First Industrial Realty Trust Inc (FR) 2012 Q1 法說會逐字稿

Good afternoon. My name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial first quarter conference 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) Now, I would like to turn the call over to Art Harmon, Senior Director of Investor Relations. You may begin.

Thanks, Cassandra. Hello, everyone, and welcome to our call. Before we discuss our first quarter 2012 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. 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, 2011, 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 is important to note that today's call includes time-sensitive information, that may be accurate only as of today's date, April 27, 2012.

Our call will begin with remarks by Bruce Duncan, our President and CEO, and our CFO, Scott Musil, after which we will open it up for your questions. Also on the call today our Jojo Yap, our Chief Investment Officer, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now, let me turn the call over to Bruce.

Thanks, Art, and thank you to everyone for joining us today. The First Industrial team is off to a good start in 2012. Our results for the first quarter reflected solid execution on leasing with occupancy at 87.4% at March 31. As we telegraphed on our last call, our occupancy dipped in the first quarter due to typical seasonality plus the known impact of a 700,000 square foot move-out in Columbus. With the benefit of continuing demand for industrial space, and the efforts of our teammates across the regions, we leased 4.7 million square feet to help offset these factors, keeping our decline for the quarter to just 50 basis points. Compared to year ago, our occupancy was up 270 basis points.

Included in our leasing results for the quarter was a net occupancy gain of 171,000 square feet at the top 10 vacancies we summarized at Investor Day in November. However, it is important to note that much of this leasing was short-term. So, we still have work to do to realize the approximately 220 basis points of occupancy opportunity from leasing the 1.5 million square feet of vacancy in this group. We also have work to do to lengthen the lease terms for some of these assets. We remain focused on the internal growth opportunities from leasing up these and other vacancies toward our goal of 92% occupancy by year-end 2013.

We increased same store NOI by 6.7% compared to a year ago. Because of our first quarter performance, we are raising our guidance range for same store NOI growth to 2.5% to 4.5% for the year, up 50 basis points at both ends of the range. Our rental rate change was negative 4.6% and was positive 1.2% on a GAAP basis, an improvement compared to last year. While it is good to see this progress in the quarter, we are not declaring victory on this metric as our outlook for the year calls for continued rent roll downs.

Not much has changed in the market environment since we last spoke to you in late February. We are seeing decent activity across most of our regions. Of note, we are seeing solid interest in expansions from a number of smaller tenants, particularly in Denver and Tampa. While there is increased talk of potential new development projects, there is not much coming out of the ground except in a few select markets.

Moving on to dispositions in the quarter, we sold three buildings totaling 676,000 square feet for roughly $20 million, including two buildings in Portland, Tennessee, outside of Nashville. Two of these sales were to users, the other to an investor. Overall, these assets were 70% occupied. We completed the sales at approximately 50% above our written down book basis. Recall that our sales target for the year remains $75 million to $100 million. Based on our pipeline, we expect the pace to slow in the second quarter, and then pick up in the back half of the year. Proceeds will be used for new investments or paying down higher cost debt, depending on the relative opportunities.

On the balance sheet side, we were pleased with the results of our tender offer as we were able to retire $87 million of senior notes, most of which were long dated with higher coupons. Scott will walk you through the details. In addition, we raised approximately $18 million through our ATM during the quarter, selling approximately 1.5 million shares at an average gross price of $12.03.

Our debt-to-EBITDA ratio was approximately 6.95 times at the end of the first quarter compared to 7.4 times at December 31. The primary driver of the decrease was an increase in NOI, plus the positive impact from the issuance of equity. So, we improved to the lower end of our original target leverage range of 6.5 times to 7.5 times EBITDA. We would like to continue to drive our leverage ratio down to around 6.5 times. We can do that by leasing up properties and improving NOI to impact the denominator. We can also impact the numerator through capital market activities, including equity. As we have been, we will continue to be mindful of dilution. But, we are also mindful of leverage with the lessons of 2009 firmly implanted in our memories.

Regarding investments, you may remember that we announced on our year-end call, the acquisition of our partners' 85% interest in a 390,000 square foot distribution building in central Pennsylvania leased to Navistar. Our total investment, including our original share, is $21.8 million, or $56 per square foot which is an approximately 7.1% going-in cap rate.

Now, let me update you on our 692,000 square foot First Inland Logistics Center development in the Inland Empire. We continue to have activity, but at this point, we see lease up as more likely being an early 2013 event rather than a late 2012 event. We acquired an adjoining parcel during the first quarter which will allow us to expand the site by 400,000 square feet to roughly 1.1 million square feet to accommodate a prospective tenant's growth or for future speculative development.

On the investment front, I would like to note that the pricing levels in the market for acquisitions is currently quite aggressive. While we want to continue to enhance our portfolio and drive external growth through quality investment, we must achieve appropriate risk-adjusted return. Looking at the bright side, the pricing we are seeing has positive implications for our portfolio. We are using our platform to uncover potential new investments, but given the competitive market for leased assets, and the lack of available supply of high quality buildings for sale in our target markets, our better opportunities in the near term may be weighted more towards development or redevelopment. As always, we look forward to keeping you up-to-date on our progress on all fronts. With that, let me turn it over to Scott. Scott?

Thanks, Bruce. First, let me walk you through our results for the quarter. Funds from operations for 1Q 2012 were $0.25 per share compared to $0.21 per share in 1Q 2011. Comparing 1Q 2012 to 1Q 2011, before one-time items, such as losses from the early retirement of debt, restructuring costs, and impairment of undepreciated real estate, funds from operations were $0.25 per share versus $0.23 per share in the year-ago quarter. EPS for the quarter was a loss of $0.04 per share versus a loss of $0.12 per share in the year-ago quarter.

Moving on to the portfolio. As Bruce discussed, our occupancy for our in-service portfolio was 87.4%, down 50 basis points from 87.9% last quarter but up 270 basis points from 84.7% at March 31, 2011. In the first quarter, we commenced 4.7 million square feet of leases. Of these, 900,000 square feet were new, 2.2 million were renewals, and 1.6 million were short-term. Tenant retention by square footage was 59%, reflecting the 700 square foot move-out in Columbus. We expect retention to improve during the balance of the year. In average, 65% to 70% for the full-year, consistent with our long-term track record.

Same store NOI on a cash basis, excluding lease termination fees, was 6.7%. 3.8 percentage points of the change was related to occupancy, rental rate change, and lower rent concessions. 1.4% was due to this year's -- this winter's favorable weather conditions that lowered snow removal and utility costs compared to the year-ago quarter. The remainder was from items such as restoration fees and real estate tax appeals. Including lease termination fees, same store NOI was 6.4%.

Rental rates were down 4.6% cash-on-cash. On a GAAP basis, rental rates were up 1.2%. We would expect cash rental rates to continue to be down in 2012 ranging from negative 5% to negative 10%. Leasing costs were $2.49 per square foot for the quarter within our expected average for the year of $2.40 to $2.60 per square foot. Lease termination fees totaled $97,000 in the quarter.

Moving onto our capital market activities and capital positions. We were pleased with the results of our tender offer. We were able to retire approximately $22.4 million of the 7.75% notes due 2032, or 64% of the outstanding amount, $55.5 million of the 7.6% notes due 2028, or 45% of the outstanding, and $9 million of the 6.42% notes due 2014, or 10% of the total. We retired the longer dated notes, our 2032s and 2028s, at an average 7.4% yield-to-maturity. Since we used the line of credit to refinance the tender, we will capture some interest savings for the balance of the year. As I will discuss in guidance shortly, we expect to record a loss on retirement of debt related to the tender offer in the second quarter.

We currently have $168 million available on our credit facility compared to available capacity of $300 million at year-end 2011. The change in capacity was primarily due to cash borrowed on the line of credit to pay off and retire the 2012 notes due in April and to fund tendered bonds I just discussed. Our weighted average maturity of our unsecured notes and secured financings is 6.6 years with a weighted average interest rate of 6.7%. These figures exclude our credit facility. Our cash position today is approximately $16 million, and our debt-to-EBITDA ratio was 6.95 times at the end of the quarter.

There was one additional item I would like to update you on. We have been in continuing discussions with the IRS related to the $40 million refund we received in 2009, largely related to the tax liquidation of our former taxable REIT subsidiary. The IRS examination team, which is required by statute to review all refund claims in excess of $2 million on behalf of the joint committee of taxation, has indicated to us on a preliminary basis, that it disagrees with certain of the property valuations we obtained from a well recognized, independent valuation expert. We are still in discussions with the IRS and will keep you apprised on future disclosures.

Moving on to our guidance. Our FFO guidance range is now $0.89 per share to $0.99 per share. Excluding the estimated $0.07 per share loss from retirement of debt related to the tender offer, guidance for 2012 FFO is $0.96 per share to $1.06 per share. The $0.03 per share increase at the midpoint is primarily due to the expected interest savings resulting from the tender offer.

The key assumptions in our guidance are as follows -- average occupancy of 87.5% to 89%, same store NOI on a cash basis is now projected to be positive 2.5% to positive 4.5% as Bruce discussed, G&A for the year in the range of $21.5 million to $22.5 million, and JV FFO of approximately $0.8 million.

Please note that our guidance does not reflect the impact of any debt issuances or repurchases prior to maturity other than the tendered bonds as discussed earlier, any additional property sales or investments during 2012, any NAREIT compliance gains or impairment charges, nor the potential issuance of equity. With that, let me turn it back over to Bruce.

Thanks, Scott. Before we open it up to questions, let me offer a few, brief concluding comments. Our team continues to execute in all aspects of our business, and I thank all of my colleagues at First Industrial for their contributions. We will keep pushing to drive internal growth from our vacancies, execute on sales to refine our portfolio, and use our platform with disciplined external growth. And finally, continued lease up of our portfolio is our path to reinstating a dividend which we know is important to many shareholders -- management and other members of the FR team included. As we make progress on leasing during the year, we will continue to evaluate our position with our Board.

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. You are more than welcome to get back into the queue. And so now, Operator, may we please open it up for questions?

(Operator Instructions) Craig Mailman, KeyBanc Capital Markets.

Good afternoon. Bruce, your comments on the smaller tenants looking to take expansion space. Are you seeing any noticeable trends in industries that that is happening in? Or, is it just a pretty broad phenomenon across verticals?

It is pretty broad-based. We are encouraged by the activity in terms of the expansions. It is not segregated to one type of tenant.

And, that was -- were those types of tenants the biggest drivers behind the more solid occupancy this quarter? Or, did you start -- are you still seeing pretty good demand at the large and medium-sized range?

I think you are seeing it in everyone, but Chris why don't you give some specifics?

Yes, as far as the activity -- if you look at our first quarter activity, over half of the leases that we did came from our tenants that were 50,000 square feet and under. Like Bruce commented on, we are definitely seeing more requests for expansion space from those tenants. So, we are encouraged by that in what we see in activity there.

One quick follow-up on the IRS, investigation or inquiry, is the biggest risk there that you would just have to repay some of that refund? Or, could there be additional fines or other issues associated with that?

Well, Craig, this is Scott Musil. We are still in early discussions with them. We haven't seen any data from the IRS that causes us to believe that our valuations that we did originally in September of 2009 were incorrect. So, as we have ongoing discussions with the IRS, we will update you.

Great, thank you.

Ki Bin Kim, Macquarie Research Equities.

Could you talk a little bit more about the leasing progress you're seeing in the Inland Empire development? 2013 seemed a little bit further than I expected just given that I heard you had a lot of traffic going through there -- some brokers and whatnot and given that it's only -- probably one of the few bulk distribution facilities in that market that are empty. Are you looking for just maybe the right tenant, and you're passing on current potential tenants just because maybe the rent is too low? Or, are you looking for one user -- or, to break it up? I was wondering if you could provide a little more color?

Sure, Ki Bin, this is Bruce. I would say that we had opportunities -- we had an opportunity to sell the asset at a good price. But again, it is not consistent with our strategy of owning and operating these good properties long-term. Secondly, I would say that we had an opportunity just to lease it on a shorter term basis. Again, we don't want one tenant. We really are looking to lease it on a longer-term basis, and we don't want to break up -- we also don't want to break it up in terms of making a multi-tenant building.

Does it have anything to do with maybe you want to develop the adjacent land parcel you just purchased? Or, is that just a separate issue?

I think that gives us more flexibility to handle in terms of just the needs of prospective tenants. In terms of some people that look at it could need that space. Some people wouldn't need it. It all depends on who we land. We want to keep that flexibility to allow us to accommodate a larger tenant should we need to be able to do that.

Last quick one what you think the market rent is for that type of product in that market?

Our guess is you're probably in the range of $0.33 to $0.35 per month.

Thank you.

Dave Rodgers, RBC Capital Markets.

Scott, on the IRS it issue. Is that a refund that you already received in cash? And so, in fact if there was a settlement out, you'd have to pay out? And Bruce, with regard to that issue, should we consider this to be another hurdle perhaps to get over before the Board would consider reinstating a dividend?

Yes, Dave, this is Scott Musil. We did receive the $40 million refund in December of 2009. So, that is cash that we already have on our balance sheet.

And, as it relates to the second question, Dave. Again, we are going through the process with the IRS, and we want to move this along as quickly as we can. We are not anticipating any issue with this. So, but hopefully, we get this resolved fairly quickly.

With regard to your comments about improving the quality of the portfolio investing capital, I think you have talked more and more in the last quarter or two, and particularly on this call about wanting to -- or maybe desiring to do more development and redevelopment. Can you put a band around that as to what you are thinking today? Do you have a one-, two-, three-year plan of how you could expand that? Would this be on existing land or new land? Are you comfortable putting more money into land these days as well? Just a band around how you're thinking about deploying that capital in the near-term and more intermediate?

I guess, from our standpoint was I said we think there could be opportunity when we look at pricing for leased, well-located assets in target markets is very aggressive. So, we could see doing developments in those areas like you've seen at the First Inland Logistics. We also bought, again, this adjacent land right next to it that could do another 400,000 foot property. We have about $50 million of land on our balance sheet that we could develop in terms of, as I mentioned on previous calls, probably the closest thing to development is our project in central Pennsylvania. We have two of them that we are going through the entitlement process now, but those could be ready to do something in the end of the year or first quarter depending on the market. We think -- we could go out and buy some land like we did at the First Inland -- next to First Inland -- or some other places because we think that may be a better opportunity to get better returns than what we are seeing in the marketplace.

Next question, Operator?

(Operator Instructions) John Stewart, Green Street Advisors.

Thank you. Bruce, on the dividend, I was under the impression that renewing the line of credit was the hurdle that you were looking towards, and just judging from your comments at the tail end of the remarks, it sounds like you are looking further down the road before reinstituting a dividend? I would have thought maybe that was something that might be revisited at the annual meeting coming up. It doesn't sound like that's the case?

No. What we said at the Investor Day and was said last quarterly call is that we said there were two hurdles that we had to get over. One was redoing the line of credit which we did in December of last year. The other was continued progress on leasing. As you look at the first quarter, we went down, not up, in terms of our leasing. So, we need to make more progress on leasing before we reinstitute dividends.

Okay. On the IRS, again, Scott, do you have any sense -- it sounds like the IRS has maybe identified some specific properties where there is some valuation disputes. If you try to put parameters around those, I understand that we are talking a $40 million refund in total, but what is the -- if you had to handicap, what is the exposure?

John, it's Scott Musil. It is really too early in the discussions to tell what is good and what the outcome will be at this point in time. The information that we've seen doesn't cause us to disagree with any of the conclusions that we made on the valuation back in September of 2009. So, we'll just have to keep you up-to-date as our meetings progress with them.

Are we talking about a fraction of the properties in question, or the vast majority?

John, the discussions are too early -- it's too early to tell at this point.

Okay, and since maybe it sounds like the queue is winding down. I'll throw in one more. Bruce, it also sounded like you'd pushed out the expectation of when the Inland Empire Project would be leased, and was just wondering what had changed during the quarter? Did a deal fall through? Or, is the market softer than you expected?

No. I think the market is doing just fine. I think that if you have seen the absorption we've had some tenants wanted to buy. They bought. Some tenants renewed where they were, and some people in terms of moved out there timing in terms of what they were thinking of when they needed the space to next year versus this year. So, it is a combination. But, there is decent absorption. We are delighted with the project, and we look forward to getting it leased.

Dan Donlan, Janney Montgomery Scott.

First question for either Bruce or Jojo. There has been some industrial portfolios traded in the market. I think the DEXUS portfolio traded for a 7.6 cap rate, and then the Weingarten traded for an 8% cap rate. I think both portfolios had properties in similar markets to what you own. I was just curious your thoughts on the pricing there? And, how comparable you think some of those properties were to your current portfolio?

We think our portfolio is better than both of those portfolios, and that is one of the reasons we didn't look at it in terms of making an investment in them.

Okay. And I guess, on the development, the redevelopments, is the idea it just -- it is demising current buildings? Or, is it just rehabbing buildings? What is the opportunity there in your view?

Jojo, do you want to answer that in terms of the redevelopment opportunity? It's not on our existing -- we're going out and buying buildings and so forth?

No, exactly. There are markets right now where the rental rates have grown to the point that there are existing buildings acquiring it where you can redevelop and then make more functional. And then, it would be a better risk-adjusted approach to invest money than buying just quality leased assets. That is what we meant.

Okay, thank you very much.

Ki Bin Kim, Macquarie Research Equities.

One quick one. Your JV FFO guidance remains the same even though you bought out 85% interest this quarter. Am I looking at that the right way? Or, is it two different things?

Ki Bin, you are correct. When you looked back at the guidance that we gave in the fourth quarter call, we made the assumption that that sale was happening within the guidance. So, we assumed that we were going to take that property on the balance sheet, and we assume that we weren't going to get any future income from that asset from a JV FFO point of view. Our assumptions that we gave in the 4Q call and what we are giving now were the same. That's why they line up.

Okay, great. Got it. Next question. Your Top 10 -- I guess it's Top 9 -- you sold your last one. But, could you just put some more color on the trends in traffic or interest we've seen in those properties? And, also because I've noticed that maybe a couple of them have actually increased in vacancy?

Bob, you want to take that?

Sure. I think, Ki Bin, as Bruce said in the remarks, we are seeing good activity across a variety of property sizes in our portfolio and the Top 10 would include that. We've still got some work to do there both in terms of leasing up those properties and also in terms of lengthening out some of the lease terms, some of which are short-term in nature. Unfortunately, it is not a linear path.

I guess if you had to describe today versus maybe half a year ago or more, has it improved? The number of -- the foot traffic?

I would say it has largely been the same. Maybe there has been a little bit of improvement.

Okay, and if you could, entertain me for a little bit. I don't know if you follow the lease Duke did for 1 million square feet in Atlanta? And given that you have -- some of your Top 10 vacancies are in that same market, I was wondering if you could comment on what you thought about the lease rate? And, if you think -- just any kind of opinions you had on that deal? I think it was done at $2 per square foot.

You ought to ask Duke about that. We can only comment that from our standpoint in Atlanta, we're seeing decent activity in Atlanta for our spaces. We've got good spaces. Again, our challenge is to get them leased.

Okay. All right, thanks.

(Operator Instructions) Craig Mailman, KeyBanc Capital Markets.

Just two quick follow-ups. The decision to use the ATM this quarter, could you just talk about the decision there? Given you have made good progress on deleveraging already with asset sales and seeing, as you point out, the sales market is pretty good here. Maybe -- is this something you would like to do opportunistically as the stock gets above $12? Or, whatever color you may have?

Sure, I would say that, again, our goal is to continue to de-lever the portfolio. We want to get down to the 6.5 times. If you look in the first quarter, we bought out our partner on that asset for about $21.5 million so this helped pay for that. We also did the tender. So, we had uses for money. So, again, we are mindful of dilution, but we thought it was good execution.

Okay, but it's that if you have another small deal you could use this to match fund, basically?

Yes

Okay, and then the second quick one. On the Inland Empire development, are you still capitalizing that? And, maybe when would that burn off if you are?

Are you talking about capitalizing costs?

Capitalizing interest, G&A -- whatever is associated with that.

Sure, Craig, it's Scott Musil. That interest -- we will cease capitalizing it as of the end of the first quarter. So, we will not continue to capitalize interest on it. I think the adjustment was a little over $300,000 in the first quarter. On the overhead, we analyzed what the dollar amount would be, and it was immaterial. So, we haven't been capitalizing G&A on this development.

Great, thanks.

John Stewart, Green Street Advisors.

Scott, sorry if I missed this in your comments, but did you say how much the charge was going to be for the early retirement of debt?

It was going to be $0.07 per share.

Okay. Have you -- on the ATM, have you been active in the second quarter? Or was that -- was the $18 million just for the first quarter, or was that year-to-date?

$18 million was for the first quarter, John, and we are in a blackout period right now. So, we are not able to use the ATM program until the blackout period expires.

Got you. Okay. And, one last one for Bruce, just on -- I know that you have had a strategy of really targeting user sales for some of your non-core properties. But, you are also -- given the aggressive pricing that you are seeing on the assets that you want to buy, can you comment on the investor appetite for some of your held-for-sale bucket?

I would say in terms of our focus is to continue to try and find users, but the interest, there is greater interest. But again, what we are trying to target are the one-off buyers and again we have been successful - in the first quarter we sold $20 million was about 50% above written down book basis. So, we are going to continue with our strategy.

Okay. Just lastly, on strategy. Bruce, have you had any conversations with the Board about de-staggering?

We always have many conversations with the Board on many issues.

Right, but is that a -- and I'm not necessarily referring to a sale of the Company, but more just from a corporate governance perspective, is that a -- is that something that is on the table?

My -- again, this is one Board member saying that I would think that over time you will see a change in that.

Okay, thank you.

Ladies and gentlemen we have come to the end of our Q&A session. I would now like to turn the call over to Mr. Duncan.

Thank you, Operator. We appreciate your interest in the Company, and if you have any questions, please feel free to call Art, Scott, or I, and we appreciate it. Thank you.

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