First Industrial Realty Trust Inc (FR) 2013 Q1 法說會逐字稿

Good morning. My name is Jasmine 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). Thank you.

I would now like to turn the conference over to Art Harmon, Senior Director of Investor Relations.

Thank you, Jasmine. Hello, everyone, and welcome to our call. Before we discuss our first-quarter 2013 results, let me remind everyone that the speakers on today's call will make various remarks regarding future expectations, plans and prospects of 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, 2012 filed with the SEC, and subsequent 34 Act Reports. Reconciliation 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's important to note that today's call includes time-sensitive information that may be accurate only as of today's date, April 26, 2013. 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, Bob Walter, Senior Vice President of Capital Markets and Asset Management, and Peter Schultz, Executive Vice President for our East region. Now let me turn the call over to Bruce.

Thanks Arthur, thanks everyone for joining us today. Our year is off to a good start thanks to the good work of my First Industrial teammates on the capital, investment, and leasing front of our business. That good work is being supported by positive sector fundamentals as the growing economy supports gradual absorption of space, while new supply remains measured.

On the capital side, our major actions were the $132 million equity offering which we largely used to fund the redemption of the remaining $100 million of our 7.25% Series J preferred stock, completed in April. Through these transactions, we have brought down our leverage inclusive of preferred stock even further.

The redemption will also help our fixed charge coverage ratio which is an important metric for the rating agencies on our path back to investment grade. With the benefit of these capital actions, we believe our balance sheet is now positioned to support up to $250 million of speculative development at any one time as we grow and continue to upgrade our portfolio.

As we've discussed before, the investment market is very competitive especially for quality leased acquisitions. In response to this pricing environment, we have shifted our investment efforts more heavily towards development. The combination of our boots on the ground local market experts and our strengthened balance sheet puts us in a position to capitalize on development opportunities.

We will continue to look for acquisition candidates as well. But the risk-adjusted returns we can earn from new construction projects have been more attractive.

We acquired two new development sites during the first quarter, the first of which is in a familiar location -- the Moreno Valley in the Inland Empire of Southern California. With this investment we plan to build upon the success of our neighboring 692,000 square foot First Inland Logistics Center. The new 28-acre site is literally across the street, and is going to be the home of the First 36 Logistics Center @ Moreno Valley. We expect to break ground on this 555,000 square-foot distribution center in the third quarter. And we are targeting completion in the first quarter of 2014.

The building will feature 36 foot clear heights with large truck courts and ample parking for trailers and cars. Estimated total investment will be approximately $32 million, and we are targeting a first-year GAAP yield of approximately 6.9%.

We also added a new 25-acre parcel in northwest Houston, that region's largest and most active submarket. As you know, industrial demand continues to grow in Houston due to the strong local economy, driven largely by the oil and gas production and service-related industries. Availability is limited as evidenced by the 99% occupancy level we have achieved in our Houston portfolio and the overall market occupancy in the mid-90s.

We have some final approvals to work through on the site, so at this point we wouldn't expect to start construction until sometime in 2014. Our current plans call for us to develop a 350,000 square foot state-of-the-art distribution center with a projected total investment of approximately $20 million with projected GAAP yield in the low 8% range.

Just yesterday we completed the acquisition of another 69 acres for future development for $16.6 million. This site is also in the Moreno Valley in the Inland Empire within a mile of our other developments.

The reason I say "future" is that this land site is in the process of entitlement. We expect to complete all required approvals by the fourth quarter of 2014. When completed, this site could accommodate 1.37 million square feet of Class A distribution space. The acquisition of this site is a testimony to the capabilities of our team and platform. With very few land sites of this size and location available for sale, our team went to work to acquire this site at very attractive pricing through a land assemblage from a number of private owners.

Updating you on our developments in process, construction is on schedule and on budget for our 489,000 square-foot First Bandini Logistics Center in LA County, and our 708,000 square-foot First Logistics Center @ I-83 in central Pennsylvania.

Regarding asset sales, we sold four buildings in the first quarter comprised of 171,000 square feet for a total of $11.2 million. The largest sale was a three building complex in the Chicago market, along with one building in Detroit and land parcels in Tampa and Indianapolis. The weighted average in place cap rate was 4.6% excluding the land.

As you saw from our financials, these were sold at an aggregate loss relative to book value but we were pleased with these transactions.

In the second quarter to date, we completed three additional sales comprised of 505,000 square feet for $20.8 million, the largest of which was our only building in Omaha, a 356,000 square-foot property that we sold to a user for $13.2 million, along with two other user sales in Dallas and Minneapolis. The in place cap rate for the second quarter sales was 5.5%. Year-to-date, our sales proceeds exceeded our written down book value by approximately 20%.

Scott will review our leasing results in detail, but I would like to offer a few comments. The leasing environment is active but discussions are still deliberate and businesses are moving forward but with caution.

Per our press release last night, occupancy was 89.6%, down 30 basis points from year-end. As you know, we typically see a dip in the first quarter, given the large numbers of leases expiring. Year-over-year, our portfolio occupancy was up 220 basis points as a result of improved demand and the hard work of our team around the country. We are driving incremental cash flow from our portfolio, reflected in our 2.4% growth in same-store NOI on a cash basis, excluding termination fees.

Cash rents for the quarter were a positive 1.2%. This is the first time we have seen positive cash rents for our portfolio since the first quarter of 2009. However, I remind you that this metric can swing significantly, depending on the population of leases in a given period, including the mix of new and renewals. This quarter, it was driven by a high percentage of renewals, evidenced by our nearly 80% retention rate and limited new leasing. For perspective, cash rental rates were up 3.4% on renewals and down 8.6% on new leases.

As we indicated last time, we expect rental rates on renewals for the year to be flat to slightly positive, but still expect rolldowns on new leases.

We shared one of our leasing highlights for the first quarter on our last earnings call -- the signing of our lease for our First Chino Logistics Center, our 300,000 square foot development in Southern California, ahead of pro forma, in terms of timing and economics. As a reminder, this lease will commence in the middle of the second quarter.

Since it was a first-quarter event, I will remind you that in February the Board declared a common dividend of $0.085 per share for the first quarter.

Cash flow is the driver of our dividend as well as the driver of the value of our company. We are focused on the incremental cash flow opportunity as we push to our year-end occupancy goal of 92%, lease up our developments and ultimately stabilize our portfolio with occupancies in the mid-90s. With that let me turn it over to Scott.

Thanks, Bruce. First, let me walk you through our results for the quarter. Funds from operations were $0.24 per share compared to $0.25 per share in 1Q 2012. Please note that FFO for the quarter reflects $262,000 of NAREIT compliant gains due to the sale of two land parcels Bruce mentioned.

Comparing 1Q 2013 to 1Q 2012, before one-time items, namely the early retirement of debt and the NAREIT gains, funds from operations were $0.25 per share versus $0.25 per share in the year ago quarter. EPS for the quarter was a loss of $0.05 versus a loss of $0.04 in the year ago quarter.

Moving on to the portfolio, I'll start with leasing volume. In the quarter we commenced approximately 5.1 million square feet of leases. Of these, 0.6 million square feet were new, 2.8 million were renewals, and 1.7 million were short term. Tenant retention by square footage was 79.7%. Same-store NOI on a cash basis excluding termination fees was positive 2.4%, due primarily to occupancy growth and the impact of rental rates. Same-store NOI growth including termination fees was a positive 2.3%. Lease termination fees were $80,000 in the quarter.

Looking ahead to the same-store metric for the second quarter, I would like to note that comparisons to the year ago period is going to be challenging due to largely the $1 million of restoration fees we earned in the second quarter of 2012. As Bruce noted, cash rental rates reached positive territory, up 1.2% and on a GAAP basis they were up 6.7%. Leasing costs were $1.88 per square foot, benefiting from the high percentage of renewals.

Our G&A for the first quarter was $6.5 million. While this was above the run rate reflected in our full-year guidance due to higher compensation expense associated with the issuance of restricted stock, our guidance range of $21.5 million to $22.5 million for the year remains unchanged.

I would like to take a moment to point out a change we made to our supplemental. We have eliminated the manufacturing property type category in the detail we provide on page 16. Over the past few years, we have pared down the properties in that group to just eight at year-end 2012 so we decided it made sense to recategorize them. While manufacturing has been the primary use for these buildings, they are traditional industrial buildings that can be repurposed for distribution or light industrial requirements, and we have recategorized them appropriately.

Moving on to our capital market activities and capital position. As Bruce mentioned we received net proceeds of $132 million from our March equity offering. We used $100 million of the proceeds to redeem the remaining $4 million depositary shares of our 7.25% Series J cumulative preferred stock which was completed in the second quarter. We paid off $14 million of secured debt with a weighted average interest rate of 7.4%, and in the second quarter to date to be paid off another $12 million of secured debt at an interest rate of 7.4%.

And as we noted in last quarter's press release, during the first quarter, we repurchased $4 million of our 7.6% notes due 2028 at a yield maturity of 6.2%. We did not use our ATM during the quarter and have $107 million of capacity remaining.

Regarding our leverage metrics, our debt to EBITDA is 5.9 times, but if you looked at it on a pro forma basis to reflect the $100 million we drew on our line to complete the preferred redemption in April, it would have been 6.4 times. Our debt plus preferred stock to EBITDA is 7 times. These calculations were based on excluding the NAREIT gains from EBITDA and normalizing G&A based on our annual run rate. As we strive towards our goal of returning to investment grade, we are now focused on debt plus preferred to EBITDA as our gauge for leverage with our target range at 6.5 times to 7.5 times.

Our weighted average maturity of our unsecured notes and secured financings is 5.5 years with a weighted average interest rate of 6.4%. These figures exclude our credit facility.

Our credit line balance today is $143 million and our cash position is approximately $27 million.

Before I review guidance, I would like to note that we were pleased to announce a few weeks ago that we finalized and closed our agreement with the IRS related to our 2009 tax adjustment and the related impact on our tax treatment for our 2012 preferred dividends.

Moving on to our guidance. Our FFO guidance range is $0.96 to $1.06 per share. Recall that guidance for the year includes the losses from the unsecured debt and mortgages we retired in the first quarter and second quarter to date, and the remaining $46 million of mortgage debt we plan to pay off in 2013. The total impact for the year will be $0.02 per share.

Guidance also includes a $0.03 per loss, per share loss related to the Series J preferred stock redemption in April. Excluding these losses and the NAREIT compliant gains recognized in the first quarter, FFO per share is expected to be in the range of $1.01 to $1.11 per share. The $0.01 change from our prior guidance is the result of dilution from our March equity offering.

The key assumptions are as follows. Average in-service occupancy end of quarter of 90.5% to 92%. Average quarterly same-store NOI on a cash basis of positive 1% to 3%, G&A of $21.5 million to $22.5 million, as I already noted. Full year JV FFO is expected to be approximately $0.5 million. Guidance reflects the impact of the redemption of the Series J preferred stock, and as noted last time, guidance includes the incremental costs to complete the three developments and process that we launched in 2012, and now includes the incremental costs related to the new First 36 Logistics Center at Moreno Valley we plan to start in 3Q.

Note that in total for the year we will capitalize roughly $0.03 per share of interest related to these developments.

Guidance also reflects the lease commencing at First Chino in the second quarter of 2013. Guidance does not reflect any potential lease up of either of our First Bandini Logistics Center or First Logistics Center at I-83 developments in process. Recall that these are slated to be completed in 3Q '13 and 4Q '13 respectively, and their pro formas assume one year for lease up post-completion. Please note that our guidance does not reflect the impact of any future debt issuances, the impact of any other future debt repurchases or repayments other than those discussed prior, any other additional property sales or investments other than the developments discussed earlier, any future NAREIT compliant gains, though it does reflect the gains recognized in 1Q, and it does not reflect any 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 say that we are off to a good start but we have much work to do - in leasing to achieve our occupancy goals, in getting our new developments built on time, on budget and lease, and in continuing our addition by subtraction strategy of targeted asset sales.

As a team, we are focused on meeting our goals, doing more of what we have been doing to enhance the value of our Company, by growing cash flow, improving our portfolio and closing the gap in valuation to our peers.

We will 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 welcome to get back into the queue.

So now, Operator, may we please open it up for questions?

(Operator Instructions). [Craig Mailman].

Hey guys. Bruce, just curious if you could comment -- I know you said in the prepared remarks leasing activity remains good, but maybe just what you're seeing on the small and medium sized tenant front. And are you seeing any of the increase in housing-related tenants that some of your peers have been talking about?

We are seeing good activity on both large tenants and small tenants. Why don't I ask Peter Schultz who runs our Eastern region to comment on that?

Good morning, it's Peter. We are seeing good activity across the entire portfolio. And while our job is to lease all of the spaces, we are seeing an improvement in the small spaces. And while I think it's too soon to say there is a trend from housing-related companies, we're definitely seeing a pickup on our small spaces from those prospects.

That's helpful. And just as a follow-up, I know the new leasing was a little bit light in the first quarter. Just, I don't know if you guys have a sense or maybe how you're modeling or just the visibility you have, how much do you think occupancy ramps as we progress through the year? Is it more heavily weighted towards back end or should we see that pick up in second quarter more towards your 90.5% to 92%?

If you look at it, and again we had this first-quarter dip now over the last few years. Last year I think we were down 0.5 points versus 30 basis points. So what we have done over the last two or three years is we had big pickup in the latter part of the year. And so we are again, to hit our 92% goal, we have got to see some traction. We are seeing good activity but our job is to move it -- move this good activity into signed leases, and we are focused on it. Again it will be more back end loaded in order to hit the 92% goal.

(Operator Instructions). John Stewart.

Thank you. Scott, I presume that since the same-store guidance is essentially unchanged, is it fair to infer that the variable in terms of bottom-line FFO per share guidance is really the equity issuance?

That's correct. Let me break the equity issuance into two pieces. There was the first $100 million was used to redeem the Series J preferred stock in April. No accretion or dilution related to that piece. The remaining $32 million was used to pay down our line of credit, that's where the $0.01 of dilution came from, from the equity offering. Now as we use those dollars to spend on the developments that we have in process and as those become leased up, obviously we will see an increase in FFO from the redeployment of those funds.

So it was related to the $32 million pay down from the equity offering.

Great. And just my follow-up would be a couple of references to the path back to investment grade. Just wondering where -- what you're hearing in your conversations with the rating agencies.

Sure. John, we have discussions with the agencies on a periodic basis. What we can say is this is on the past calls I've mentioned, the one I would say Achilles' heel we've had with agencies is our fixed charge coverage ratio. In order to get back to investment grade rating, we would need about 2.0 times fixed coverage to get that area. If you look at our fixed charge coverage in the second quarter on a standalone basis, post-equity offering, post-redemption of the Series J, we're going to be between 1.95 to 2.0 times.

And obviously as the year goes on and NOI increases, that will only improve. We think we've hit -- we've hit these metrics and we hope to see traction shortly from the agencies. But that's something that they will have to decide.

Okay, thank you.

(Operator Instructions). There are no further audio questions in the queue. I'll now turn the conference back over to Bruce Duncan.

We'll give it a second for the queue to come back up. Anyone have any follow-up questions or additional people in the queue?

John Stewart.

Thank you. A couple of things. I guess first of all, would it be possible to get an update on the top 10 vacancies?

Sure. Bob?

This is Bob Walter. If you look at our numbers as of the end of the quarter, we were pretty flat from the fourth quarter. We have about 100 basis points of potential pickup from the original top 10 list. But I'd also like to bring in Peter Schultz to talk specifically about some of those opportunities.

Thanks, Bob. A few of those remaining vacancies are in Atlanta and Central Pennsylvania. Atlanta, you know, continues to trail some of the other larger distribution markets with an occupancy in the low 80s, which is about where our portfolio is, so there continues to be a lot of supply. But we are encouraged by the activity we are seeing and, as Bruce and others have said, it's our job to get the leasing done to drive cash flow.

In Central Pennsylvania as well, we have seen an increase in activity on those spaces. And we continue to see good activity in the market for our new spec building as well, so we continue to be encouraged by that.

Thank you. I think Eric has a question as well.

Just a question on the Inland Empire developments. Obviously you've had some really great success with the last couple of projects in leasing up. But they are facing a potentially more competitive environment in terms of new supply. Just curious on your thoughts on your prospects going forward.

We are pretty encouraged in terms of if you look at supply and demand. Jojo, you want to comment on that?

Sure. The demand in the marketplace continues, there has been strong net absorption and we believe that net absorption will continue. In addition to that, the strongest part of the market are the spaces over 0.5 million square feet and that's what we're building. In looking at selecting sites or building design, what we try to do is we try to really offer a prospective tenant the highest class property, and that means high clear ceiling heights, really top loading in terms of vis a vis the competition, very generous trailer parking, and then ingress and egress out of the site. So those are things that we look at.

And also, the other thing we look at is being into the land on a comparative basis. We have achieved all that.

I just want to also remind you that, as we sit today, the only development that we are committing to in the Inland Empire East is a $32 million investment, which is the 555,000 square feet that Bruce had mentioned. So we think our investment is measured.

Again, the proof -- it's up to us to get these things built on time, on budget and get them leased at pro forma or hopefully ahead of pro forma. We acknowledge that, we have good success to date, we have to just keep going and we are focused on it.

Great, thanks guys.

Craig Mailman.

Scott, just on the same-store you had mentioned the tougher comp in Q2 because of the restoration gain, I guess, in 2Q of last year. Is that what might be the drag on -- or keeping you guys from kind of getting a little bit more aggressive on the same-store outlook for the year? And that is may be what keeps you in the 1% to 3% range or is it still just the expenses?

This is Chris. Yes, that certainly is an impact, in that our original guidance was a 1% to 3%, we had obviously anticipated we have the restoration fees rolling down the second quarter. So that was all kind of baked in there.

The other piece of it there as well as we've had very low bad debt as we've been saying on the past calls over the last year or so. We had low bad debt in 2012, we had low bed debt in the first quarter of '13, but for the second quarter to the fourth quarter of '13, we actually budgeted in a higher dollar amount of bad debt expense. It was to budget in what a more normalized rate would be. So from a -- if we are able to continue this trend of low bad debt from the second quarter to fourth quarter, we should be able to pick up same-store a little bit.

But that will be something we will discuss on a quarterly basis on the next couple of calls.

That's fair. Just a question on the land acquisition environment, you guys have obviously been pretty successful lately. Is it just personal relationships here, or are we seeing private guys just the lands get too costly to carry and they're just turning to put it out on the market? Any trends you are seeing?

Let me have Jojo answer that, because again we are very pleased with the land acquisitions we have done, especially the one we finished yesterday which is really a land assemblage. Why don't you talk the land, Jojo?

We are building on our success of FILC, that 692,000 square foot building that we built and leased. And so we are very focused in that sub market that we felt that was pretty strong. So our team really kind of went out and looked for potential to acquire land off market. And that's what we've delivered as of that Bruce mentioned yesterday, and that's through a land assemblage of -- from a number of owners to be able to acquire that kind of site that's not readily available in the market today.

Vis a vis Houston, that's a market that -- so our land acquisition strategy is very, very targeted. The market in Northwest is very strong today, and we think it will continue to be strong. So our team is looking at that particular submarket and not using a shotgun approach, for example, to go and look for land in that submarket. Hopefully, that answers your question.

What other market would you guys be most interested in, and where are you seeing the best opportunities?

We'll let you know when we close.

That's fair, thanks.

(Operator Instructions). Jon Peterson.

Thanks. I was hoping you guys could maybe give a little more color on the leasing spreads turned positive, so that's obviously great. Maybe you could break down by market which market you are seeing the highest positive leasing spreads where rents have actually recovered and which ones are still in the process of recovering?

Again, what you're seeing in terms of the market is if you just look at the markets we're seeing very good rental rate growth. The Inland Empire has seen good rental rate growth. LA, we are seeing very good growth there. We're looking at Houston, Miami, have all been good markets for us. Indianapolis has -- we are seeing decent growth in Indianapolis in terms of rates. So obviously those are in terms of just overall the markets have done well. Chris, you have any other color you want to add?

Yes, as far as the commentary, looking at leases that were rolled over from our peak years in 2005, 2008, as we look forward to 2014, the leases expire there. It's only 13%. So we are seeing less and less of those peak year leases rolling, so that would continue to say that we are getting closer to the consistent positive spreads.

Great. I apologize if you already talked about this, I keep getting cut off on the call for some reason. In terms of dispositions that you guys still have left in terms of your nonstrategic portfolio, I mean, where are those located? And then maybe in the really strong markets like Inland Empire and Houston, where acquisition cap rates are too low for you to acquire, are they so low that maybe you guys are looking to sell some of your assets in those markets?

Again, we have identified -- we have a couple of hundred million of assets that we want to sell over time, and our view on that is we want to sell them over the next couple of years. They are really all across the country, and, again, they are more -- we're going to continue to sell these in sort of a one-off basis because we think we get the best execution for that in terms of pricing. But things can change, and we will see.

And overall, the LA markets, the Houston markets are strong. So we expect good rent growth from those and we are not looking to sell.

Okay, that's fair. Thank you.

(Operator Instructions). There are no further audio questions at this time. I'll now turn the conference over to Bruce Duncan.

Great. Thank you, Operator. Again, we appreciate your interest, please call Art or Scott or myself if you have any questions. We look forward to seeing you in June in Chicago, our fair city, for NAREIT, and, again, thank you for your interest in our Company. Thank you.

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