First Industrial Realty Trust Inc (FR) 2012 Q3 法說會逐字稿

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to First Industrial's Third Quarter Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to Art Harmon, Senior Director of Investor Relations. Please go ahead, sir.

Thanks, Tiffany. Hello, everyone, and welcome to our call. Before we discuss our third 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, which is 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, October 25, 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 are 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. With that, let me turn the call over to Bruce.

Thanks, Art, and thank you to everyone for joining us today. Since we spoke to you on our last call, we continued to execute on our strategic plan. In my remarks today, I'll take some time to reflect on some of the strides we have made in strengthening our balance sheet and reshaping our portfolio. Overall, we are pleased with our progress, and I would like to thank my teammates for their many contributions. We have more work to do, which is an opportunity for us and for our shareholders.

On the capital side, we completed a $117 million equity offering in August. The proceeds from this offering will help fund our growth through the three developments and the building expansion we started in the third quarter. They will also keep our leverage at the low end of our target range of 6.5 times debt-to-EBITDA.

We also closed on the $100.6 million 10-year 4.03% secured financing that we told you about on our last call. This financing effectively funds in advance the higher cost debt we plan to repay in the fourth quarter and throughout 2013, and provides additional proceeds for growth. We would like thank our banking and lending partners for their continued support in executing these transactions.

On the portfolio side, we made significant progress on our sales of nonstrategic assets, or as we like to call it, improving our portfolio through addition by subtraction. We completed $56.5 million of sales during the quarter, bringing our total for 2012 to $80.4 million. The largest sale in the quarter was our Columbus, Ohio portfolio for $39 million. We also sold our land parcel in that market for $5.3 million. As we discussed on past calls, Columbus has been a difficult market for us. We expect rent growth for that market to be below average as the supply and demand fundamentals will remain challenging there for the foreseeable future.

As a group, these assets also significantly lag our overall portfolio in terms of functionality. Our total sales proceeds for the portfolio and land combined exceeded our written down book value by about $6.6 million, or about 18%. During the quarter we sold seven additional buildings for $12.2 million, or approximately 36% above our written-down basis.

I'd like to recap what we've accomplished in our portfolio improvement efforts since the fourth quarter of 2010, from both a sales and investment perspective. Since that time we have sold 6.9 million square feet and four land parcels for a total of $175 million. The sales prices we have achieved exceeded our written-down book value on these assets by 35%. The sales cap rate was 6.4%, including land. Excluding land, the cap rate was 7.7%.

On the investment side during the same time frame, we completed and committed to a total of more than $200 million of new investments comprised of $52 million through two acquisitions, totaling 1.1 million square feet in Houston and central Pennsylvania; $36 million through our 692,000 square foot First Inland Logistics Center development in Southern California that we leased during the quarter; and the $115 million we will invest through the development and building expansion we talked about on our last call, namely, First Bandini Logistics Center, a 489,000 square foot distribution center in LA County, First Chino Logistics Center, a 300,000 square foot building in the West Inland Empire, First Logistics Center at I-83, a 708,000 square foot distribution center in central Pennsylvania, and the 156,000 square foot building expansion in Minneapolis.

We continue to look for additional investment and development opportunities that will deliver sustainable cash flow, meet our return criteria, and help in our mission to upgrade our portfolio.

While we are pleased with this progress, it is also important to note that the investment market, particularly for the type of assets we are focused on, remains very competitive. We will maintain our discipline on pricing so our main avenue for growth and new investments may continue to be development and value-add acquisition opportunities using our platform.

Turning now to leasing. We finished the quarter with occupancy at 88.5%, up from 87.9% as of the second quarter, and 86.6% a year ago. Sales accounted for 80 basis points of the gain quarter-over-quarter, so the rest of our portfolio was down 20 basis points.

When we spoke to you last time, we talked about the summer lull we were experiencing. For us, that lull continued throughout much of the quarter, so our average occupancy was less than we expected, which will also impact our fourth quarter. Scott will walk you through the details.

Leasing activity picked up late in the third quarter and has continued in the fourth quarter across a range of tenants and industries, although decision-making remains measured. Activity doesn't pay the bills, so our job is to convert this activity into signed leases.

For the quarter, we delivered good growth in same store cash NOI, which was positive 4.3% excluding termination fees. We also made further headway on our top 10 vacancies from our Investor Day last November. As of the end of the third quarter, these properties represented 830 square feet of occupancy opportunity, or 130 basis points on our current portfolio base, compared to 325 basis points at investor day. We still have short-term leases in place at some of these properties so we can generate additional cash flow by stabilizing them with long-term leases.

Leasing is at the heart of our plan to drive value from our existing buildings and our new development, and our team is focused on those opportunities. 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 were $0.30 per share compared to $0.22 per share in 3Q 2011. Comparing 3Q 2012 to 3Q 2011, before one-time items, such as NAREIT-compliant land gains, losses from the early retirement of debt, and impairment of undepreciated real estate, funds from operations were $0.27 per share versus $0.21 per share in the year-ago quarter. EPS for the quarter was $0.04 versus a loss of $0.10 in the year-ago quarter. Moving on to the portfolio.

As Bruce discussed, our occupancy for our in-service portfolio was 88.5%, up 60 basis points from 87.9% last quarter, and 190 basis points from 86.6% at September 30, 2011. In the third quarter, we commenced approximately 4.9 million square feet of leases. Of these, 1.1 million square feet were new, 2.4 million were renewals, and 1.4 million were short term. Tenant retention by square footage was 71%, in line with our expected average retention for the year of 65% to 70%.

Same store NOI on a cash basis, excluding termination fees, was positive 4.3%. 4% was related to contractual increases and lower rent concessions. Lower bad debt expense year-over-year accounted for the balance. Same store NOI including termination fees was also a positive 4.3%.

Rental rates were down 3.9% cash-on-cash, but on a GAAP basis they were up 0.8%. Leasing costs were $2.01 per square foot for the quarter, reflecting a high mix of renewals as a percentage of total leasing for which tenant improvement costs are typically lower. Year-to-date, we averaged $2.23 per square foot, and we expect the fourth quarter to come in higher as we expect more new leasing in the quarter. Lease termination fees totaled $113,000 in the quarter.

I would like to point out that G&A of $4.8 million during the quarter was lower than our typical run rate implied by our G&A guidance. We expect fourth quarter G&A to be a little higher than our average run rate due to timing of expenses. So, as you think about modeling, this would represent roughly a $0.01 per share shift from the third quarter to the fourth quarter. Moving on to our capital market activities and capital position.

Bruce discussed the 9.4 million share offering for $117 million of net proceeds in August and our $100.6 million secured debt financing. Capital market activities in the quarter also included the repurchase of $4.2 million of our 7.5% note due 2017 at a yield to maturity of 5.35%.

Thinking about capital uses, we discussed on our last call the $63 million of higher rate secured debt we plan to repay comprised of $13 million in the fourth quarter and the remaining balance next year with an average coupon of 7.5%.

In addition to these opportunities, we have approximately $217 million of currently outstanding secured debt that is either open to fixed prepayment or that matures between now and the end of the second quarter of 2016. This debt carries a current average interest rate of 6.4%, amortizes over 25 years, and represents a current debt yield in excess of 14.5%. We did not use our ATM during the quarter and have $107 million of capacity remaining.

Updating you on our debt-to-EBITDA ratio, we were at approximately 6.4 times at the end of the third quarter compared to 7.05 times at the end of the last quarter. The decrease primarily reflects the impact of the proceeds of the equity offering.

In calculating the ratio for 3Q, we also adjusted EBITDA to normalize G&A expense and to take into account the EBITDA dilution from our third quarter property sales. We also excluded the NAREIT compliant gain. As we have noted, our goal for this ratio is to be approximately 6.5 times, so we are pleased to get below this level. All things being equal, you should expect to see this ratio to ramp back up as we fund our development investments and scale back down when we are successful in leasing them.

I'd like to update you on a few additional balance sheet items. Our weighted average maturity for unsecured notes and secured financings is 6.1 years, with a weighted average interest rate of 6.5%. These figures exclude our credit facility. Our credit line balance today is just $47 million, and our cash position today is approximately $22 million. Moving on to our guidance.

Our FFO guidance range is $0.89 per share to $0.95 per share. Excluding the estimated $0.07 loss per share from retirement of debt, $0.05 per share charge related to the IRS settlement discussed on our last call, and the $0.04 per share NAREIT FFO gain from our land sale, guidance for 2012 FFO is $0.97 to $1.03 per share.

At the midpoint, compared to our second quarter earnings call, full year guidance is lower by $0.03 per share due to $0.03 of dilution from the equity offering, $0.01 of dilution due to the third quarter property sales, and $0.01 related to NOI due to timing of occupancy. This is offset by $0.02 of lower interest expense.

The key assumptions which have been adjusted from our prior call to reflect year-to-date results in our expectations for the remainder of the year are as follows. Average end-of-quarter in-service occupancy of 88% to 88.5%; average quarterly same-store NOI on a cash basis of positive 4% to 6%, an increase of 0.75% at the midpoint; G&A for the year in the range of $22 million to $23 million; JV FFO of approximately $1 million. And I would also like to note that we capitalized $700,000 of interest in the third quarter and expect to capitalize another $800,000 in the fourth quarter related to our new development projects.

Please note that our guidance does not reflect the impact of any future debt issuances; the impact of any future debt repurchases or repayments other than the $13 million of mortgage debt we plan to pay off in 4Q; any additional property sales or investments during the fourth quarter of 2012, other than the developments and expansion we discussed earlier; any future NAREIT compliant 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 just say that we have been working over the past few years to reposition our balance sheet and our portfolio and improve our cash flow. We are making good progress with our new developments, which represent $115 million of quality investments, and we are out seeking additional opportunities that meet our criteria.

We have been reshaping our portfolio through our disciplined sales process. Our balance sheet is in good shape, and we will continue to look for ways to further strengthen it and lower our capital costs. We can grow cash flow through leasing, both from our existing assets and our new developments. We do all of these levers as great opportunities for our Company and for our shareholders, and as a team we are focused on continuing to execute and enhance shareholder value.

Finally, becoming a dividend-paying REIT remains a key goal for our Company. We have reached a number of milestones to that end, but as we previously noted, more leasing is essential to recommending the reinstatement to our board. Our team is comprised of many shareholders who also look forward to return of the dividend. So, we are all focused on improving occupancy and cash flow.

We will now be happy to take your questions. As a courtesy to our other callers, we ask that you limit your question to one plus a follow-up, in order to give other participants a chance to get their questions answered. You are most welcome to get back into the queue. And so, now, Operator, may we open it up for questions?

(Operator Instructions) Our first question comes from Craig Mailman of KeyBanc Capital Markets.

Good morning. Bruce, maybe we can just follow-up on your last point on the dividend. Your thoughts on maybe what leasing threshold you would need to get to and just, Scott, maybe where taxable net income is today and how much room you guys have left to delay the dividend at this point?

You want to take the first and I'll get the second.

Sure. Craig, this is Scott Musil. On the taxable income and the preferred dividend, where we stand, so for the nine months ended 2012, our preferred dividend covered our taxable results. As far as fourth quarter is concerned, it's really going to be dependent upon which properties we sell during that quarter.

In terms of where we need to be for leasing, I don't want to give a number, but we've got to make progress in terms of getting it leased up. We have a goal to try and hit 92% by the end of 2013, so we've got to be on our way there. So, to me we've got to be up from where we are today. But we are focused on it, it's a key focus of the Company, and I'll be disappointed if we don't get there soon.

You don't need to hit the 92% though; you can do it before--

No, no.

Okay. And then just one quick follow-up. It sounds like leasing picked up sort of after the 2Q call there. Can you just give us a sense of maybe where the spread is between leased and occupied, where it was at the end of the quarter and maybe where it stands today?

Yes, on the leased and occupied, we really don't give out that stat, so the spread is -- it's not very much, but we don't give out that stat.

Okay. But we should expect it to at least close a gap on sort of the backlog here in 4Q and maybe the timing, we'll have to wait a little bit?

Right. The key is we have not changed our guidance for year-end occupancy, so in terms of -- we anticipate picking up and getting it up from where it is today.

Great. Thank you.

Your next question comes from the line of Joseph Dazio of JPMorgan.

Good morning, guys. On the asset sale front, you've already, I guess, met the $75 million to $100 million plan this year. And sorry if I missed some of this in the earlier commentary, but can you kind of outline, I think, sort of what is left to be sold? And I know that if you look at the cap rates on the 3Q sales it was high because of the Columbus portfolio, but can you maybe place a rough range on what you think the cap rates are on the product left to be sold as well?

Sure. We have, in terms of the nonstrategic portfolio, it's approximately $175 million left, and we anticipate over the next two years to dispose of those assets. Probably the best frame of reference would be if you looked at what we've sold to date since like fourth quarter -- of 2010, we put this in place, the statistic I gave was that portfolio which comprised both buildings and land, yielded about a 6.4% cap rate. And if you took the land out of it, the buildings were about a 7.7% cap rate.

The 7.7% on what's left or what -- the overall?

No, on what we've sold to date.

Yes, 7.7% was Q4 2010 to 3Q 2012. So, that's a rough barometer that you could use in order to forecast what the cap rates would be on a go-forward basis.

Got it, okay. Thank you.

Your next question comes from the line of John Stewart of Green Street Advisors.

Thank you. Bruce, on the secured debt that you mentioned is prepayable, are there penalties associated with that?

Moderate. Bob, do you want to handle that?

Yes. John, on the debt that we have to prepay the $13 million and the $50 million next year, there are fixed prepayment penalties which are generally 2 to 3 points on the outstanding loan balance.

Okay. And then more broadly speaking, just reading between the lines, it seems like you have planned to stick with a secured debt strategy. Are we interpreting that correctly and what are your thoughts on pursuing the unsecured market?

I think we've probably done about all the secured debt we want to do. We might do $50 million more in the short term. But, again, we want to go back to being an unsecured borrower and have access to both the unsecured and the secured market. So, I think what you'll see is over the next few years we'll be taking out the secured debt and we won't be replacing it.

Got it. And then just lastly, how many square feet are in the noncore, nonstrategic pool?

It's just under about 9 million.

9 million, okay. Thank you.

(Operator Instructions) Your next question comes from the line of Michael Salinsky of RBC Capital Markets.

Good morning, guys. Just to go back to the prior question, do you have kind of a dollar amount the noncore portfolio represents? And, also, one of your peers has mentioned they expected positive rent roll in '13, just curious if you expect the same.

In terms of what we said in terms of the amount of the assets in the nonstrategic assets, it's about $175 million. That's at book value. That's probably the number you should use and we've been successful in the past at selling things in excess of book value, but that's the number. And the second question was?

Rental rates (inaudible) --

Again, we think at some point next year the lines cross and you go positive, but we'll give more guidance on that when we give our guidance for 2013 on the fourth quarter call.

Fair enough. Thanks, guys.

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

Yes, thank you. Real quick, just going back to the nonstrategic pool to ask it one more -- a different way. What percentage of your remaining NOI post these sales would you consider to be nonstrategic?

I would say it's roughly about $22 million.

Of NOI?

Yes.

Okay. All right. And then as far as exiting Columbus, is there any other markets that you guys are looking to fully get out of, or is that kind of -- or is it more or less a market-by-market, kind of some of your lesser quality or not as well located probably as you're looking to divest?

I would say if you look at the nonstrategic pool, it's sort of located throughout in terms of the different markets that we're in for the most part, but it does not limit us from exiting a market.

Okay. And then just specific to Columbus -- this is my last question -- is there anything that made that cap rate a little bit higher than, or brought the cap rate into kind of that 9% range? Was it older property? Obviously, some of it was vacant, but could you maybe give a little bit more detail on that portfolio?

Well, I would say this has not been our favorite portfolio over the last three years. I think it has, in terms of functionality, it's in the low end of our portfolio and it's just -- we just wanted to get out.

Okay. So, this is really some of the worst stuff that you guys had, you would imagine?

This is not a market that we thought had a lot of future, and we'd rather take the proceeds here and reinvest in higher growing markets.

Thank you, I agree. Thank you.

(Operator Instructions) One moment, please. There are no further -- I do apologize. We do have a follow-up question from the line of Craig Mailman.

Hey, guys. Just one quick follow-up. You mentioned the acquisition markets obviously still competitive here and you'd rather go the development route. Kind of what's your feeling on starting new development? Do we need to see the three that are currently under construction have a significant amount of pre-leasing before you go somewhere else? And maybe what markets would you consider here to go to next?

Craig, we've got $115 million under development right now that excludes the $36 million we spent on First Inland Logistics we leased this quarter. So, of that $115 million, I could easily see development going up to the $200 million range on a run rate basis. So, if we find some good opportunities, we could increase that amount from where it is today.

Do you have it in a land bank now, or would you go out and buy land and then start it?

We would do both. We have land in a land bank that we are looking at doing something with, in terms of starting development. Depending on some of it, we want to get a tenant, some of it we might go spec; it all depends on how the market improves over the next three to six months. And some we'd go out and buy, like the sites that we're building right now are three sites that we bought.

And a couple of your peers have been talking about build-to-suit ramping. Are you guys seeing the same interest?

Yes. Jojo, do you want to talk about that? We are looking at a couple of build-to-suits.

Yes, absolutely. That is one way that we could continue to create value and monetize our land sites as well, so we are continuing to compete. We are out in the market and our land sites that we hold right now are out for build-to-suit as well. But one thing we are not doing is we're not pursuing third-party land sites to pursue build-to-suits, because the build-to-suit business is a very, very low margin business.

And I just want to add to what Bruce had mentioned in terms of additional development. I want to emphasize that all these three developments are all in different submarkets and targeting all different tenants. So, they are not overlapping each other. You're looking at central PA, West Inland Empire and LA County, totally, totally different submarkets. So, we don't want to leave you with impression that we're building all in the same submarket.

That's fair. Thanks, guys.

Your next question is a follow-up from the line of John Stewart.

Thank you. Bruce, just wanted to follow-up on that line of questioning and specifically $200 million of run rate development sounds like a pretty meaningful step-up to me in terms of what you guys have been doing, and just wanted to get your thoughts on the competitive landscape. And also you mentioned the land bank, and then, of course, went on to say that the recent deals here you've bought the land. Just curious on where you think you would build on land that you own today?

Well, we've got two sites in Pennsylvania that could handle about 1.2 million square feet. We've got a site in Dallas that could do about 600,000 square feet. We've got land in Nashville that could do like 1.2 million square feet. We've got some land up in Stockton that's a little bit further off. But we have some good land to build on or sell and maximize value over the next three to five years.

In terms of overall, again, our view on development is there's risk associated with it. That's why we did this $114 million new development, we went out and did an equity raise to fund that, and we think just judge us on how we do in terms of building these projects and leasing them up, just as we did with First Inland Logistics.

Sure.

Just to add to what Bruce said, you know, we're going to maintain our discipline, and we have to have a spread over the functional net lease cap rate, meaning we have to have 100 to 150 basis points on a risk-adjusted basis in development.

Okay, thank you.

(Operator Instructions) Your next question is a follow-up from the line of Dan Donlan.

Yes, thank you. Sorry if I missed this in the remarks. Could you maybe talk about what percentage of your leases you are able to achieve, you know, rent escalators on and kind of what the average escalator was on those leases, and kind of where you see that trending forward?

Sure, Dan, this is Chris. On the leases that we commenced in 2012, we had an annualized bump of about 3.8%, and that's on about 70% of the leases. So, the entire portfolio is very similar on that.

Okay. And how is that trending -- how did that trend this quarter and where do you see that trending over the next 12 months?

It was a little bit up this quarter, and then for the next 12 months it will be similar. It might go down a little bit. We're doing a little bit less of the teaser rates or lower rates the first year of the term, but it should continue pretty similar.

Okay. All right. Thank you very much.

Your next question is a follow-up from the line of Michael Salinsky.

Yes, given you had the land parcel sale during the quarter, can you talk a little bit about demand for land there and whether you expect it to monetize some of the land bank here going forward?

Well, I would say that we intend to monetize the land bank either by building on it or selling the assets over time. I would say there is nothing imminent that we're ready to announce of a sale, but, again, we have good land, we anticipate about $50 million in book value. We anticipate building on it, if we can, and if we find a better price in terms of selling it, we would consider that.

Have you seen any incremental pickup in demand for land?

Yes. You're seeing more interest in terms of -- from tenants in terms of trying to look to build-to-suits on it.

And has that translated to an increase in pricing or not yet?

Well, it all depends on what base you're talking about. If you're talking about two or three years ago, yes, absolutely. Again, land is the ultimate accordion. When there is demand, prices go up fairly significantly, and land relative to buildings. So, I think land prices are definitely up from where they were two years ago.

Fair enough. Thanks, guys.

There are no further questions at this time. I would like to turn the call back over to Mr. Bruce Duncan.

Thank you, Operator. And, again, thank you all for joining us on the call. We look forward to answering your questions, if you have them. Call Scott or myself, and we look forward to seeing you at NAREIT in a couple of weeks. So, thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.