First Industrial Realty Trust Inc

NYSE:FR

Earnings Call Analysis

Strong Growth and Positive Guidance in Q3 Earnings Call

In Q3, First Industrial Realty Trust showcased impressive performance, achieving NAREIT funds from operations of $0.68 per share, an increase from $0.62 a year ago. Cash same-store NOI grew 11.9%, driven by 51% rent increases on new and renewal leases. The company anticipates 2024 NAREIT FFO between $2.61 and $2.65 per share, tightening guidance with an 8%-10% cash same-store NOI growth expected for Q4. They have successfully renewed 97% of their 2024 leases, while occupancy is projected between 95% and 97% at year-end. New acquisitions and ongoing development projects provide strong growth prospects in markets like Pennsylvania and Nashville.

Solid Financial Performance

First Industrial Realty Trust reported strong financial results for the third quarter, with NAREIT funds from operations (FFO) rising to $0.68 per share from $0.62 per share in the same quarter last year, indicating a 9.7% year-over-year growth. Cash same-store net operating income (NOI) demonstrated striking 7.6% growth, which is an impressive sign of the company’s ability to generate revenue from its existing properties.

Strong Leasing Activity

During the quarter, the company commenced approximately 3.5 million square feet of leases, with notable success in renewals. The company achieved a 51% cash rental rate increase on leases for the year with a renewal rate of over 150% for significant contracts. As of the call, 97% of their 2024 lease expirations were resolved, showcasing excellent management of lease transitions.

Market Context and Growth Outlook

The broader U.S. industrial market showed signs of stabilization with a slight increase in vacancy to 5.8%. Interestingly, new construction completions have decreased drastically, showcasing a shift in supply dynamics. At the same time, net absorption remains active. This situation creates a favorable environment for First Industrial as demand remains robust while supply constraints could facilitate rental rate growth in the future.

Updated Guidance for 2024

The company tightened its 2024 FFO guidance to a range of $2.61 to $2.65 per share, a $0.02 increase in the midpoint from previous guidance. This reflects improved performance expectations as occupancy is targeted between 95% to 97% at year-end, suggesting that the strategic management of their property portfolio is yielding positive results. Moreover, cash same-store NOI growth guidance for the fourth quarter is set between 8% to 10%, a notable increase from prior forecasts.

Acquisitions and Dispositions Strategy

The company continues to strategically acquire properties while reducing holdings of lower-growth assets. Recently, they acquired a 4-building park in Houston for $29 million with a 6% in-place cash yield, reinforcing their focus on high-quality assets. On the disposition front, they completed sales of $157 million year-to-date, including a recent sale of $19 million for buildings in Pennsylvania. This reflects their ongoing strategy to reallocate capital effectively.

Risks and Challenges

A notable risk stems from lease issues with the tenant boohoo, which has begun winding down operations at their facility. While current rental obligations are being met, the company took a $0.01 per share hit to its 2024 FFO guidance due to accounting adjustments related to this lease. The ongoing macroeconomic uncertainties, including geopolitical tensions and policy shifts, also pose risks to future leasing activity.

Conclusion: A Promising Trajectory

First Industrial Realty Trust's current performance and strategic direction suggest a solid footing amid a changing industrial landscape. Their ability to drive operational performance and capitalize on favorable market conditions positions the company well for continued growth. With a strong balance sheet, focused management team, and strategic asset allocation, First Industrial is equipped to navigate challenges and leverage growth opportunities effectively.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the First Industrial Realty Trust, Inc. Third Quarter 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, sir.

[Art Harmon, executive]

All right. Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our third 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, October 17, 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 turn the call over to Peter.

[Peter Baccile, executive]

Thank you, Art, and thank you all for joining us today. The First Industrial team delivered another great quarter with solid operating metrics, along with some important new leases and capital deployment activity. We continue to drive cash flow growth from our portfolio via contractual escalations in our leases, capturing embedded rent growth, on rollovers and continued development leasing, all of which position us to deliver strong growth in funds from operations.

Before getting into specifics, let me update you on the industrial market broadly. According to CBRE EA, U.S. industrial market vacancy increased a modest 10 basis points to 5.8%, reflecting that most of last year's development starts have now come online. Completions for third quarter totaled 87 million square feet. This is down approximately 30% compared to last quarter and the lowest quarterly completion number since the third quarter of 2021.

For our target markets, completions were 45 million square feet, down 40% from the prior quarter. New starts remain disciplined, totaling 36 million square feet in the third quarter down 68% from the peak in the third quarter of 2022. On the demand side, the third quarter was active with net absorption nationally of 54 million square feet. This brought the year-to-date total to approximately 125 million square feet, of which 75 million were in our target markets. Renewal leasing, in particular, remained strong.

Since our last call, we successfully renewed the last of the 3 large 2024 Southern California expirations with a cash rental rate change of more than 150%. As of the date of this call, we're now through 97% of our 2024 lease expirations by square feet. Our cash rental rate increase is 51% which is a strong follow-up to the 58% cash rental rate growth we delivered on our 2023 commencements. Congratulations to our leasing teams for back-to-back years of outstanding performance on this metric.

Looking at our 2025 lease expirations. We're making good progress and are now through 37% by square footage, which is similar to our pace of progress last year. Together with new leasing, our cash rental rate increase for leases signed with 2025 commencement date is 33%, more than half of this population is comprised of the 1.3 million square foot fixed rate renewal in Central PA, we discussed on our last call. We will give you a refined view of our thoughts on our estimated 2025 cash rental rate increase on our fourth quarter call with the benefit of budget reviews and incremental signings.

Regarding development leasing, as we highlighted on our last call, 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 plus a 61,000 square foot lease at our First 76 project in Denver. Turning now to capital deployment.

We continue to closely monitor demand and competing supply in our target investment markets, determine potential incremental starts as we wrap up 2024. Since our last call, we launched a 542,000 square foot development at our first Rockdale Park in Nashville. Our total projected investment is $54 million with an expected cash yield of approximately 7%. The current supply/demand dynamic in Nashville is attractive, and we like the long-term drivers of this market. Current vacancy stands at just 2.7% and unleased new supply represents about 2% of the total stock.

We also acquired a 4-building 211,000 square foot park in Houston's Southeast submarket with close proximity to the port. The buildings are 100% leased on a long-term basis. Our total investment is $29 million and the in-place cash yield is approximately 6%.

Moving now to dispositions. As discussed on our last call, we sold the portfolio in New Jersey for $82 million. In the fourth quarter to date, we sold 3 buildings in Pennsylvania, totaling 163,000 square feet for a total of $19 million. This brings our year-to-date total to $157 million.

With that, let me turn it over to Scott to walk you through further details on our results and guidance.

[Scott Musil, executive]

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.68 per fully diluted share compared to $0.62 per share in 3Q 2023. Our cash same-store NOI growth for the quarter, excluding termination fees, was 7.6%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases, partially offset by higher free rent and lower average occupancy.

Excluded from the same-store calculation is the accelerated recognition of a tenant improvement reimbursement related to our tenant boohoo, which leases 1.1 million square feet in Central Pennsylvania. Including this amount, our third quarter cash same-store NOI growth was 11.9%. I will have some additional comments on boohoo shortly.

We finished the quarter with in-service occupancy of 95%. Within the in-service portfolio, we have approximately 200 basis points of lease-up opportunity from developments placed in service in 2023 and 2024. Summarizing our leasing activity during the quarter, approximately 3.5 million square feet of leases commenced. Of these, 500,000 were new, 2.2 million were renewals and 900,000 were for developments and acquisitions with lease-up.

Turning back to our lease with boohoo. As reported in the press, they are ceasing operations at our building for which they have 10 years remaining on their lease. Due to the cessation of their operations, we have written off their straight-line rent asset and tenant improvement reimbursement liabilities, the net result of which is $0.01 per share reduction in our 2024 NAREIT FFO. They are current on the rent and have a shorter-term sublease to a 3PL for about 40% of the building.

Also keep in mind that we have a security deposit in the form of a letter of credit, which covers about a year's worth of rent. Let me quickly review our updated guidance for 2024. Our guidance range for NAREIT FFO is now $2.61 to $2.65 per share, which is a tightening of the range and an increase at the midpoint of $0.02 per share since our last earnings call. Key assumptions have been tightened as we only have 1 quarter remaining in 2024. End of fourth quarter occupancy range of 95% to 97% which implies a quarter-end average for the year of 95.2% to 95.7%.

Our occupancy guidance now assumes about 800,000 square feet of development leasing we had previously slated for the fourth quarter will now take place in 2025. Fourth quarter cash same-store NOI growth before termination fees of 8% to 10%. This implies a 7.75% to 8.25% range for the year, which is a 25 basis point increase at the midpoint since our last earnings call. Note that the same-store guidance excludes the impact of the accelerated recognition tenant improvements related to the Central Pennsylvania lease in 2024 and the onetime tenant reimbursement in 2023 that we previously disclosed.

Guidance includes the anticipated 2024 costs related to our completed and under construction developments at September 30. For the full year 2024, we expect to capitalize about $0.06 per share of interest, and our G&A expense guidance range is $39.5 million to $40.5 million.

Let me turn it back over to Peter.

[Peter Baccile, executive]

Thanks again to the First Industrial team for another solid quarterly performance through our focused strategy and capital allocation actions we've created a high-quality portfolio that is well positioned to outperform through the business cycle. We have embedded growth opportunities within our portfolio, and we have future growth opportunities from our current landholdings on which we can build over 14 million square feet of highly functional and well-located logistics facilities.

Our balance sheet is strong, and we have flexibility with no maturities until 2026, assuming the exercise of extension option and our bank loans.

Operator, with that, we're ready to open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

So occupancy guidance implies upside from the third quarter but has a relatively wide range of outcomes between 95% and 97% at year-end. I guess, can you just talk about some of the biggest drivers in the lease-up portfolio that could kind of push you towards the upper end of that guidance? Are there any specific large leases you're working on that you can maybe give us some color on?

[Christopher Schneider, executive]

Yes. This is Chris. If you look at the occupancy drop about half of it was from the development portfolio that we talked about, the other half was from the core portfolio. As we stand here today, we certainly do have some activity or we're talking to some tenants, but we thought it was prudent to push back -- lease is up with only 2 months left in the quarter.

[Scott Musil, executive]

Blaine, it's Scott. I think development leasing is the key is to hit the high. And frankly, it could be going below the midpoint. We've got 400,000 square foot of development leasing built into our guidance in the fourth quarter. That's about 60 basis points. If we get more than that, we'll be above our midpoint occupancy guidance.

[Blaine Heck, analyst]

Great. That's very helpful. And then maybe just a little bit more of a high-level question.

I guess, given that you all have a relatively diverse portfolio geographically. It seems as though you're in a good position to talk about which markets you think are poised to inflect sooner than others. I guess can you just talk about which markets you're feeling best about from a supply and demand standpoint and which you think might take longer to come back to seeing rental rate growth?

[Christopher Schneider, executive]

Sure. Let's take it kind of East to West. I think as you've seen rent growth was very, very strong in Southern California, other West Coast markets, New Jersey, South Florida. Those are the markets where the change in dynamic has happened first. And the leasing progress that we've made in our portfolio, you've seen, largely, it was stronger in the East.

That whole dynamic is going to shift over time as the alternatives that are available in the marketplace for potential tenants begin to get absorbed, and we're seeing that happen right now, and we're seeing that additional traffic turn into more leasing activities.

Peter, do you want to comment?

[Peter Schultz, executive]

The only other thing I'd say is as we think about rental rate growth. We continue to see traction in Pennsylvania, Nashville and Houston today -- generally speaking.

[Unknown Executive]

Jojo, you want to comment on the West?

[Johannson Yap, executive]

Yes. And then in terms of cycling through, taking time -- taking more time to like [ IEE ], in general, has to cycle through and digest the supply it has. But there has been increased activity in terms of offers and proposals.

[Operator]

Our next question comes from Craig Mailman with Citi.

[Craig Mailman, analyst]

Just Scott, on the boohoo lease. So you guys -- I guess they're on a cash basis accounting now. Is that correct? And kind of how should we think about the impact of that if they continue to pay rent over the next couple of quarters? Or are you guys planning on taking back the security deposit and trying to go direct with the subtenant kind of what's the game plan here to attack this to either get it re-leased or continue the cash flow on the asset?

[Scott Musil, executive]

Right. I'll take care of the accounting piece of it and I'll let Peter Schultz take care of the question about booho.

So Craig, you're right, we're on a cash basis. And again, as we mentioned in the script, they're current on their rent right now, if they continue to be current, obviously, we'll reflect that NOI and our FFO -- if they stop paying rent, we do have the security deposit in the form of a letter of credit. So we can use that for about up to 1 year that covers about 1 year's worth rent. So that's something that would help us out in the case that they stop paying rent.

And I'll turn it over to Peter to talk about the tenant more in detail.

[Peter Schultz, executive]

Thanks, Scott. So the Boohoo is in the process of winding down their operations at the building, which should be completed by the end of the year. They then plan to put the entire building on the market for sublet. They will be retrenching back to the U.K. to fulfill their orders. Today, there are very few options for this quality of a building in Central Pennsylvania.

So they feel pretty good about their prospects for subletting. They also have a current subtenant in a portion of the building, about 400,000 square feet or so through their 3PL, [ DHL ], who's managing that. So that's subsidizing, if you will, some of their rental payments, but they fully intend to honor their lease obligation and have some success with subletting the building. We'll keep you posted on that.

[Craig Mailman, analyst]

Okay. And so if they do pay rent in the fourth quarter, kind of what could that be upside to the guidance, Scott?

[Scott Musil, executive]

We have them paying rent, Craig. Just because...

[Craig Mailman, analyst]

Oh you have them paying rent in the guidance?

[Scott Musil, executive]

Yes, absolutely because they're paying for, one; two, we've got the letter of credit, that's their security deposit. So even if they stop paying rent, I can keep accruing rent because I've got that letter of credit out there. Keep in mind, that's with a bank -- it's not with the tenant.

As a result, the accounting rules will let me recognize that security deposit on a go-forward basis if they stop paying. That takes me to -- if they stop paying now, that takes me to probably the end of third quarter, early fourth quarter of next year.

[Craig Mailman, analyst]

Perfect. And then just going back to Blaine's question on the occupancy side. So we're halfway through October here, you have 400,000 square feet of development leasing in the number. How does the activity of that 400,000 square feet look and from a kind of average occupancy in the fourth quarter versus ending occupancy? Where should we be thinking about that depending on when some of the stuff could hit? Is this just going to be more kind of first quarter '25 impact from an earnings perspective?

[Scott Musil, executive]

Well, I would say the development leasing, we have it baked in to our guidance at the end of the fourth quarter. So that's how we have it factored in. As far as what is included in that 400,000, correct, that's a macro assumption. There could be many different combinations of development leases with the properties that we have available. I would say the prospects we have for it is pretty decent at this point in time, but we have work to be done. There's only about 2 months left in the year.

[Operator]

The next question comes from Vikram Malhotra with Mizuho.

[Vikram Malhotra, analyst]

I guess just first of all, just on the tenants. You mind just sort of walking us through how is sort of the watch list evolved?

And specifically there's one known move out, I guess, in the -- I believe it was in the first quarter of next year in Federal-Mogul. Do you mind just sort of talking about prospects for re-leasing that space?

[Peter Schultz, executive]

Sure. Vikram, it's Peter Schultz. Right, that's the 780,000 square foot building, that lease expires at the end of March. Tenants already out of the building. So we've done our make-ready work to position the building for marketing. We have seen some interest in it already, and we're encouraged by the limited number of options for that size space in Central Pennsylvania today.

[Scott Musil, executive]

And Vikram, what was your question again on...

[Vikram Malhotra, analyst]

Just the watch list -- like the tenant watch list just given the kind of sublet volumes and bankruptcies in certain segments, just in the economy softening, just mind giving some color on the watch list?

[Scott Musil, executive]

Sure. Other than Boohoo, nothing material on the watch list at this point of time.

[Vikram Malhotra, analyst]

Okay. Great. And then just last one.

You did some -- a few acquisitions. I'm just wondering from a capital deployment standpoint, you mentioned starts have come down. You did start a new development. Some of your peers who had, I guess, big development pipelines have walked it back. I'm just wondering from a development and acquisition standpoint, what are you thinking as we head into '25?

[Peter Baccile, executive]

So with respect to development, we continue to keep a close eye on the submarkets where we have development opportunities. Obviously, there are a lot of factors involved that impact the fundamentals of those submarkets whether it's the wars around the world, what's happening in the economy, the election, we have been hearing from some big tenants that, that's causing them to put their decision-making off to the end of the year.

When we look at the fundamentals around the country, the markets that we think are going to be most encouraging for new starts next year will be in Pennsylvania, Texas, South Florida, again, and of course, Nashville, which again is one of the stronger markets in the country.

[Operator]

And the next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

I was wondering if you could talk a little bit more about new leasing, whether development or other vacancy. I guess, what do you think it will take for new leasing to pick up? And what's your take on utilization and how that's impacting kind of the market today.

[Peter Baccile, executive]

Peter, do you want to take that?

[Peter Schultz, executive]

Sure, Caitlin. It's Peter Schultz. A couple of comments. In terms of space utilization in our discussions and inspections with our tenants, generally pretty high sublet space other than the one we just talked about with boohoo not that material.

In terms of the cadence and pace of decisions and discussions -- some tenants are operating with more urgency. But most, as Peter just commented on or not for a variety of reasons. So there is demand and there's activity. And I would say that the level of prospects in the market today are probably better than it has been for most of the year, but the pace of that decision-making continues to be lumpy and somewhat deliberate.

[Peter Baccile, executive]

There's a lot of uncertainty out there with respect to the macro economy, geopolitical issues. The weather is now on people's mind. So we need to work through these things. But we believe we see there's pent-up demand. There are definitely larger tenants who have investment dollars for growth that they want to get going on, and they're just waiting for the fog to clear a little bit on some of this uncertainty.

[Caitlin Burrows, analyst]

Got it. Okay. And then just maybe on the acquisitions versus disposition strategy at this point I could maybe imagine that you're looking to sell lower growth properties and buy higher-growth ones. But I guess, like how possible is that? And you mentioned the 100% lease rate for the Houston acquisition. So just wondering kind of what's the opportunity there?

[Peter Baccile, executive]

Yes. So for us, we're kind of choosy about what we're going to buy. It has to be in the right place and have the right functionality and a lot of other factors.

And so typically, we do best when there are complications around deals, call them [ hair on ] deals. And so we don't participate in the broadly attended options, by and large, and we're much better at acquiring assets, as I said, where there's work to be done.

So that's the strategy there. And again, we're focusing on the submarkets that we think are going to show the most growth over the coming near to medium term.

[Caitlin Burrows, analyst]

And if I could, just on the Houston one, it doesn't sound very hairy given it's well leased. Was that one maybe it was just off market and it worked out? Are there some other complication that is not so obvious?

[Johannson Yap, executive]

You hit the nail right on the head, Caitlin -- basically it was off market. In addition to that, the seller wanted certainty. And we have a good portfolio in the southeast submarket and they wanted to make sure that they work with a buyer that knew the submarket -- could close pretty quickly, and we won the limited marketing. We were -- they were very few competitors. And we're very pleased with that acquisition, great product, new product and a 5.9% going in cash yield.

[Peter Baccile, executive]

So Caitlin, I think you also asked about dispositions. You're right, as we have done for now quite some time. We're focusing on those assets that have a lower growth trajectory going forward so that we can redeploy that capital into higher growth opportunity. We'll keep doing that. But I think at a macro level, you will see the volume of those sales going forward be much lower than it's been in the past.

[Operator]

And the next question comes from Rich Anderson with Wedbush.

[Richard Anderson, analyst]

First question is on the election, and you mentioned some tenants are holding off until they see what the outcome. What's the swing factor there? Like is there like, I'm not doing anything if Harris wins, but I'm all if Trump -- like I don't understand beyond tariff risk, what it is -- that will change on November 6 with the election in the minds of your tenants?

[Peter Baccile, executive]

Yes. So we don't get into the micro on nitty gritty details. I think, generally speaking, it's about growth and the stability in the economy. And I can't attribute that to either candidate in terms of how that's going to come out.

But it's the new growth investment, not the renewals. The renewal activity is extremely strong. As you've seen in our cash rent increases have been very, very strong. So it's really the new growth investment. People want to see what the landscape is going to look like either way, regardless of who wins and what that's going to mean for anything from economic activity and social unrest to increased regulation or decreased regulation. So there are some pretty big factors involved in the outcomes, and that's kind of it at a macro level.

[Richard Anderson, analyst]

Is there any like red state, blue state, Trump wins. Red states are going to do better or -- is that too oversimplifying it in your mind?

[Peter Baccile, executive]

I don't have a view on that.

[Richard Anderson, analyst]

Not to get political on you guys. The next question is 8% same-store NOI growth for 2024 is your guidance. Do you have a read on what your earn-in is for 2025 based on particularly what you've done in the second half of 2024?

[Scott Musil, executive]

Are you asking for what we think an estimate of what it's going to be in 2025?

[Richard Anderson, analyst]

Yes, I want guidance for 2025.

[Scott Musil, executive]

Well, we're not going to give it to you.

[Richard Anderson, analyst]

I'm talking about what is baked in? So if maybe there's 3% or 4% same-store already baked into next year because of what you did in 2024?

[Scott Musil, executive]

Well, I think the key drivers of same-store, a couple of different items. Occupancy is one on the core. I'm not going to get into that. But others are rental rate bumps that's been pretty stable. And then it's the cash run rate increase on new and renewal leasing, what we're able to achieve next year because that's been a real driver of cash same-store growth for the industrial peers.

We gave you a look into what we think early what 2025 is we signed 37% of the expirations in '25 at a 33% increase in cash rental rates, and that includes that fixed rate renewal option for the 1.3 million square footer in Central Pennsylvania.

So I think the number is going to be a pretty good number. We've got to see how rental rates flesh out when we do our final guidance -- what we think it's going to be a good year.

[Richard Anderson, analyst]

Okay. Last for me. I don't know if you mentioned where you're seeing market rent growth in your areas of the country, how that's moving right now. Maybe you can answer that. But also how quickly can it change? Let's say, God willing, we get some recovery in the geopolitical landscape and everyone is kind of happy with the political environment and macro stabilizes. All those good things happen. How quickly can you go from 0% to 5% market rent growth in your business and perhaps what you've seen in history? I'm just wondering the speed by which we start to see real health bring back -- come back into the marketplace?

[Peter Baccile, executive]

Look, we can't put a time frame on that, but some math helps frame it, okay? So net absorption is not bad. It needs to improve some. Completions -- so the existing pipeline is way down, completions last quarter went from 72 million in the second quarter to 45 million this year, and this is in our markets. The construction pipe went from 170 million to 135 million feet and 28% of that 135 million is pre-leased.

So when you look at the falloff in what we'll call new alternatives for prospective tenants. If we get some wind at our back on the net absorption front, the least, the demand side, things can change.

We don't think it's going to happen with any great speed. You're probably looking at the second half of next year. But aside from that, it's difficult to handicap.

[Richard Anderson, analyst]

And did you have a number for market rent growth that you're seeing today?

[Peter Baccile, executive]

Yes. So overall, rents are flattish to up a little bit. If you take SoCal out of that number, they're probably up 2% or 3%.

[Operator]

The next question comes from Rob Stevenson with Janney.

[Robert Stevenson, analyst]

Can you talk about the transaction market given that you've been both buyers and sellers recently given the first rate cut and the speculation leading up to that and sort of where cap rates are today versus 6 or 12 months ago? And how strong demand is and transaction volumes are that you're seeing out there ahead of the fourth quarter?

[Peter Baccile, executive]

At a high level, there's definitely significant capital chasing opportunities in the space. We're seeing some pretty significant prices paid. We would say some people are making some pretty big bets -- on the prior question about speed of recovery we see a lot of bets on that being quicker rather than longer.

Peter and Jojo, do you want to comment on any specifics in your markets?

[Peter Schultz, executive]

Rob, I would just say as we monitor some of the widely marketed transactions earlier in the year, there were maybe 6 to 8 bidders, and now you're seeing over 20 bidders on some of these packages. So to Peter's point, a lot of interest in the space.

[Johannson Yap, executive]

In terms of -- our house view in that second half will have more transactions then the first half. In addition to what both Peter said is that when talking to competing buyers they feel like the decline in volatility, the 10-year help, the lowering or short-term interest rates help their carry, they're more -- a bit more definitive now, what kind of fixed rate financing, they can get all of those leads to more comfort in pricing.

Overall, cap rates came in about 25 basis points over the last 3 months, I would say, in the higher expectation for un-levered IRRs also came in. So definitely, overall, the market is a bit more competitive.

[Robert Stevenson, analyst]

Okay. That's helpful. And how aggressively are you guys looking to add to your land pipeline today? And have you seen land pricing come down in any material manner across your core markets?

[Peter Baccile, executive]

Jojo?

[Johannson Yap, executive]

Right now, I mean, if you're looking at -- we have a very good pipeline to continue to grow our platform and our company. Of course, we'll watch like Peter Baccile said, we'll watch the submarkets. And I want to make sure that the supply/demand dynamics are favorable.

We will continue to look for land sites. One thing that I want to mention is the land sites have -- pricing is not a really significant decline, if you compare it to the decline of rents. So there is still quite a bit of bid ask between buyers and sellers. In the same token, there are more buyers now being more -- a little bit more aggressive, just a little bit more aggressive in buying land sites with lower yield expectations.

[Peter Baccile, executive]

Yes. landowners, it seems I think the market is going to go back to 2022 pricing, which we definitely don't. So that's why the bid asset that Jojo references is pretty wide.

So we are out there looking for land, but the transactions volume on that front are kind of slow.

[Operator]

And the next question comes from Nick Thillman with Baird.

[Nick Thillman, analyst]

Peter, you kind of mentioned just more recently, the weather becoming more of a factor -- in tenant decision-making. Is that hurricane related? Are we talking like south Florida? And like how recent is that? Or like maybe how broadly is that comment?

[Peter Baccile, executive]

It's more of a broad comment about the frequency of these highly disruptive weather patterns, they cause great economic damage. It probably has a big impact on consumption. So you can't ignore it. Now they are geographically confined, I guess, you would say, but they're still big and they're now coming back to back. It's just something else that's on the minds of people who are looking at all the uncertainties that they have to weighed through before they make investment dollars in new growth.

[Nick Thillman, analyst]

That's helpful. And then on First Logistics Center, it seemed like the second building that's still in lease-up. It seemed as though you guys are pretty bullish on the prospects there.

With boohoo kind of listing that other space as sublease space, is that another competitive building, you think? Or is there different space needs in that specific submarket?

[Peter Schultz, executive]

Nick, it's Peter Schultz. So not competitive. Boohoo, as I mentioned, is going to be subletting the building in its entirety. So irrespective of the shorter-term sublease that they have there now that will be come to conclusion, and they'll be marking the entire building.

The balance of the second building is 350,000 feet. They're not competitive. We've had some activity there, a little disappointed at the pace of decision making with some of the prospects, but there are really two separate spaces.

[Operator]

The next question comes from Vince Tibone with Green Street.

[Vince Tibone, analyst]

Could you share your views on the latest California legislation, impacting industrial development, AB 98, particularly, does this bill impact your existing land bank at all in California and your ability to build on that land? And then also what impact do you think this legislation could have on industry-wide supply in California over the next few years?

[Peter Baccile, executive]

I mean generally speaking and then I'll hand it over to Jojo for the details on our portfolio. This is going to be a tailwind. I mean it will be a tailwind for our business. It will be -- it will increase value for existing assets. And over time, it's probably going to put upward pressure on rents. But Jojo can talk more about our holding and how we're positioned with this. We're in pretty good shape.

[Johannson Yap, executive]

Sure. Vince, thanks for your question. For those who are not familiar, the AB 98 is the new California state law, and it aims to limit industrial development depending upon how you -- how far you are with sensitive receptors, which is really the school, resi and hospital, for example.

And what that means is that -- the state law requires building upgrades and increased setbacks and buffer zones. All of our land under entitlement is exempt from AB 98 because this law is basically affecting development projects that have not started their permitting or entitlement process after 10/1/24. So after -- actually September 30 of this year, anything that you haven't started entitlement, you are subject to AB 98. So that's one thing I want to make clear.

Just to add to what Peter has said is that again, there are our view is that there are going to be numerous sites that would be very difficult or nearly impossible developed due to the constraints put by AB 98. And basically, this has the effect of constraining development of land across the state and we all believe that anything that constrains the supply of developable land will increase the value of our existing sites and existing buildings. And of course, as we all know that anything that decreases potential supply should be good for the fundamentals of the market, i.e., rent growth.

So I hope that answers your question with.

[Vince Tibone, analyst]

No, that's really helpful color, and we're just trying to think about how much -- versus the historical pace of development in Inland Empire, specifically, how much this new legislation can impact that. So this is all really helpful color.

[Operator]

[Operator Instructions] Our next question comes from Michael Mueller with JPMorgan.

[Michael Mueller, analyst]

I think you mentioned the go-forward asset sales could be considerably lower on a go-forward basis. And it seems like in the past, you've normally pointed to 75 to 125 or 150 of annual disposition targets.

So I guess, how should we read into what that implies for development starts going forward even relative to this year? Is it implying much lower go-forward pace? And just how sensitive is dispositions to start?

[Peter Baccile, executive]

Yes, they're disconnected or they're not connected, let me say it that way. The sales program over the last dozen years, as you've seen and as you know, for us was to reallocate capital away from lower-growth assets into higher-growth opportunities. We're now to a point where that program is essentially over.

And so -- that really has nothing to do with developments. Now yes, obviously, the sales proceeds over the last decade or so have helped fund new development. But we'll just fund those developments in a different way going forward, we'll fund them through some sales but much lower numbers, as well as retained cash flow and the right proportion of debt and equity. So it's not really going to impact starts. They're not connected.

[Operator]

And the next question comes from Nicholas Yulico with Scotiabank.

[Nicholas Yulico, analyst]

I just wanted to go back to boohoo and the -- that accelerated tenant improvement reimbursement, was that income was that already in the guidance? Or was that unexpected this quarter?

[Scott Musil, executive]

That was unexpected because it was the accelerated recognition of that tenant improvement reimbursement liability. So what the accounting rules tell you to do is you have to amortize that over the life of the lease. Well, at the end of the third quarter, we accelerated the unamortized balance, which I think was about $4.4 million or $4.5 million.

So that was a benefit but that was netted against the write-off of the straight-line rent receivable of $5.5 million. So that's how you get the $0.01 per share. So again, it's all in conjunction with boohoo and it was not anticipated when we issued guidance in the second quarter.

[Nicholas Yulico, analyst]

Okay. And then the write-off, which is the offset that also wasn't in prior guidance?

[Scott Musil, executive]

It was not in prior guidance, correct. Both pieces were not.

[Operator]

The next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

I just had one quick follow-up that I figured it was easier to ask this way. Before when you guys were talking about the rent growth, I think you mentioned market rent growth that it was about flattish, maybe up a little, and then excluding Southern California, it might have been up 2% to 3%. Just for the time period, was that year-over-year in the third quarter or something else?

[Peter Baccile, executive]

That's year-over-year.

[Operator]

And the next question comes from Brendan Lynch with Barclays.

[Brendan Lynch, analyst]

Just a follow-up on AB 98. My sense is that there's a lot of gray area in the bill and maybe there's some additional legislation that might be coming.

Can you talk about whether you think the dynamics of what has been established with the AB 98 is actually finalized versus might be adjusted in the future?

[Johannson Yap, executive]

Sure. Very good question. When you read through AB 98, they certainly could benefit for more clarification. At this point, their investment criteria, setback criteria and specific building upgrades depending upon the size and how far each building would be in the receptor.

And there is enough detail where you can kind of ballpark what might happen in building and what land site is available. But certainly, there could be additional detail because even the building upgrades and how, for example, the building is laid out, could be more specific. But I can't -- but it's so hard to forecast what kind of changes might end up with that. But right now, it is a state law and it has some detail on it.

[Peter Baccile, executive]

It's also fair to say the municipalities don't like this. So it will be litigated as well. So we'll see. There's definitely going to be some movement here.

[Brendan Lynch, analyst]

Great. That's helpful. And maybe just one other one on this topic. Did you submit kind of a flurry of entitlement request rate before the deadline to avoid some of the consequences of the bill itself?

[Johannson Yap, executive]

Not at all. All our sites were clearly within some years into, and we also have some entitled sites already. And so No, none was done as a quick reaction to this AB 98.

[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 Baccile, executive]

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

[Operator]

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