First Industrial Realty Trust Inc (FR) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Industrial second quarter earnings conference call. (Operator Instructions) Thank you. I will now turn the floor to Mr. Art Harmon, head of Investor Relations of First Industrial.

Thank you, Beverly, and hello everyone, and welcome to our call. Before we discuss our Second Quarter 2011 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 maturity, portfolio performance, our overall capital deployment, our plan 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, 2010, filed with the SEC, and subsequent reports on 10-Q.

Reconciliation 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 is important to note that today's call includes time-sensitive information that may be accurate only as of today's date, July 28, 2011. Our call will begin with remarks by Bruce Duncan, our President and CEO, to be followed by Scott Musil, our Chief Financial Officer, who will discuss our results, capital position, and guidance, after which we will open it up for your questions.

Also on the call today are Jojo Yap, our Chief Investment Officer, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets. With that, let me turn the call over to Bruce.

Thanks, Art, and thank you to everyone for joining us today. The industrial real estate market continued its recovery, with positive net absorption for the fourth consecutive quarter. Demand for industrial facilities continues to improve as the overall economy recovers, even if at a slower rate than many economists originally projected.

The second quarter was another milestone for our company, as shown by our leasing results, our progress on our balance sheet, as well as our return to investing. I thank our team across the platform for their hard work and contributions, and I know our entire organization is excited about the opportunities that lie ahead.

Given our strong performance in the quarter, we are maintaining our FFO guidance range before one-time items for 2011, as our projected performance for the year is offsetting the impact of our June equity raise.

First and foremost, our focus is on leasing, since improving NOI is the key to driving the value of our company. Improving cash flow from our portfolio will also further strengthen our capital position and financial ratios, and ultimately position us to be a dividend-paying REIT in the future.

We achieved quarter-end occupancy of 86.1%, up 140 basis points from 84.7% last quarter, and up 400 basis points from a year ago. Occupancy was driven by customer demand and activity across our markets, including the Diapers.com expansion in Central Pennsylvania, which contributed approximately 70 basis points. Our acquisition in Houston, which I will talk more about in a minute, also provided a 13 basis point pickup. Sales accounted for just 2 basis points of the increase.

In the leasing markets, demand continues to be broad-based across regions and customer types. We have seen good activity on our vacancies, including in some more-challenged markets, like Atlanta and Dallas. But, our job remains to convert this activity into signed leases.

Market rents and concessions have stabilized, but remain competitive. However, as we have noted in prior calls, since the leasing cycle in our business is typically five years, we continue to roll off leases signed in better years. Reflective of that, our rental rate change came in at negative 15.1% for the quarter. Our rates for the quarter were impacted by a few transactions where we needed to meet the market.

Year-to-date, rental rate changes were negative 12.4%. Until rates recover further, we expect new supply to remain constrained in the vast majority of markets. This should help the market absorb the existing vacancy over time.

Regarding our balance sheet, through our $101 million common equity offering in June, we achieved the higher end of our targeted debt-to-EBITDA range of 6.5 times to 7.5 times. At the end of the second quarter, we were at a debt-to-EBITDA of 7.4 times, when applying a normalized G&A expense run rate of about $6 million per quarter.

Factoring in our preferred stocks, we are still a levered company, but we have made great progress in de-leveraging the balance sheet. And, because of that progress, we are now positioned to look for new investments to continuously upgrade our portfolio and grow the bottom line.

As we noted on prior calls, our strategy for new investment is to target high quality distribution facilities in higher-rate growth markets, and infill locations to generate long-term cash flow growth. Consistent with that, we acquired our joint venture partner's 85% interest in a 664,000 square foot distribution center in Houston, Texas, 100% leased to Michelin until 2016. Our investment was $30.6 million. We assumed a first mortgage of $24.4 million, and made an incremental cash investment of $5.3 million. The in-place unleveraged cap rate was 8.4%.

In the third quarter, we have started development on our first inland logistics center, which is located in Marino Valley in the Inland Empire in Southern California. We are building a 692,000 square foot distribution center to be lease-certified with an adjacent 10-acre trailer yard, which is a unique feature in this market. The market for building 600,000 square foot or larger has been very strong, and rents have recovered more than 40% from their lows 18 months ago.

Because we worked on entitlements throughout the downturn, we are ready to break ground as market conditions rebounded, giving us an early mover advantage. Our all-in investment is expected to be approximately $44 million, including our original land basis. Our projected yield on our incremental investment of $29 million is approximately 10%, and our projected yield on all-in, non-written-down values, is approximately 6.6%.

We view this property as a long-term hold, but for your information, I would note that cap rates on recent transactions in the Inland Empire have been sub-6%.

In addition to using new investments to advance our goal of upgrading the portfolio, we continue our dissolute sales of non-strategic assets. Again, our objective for sales are to achieve appropriate pricing and value, and to cull assets that are not consistent with our long-term vision for the portfolio.

In the second quarter, we sold four properties totaling 364,000 square feet, for $12.4 million, or $34 per square foot, at an applied cap rate of 8.3%. Three buildings in Detroit were sold to users, and we also sold a manufacturing building in Cambridge, Ontario, to a local investor.

In the third quarter to date, we've sold one building totaling 204,000 square feet for $3.1 million.

As an indicator of our efforts to get appropriate value, total proceeds on sales during the quarter exceeded the written-down book value of these assets by about 40%. Although year-to-date our sales of $34 million are behind pace, we continue to maintain our goal of $100 million of sales for the year based on activity we have to date.

So, in sum, we continue to make good progress. Leasing is our biggest opportunity to drive cash flow and value, and continues to be a relentless focus of the FR team. And, with the work we have done to strengthen our balance sheet, we are positioned for new investments, to upgrade our portfolio and grow our Company.

Now, let me turn it over to Scott.

Thanks, Bruce. First, let me walk you through our results for the quarter. Funds from operations were $0.23 per share, compared to $0.16 per share in the year-ago quarter. FFO per share results were impacted by a few one-time items during the quarter. These were a $0.04 loss on early retirement of debt, a $0.06 net impairment reversal primarily related to recent offer activity on one of our land parcels in our non-strategic portfolio.

Comparing second quarter 2011 to second quarter 2010, the four one-time items such as balance sheet impairment, losses from early retirement of debt, and restructuring costs, funds from operations were $0.21 per share, versus $0.24 per share in the year-ago quarter.

Note that second quarter results also included a $0.01 per share reserve reversal related to a franchise tax matter that has been resolved. This item flowed through our G&A line item in our income statement.

EPS for the quarter was a loss of $0.06 per share versus a loss of $0.29 per share in the year-ago quarter.

Moving on to the portfolio, as Bruce discussed, our occupancy for our in-service portfolio was 86.1%, up 140 basis points from 84.7% last quarter, and up 400 basis points from 82.1% a year ago. In the second quarter, we commenced 4.6 million square feet of leases on our balance sheet. Of these, 1.7 million square feet [were new], 1.8 million were renewals, and 1.1 million were short-term. Tenant retention was in line with our guidance at 67%.

Same-store NOI on a cash basis was down 2.7%, excluding lease termination fees. These results reflected new leasing offset by rental rate declines, and same-store NOI for the year-ago quarter benefited from one-time items, primarily bankruptcy settlements and real estate tax appeals. Without these items, same-store would be approximately negative 0.7%.

Rental rates were down 15.1% cash-on-cash, reflective of the competitive leasing market and impacted by a handful of deals where we faced particularly strong competition on rate. On a GAAP basis, rental rates were down 9.9%.

Leasing costs were $2.77 per square foot for the quarter, as there was a higher mix of new leasing versus renewals compared to the first quarter.

For the first half of 2011, lease costs were $2.34 per square foot. For 2011, we now expect leasing costs to be approximately $2.30 to $2.60 per square foot, an increase in both ends of the range by $0.10 based upon anticipated costs for new leases in our pipeline.

Lease termination fees totaled $534,000 in the quarter.

Moving on to our capital market activities and capital position, Bruce already mentioned our June equity raise of $101 million, in which we sold 8.4 million shares. We also raised about $1 million through our ATM program in the quarter, so virtually all of our $100 million capacity under this program remains intact.

You will also recall that we completed our $178 million secured financing, in May. This loan carries a 4.45% interest rate, 70% loan-to-value, a seven-year term, and a 30-year amortization. We also continued our efforts to prepay some of our higher interest rate debt prior to maturity. During the quarter, we paid off a $27.4 million mortgage loan with an interest rate of 7.5%. We also repurchased $49.6 million of our 7.6% senior notes due 2028, and $7.5 million of our 7.15% senior notes due 2027. After quarter-end, we repurchased another $9.4 million of 7.6% notes due in 2028.

In the second quarter, we also modified an existing $23.3 million mortgage loan, lowering the weighted average interest rate from 5.83% to 4.83% over a new five-year term.

Because of the capital we have raised, we are well-positioned for our maturities through 2013. We have capacity under our existing credit facility to pay off at maturity a substantial portion of the $129 million of the 4.625% September 2011 converts, and $62 million of the 6.875% April 2012 notes outstanding.

Next up on the capital front is our credit facility which matures in September 2012. We expect to replace this credit facility by the end of the first quarter of next year. De-levering is still a significant focus, but as Bruce noted, we are prepared to deploy some capital on new investments, if we can find opportunities that meet our portfolio objectives.

Investments would likely be funded by sales proceeds and potentially additional equity depending upon market conditions.

Quickly summarizing our capital structure and current capital position, our weighted average maturity of our unsecured notes and mortgages is 6.6 years, with a weighted average interest rate of 6.78%. These figures exclude our credit facility. Our cash position today is approximately $23 million. Currently, we just have a $5 million balance outstanding on the $200 million revolving portion of our credit facility, with the capacity available to retire substantially all of our 2011 and 2012 senior notes maturities.

We have $100 million outstanding on the term loan portion of our facility. And, our debt-to-EBITDA ratio is approximately 7.4 times, using our normalized G&A expense run rate of approximately $6 million per quarter.

Moving on to our guidance, per our press release, our FFO guidance range for 2011 is now $0.82 to $0.92 per share. Key components of guidance are largely unchanged from last quarter. We expect 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%. G&A of $22.5 million to $23.5 million, a $0.5 million reduction of the range at both ends due to the one-time franchise tax matter reserve reversal I discussed earlier.

JV FFO of $1.5 million, primarily related to our net lease joint venture. This is a $0.2 million increase from our prior guidance, primarily due to the impact of additional economics from our JVs concluded in 2010. Our JV FFO guidance assumes no property sales in this joint venture or additional economics from the concluded JVs.

For your modeling, our run rate for JV FFO for our net lease joint venture is approximately $250,000 per quarter.

Despite the full year net dilution of $0.02 per share from our June equity offering, we were able to keep our guidance range for 2011 before one-time items such as restructuring costs, losses from retirement of debt, and balance sheet impairment, unchanged at $0.83 to $0.93 per share. Our 2011 guidance does not reflect the impact of any further debt issuances or repurchases prior to maturity other than the $9.4 million of 2028 notes that we repurchased in the third quarter, that I noted earlier.

Guidance also does not reflect future property sales or acquisitions, any NAREIT-compliant gains, nor 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.

We are focused on four key drivers to enhance value for our shareholders. First, leasing and improving cash flow. Second, disciplined expense management. Third, executing our asset management strategy. And finally, select, disciplined investments. Our job is to execute on these four drivers.

We also want to help you better understand the underlying value of our property and our platform. By doing so, we believe we can demonstrate that we represent good value compared to our peers, especially on an in-place cap rate and price-per-pound basis.

And, to help you get to know First Industrial better, we ask you to please mark your calendars for our investor day on November 9 in New York City, and plan to join us for a property tour of a portion of our Central Pennsylvania and New Jersey portfolio the following day, November 10.

We hope to see many of you there, for a broader discussion of our plan and our portfolio, and to give you an opportunity to meet some of our talented teams. Additional details will be forthcoming.

And with that, we'd now be happy to take your questions. As a courtesy to 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 in the queue.

And so now, operator, can we please open it up for questions?

(Operator Instructions) Your first question comes from the line of Ki Bin Kim with Macquarie.

Thank you. Just to reconcile the negative 2.7% cash same-store NOI decrease this quarter, especially in light of the 140 basis points increase in occupancy, was there one-time items in there? Or, can you just walk me through that?

Sure, Ki Bin. This is Scott Musil. As we mentioned in our remarks, if you factor out one-time items that occur in the second quarter of 2010, such as some bankruptcy settlement payments that we received, and some lower real estate taxes that occurred in the second quarter of 2010 due to some tax appeals that were finalized, if you got rid of those items we were at a negative 0.7% same-store decline 2Q of '11 to 2Q of '10. So, a large portion of that 2.7% decline was made up of a couple of one-time items.

So, I guess the guidance of negative 1% to positive 1% is still on track, and you expect it to turn -- I mean mathematically, I guess, it would have to turn positive in the second half?

That's correct, Ki Bin.

All right, thanks.

Your next question comes from the line of Suzanne Kim with Credit Suisse.

Hi, good morning. A couple questions about the Inland Empire. Have you broken ground there, and who else has broken ground there, and what are the rents sort of projected to be at this point, and the concession packages for the Inland Empire?

We have broken ground, there. We've got a building permit, and we're doing grading right now on-site. In terms of new buildings, there are a couple plans, and Watson's got one under construction right now. Jojo, do you want to add any more color?

Correct. Correct, Bruce, that's correct on Watson, and the 600,000 square foot under construction and under a few plans. In terms of the rental rates, we'll report to you once we've completed next quarter of next year what will we lease it at, but I'm just going to give you a data point. The most recent large new lease that was signed in June, about mid-June, June 15, was signed by a 600,000-footer in Rialto for a 10-year lease at $0.325 per month, so that's about 390 net per square foot, with average annual escalation of 2% per year. So, that's the most recent comp that is available.

Great. And just one more follow-up question. Regarding the leases that you're signing right now, the rental rates are down, but what are the average lease lengths, terms that you're sort of signing now, and concessions? Have they started decreasing, or are they still at the shorter length lease terms?

Chris, why don't you give an update?

Sure. Yes, for the quarter our lease term was about 4.6 years, and if you factor in the short-term deals we're about 3.5 years. So, we're still seeing that the leasing activity that is of the shorter nature. On concessions, concessions are starting to level off in most of the markets. We're starting to see a little bit of leveling about the concessions.

And the annual bumps were what?

And then for this quarter, the annual bumps [to send] the leases that commence in 2011, the annual bumps were about 4.3%. So again that's the annualized bumps. So again, we're seeing those, a little bit higher so we're still having a little bit where the starting rates are lower, but we're getting the bumps built into the leases.

Great, thank you so much.

You're welcome.

Your next question comes from the line of Steven Frankel with Green Street Advisors.

Thank you. Central PA has been pointed out as this stronger development market by Liberty earlier this week, and it sounds like you made some progress with Diapers.com this quarter. When are you going to look at breaking ground there with the land piece you took out of your impaired bucket last quarter?

We're working on entitlements there, and it'll be a little bit. My guess, it will not be a start, a 2011 start, but it's a possible start for 2012. And we can talk more about that --

The economic -- oh sorry, do the economics justify development?

We'll talk more about that at investor day when we see you.

(laughter)

What, Steve?

I said, do the economics there justify development right now, for spec?

My guess is, we wouldn't do a spec development. We would wait and get -- one possibility we have is, one tenant that has shown some interest would take like a portion of the building, it'd be a two-building complex, and they would take a portion of it. But again, we're still in the approval stage, and it's too early to really talk about anything.

Understood. And then just this last question before I jump back in the queue. You guys were able again this quarter to generate sales prices well in excess of your impaired basis. It sounded like Bruce, you mentioned it was about 40%, I think, in your prepared remarks. But the sales pace has started to slow down, do you think that you guys wrote down your impaired values much too early at this point?

Well, we'll wait and see, in terms of we're pleased with the progress we've made to date on sales, but you know, there's work to be done in terms of to continue to get our goal of $100 million. But we'll see, but the market is definitely getting better.

Great, thank you.

(Operator Instructions) The next question comes from the line of Michael Mueller with JPMorgan.

Oh, hi. I have a question, but first, I just have a quick clarification question for Scott. On the basis that you're presenting guidance for the $0.83 to $0.93 excluding charges, etc., where are you on a year-to-date basis? Because, I know you had a couple of moving parts in there. I just want to make sure that we know what's been excluded from that.

Well, what we've excluded from it, Mike, is restructuring costs, impairment charges, and loss from retirement of debt. So, those are the three pieces that we've excluded from our guidance before one-time items. So, those are the three pieces to exclude to get to that number.

Okay. Okay, and then secondly, it seems like you have been a little more active on the new investment side, both with the development as well as the buyout of the JV partner. I guess if you're thinking about, and I know you talked about still having confidence for about $100 million of dispositions this year. But, if we're thinking out '11, '12, does it still feel like you're going to be in that cellar at this point, or do you think there's a chance that even if you are, it could be pretty nominal? Just based on --?

I think it's going to depend on what the opportunities are, i.e., if we find some good opportunities, we will be an investor, and buy. But, we'll have to again, focus on -- we're going to continue to operate the portfolio and focus on culling the portfolio of assets we want to dispose of, but also buying assets in markets we like, and high-quality assets. So, it'll depend on the opportunity.

Okay. Okay, hey, thank you.

Your next question comes from the line of Dave Rogers with RBC Capital Markets.

Hi guys, it's Mike Carroll, here. I know that FR is in a position to make new investments. Where is the company's focus? Are you guys looking more at developments or acquisitions, and what markets look more attractive to you today?

Again, our focus is to continue to upgrade the portfolio, and we're doing that both by selling assets that don't fit our strategic vision and also by buying or developing. As I mentioned in our remarks, I'm not sure you're going to see a lot of new development in the short term. We're doing Southern California because that's a very strong market, and we have a very good site there. Central PA, which Steve just talked about, Steve Frankel, is a very good site too. But in terms of markets that you're going to see new construction in the short term, I'm not sure you're going to see that much of it. So, our focus will probably be more on the acquisition side, than development.

So then, how much would you like to sell over the longer term to achieve your strategic goals?

Well, as you know, we've got a portfolio that we identified close to $400 million that we would like to cull over time.

Okay, great, thank you.

Thank you.

Your next question is a follow-up from the line of Ki Bin Kim with Macquarie.

I might have missed this part, but did you have a tenant lined up, or working on a tenant for that development project in Inland Empire?

We'll tell you when we get a tenant, Ki Bin.

Okay, so not yet? I just wanted to make sure I didn't miss it. And second --?

You won't miss it if we get one.

(laughter) And second, in 2012 it looks like you have a fair amount of lease expirations, about 20% is coming, rolling over. Could you just give some color on how much of that you've started working on, and what the mark-to-market looks like?

Yes, Ki Bin, as far as looking at 2012 and right around that 18%, 19% number, and if you look back a year ago, we were about in the same position. So, we feel that we're still working on that. Obviously, we'd start talking to our tenants well in advance, and we're in progress with that. So, the bottom line, we're about the same position we were a year ago, so we feel okay about that.

So what, I mean, in terms of mark-to-market color, does it seem like it'll improve much more than what we've seen in 2011, or do you think at this point it's kind of too early to call?

Well again, we think the market continues to improve. So, we'll have to, we'll keep you posted on the progress. But the markets, almost all markets, are strengthening.

Okay, thank you.

(Operator Instructions) Your next question is a follow-up from the line of Steven Frankel with Green Street Advisors.

Just to follow up on the same store discussion from earlier. I think that was one of Ki Bin's questions. If you break the same store down to, even down 70 bps in the quarter, given the occupancy increase, the amount of bumps that you have in your leases, I'm still not sure even with the 15% rolldown how you could have negative same-store. Is there just a lot of free rent, or something with free rent coming on versus burning off this quarter, that functions it on a cash basis?

Yes and you know, another factor in there was the year-over-year change in the free rent. And so, the free rent went up about $300,000 from a quarter a year ago. So, if you factor that in, then the same-store, you'd be about, with that, with the one-time items, about flat for the year.

Okay.

And Steve, this is Scott Musil as well. In the end of this second quarter, we had quite a few leases that were signed as well. So, you see it in our quarter-end occupancy, but you're not quite seeing it in the second quarter 2011 results. That'll bleed through in the third quarter of 2011.

Okay. That makes more sense. And then just in terms of the modification of the loan, when was that loan due, and what's the new LTV on that loan?

Bob, you want to answer?

That loan had about four years remaining on the term, and it was a very flexible prepayment structure. The LTV on it was about 65%.

Do you have any other loans that you could be doing this with on the secured mortgage side?

We've got a number of loans that are going to be open to prepayment in, starting in 2012, and we'll look at having those conversations as those dates approach.

Great, thank you.

Your next question comes from the line of Dan Donlan with Janney.

Thank you, good morning. Just a quick question on the NOI margins. Just curious as to how high those things can rise. I think if you look at the same-store portfolio, I think for the quarter it's about 67.5%. Looking at some of your competitors in the industrial space, they run close to 70% margin. Is that as you sell off some of your non-core stuff, is that a level you think you guys can reach in two or three years?

Dan, this is Scott Musil. I think it's a function of two items, is one is increasing our occupancy. We are at 86.1% at the end of the second quarter, so as we continue to increase occupancy in the portfolio, that'll drive NOI and our margins will get a little bit better. And you're correct, as we continue to execute on our non-strategic sales program, that should help out margins as well. Our non-strategic portfolio, this is excluding the land piece, is in the mid-70% occupied. So, to the extent we're able to sell off that portfolio at that average, that will help increase our NOI margin, as well.

Okay. Is there a certain level of occupancy where you would get to 70%, or is that like 90%, 91%?

It really depends a lot on what the rental rates do over the next couple of years, so it's hard to project without looking at that assumption.

Okay. And then, lastly, as we look at your -- kind of what's left to be leased, is there any way we can kind of quantify that on the average age of some of those properties? I guess my concern would be that some of these properties are a little bit older, and if I'm a new tenant in the market, given build-to-suit that they were talking about, maybe it'd just be better off if I went with a build-to-suit, in a nice, brand new space, versus something that might be five, six, ten years old.

Hey Dan, we're going to have a thorough discussion of our vacancies on investor day, November 9. We're going to highlight the vacancies and show where they are, and I think you're going to be pleasantly surprised in terms of the quality of assets and where they are. So, come to investor day, we're going to go through it in detail. November 9.

Thank you, there are no further questions at this time. I will now turn the floor to Bruce Duncan for closing remarks.

Thank you, Operator, and thank you all for participating on our call today. Please feel free to call us with any of your questions, and we look forward to seeing some of you in the coming months and at our investor day on November 9, and 10 for the tour of Central PA and New Jersey. Thanks a lot.

Thank you for joining today's conference call. You may now disconnect.