commerce jumped and since then have continued, I'll say, to trickle up. It's one of the statistics that has continued to climb even after COVID. Obviously, that's a nice tailwind for our business. What was the...
Like robotics and...
Got too many terms. I would say it's not a lot of our tenants are heavy into robotics. We do have Amazon in about 4.8% of our space. So far, that technology has not become any kind of a differentiator. Clear height definitely is. Building to the proper clear height is very important. Not everybody stacks. For long-term competitive positioning for your asset, you need to build the proper clear height. Within that, people can put as much in the way of robotics as they choose. Interestingly, a lot of our tenants do not want solar. They find that it is not reliable. We look at a lot of opportunities to put solar on our rooftops. It is a very complicated subject. The first step is always to talk to the tenant about what they do and do not want.
Great. Any last questions? All right. Thank you, everyone, for joining the First Industrial session. Thank you.
Thank you.