First Industrial Realty Trust Inc (FR) 2010 Q4 法說會逐字稿

Good morning. My name is Jodi and I will be your conference operator today. At this time I would like to welcome everyone to the First Industrial Realty Trust's fourth-quarter and full-year 2010 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Art Harmon, Senior Director of Investor Relations. Sir, please go ahead.

Thanks, Jodie. Hello, everyone, and welcome to our call.

Before we discuss our fourth-quarter and full-year 2010 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, portfolio performance, our 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 31, 2009, filed with the SEC and subsequent '34 Act reports. 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.

Since this call may be accessed via replay for a period of time, it's important to note that today's call includes time-sensitive information that may be accurate only as of today's date, February 24, 2011.

Our call will begin with remarks by Bruce Duncan, our President and CEO, to be followed by Scott Musil, our Acting Chief Financial Officer, who will discuss our results, our capital position, and 2011 guidance after which we will be pleased to open it up for your questions. Also in attendance today are Jojo Yap, our Chief Investment Officer; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets.

Now let me turn the call over to Bruce.

Thanks, Art, and thank you to everyone for joining us on our call today. As you saw in our press release last night, with the benefit of the improving economy and stabilizing industrial fundamentals, our team delivered a 140 basis point increase in occupancy in the fourth quarter growing our portfolio occupancy to 85%. This was our third consecutive quarter of gains. During this three-quarter period we improved occupancy by 360 basis points.

Demand was broad based as tenants continue to actively seek industrial space with a number looking to expand for growth while others are reconfiguring supply chains to gain efficiencies. New demand is coming from businesses of all sizes and across all property types. Active industries include 3PLs serving the needs of a range of customers, consumer products and food related companies, as well as aerospace, medical equipment, and other specialty manufacturers.

As a point of comparison for you on occupancy, the overall national industrial market improved 30 basis points to 85.7% at the end of the fourth quarter according to CB Richard Ellis Econometric Advisors after growing just 10 basis points in the third quarter following 11 quarters of occupancy declines. So we have outpaced the broader market with our recent occupancy gains but we still have work to do in our portfolio, which we view as an excellent opportunity to drive cash flow and value.

We expect first-quarter occupancy to be down slightly versus our year-end figure, which is fairly typical for us and our peers. We forecast occupancy to improve throughout the year with our average occupancy for 2011 expected to be in the range of 85% to 87%. One piece of good news we received this week was a major lease expansion with one of our largest tenants. Diapers.com exercised their option for 468,000 square feet and beginning in the second quarter will fully occupy our 1.3 million square-foot distribution facility in Central Pennsylvania.

Rents have stabilized in most of our markets but recall that industrial leases are typically around five years, so as an industry we are coming off transactions primarily signed in much better times in 2005 and 2006. As a result, we expect to see rent roll-downs of roughly 10% to 12% this year.

As the overall market continues to get better and we drive our occupancy higher and stabilize our portfolio, we would expect rates on new and renewal leases to improve. In our negotiations we are striving to minimize rent declines and reduce incentives like free rent. But at this point in time we still have vacancy to lease and customers have alternatives so we need to be competitive on pricing and incentives.

We continue to aim to keep lease terms shorter in order to preserve the value and long-term NOI growth potential of our assets. Our average lease term for our long-term leases that commenced in 2010, that is our leases with terms greater than one year, was 4.3 years compared to our overall portfolio average of six years. If you include short-term leases, those less than one year, the average term for 2010 was 3.6 years.

In 2009 recall that our average lease term on long-term leases was just 4.1 years. By focusing on keeping terms shorter during this leasing environment we believe we will have opportunity for further upside as the market recovers.

As we have previously noted, we have employed a strategy in certain markets of offering teaser rates with lower entry-level pricing and bigger than average rent escalations. For our long-term leases commencing in 2010, average annualized rent escalations were 5.1% on about 74% of those leases. Historically, we have averaged 2.5% to 3% on about two-thirds of our leases.

Leasing traffic is up virtually across the board. Notably New Jersey, Baltimore/Washington, and Indianapolis have all shown good activity. Looking at some of our more challenging markets, Florida, Atlanta, and Phoenix are seeing a welcome increase in traffic while leasing velocity in Columbus, Dallas, and Denver is less robust.

The supply side of the equation remains in balance. New construction is minimal except for the occasional build-to-suit. You may see very select spec buildings in markets where large distribution facilities are becoming tough to find, like the Inland Empire, Houston, and Salt Lake City, but with current market rents as they are it's difficult for spec development to make sense in most US markets.

Moving now to the capital side of our business, since we announced our amended credit facility last quarter we started the process of marketing select properties from our pool of non-strategic assets. Again, in pursuing these sales we are focused on achieving appropriate pricing and value for our shareholders. We are not engaging in a fire sale.

We also want to be clear we are not marketing the entire non-strategic pool at one time. It is largely an asset-by-asset execution that should deliver the best pricing for our shareholders.

During the fourth quarter we closed 8.2 million of sales and another 7.7 million in the first quarter to date. We expect our sales to gain traction throughout the year towards the goal of $100 million by year-end and approximately $250 million in total by year-end 2012. We continue to be focused on deleveraging and have a clear path on taking care of our upcoming maturities.

In addition to our sales proceeds, we issued approximately $41 million of equity in the fourth quarter through our ATM program. Our ATM program expired at the end of last year, but we anticipate filing a new ATM in the near future. Equity remains part of our arsenal to delever towards our get to EBITDA target of 6.5 to 7.5 times. Using our fourth-quarter EBITDA, excluding one-time items and reflecting our anticipated 2011 G&A, we were at roughly 8.3 times.

While the world has improved, we need to continue to delever as we cannot run our business for the long term assuming interest rates will remain at these historically low levels.

The secured debt market remains active as capital providers, like insurance companies, regional banks, and securitized lenders, look to deploy capital. As discussed on our last call, we completed a small, secured financing transaction of about $10 million in the fourth quarter.

In the first quarter we have executed a commitment with a life insurance company lender on a secured debt package that is expected to generate in excess of $175 million of proceeds. This commitment carries a 4.45% interest rate, 70% loan to value, a seven-year term, and 30-year amortization. We have previously consummated our transaction with this lender and anticipate this financing will close in the second quarter.

Please keep in mind that this transaction remains subject to due diligence and documentation, and there can be no assurance that it will close or generate the proceeds we anticipate. If we are able to close the transaction, the anticipated proceeds will nearly cover both our $129 million of convertible debt due in September and our $62 million of 2012 unsecured notes. Scott will walk you through our updated capital roadmap in his comments.

On the sales front the overall market continues to strengthen as evidenced by Real Capital Analytics report of 136% volume increase in the fourth quarter versus the year-ago period. With financing availability and investors seeking yield and a way to participate in the recovery, the overall sales market is heating up.

We had a notable sale in our net lease joint venture that demonstrates the improving strength of the market and continued recovery in leased property values. We completed the sale of a 236,000 square foot property in the west suburban Chicago market net leased to a manufacturer that sold for $17.6 million or $75 per square foot, which represents an in-place cap rate of 6.6%. So we are encouraged by the continuing improvement in the sales market in terms of capital availability and activity and its implications for values in the sector and, more importantly, our portfolio.

While our focus is on enhancing the value of our company through leasing and deleveraging, we are also tracking potential investment opportunities but pricing for well-located leased assets is challenging. Long term we will increase our capital allocation to markets with prospects for above average rental rate growth, such as coastal markets and select infill opportunities.

Now, as I have in prior quarters, I want to discuss the dividend since as a REIT the dividend is important to investors. We look forward to reinstating the dividend based on sustainable, stable cash flow, but we are not forecasting a timetable for when we may reinstate it. Management and the Board will continue to review our position on a quarterly basis as we progress on further delevering our balance sheet and driving occupancy.

I remind you that our dividend policy is to distribute the minimum amount required to maintain our REIT status. Taxable income levels are in part dependent upon the level and nature of our asset sales.

So before turning it over to Scott, let me take a moment to acknowledge and thank the entire FR team for their efforts on a job well done throughout the past year. As a team we know we have more to do and are excited about our opportunity to build upon our progress to date. We are committed to driving value for our investors through leasing, remaining vigilant on expenses, executing our asset management program, of sales of non-strategic assets, and improving our capital position towards our targeted debt levels while positioning the Company for future growth.

So with that, Scott?

Thanks, Bruce. First, let me walk you through our results for the quarter and the year which had a number of one-time items.

For the quarter, funds from operations were a loss of $0.02 per share compared to income of $0.60 per share in the year-ago quarter. FFO results were impacted by a few one-time items during the quarter such as a non-cash impairment charge of $21.5 million or $0.31 per share related to the non-strategic pool as discussed last quarter. In addition, JV FFO included approximately $1.4 million, or $0.02 per share, related to distributions from the sale of properties and the joint ventures that we wound down in the third quarter.

Comparing fourth quarter 2010 to the year-ago quarter, excluding one-time items, such as impairment charges on the balance sheet and in joint ventures, gains and losses from debt repurchases, income taxes, and distributions from the joint ventures I just discussed, funds from operations were $0.28 per share compared to $0.25 per share in the year-ago quarter. EPS for the quarter was a loss of $0.43 per share versus income of $0.18 per share in the year-ago quarter.

For the year funds from operations were a loss of $1.71 per share compared to income of $2.08 per share for the prior year. Results for 2010 included $2.85 per share of impairment charges, $0.16 per share gain from the sale of interest in certain joint ventures, and a $0.06 per share loss on retirement of debt.

Excluding impairment charges on balance sheet and in joint ventures, gains and losses from debt repurchases, income taxes, and the gain related to the sale of certain of our joint ventures, full-year 2010 FFO was $1.08 per share versus $1.28 per share in 2009. Full-year 2010 EPS was a loss of $3.53 per share compared to a loss of $0.28 per share in 2009.

Moving on to the portfolio. Our occupancy for our in-service portfolio was 0.85%, up 140 basis points since the last quarter and 300 basis points since year-end 2009.

In the fourth quarter we commenced 3.7 million square feet of leases on our balance sheet. Of these 2.1 million square feet were new, 0.9 million were renewal, and 0.7 million were short term. So far in this quarter we have commenced another 2.7 million square feet of new and renewal leases. The 2.7 million figure excludes short-term leases.

For the quarter tenant retention by square footage was 55% and our weighted average for the year was 65%, in line with our expectations. For 2011 we expect retention to average approximately 65% to 70%. Same-store NOI on a cash basis was down 2% excluding termination fees. This was better than expected, primarily due to higher than expected occupancy as well as lower bad debt expense and property taxes.

Termination fees totaled $1.1 million in the quarter. Rental rates were down 17% cash-on-cash reflective of the competitive leasing market. On a GAAP basis, rental rates were down 13%.

Leasing costs were $3.08 per square foot for the quarter, higher than recent quarters due to the greater mix of new leasing versus renewals. For the year leasing costs averaged $2.27 per square foot, in line with our expectations. For 2011 we expect leasing costs to be approximately $2.20 to $2.50 per square foot. Where we end up in the range will be dependent upon the mix of new and renewal business.

Moving on to our capital market activities and capital position. During the fourth quarter, as Bruce discussed, we sold four buildings totaling 304,000 square feet plus two land parcels for sales proceeds of $8.2 million. For 2010 we completed approximately $71 million of sales. Since the end of the fourth quarter we sold three properties totaling 339,000 square feet for a total of $7.7 million.

As we reported on our last call, during the fourth quarter we closed one secured financing transaction for $9.8 million with a local bank secured by two properties with a five-year maturity and a 5% interest rate. In conjunction with the line of credit amendment, we paid down approximately $100 million on October 22.

On the equity front, we raised approximately $41 million by issuing 4.9 million shares through our ATM at approximately $8.24 per share. As Bruce mentioned, equity will continue to be part of our capital program.

Proceeds were used to repurchase $18 million of our September 2011 convertible notes and pay down $22 million on our line of credit. We also paid off and retired a $13 million mortgage loan that matured in the fourth quarter. Subsequent to quarter end we prepaid and retired a 6.75% $14.5 million mortgage loan that we originated in 2009. This was partially funded with an $8.6 million mortgage loan receivable payoff we received in the first quarter.

Let me briefly update you on our planned sources and uses through 2012. On the uses side, as of December 31, we have the $129 million of 4.625% September 2011 converts remaining, $62 million of our 6.875% 2012 notes, and $22 million of mortgage maturities through 2012 at an average interest rate of approximately 7%. Plus, we have another $76 million of pay downs on our unsecured credit facility to reach our target outstanding balance of $300 million. These uses total $289 million.

On the sources side, we have discussed our plan to sell approximately $100 million from our non-strategic pool in 2011 and roughly another $150 million through year-end 2012. Bruce discussed the $175 million of secured financing that we have under commitment which, subject to due diligence and documentation, we anticipate closing in the second quarter. Total sources approximate $425 million, in excess of the uses I just discussed by $136 million.

We have a few logical choices for these excess funds. We have approximately $60 million of secured debt where it could be economically beneficial for us to prepay in 2011 with interest rates ranging from 6.42% to 7.5%. Prepayment penalties range from 2% to 4% of the outstanding balance.

We can also make additional pay downs on our unsecured credit facility. As you can see, we have a clear plan in place to take care of our maturities through 2012. Longer term we will look for opportunities to deploy capital into new investments, whether on balance sheet or through joint ventures, but new investment is dependent on our visibility on our progress in deleveraging, executing our asset management strategy through select sales, and stabilizing our current portfolio through incremental leasing.

Quickly summarizing our capital structure and current capital position, our weighted average maturity of our notes and mortgages is 7.3 years with a weighted average interest rate of 6.9%. These figures exclude our unsecured credit facility. Our cash position today is approximately $31 million. Our credit facility balance stands at $386 million, and again, as Bruce described, our debt to EBITDA ratio is approximately 8.3 times.

Moving on to our 2011 guidance, per our press release our initial guidance range for 2011 is for FFO per share of $0.81 to $0.91 per share. Key components of that guidance are as follows. Average occupancy of 85% to 87%, same-store NOI on a cash basis for the year is projected to be negative 1% to positive 1% primarily driven by higher average occupancy offset by rental rate changes on new leasing and renewals. G&A of $23 million to $24 million.

JV FFO of $1.1 million related to our net lease joint venture. This assumes no further property sales in this joint venture or additional economics for the wind down of certain JVs we announced last year. Guidance also assumes that we are able to issue the $175 million of secured debt mentioned earlier at an interest rate of approximately 4.45% in the second quarter.

Note that guidance also reflects $0.02 per share of restructuring charges, primarily related to the sublease of some office space in our corporate headquarters. Excluding these restructuring charges, our FFO guidance range is $0.83 to $0.93 per share.

Our 2011 guidance does not reflect the impact of any further debt issuances, property sales, nor any NAREIT compliant gains. Guidance also does not reflect any potential additional equity issuance.

With that let me turn it back over to Bruce.

Thanks, Scott. Before we open it up to questions let me offer a few final comments. As a team we have strived to provide you with a clear plan of what we are going to do for our portfolio, our expense management, and capital management. We have been committed to meeting that plan and earning investors' confidence by doing so.

We still have some work to do in reaching our leverage target of debt to EBITDA of 6.5 to 7.5 times, and we have laid out our path for you on the capital side. With occupancy at 85% we still have room to drive cash flow. Even with our recent strong stock performance, we continue to be at the bottom of our peer group on a price to forecasted FFO multiple.

On a cap rate basis, using our fourth quarter NOI annualized we traded roughly an 8% cap rate at just 85% occupancy. That is not factoring in the embedded cash flow potential of our vacancy. On a price per pound basis we traded just $41 per square foot, substantially less than our peers and below replacement costs to sales comparables.

Additionally, the per square foot metric ascribes no value to our platform, one of few like it in the industrial market and soon to be one less upon the completion of the anticipated AMB ProLogis merger. And we are focused on what we need to do with our portfolio and our balance sheet to enhance value for our shareholders.

So with that we would now be happy to take your questions. As a courtesy to our other callers we ask that you limit your questions to one plus a follow-up in order to give other participants a chance to get their questions answered. Of course, you are welcome to get back into the queue.

So, now, Jodie, can we please open it up for questions?

(Operator Instructions) Ki Bin Kim, Macquarie.

Good morning, guys. So I am going to cheat a little bit but it will be very quick questions. First, on diapers.com, is that in your guidance?

That is in our guidance.

That is?

Yes.

Okay. And second quick question, what is the cap rate lenders use and who is the lender for the $175 million of secured financing debt?

I am sorry; the question again is what is the cap rate?

Yes, what is the cap rate that they use on the deal? I know it is not closed yet, but --.

I would say on a debt yield basis on our projected NOI for the portfolio it's about 12.5%. Cap rates, it's very difficult because it's going to be an asset-by-asset discussion. As Bruce mentioned in his prepared remarks, it's a major life insurance company as the lender.

Okay. And last question, if I look at your occupancy for 2011, let's say it's 86% versus 2010. It is substantially higher, and I know roll downs are pretty significant, but I am just trying to get a sense of why your same-store NOI would be flat in 2011.

Chris, do you want to take that?

Yes. I will kind of run through some of the assumptions, the key assumptions. So on the same-store portfolio we are looking at the average occupancy to be up about 200 to 250 basis points. On the downside, while free rent -- we are starting to ease a little bit on the number of months per year of term, as we do the new leasing you are going to have some increased free rent. So free rent will still be up 2010 to 2011.

Also on bad debt in 2010 we had an extraordinary year as far as bad debt, so we assume more of a more normalized rate in 2011, closer to about $700,000 a quarter. Obviously, or you mentioned on the rental rates, rental rates are still continuing to roll down about 10% to 12%. So that kind of gets you to where you are at as far as the midpoint of a flat, same-store.

What is the dollar amount of free rent?

The dollar amount free rent for 2010 it was about $9 million. We are looking at 2011 of right around in the $11 million range.

Because you are doing more new leasing.

You are doing more leasing.

Thank you, guys.

Suzanne Kim, Credit Suisse.

With regards to the leases, I didn't catch that. I am not sure if you discussed in this but the rental rates decreased 17.2%. Just wondering about the terms of those leases and the annual step ups on those leases. Then, secondly, what is the dollar amount of land that you can sell?

On the first one, we went through in the prepared remarks the amount of the lease terms. But do you want to repeat that?

Yes, so the lease terms we were right around four years as far as the lease terms. Then on the bumps for those particular leases are commencing -- that were commencing in 2010 in total were right around 5.1%.

And in terms of your question on the land, we probably -- in terms of our portfolio, we have $70 million to $80 million worth of land.

And is that included in your real estate held for sale?

Yes.

Okay, thank you.

Michael Mueller, JPMorgan.

Hi. I was wondering if you could just talk a little bit about G&A because it looks like in the fourth quarter what happened in the quarter came in below the prior guidance by a considerable amount. And it looks like 2011 versus 2010 the run rate is a lot lower than where it has been trending. So wondering if you can just give us some color on that.

Sure. What we have done is, again, our G&A we have been very vigilant on expenses. If you look at what we have been -- where we are, we think that run rate of $23 million to $24 million is a good number.

We don't anticipate any more people cuts, if you will. Last year we downsized a little bit as a result of the joint venture going away, but we are focused on it and that is a good run rate.

Okay. And then secondly, with portfolio occupancy at about 85% now can you talk a little bit about where peak was, peak occupancy for the portfolio and kind of where you see full at this point?

Sure. I would say in the peak we were in the mid-90%s and I think that if you look at where we are going to get, my guess is you should easily be able to get to the 92%, 93% range over the next two or three years.

Okay, thank you.

Ki Bin Kim, Macquarie.

I didn't know I would come back on that quickly. In terms of your comments about equity issuances, it looks like things are moving in the right direction and if the free rent burns out your debt to EBITDA will probably hit the high end of your target range of 7.5 by the end of 2011, maybe 2012. How do you -- with that in mind how much equity do you realistically need?

Again, if you go back to the prepared remarks you look at our sources and uses we are in very good shape as it relates to any maturities coming up. We have excess proceeds to pay down debt, but we do want to delever. We want to get that back to -- we want to get down to the 6.5 to 7.5 times so we do think that we will issue equity over time.

But again equity is very dear to us and we will be -- we want to make sure we do it at a decent price. So again our focus is on leasing up. Our best way to delever is leasing up the portfolio but we will look to do some equity.

Okay. And to the extent you can, can you talk about any portfolios that you have for sale? I heard there might be something in Atlanta of size that you are seeing a lot of activity on.

We will comment, Ki Bin, on our sales when they are consummated.

Okay, that is fine. Thank you.

[Shiraz Allidina], (inaudible) Group.

Thanks a lot. You mentioned that your stock was undervalued at the equivalent of $41 a square foot in the nine cap and I am a shareholder and I actually agree -- excuse an eight cap. So that is why I am a bit perplexed as to why you would sell your shares in the open market at $36 a square foot and the equivalent of a nine cap when you are sending a very clear signal to the market that you think your actually assets are worth a nine cap and $36 a square foot on a weighted average basis.

That just it's absurd to me that you would sell your shares that cheap in the market and that level is actually lower than where you IPO'd at in 1994.

I wasn't here then, but I applaud your enthusiasm for our stock. I would say when you are running a business you have to run a business assuming that interest rates normalize, and if you look at the amount of leverage we have we don't want to get in the situation where we were in the last couple of years where we were very close to having a problem.

So our guess, if we are going to delever we are going to delever prudently and we are going to get down to that debt to EBITDA ratio of 6.5 to 7.5 times. That can be done both by sales of our assets at decent prices, it can be done by leasing up our portfolio, and it can be done by issuing equity and we will probably look to do all three.

[Alex Kutsubi], [Phoenix Investments].

You have been very proactive with your capital structure and I was wondering if you are potentially looking to address the preferred securities that you have outstanding which still trading at a discount and you do have a couple of tranches there that do float with increasing interest rates. It seems like you do have a worry about interest rates increasing. So I was wondering if you are looking to address that part of the capital structure while it's still at a discount.

Sure, I would say that our goal over the next two years is to delever, to take debt out of the system. As we said before, we plan to do that with sales of properties and potentially additional issuance of equity.

So I would say over the next couple of years our focus is going to be paying off debt and not paying off preferreds. Plus some of the rates that we have on the preferreds are very attractive as far as long-term capital is concerned.

(Operator Instructions) Suzanne Kim, Credit Suisse.

With regard to the ATM that you are planning to file this year, could you give us a more color on that? Is it going to be a similar sort of amount as last year?

My guess is it will be a similar amount.

Okay. And then also, do you have a GAAP same-store NOI for 2011?

The GAAP -- we do not have that as far as a projection. We do comment on the GAAP rental rate changes; for the fourth quarter that was negative 13% versus a negative 7% cash.

Okay. And finally, with regard to same-store NOI how do you see the flex product versus your straight industrial product?

I would say that what we are seeing right now is demand for all asset classes, I mean all types. I would say the flex property, to me just in general, can be great but it also could be -- the negative is a higher TI vis-a-vis the straight industrial product.

Okay, great. Thank you so much.

Operator?

Thank you. I will now turn the call back over to Mr. Bruce Duncan for closing remarks.

If there are no more questions, I want to thank you all for being on the call and participating. Again, we look forward to seeing some of you at the upcoming Citigroup conference in Florida. If you have any questions, please give us a holler; call Scott, Art, or myself. We would love to talk to you.

Thank you. Appreciate your support.

Thank you. That does conclude today's conference call. You may now disconnect.