First Industrial Realty Trust Inc (FR) 2009 Q1 法說會逐字稿

Good morning. My name is Kimberley, and I will be your Conference operator today.

At this time, I would like to welcome everyone to the First Industrial First Quarter 2009 Earnings Conference Call. (Operator instructions)

Thank you. I would now like to turn the call over to First Industrial.

Hello, everyone. This is Art Harmon, Director of Investor Relations for First Industrial. And welcome to our call.

Before we discuss our first quarter results, let me remind everyone that the speakers on today's call will make various remarks regarding future expectations, plans and prospects for First Industrial, such as those related to our liquidity, management of our debt maturities and overall capital deployment, our planned dispositions, our development and joint venture activities, continued compliance with our financial covenants, and expected earnings.

These remarks constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. First Industrial assumes no obligation to update or supplement these forward-looking statements. Such forward-looking statements involve important factors that could cause actual results to differ materially from those in forward-looking statements, including those risks discussed in First Industrial's 10-K for the year ending December 31st, 2008 and subsequent filings on 10-Q filed with the SEC. Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report available at firstindustrial.com, under the Investor Relations tab.

Today, we will begin our call with remarks by Bruce Duncan, President and CEO, which will be followed by a review of our results, financial position and guidance by Scott Musil, acting Chief Financial Officer; after which we will be pleased to open it up for your questions. The other members of senior management in attendance today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President of our East Region; and Chris Schneider, Senior Vice President of Operations.

And with that, I'd like to turn the call over to Bruce Duncan.

Thanks, Art. And thank you all very much for joining us today on our call.

Let me begin by saying that we had an excellent first quarter. FFO came in at $0.38 per share, which includes $0.10 of restructuring charges. Occupancy was at 86% at quarter end for our in-service portfolio under our new definition. Tenant retention was 69%, and we are pleased with our team's efforts on that benchmark.

That being said, as Scott will discuss, we are keeping our FFO guidance for 2009 at the same level, as we think that leasing and overall business environments will continue to be difficult, as evidenced by the recently announced first quarter GDP draft of 6.1% and the fact that real estate is generally a lagging indicator.

Since we last spoke, in early March, we have continued to be hard at work on our back-to-basics strategy, focusing on three key elements of our business -- leasing, expense management and capital management. All three elements of this strategy are critical to our success in the current economic climate and, as importantly, positioning the Company for the long term.

So what have we seen in the markets and in our portfolio? The impact of the recession is working its way through the economy and our customers' businesses. As I told you on our last call, we are in hand-to-hand combat in the marketplace. And our regional teams are working very hard to retain tenants and attract new ones.

As you would expect in an uncertain economy, prospective customers are taking longer to make decisions. And with increased availabilities in most markets, customers have more choices. We're especially seeing it now in the market for larger spaces, which is affecting our outlook for overall occupancy, which Scott will discuss later. In this competitive market, we're being aggressive in doing what it takes to get and keep our buildings filled.

As we have noted before, many tenants in the current uncertain economic climate are choosing to stay in their current facilities, whether for cost reasons or while waiting to get a clearer picture of their business outlook. However, looking ahead, we expect our weighted average tenant retention to be approximately 55% for the remainder of the year, with the biggest dip coming in the second quarter due to several expected move-outs. These move-outs are factored into our overall occupancy guidance for the year.

Looking at the regions in which we operate, the overall market occupancy rates are highest in L.A., Houston, Salt Lake City and Seattle. And Minneapolis has also been a solid performer. The most challenging markets include Detroit, Columbus, Atlanta, Phoenix, and the Inland Empire.

Moving on to the expense side -- our G&A expense during the quarter was on track, with our results reflecting our cost savings and restructuring efforts. As we discussed on our last call, we made significant changes in the past several months to adjust our organization and rationalize our business model for the current economic realities. Our expense management discipline is becoming ingrained throughout our organization, as our people continue to look for ways to be more cost-efficient in all aspects of our business.

On the capital management side -- our upcoming June debt maturity is clearly priority number one. We have chipped away at this maturity with some recent open-market repurchases, reducing our total outstanding to $119 million. We're working with federal lenders for proceeds in excess of that total, and we expect funding prior to the June maturity. Also, as part of our efforts to improve liquidity, during the first quarter, we sold $20 million of properties and another $13 million since the end of the quarter.

We're preserving capital where we can. Aligned with that goal, in March, we announced that our dividend policy is to distribute the minimum amount required to maintain our REIT status.

As we noted at the time, we did not pay a common dividend for the first quarter of 2009. We will look at our estimate for taxable income in the latter part of the year. And to the extent we are required to pay common dividends in 2009, we may elect to satisfy this obligation by distributing a combination of cash and stock. We're also preserving capital by not pursuing any new investments on our balance sheet for the balance of 2009. And we will be very selective in our joint venture investments.

Longer term, we think the current industrial market may offer some tremendous investment opportunities with current or future joint venture partners, where we can utilize our broad North American platform.

Before I turn it over to Scott to review the quarter and our guidance, I would like to say that I am pleased with our results and the job our people are doing in executing our strategy. It is a difficult market, but we are working hard to meet our plan. And I thank each and every member of the First Industrial team for their efforts and contributions.

So with that, I'll turn it over to Scott to review some of the specifics of the quarter with you as well as provide you with an update on the components of our guidance. Scott?

Thanks, Bruce.

As Bruce noted, we are very pleased with our results for the quarter. Funds from operations under the NAREIT definition, which we have adopted this year, came in at $0.38, compared to $0.44 per share in the year-ago quarter. These results reflect $0.10 in charges related to our expense reduction plan, of which $0.04 were cash and $0.06 were non-cash.

Please note that due to the timing of certain related expenses, we expect approximately $1 million of restructuring charges to be reflected in the remainder of 2009, or $0.02 per share. In total, the first quarter charges plus our anticipated charges for the rest of the year are consistent with our prior guidance of approximately $6 million of restructuring charges for 2009. Also, note that our FFO results for the quarter included approximately $0.5 million of NAREIT-compliant gains, or $0.01 per share. Excluding the restructuring charges, FFO per share was $0.48. EPS for the quarter was negative $0.35, compared to $1.10 for the year-ago quarter.

As noted in our press release, our results for the year-ago quarter were adjusted for the adoption of a few accounting rules. Net income and FFO was adjusted to reflect the adoption of FAS 141R, generally related to the expensing of transaction costs; and APB 14-1, related to convertible debt which are described in footnote J in our supplemental report. The net impact of the adoption of these rules for 1Q of '08 was a reduction in net income and FFO of approximately $450,000 or $0.01 per share.

The Company has also adopted Staff Position EITF 03-06-1, which is related to the inclusion of equity-based compensation rewards with dividend rights in the computation of EPS. The impact of this adoption was a reduction of 1Q '08 FFO of a penny, and a $0.02 reduction to net income.

Moving on to our portfolio results -- as Bruce mentioned, our occupancy at quarter end for our in-service portfolio, under our new definition, was 86%. For comparison sake, First Industrial's occupancy for 4Q 2008 on a comparable basis was 88%. First Industrial's all-in occupancy for the quarter was 82%, compared to 84% for the fourth quarter.

As a reminder, as we noted last quarter, we modified our definition of our in-service balance sheet portfolio to provide enhanced clarity on our overall portfolio performance over the long term, and to highlight the opportunities within our portfolio to improve value through leasing. This definition is described in footnote T in our supplemental.

Tenant retention was 69%. Same-store NOI on a cash basis was negative 0.2% excluding term fees. Rental rates were up slightly, at 0.7%. Leasing costs averaged $2.18 per square foot for the quarter.

Now to help you a bit with modeling, I'd like to walk you through the major factors of our change in NOI from 4Q '08 to 1Q of '09.

First is declining occupancy, as I mentioned prior, which accounts for approximately $2 million. Second, we had less property management costs in the fourth quarter as a result of lower compensation, due to a reversal of prior incentive compensation accruals. This accounts for about $3 million of the change. We also had the winding down of some third-party developments in 1Q of '09. This accounted for about $2 million of the change.

I also wanted to remind you about our overall debt maturities. Our weighted average maturity is seven years, significantly longer than many other companies in our industry. All of our long-term debt is fixed rate. Currently, 96% of our assets are unencumbered by mortgages. In addition to the senior notes due in June that Bruce discussed, we have just $25 million in additional maturities through 2010.

Since the end of the quarter, we have been successful in applying available cash to buy back approximately $6 million principal of the June maturities, at prices between 95% to 97% of par. So we have $119 million remaining.

As we have noted, select asset sales are part of our plan to improve liquidity. During the first quarter, we completed the sales of four assets for total proceeds of $19.9 million, which was comprised of three buildings totaling $18.9 million, at a weighted average cap rate of 8.8%, and one land parcel for $1 million. Since March 31st, we have completed the sale of two assets totaling $12.6 million, at a weighted-average cap rate of 9.3%. Our cash position plus line availability as of today is $39 million.

The last point with respect to liquidity is that we need only $2 million to fund the remainder of our developments in process, and that includes our balance sheet and our pro rata share of joint ventures.

With regard to our loan covenants, we were in compliance as of the end of the quarter, and we expect to remain in compliance for the balance of the year subject to achieving our 2009 plan. As we noted in our 10-K filed in March and our last conference call, reductions in net operating income below our projections or limitations on our ability to sell properties, or ability to refinance our debt coming due in 2009, could impact our ability to meet our financial covenants.

With regard to JV debt maturities as provided in our supplemental, the total debt for our JVs is $1.5 billion, and our share is 10% to 15% of the equity, depending on the venture. None of the joint venture debt is recourse to FR. For 2009, as of March 31st, we have a total of $455 million maturing, with only $69 million maturing without a unilateral extension right.

Regarding 2009 guidance -- we are maintaining our FFO per-share guidance of $1.23 to $1.33 per share, which includes the impact of approximately $0.12 per share of the restructuring charges that I discussed earlier.

Here are the key components of that guidance for 2009 which reflect the continuing softening of the economy and industry fundamentals that we expect for the remainder of the year. On the portfolio side, we expect average in-service occupancy to be 82% to 84% and all-in occupancy to be 80% to 82%, which is a 1% reduction of the midpoint.

Same-store NOI is projected to be negative 3% to negative 5%, so we extended the lower end of the range. Rental rate change is now expected to be negative 2% to negative 3%, a 1% change from our prior guidance. Please note -- our portfolio guidance does not include the impact of future asset sales.

On the G&A side, we now expect our G&A expense for 2009 to be about $39 million to $40 million. This is up slightly from our prior guidance of $37 million, primarily due to the accounting for expenses for fee developments. Development G&A related to third-party developments is netted against our development fee income. In 1Q, it was determined that less G&A was required to be allocated to these fees, which results in higher G&A. This is offset by higher development fee revenue. We do not expect to capitalize any further development expenses in the remainder of 2009.

For JV FFO, we now expect this to be in the range of $10 million to $12 million, an increase of $2 million at the midpoint, reflecting the benefit of lower interest rates, as much of the JV debt is floating rate; as well as additional JV FFO from our 2005 core joint venture. The majority of our JV FFO is expected to be from our share of NOI and fees from our income-producing properties.

We do not expect to pursue new investments on balance sheet for the foreseeable future. We will also be very selective for our joint venture investments.

With regard to asset sales, we will continue to target disposition of select properties. Again, we are not providing specific guidance, due in large part to the uncertainty in the overall transaction market. As a result, the impact of any future sales activity is not included in our NAREIT FFO or EPS guidance.

With that, let me turn it back over to Bruce.

Thanks, Scott.

Before we open it up to questions, let me summarize where we are today.

We expect that we will complete the secured financings that we are working on prior to the June 15th maturity. We have significantly lowered our G&A run rate, while still maintaining a very strong platform across North America.

We have very little property under construction, with only $2 million to fund between our balance sheet and joint ventures this year. And importantly, we have very little debt maturing from July 2009 to March 2011, which gives us time to continue our de-leveraging efforts and to focus on raising capital by obtaining more secured debt and selectively selling more properties.

And finally, we have a lot of embedded earning power in our portfolio, given our full-year estimate for all-in occupancy of 81%. If we look at the long-term opportunity we have, by increasing our occupancy just 10%, to 91% all-in, that would equate to roughly $40 million of incremental FFO, or $0.80 per share. This is significant when compared to our current 2009 FFO midpoint estimate of $1.28 per share, and as earnings power is a lot, when you think about a stock that's currently trading around $4 a share.

And with that, we'll be happy to take your questions. As a courtesy to the other callers, we will again limit questions to one per person, in order to give other participants a chance to get their questions answered. Of course, you're welcome to get back into the queue.

And so now, Kimberley, would you please open it up for questions?

(Operator instructions) Ki Bin Kim, Macquarie.

Hi, good morning.

Could you talk about -- you guys placed in service $100 million-plus of development properties. What is the current leasing rate? And what are you projecting within your guidance?

The question, again, Ki Bin, is what?

In your development portfolio, you guys placed in service about $100 million-plus of properties this quarter.

Yes.

What was the leasing on that? And what is the leasing that you're kind of putting in your guidance, related to your development properties?

Currently, the development -- this is Jojo Yap, by the way -- currently, the developments we put into service on our balance sheet is 55% leased. And we factor that -- and that's only one component, as our overall portfolio, to come up with our guidance that Scott already mentioned.

Yes, if you look at the largest development in process at March 31st, 2009 -- it's the building at 600 1st Avenue -- that was the Circuit City building property that the tenant filed bankruptcy last year. Currently -- so that represents about $66 million of our $83 million estimated investment of developments in process. That one particular development, which is the lion's share, we are expecting not to re-lease in 2009. So there's $0 NOI in our forecast for that large development.

Dave Rodgers, RBC Capital Markets.

Good morning, thank you.

Bruce, can you give us a little bit of a sense for where the asset sale environment is today? I mean, I'm assuming that the asset sale environment is favoring cash flow assets, versus the lower cash flow assets or more vacant assets. So I guess -- one, can you give us your update on what you might be marketing, and how that impacts your portfolio? And then two, if in fact you're selling cash flow assets, or you plan to, how does that impact your covenants for this year, if that's not embedded in your guidance, as Scott had just said?

Hi. Well, let me take a crack at that.

If you look at what we're selling right now -- if you take the first quarter of those sales, that $20 million, we sold an asset in Indianapolis, we sold an asset in New Jersey, we sold -- Baltimore. And those were all income-producing assets. The buyers of those, though, were typically -- in two cases were user. So the user ended up being the buyer there. And we thought we were getting some fair -- decent cap rates, if you look at that 8.8%.

Going forward in terms of what we look to sell -- again, we're sort of being selective, looking at different assets. Our main suspects are really users that are looking for space. And we've got a bunch of the pipeline, but we really don't want to talk about that until we close these transactions. As you know, it's a pretty fickle environment. And when we close them in the second quarter, we will announce what we have. And my guess is we'll do a little bit more than what we had in the first quarter.

Do you want to take the second one, in terms of that guidance? Covenants?

Our covenants. And so your question was, what would the impact be to our covenants on a go-forward basis if we sold properties?

If we sold properties, what we would use the proceeds for would be to de-lever the Company. And when you look at some of the opportunities that we're seeing in the market on our unsecured notes, our 2011 and 2011 bonds, you probably can pick up between 65% to 75% of face. So if you take those sales proceeds and use them to buy back those bonds -- and again, if you bought back bonds with longer tenor, you can buy back at larger discounts. You have a significant de-levering to the Company by doing that strategy. So with that strategy, it's beneficial to the covenants.

Paul Adornato, BMO Capital [Mortgage].

Yes, thanks.

Just a follow-up related to the asset dispositions. And that is, do you think the cap rates that you achieved are representative of what the rest of the portfolio might fetch in today's market?

I would say that in terms of the portfolio, cap rates today would probably range from 8% to 10%. It all depends on which markets, and the leasing and that sort of thing. So I think that's probably -- so the average of 8.8% for the first quarter, and the 9.3% in the sales to date in the second quarter, are probably indicative of what we think is optimal.

(Operator instructions) David Taylor, David P. Taylor & Company.

Thank you.

I'd like to discuss taxable income. What was your taxable income for the first quarter?

We do not --

Or loss?

We do not provide -- David, we don't provide guidance on taxable income. As Bruce mentioned earlier in his remarks, what we will do is we will evaluate our taxable income on a quarterly basis. And to the extent that we're required to pay a common dividend to meet our distribution task, we will have that discussion with our Board of Directors at that point of time.

Stephanie Krewson, Janney.

-- everyone. I had to step out of my office, so I apologize if this has been asked. But what is the impact of Chrysler's bankruptcy filing on your tenant base, if any?

Hi, Stephanie, it's Peter.

Hey, Peter.

Our -- good morning. Our portfolio, as you know, is limited to about 1% of rent to the big three, and only a little less than 2% across the suppliers. So we have a relatively low concentration there. I think with Chrysler, it released its news because most of the suppliers are just waiting on some direction. So as that moves forward, I think that situation will become more clear.

(Operator instructions) David Taylor, David P. Taylor & Company.

Yes, I think you misunderstood my prior question. I was not asking for guidance on taxable income. I was asking for the historical information on the first quarter -- what was the taxable income or loss?

Again, that's part of our guidance. So we're -- I know it's the actual first quarter, but we're not going to comment on taxable income.

Stephanie Krewson, Janney.

Actually, I have two follow-up questions, if -- the first one's for Jojo. And I'll re-queue after this.

Jojo, can you just walk us through your best estimate of the cap rates by each of the five asset class -- sorry, it's been a long week. Can you just go through your cap rates for both distribution, multitenant, flex, R&D, et cetera? Just your best guess?

As Bruce has mentioned, cap rates would range from, Stephanie, about 8% to 10%. And it really -- I would say at the lower end, the lowest in the cap rates would be bulk distribution properties, and on the higher end would be flex properties. That would -- it would be -- in today's market, it would really be hard to try to narrow it down to less than 50 basis points, because of limited trading. Now -- so that's 8%-10%. So bulk warehouse at lower end, and flex at the higher end.

The only thing I want to mention is that one thing that would break that trend is sales to users. And when you sell to users, they still buy on a replacement-cost basis and not on an income approach. And that's what we're targeting.

(Operator instructions) Ki Bin Kim, Macquarie.

Hi. Just to follow up on your debt maturities in June of this year -- do you know kind of who's holding the note, and how many clients, or how many investors?

You know what, we received a list from our bond trustee that discusses the note-holders. But it's all in Street name. So we do not have the detail at this time of who the specific holders are, Ki Bin.

Stephanie Krewson, Janney.

Thanks. Last question, and it's for Scott.

And if this is something you'd rather address off-line, that's fine. But can you walk us through how to reconcile, on page 44, your share of FFO of $1,758,000 versus, on page 30, the $595,000? Like I said, if you want to do this off-line, that's fine.

You know what, I will -- I'll answer that question. If you look at -- I believe there's a footnote at the bottom of page 30. The large part of the difference relates to a distribution that we received from our 2005 core JV of $1.3 million in the first quarter.

So as you recall, at the end of the fourth quarter, we wrote down our 2005 core JV investment balance to zero. Subsequently in the first quarter, we received a $1.3 million distribution that took our investment balance down below $0. Per GAAP, when you receive a distribution like that that takes your investment below $0, you recognize that as income.

So it's -- I guess it would be an outside-basis adjustment that wouldn't be reflected in the financial information of the joint ventures, because it relates specifically to a distribution.

And there are no further questions. I would now like to turn the call back over to Mr. Duncan.

Thank you, operator. And thank you all for joining us on the call today.

Again, look forward to keeping you updated on our progress, and we look forward to seeing a lot of you at NAREIT. And if you have any questions, please feel free to give us a holler. Appreciate it very much. Thank you.

This concludes today's First Industrial First Quarter 2009 Earnings Conference Call. You may now disconnect.