First Industrial Realty Trust, Inc. (NYSE:FR) Q2 2025 Earnings Call Transcript

First Industrial Realty Trust, Inc. (NYSE:FR) Q2 2025 Earnings Call Transcript July 17, 2025

Operator: Good day, and welcome to the First Industrial Realty Trust, Inc. Second Quarter 2025 Results Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead.

Arthur J. Harmon: Thank you, Michael. Hello, everybody, and welcome to our call. Before we discuss our second quarter 2025 results and our updated guidance for the year, please note that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management’s expectations, plans and estimates of our prospects. Today’s statements may be time sensitive and accurate only as of today’s date, July 17, 2025. 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’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.

Peter E. Baccile: Thank you, Art, and thank you all for joining us today. Our portfolio continues to perform well, producing strong cash rental rate growth with a solid pace of renewals. Tenant leasing activity and investments to support new growth continue to move at a deliberate pace. The uncertainty around tariffs, whether they will be applied, where and when and to what degree continues to dampen momentum around decision-making. That said, we have a couple of success stories to share in the form of new development leases that I will review shortly. As we said on prior calls, a positive for our business is with new starts at a 10-year low, even with modest net absorption, the available alternatives for new Class A space continue to diminish.

This trend is reflected in the most recent metrics on the broad industrial market reported by CoStar. Vacancy in Tier 1 U.S. markets was 6.3% at the end of the second quarter and up 30 basis points compared to the prior quarter. On the demand side, according to CoStar, net absorption year-to-date totaled 16 million square feet nationally and 5 million square feet in our target markets. We should also point out that there is a wide variation in reported net absorption. Depending upon the source you use, year-to-date net absorption ranges from negative 4 million square feet to positive 63 million square feet. Nationally, new construction start volume was 62 million square feet in the second quarter versus 66 million in the first quarter of 2025 and 72% lower than the peak of third quarter 2022.

In our 15 target markets, new starts were 37 million square feet and completions were 38 million. Space under construction totals 204 million square feet, and that is 42% pre-leased. From a portfolio standpoint, our in-service occupancy at quarter end was 94.2%, in line with our expectations, reflecting the known 708,000 square-foot move-out in Central Pennsylvania and the impact of two developments placed in service, partially offset by some new leasing. We’ve now taken care of 88% of our 2025 rollovers by square footage. Our overall cash rental rate increase for new and renewal leasing is 33%. And if you exclude the large fixed rate renewal in Central PA, we previously disclosed, the cash rental rate increase is 38%. This puts us on track to achieve our overall cash rental rate growth expectations of 30% to 40% and 35% to 45%, excluding the fixed-rate renewal.

Moving now to developments. We are pleased to report that after we issued our press release, we leased the remaining 501,000 square feet of the 968,000 square foot building in our Camelback 303 joint venture in Phoenix. That brings the entire 3-building 1.8 million square foot project to 100% leased. Per our press release, we also leased 58,000 square feet at our First Loop project in Orlando. As discussed on our last call, we’re underway on two new starts in the quarter. The first is a 176,000 square foot facility at First Park 121 in Northwest Dallas. The second is the 226,000 square footer at our First Park New Castle project in the Philadelphia market. The total estimated investment for both of these projects is $54 million with target cash yields of approximately 8% for each.

Both of these opportunities are located in infill locations with low submarket vacancies and target the 50,000 to 100,000 square-foot tenant segment. Turning to our capital markets activity. We reached two important milestones during the quarter. First, we were upgraded by Fitch to BBB+ in early May. That upgrade was timely as shortly thereafter, we launched our first public bond offering since 2007 in the form of $450 million of senior unsecured notes at a coupon rate of 5.25%. Demand from fixed income investors was strong, and we appreciate their support for the offering. Let me conclude by saying thank you to my teammates around the country who are executing on our plan and taking care of our customers. With that, I’ll turn it over to Scott.

Scott A. Musil: Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.76 per fully diluted share compared to $0.66 per share in 2Q 2024. Our cash same-store NOI growth for the quarter, excluding termination fees, was 8.7%, primarily driven by increases in rental rates on new and renewal leasing and contractual rent bumps, partially offset by lower average occupancy. We finished the quarter with in-service occupancy of 94.2%, down 110 basis points from the quarter. As Peter noted, our occupancy change reflects the impact of the known move-out in Central Pennsylvania and two developments entering the in-service pool, offset in part by some new leasing. Summarizing our leasing activity during the quarter, approximately 2.5 million square feet of leases commenced.

Of these, approximately 400,000 were new, 2.1 million were renewals and 100,000 were for developments and acquisition with lease-up. On the capital side, as Peter noted, we were very pleased with our return to the public bond market for the first time since 2007. Our $450 million unsecured notes issued in this offering mature in January 2031 and carry a coupon rate of 5.25%. We remain strongly positioned on the capital front with our next maturity coming in 2027, assuming all available extension options are exercised on one of our bank loans. We would like to thank our banking partners for their outstanding execution and support in this transaction. Now moving on to our guidance. Our guidance range for NAREIT FFO for the year remains $2.92 per share at the midpoint with the range narrowed to $2.88 to $2.96 per share.

Our assumptions are as follows: average quarter-end in service occupancy of 95% to 96%. This range reflects approximately 1.5 million square feet of development leasing assumed to occur in the fourth quarter of this year. Cash same-store NOI growth before termination fees of 6% to 7%. As a reminder, our same-store guidance excludes the impact of the accelerated recognition of a tenant improvement reimbursement in 2024. Guidance includes the anticipated 2025 costs related to our completed and under construction developments at June 30. For the full year 2025, we expect to capitalize about $0.09 per share of interest. And our G&A expense guidance range is $40.5 million to $41.5 million. Now let me turn it back over to Peter.

Peter E. Baccile: Thanks, Scott. Our diversified operating portfolio continues to perform strongly, generating cash rental rate growth on new and renewal leasing amongst the top performers in our sector. When the tariff picture becomes more clear, we expect improved confidence, more timely decision-making and an increase of investments in new growth initiatives. We remain focused on securing and serving existing and new customers to drive long-term cash flow growth. Operator, with that, we’re ready to open it up for questions.

Operator: [Operator Instructions] And your first question comes from Rob Stevenson with Janney.

Q&A Session

Robert Chapman Stevenson: Peter, incremental development starts from here more or less attractive today than they were 3 or 6 months ago? And how is construction pricing in terms of labor materials today versus in the past?

Peter E. Baccile: I’ll take the first part of that, Jojo, you can talk about construction pricing. Like we said on the last call, in order to really get deeper into new starts, we’d like to see more consistent development lease signings. There’s a lot of activity in the market. The amount of gross leasing activity in the first half of the year was pretty strong relative to 2024. But we need to see more investment in new growth, more take-up of development space. As you’ve seen, we have executed on new starts in certain markets and in those markets that we think continue to show good fundamentals and where there’s demand that is going unmet, we’ll continue to execute starts there. Jojo, do you want to talk about the cost?

Johannson L. Yap: Yes. For construction costs from the second half of last year, costs are down 5% to 10%, depending upon the market. From the start of the year, total construction cost has been pretty flat. The contractors have been more aggressive, so their margins have compressed, slight increase in construction costs. Keeping an eye on steel, there’s some talk that steel might go up, but we haven’t seen it yet. Contractors though are able to keep their pricing for 30 to 60 days, which is good. And you probably all follow this, there’s been a tariff increase in copper, so you’re looking at electrical — the electrical supply to switchgear and — but these items have a small impact on the cost, maybe total construction costs under 1%.

Robert Chapman Stevenson: Okay. That’s helpful. And then, Scott, anything abnormal or not recurring in the second quarter FFO or anything expected to be sequentially a drag in the back half of the year? I’m just trying to figure out, you guys did $0.76 and just doing a flat $0.76 and $0.76 in the next 2 quarters puts you at the very high end of your current guidance range. I just wanted to get a feel for what’s coming up here.

Scott A. Musil: So I would say in the third and fourth quarter, we’re recognizing more interest expense than in the second quarter. And Rob, that’s driven by 2 items. We have to continue to fund our development pipeline. That’s about $110 million of spend for the last 6 months of the year. So that’s driving interest expense higher. Also, the May bond offering was slightly dilutive. We used the funds to pay down our line of credit and the line of credit had a lower interest rate than what the bond offering rate was. So in the back end of the year, you’re going to see a little bit of higher interest expense, which will knock down our FFO in the third and fourth quarter.

Operator: And your next question comes from Vikram Malhotra with Mizuho.

Vikram L. Malhotra: I just wanted to understand the new lease you just announced, that was not in the 1.6 million target? And if you can just sort of maybe walk us through some of the bigger pieces in the 1.6 million, like how do the prospects look for 3Q and 4Q?

Peter E. Baccile: Peter, do you want to talk about what’s happening in your markets?

Peter O. Schultz: Sure. On the 1.6 million square feet that we have in our guidance at year-end, the largest component of that is our building at First Aurora Commerce Center in Denver. We continue to have active prospects for all or portions of the building. In fact, a couple of the prospects have a need for rail, which we can accommodate on this site. Difficult to peg exactly when those get signed, but we continue to be pleased with the level of activity.

Johannson L. Yap: Part of the $1.5 million in the West Coast, we have 3 buildings there, 2 in the 150 square foot range and 1 in the 324,000 square foot range in East IE. Good product and great product with very, very good functionality. We’re having tours and proposals for every building, but nothing — no lease to announce yet. And then the remaining in the West would be — under the West region, it would be 120,000 square foot in Chicago. Like East IE, we’ve been getting tours and we’re responding to requests for proposals, but don’t have a lease to announce yet.

Vikram L. Malhotra: Okay. And then can you just clarify the $0.02 impact you had mentioned prior, like if you don’t do any of the 1.6 is that still — the $0.02 is still in the guide? Or have you pushed that out? And then — and sorry, if you could just clarify that new 500,000 square foot lease that was not part of the original 1.6 million.

Scott A. Musil: Well, the good news is with the benefit of that lease that Peter just announced in the call, coupled with the lease that we did in first loop earlier than what we projected, Vikram, that $0.02 a share is now $0.00 a share. So what does that mean? The 1.5 million square feet of development leasing that we still have in our guide, and I’ll also throw in the 708,000 square foot in Central Pennsylvania, now effectively, they have a 12/31 lease-up. So they’re assumed to be leased up on 12/31.

Operator: And your next question comes from Nick Thillman with Baird.

Nicholas Patrick Thillman: Following up maybe on that Camelback and the lease up there. Is the plan there to kind of take that out like you did similar in 1Q?

Johannson L. Yap: Nick, the plan there is to — like every time is to maximize value. We have a couple of executions. We can take it to market. We can acquire the product. We can look at holding it, really all about the center, again about maximizing value. Also, we’re very pleased about the execution because that JV project delivered returns exceeding our expectations. I also want to remind you, there’s another 71 acres left with great land, freeway frontage and that we’re focused on again, maximizing the value there, either developing it, either doing a higher and better use deal like we’ve done before and all of that.

Nicholas Patrick Thillman: Maybe dovetailing on that, just on — you guys have outlined maybe the potential opportunity for monetizing some of the land bank or existing portfolio for data centers. I guess is there any update there or the size or scope of what that opportunity set is?

Peter E. Baccile: Not really. That’s a pretty big project. It’s going to take some time. We have to look into power, of course, without that, you really don’t have much to talk about. And these things are going to — they’re going to take several months to get to the answers on some of this.

Operator: And your next question comes from Craig Mailman with Citi.

Craig Allen Mailman: Peter, maybe can you just give some context around the 501,000 square foot lease? Was that a longer kind of burn on the demand there? Is that more recent? Just to give us a sense of how quickly some of these can come together, having some bigger ones like First Aurora left to take care of?

Peter E. Baccile: Yes, sure. That was on the shorter end of the spectrum. Jojo, do you want to talk about that?

Johannson L. Yap: Sure. Sure. Basically, the building was just completed. So basically, the building was leased at completion. Craig, we had a number of showings. As you may recall too that building has been 48% leased. So we’ve leased already basically half the building. And then so we had continued showing some remaining vacancy, and we actually had 3 interested parties, and this party wanted to really — they needed to grow and they wanted to control the space pretty quick.

Peter E. Baccile: Tell him how long from beginning to now that discussion.

Johannson L. Yap: The discussion, I would say, would be about 45 days.

Craig Allen Mailman: Okay. And when does that one commence?

Johannson L. Yap: Right now.

Craig Allen Mailman: Right now, oh immediately. Okay.

Johannson L. Yap: Yes, immediately.

Craig Allen Mailman: Okay. And then just, I guess, more broadly, Peter, you’re kind of showing that there’s some improvement in demand, but it doesn’t sound like you guys are getting excited about it yet. But at the same time, there can be some big deals that can come quickly. I’m just kind of curious, as you guys are talking to people at some of these developments, like First Aurora has been one that’s been vacant for 2 years. Like — are some of these — I know we’ll call them stubborn vacancies, but kind of longer-tailed lease-ups. Are these, in your opinion — like is it a leasing strategy issue? Is it a product issue? Or is it just a market issue that you guys are contending with on some of these that are taking a little bit longer to lease up?

Peter E. Baccile: It’s a demand side issue. It’s finding the right fit at the right time for the particular candidate or potential tenant. People make decisions. This particular tenant that took the Phoenix property or the other half of the Phoenix property made some business decisions that caused them to need it pretty quickly. It’s really just finding the right fit, Craig, and having the right-sized space at the right time. And so we’ve had, as you point out, in Denver, several tenants come by there and actually, we’ve traded proposals with several tenants. Look, there’s definitely pent-up demand. There’s frustration to some degree. The tariff thing has really caused people to pause. And yet there are also other tenants who are less tariff sensitive who are going to do deals. And that would, in fact, include the one that signed the lease in Phoenix.

Operator: And your next question comes from Blaine Heck with Wells Fargo.

Blaine Matthew Heck: Great. So one of your competitors mentioned that their build-to-suit pipeline is very strong. I guess are you seeing demand on that side as well? What’s your general appetite for build-to-suits? And how do those returns compare with what you might be able to generate through spec development?

Peter E. Baccile: Yes. The returns are always going to be a little bit lower unless there’s a special circumstance. We do execute on build-to-suits. You’ve seen us do that, but it’s also not ever been a very high-volume component of our business. Our platform is set up and our land holdings are such that we’re more targeted to the speculative development business. But we do like the build-to-suit business depending on what we can earn and obviously, we’re trying to maximize returns for shareholders. So we’re going to evaluate the kinds of returns we can earn on a build-to-suit relative to the risk in taking on a speculative project — risk and return of taking on a speculative project.

Blaine Matthew Heck: Great. That’s helpful. And then maybe a little bit more high level. It seems as though there are a few different strategies we’re seeing from tenants, those that are continuing on with their business plans and leasing despite the uncertainty. You’ve got those that are strategizing more, but still in the market, but taking a little bit longer to make decisions and those that are completely on pause and waiting for clarity. I guess would you agree with that characterization? And how would you kind of characterize the relative size of each of those groups today in your markets?

Peter E. Baccile: I would agree with it. We’ve had some conversations. We’re close to trading paper and they’ve said, “We want your building, but we’ve just got word from HQ that we have to pause now.” And that was post April 2. So there’s definitely a large group there — there is definitely a large group who window shop because they know they need space. They’re just not sure when. And then there are the ones who are a bit more bold and some of them who say, “Hey, we see what Amazon is doing.” Spending $15 billion or at least they’re announcing to spend $15 billion on new centers, largely in rural areas, and they’re going to build out their same-day delivery from the city to the suburbs to the rural areas, and they can’t afford to sit and watch. So they’re going to go ahead and sign leases. So I think you outlined it pretty well. You’ve got tenants kind of active across the spectrum in terms of objectives.

Blaine Matthew Heck: And do you think those different strategies are roughly equal in size? Or would you say 1 or another or more prominent here?

Peter E. Baccile: Hard to say. Hard to say.

Operator: And your next question comes from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows: I think you historically mentioned the answer was that it doesn’t. But to what extent have you found that reducing price can create more leasing demand, whether it’s developments or other vacancies? Like have you seen this work in some places, but not others?

Peter E. Baccile: Caitlin, we really — first of all, we focus on the NPV of that discussion, if you want to call it that. There are lots of different inputs. Certainly, rate is one, TIs, free rent and move-in date. Some people want to sign leases and not move in for 6 or 8 months. So there’s a lot of variables there. Lowering the rate doesn’t create new demand. And it’s really — then you subject yourself to a big hit to that NPV model. And so that’s always the thing you try to hold steady on this rate.

Caitlin Burrows: Got it. Okay. And then just on the decision to issue the unsecured bonds, I was wondering if you guys could go through — I don’t think you had talked about it before, but maybe you had, but kind of like what drove that? Is it based on your size today, efficiency of the market that you’re not doing dispositions? Or like what was different now versus the last 18 or so years?

Scott A. Musil: Sure, Caitlin, it’s Scott. I think we saw that we had a path to be a serial issuer in the public bond market. We’ve got maturities coming up the next 5 years. And if you look over the majority of the years in the last 20 years, the pricing in the public bond market is inside of this pricing in the private placement market from a spread point of view. So that was the rationale for doing it. As far as the home for the offering, we had about $500 million on our line of credit. So we utilized the proceeds to pay down our line.

Caitlin Burrows: Got it. And just in terms of like what was different now versus like 4 years ago or something to not do it then — any comments on that?

Scott A. Musil: We have the — well, now we — if you look at our maturity schedule over the next 5 years, we’ve got enough maturities to be somewhat of a serial issuer in the public bond market, which is what the investor base wants to see. And 4 years ago, we just didn’t — we might — if we did something then, we might not have been back to the market for a couple of years and the public bond investors is likely to be back on a more reoccurring basis.

Peter E. Baccile: And the size of the offering back 4 years ago was smaller than it is today. It wasn’t benchmark size. And in some cases, the private placement market was cheaper actually than the public market.

Scott A. Musil: ’17 and ’18.

Operator: And your next question comes from Jessica Zheng with Green Street.

Jessica Zheng: I was wondering if you have any insights around how private industrial developers are behaving in the current environment. I just wonder for the firms that are sitting on — spec developments, are they — start to offer elevated concession packages? Or are they materially cutting say basis rents to try to secure a tenant?

Peter E. Baccile: Peter and Jojo, you guys want to talk about this thing?

Peter O. Schultz: Sure. I would say, generally speaking, where there are more choices, you’ve seen concessions drift up because tenants have a lot of choices, so developers are responding in that way. But I wouldn’t say there’s a material difference across the landscape for developers. Jojo?

Johannson L. Yap: Yes, I would agree. And then in terms of starts, they’re cautious, hard to get debt, debt is expensive, and they’re sitting — a lot of developers are sitting on their land because they’ve got still some vacancies on their new developments.

Operator: And your next question comes from Nick Yulico with Scotiabank.

Unidentified Analyst: This is [indiscernible] with Nick Yulico. Now that the focus is shifted to addressing ’26, ’27 expirations, we see that expiring rents are rather on the lower end for ’26 and ’27 as well. Are those assets indicative and comparable to the types of assets you leased in 2025? Just trying to understand here the demand and potential rent spreads for those properties.

Arthur J. Harmon: So asking about ’26 and ’27 expirations and how the rent stack up.

Scott A. Musil: Well, so ’26 compared to ’25, I would say, pretty consistent. But in ’26, we do have a higher proportion of expirations in Dallas and Atlanta, which have been very good markets over the last several years. So I would say that’s pretty much the difference between ’26 and ’25. ’27, I don’t know right off hand, I can get back to you after the call.

Unidentified Analyst: Got it. And then a quick follow-up on your current development leasing. Any types of tenants that you might highlight that are having a kind of higher interest in your assets at this point? Or there is no kind of particular trend you can highlight?

Peter O. Schultz: I would say, generally, we’re seeing a lot of activity from food and beverage and 3PLs, some automotive, some manufacturing, some consumer products. E-commerce continues to be very busy. As Peter mentioned a couple of minutes ago, Amazon, in particular, has a range of requirements in a number of markets. They’re very, very active. So activity overall continues to be pretty broad-based. We’re pleased with the breadth of that.

Operator: [Operator Instructions] Your next question comes from Brendan Lynch with Barclays.

Brendan James Lynch: You mentioned the interest rate drag on FFO in the back half. Can you also discuss the drag on same-store that’s implied in guidance for the second half as well?

Peter E. Baccile: Chris?

Christopher M. Schneider: Yes. If you look at the same-store kind of the second half, that’s primarily due to lower average occupancy in the second half of the year compared to the first half of the year, a little bit less contribution of the cash rental rate increases. And then we have some increased free rent concessions on new leasing. So that’s really what’s driving that a little bit lower in the second half of the year.

Brendan James Lynch: Okay. That’s helpful. And can you also discuss what dictates when you grant a fixed rate renewal option for tenants? Where does that kind of fall in your list of priorities when negotiating a lease — and should we expect any more of these in the remainder of ’25 or into ’26?

Peter E. Baccile: It’s not on Page 1 of the list, let’s put it that way. It’s — obviously, you’d rather not do that. But sometimes there is a benefit in that particular case, very large tenant, very good credit, and it made sense for that deal.

Peter O. Schultz: And Brendan, the timing of that, that was done in 2017 as part of a lease renewal at that point. So it should — you should not take that as a reflection of market conditions in the current environment.

Johannson L. Yap: Yes, we do it rarely, very rarely.

Operator: And your next question comes from Todd Thomas with KeyBanc Capital Markets.

Todd Michael Thomas: First question, just from your comments earlier around the Camelback lease, you mentioned that it replaced the lease-up assumptions on the 1.6 million square feet that you had in guidance, the $0.02 and that you’re now assuming a 12/31 lease-up essentially. But 2 questions. Do you actually feel different or less confident in the timing of the lease-up on that 1.6 million square foot bucket, any different than you did last quarter? And then I suspect this means that the 95% to 96% occupancy assumptions, if you’re pushing out some of that leasing that, that should sort of be disregarded, I guess, to some extent as it pertains to ’25. We can do the math, but just wanted to ask about that also since this sort of hit after the release, it sounds like.

Scott A. Musil: So for the occupancy assumptions don’t change, Todd, because both the 1.5 million actually and also that includes the 708,000 they’re assumed to lease up on 12/31. So that impacts — positively impacts our 4-quarter average on that. And I’m sorry, what was the other question you had? I think I took care of the last part first.

Todd Michael Thomas: Whether or not you actually feel different at all around the timing of that 1.6 million square-foot lease-up, right? Camelback helps in the sense that you’re kind of pushing back that assumption. But in terms of traffic and the leasing prospects that you’re working on, do you feel any different than you did last quarter?

Peter E. Baccile: Well, look, we’ve got 5.5 months left in the year. Traffic around those assets is decent. They happen to be — most of them happen to be assets as someone earlier pointed out, that have been available for a while. So the risk of getting those done is not 0. So generally, we felt that it was more reflective of the probability to push those to the end of the year.

Operator: And your next question comes from Michael Mueller with JPMorgan.

Michael William Mueller: Two questions, and one is probably like a really dumb clarification question. But on the first one, was there anything to note out of the ordinary with either property operating expenses or recoveries this quarter? Because it just looks like the ratio — the expense ratios were kind of lighter compared to where they’ve been running and especially compared to last year and stuff?

Scott A. Musil: Mike, it’s Scott. I’ll explain it this way. It has to do with our tenure policy related to equity-based compensation. If you remember in the first quarter, our G&A was a lot higher because of that tenure-based policy. What does that mean? GAAP accounting requires us to expense immediately awards issued to folks that reach a certain point of age and have a certain point of service in accordance with our policy. You saw that it increased our G&A that quarter. It also increases our property expenses because our people that manage our properties, their compensation is reflected down in that line item. So what happens is it causes a depressed margin in the first quarter. And then in the second, third and fourth quarter, the margins are elevated.

And if you were to look back in the first quarter of ’24 and compare it to the following quarters, that same dynamic happened. And my bet is if you look back further years, that dynamic has happened. So I would say that’s the cause of the differential in margins between 1Q ’25 and 2Q ’25.

Michael William Mueller: Got it. Okay. Yes. I just thought it was a little bit bigger even compared to last year, but maybe not in that context. And then the second one, and this is kind of the dummer question. When you talk about the development leasing, because in my mind, I think development, external growth, development pipeline, when I think of same-store, I think of occupancy, the in-service portfolio, how much of this — like is all the 1.6 million development leasing you’re talking about doing or the 1.5 million, is all that related to the in- service portfolio? So it just happens to be stuff that you developed at some point in time that is in there. So you can have development leasing that’s impacting your occupancy guidance for the in-service portfolio? Or is a portion of that kind of true development leasing where it’s not in the in-service portfolio? It’s just getting a little kind of confusing in my — from my standpoint.

Scott A. Musil: Mike, I mean the way that we look at it, it relates to what’s already in service. That’s the 1.5 million — and if you want to walk through those projects after the call, I’d be willing — definitely be willing to do so. Now life isn’t perfect in development leasing though. We saw that last year as well. There might be 300,000 square feet of projects that we’ve completed that aren’t in service that aren’t in our guidance that we lease up this year that have a positive impact that make up maybe for not leasing up some of the 1.5 million square feet. But what we have in guidance is in service. And again, I’d be glad to walk through the projects with you after the call if you’d like to.

Operator: And your next question is a follow-up from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows: I feel like there hasn’t been much talk about specific markets, so I figured I would follow up on it. Could you talk a little bit first about SoCal, how you saw it evolve during the quarter, maybe from a demand perspective and on the rent side and whether there are any differences to call out by submarkets?

Peter O. Schultz: Jojo?

Johannson L. Yap: Sure, Caitlin. Let’s start with the rent. Rent, I would say, from Q1 to Q2, there was a 5% decline in market rents in terms of — but it’s still — rents today are probably about 100% or double the pre-COVID rents. So that’s the way to look at it. So if you look at that, it’s about 13.5%, 14% CAGR. Now let’s move on to activity. Gross leasing activity in Q2 was kind of comparable to Q1. Vacancy increased about 10 basis points in both IE West and IE East. IE West is a little bit lower vacancy rate, is performing better than IE East. In terms of net absorption, it’s somewhat flat because despite the positive gross leasing activity, there has been a little bit higher giveback of space. Then moving on to the supply side.

Deliveries and starts have been really low. Total deliveries is under $2 million, of which roughly about 35% is pre-leased and starts are about $1.6 million under $2 million, of which $600,000 was a build-to-suit. So now the stats I’m giving you is basically only IE core because we don’t invest in the High Desert, IE North, which is less than 4% of the market. Anyway, I hope that helps in terms of rents and absorption and activity.

Caitlin Burrows: It does. And then I guess as you think about the other markets you guys are in, are there any to call out as being strongest versus weakest today?

Peter O. Schultz: Caitlin, it’s Peter Schultz. I would say Nashville continues to be among the strongest in the country, little new supply, good demand, rents continue to go up. We’ve seen some increased activity in Florida recently. So all the markets are doing pretty well, but those would be — 2 of the stronger.

Peter E. Baccile: Caitlin, I’d just add certain submarkets of Dallas and Houston, we like right now. They’re doing well.

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

Peter E. Baccile: out to Art, Scott or me.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.