First Industrial Realty Trust Inc (FR) 2013 Q4 法說會逐字稿

Good morning. My name is Jody, and I will be your conference operator today. At this time I would like to welcome everyone to the First Industrial fourth-quarter and full-year 2013 results conference call. (Operator Instructions). Thank you.

I would now like to turn today's conference over to Mr. Art Harmon, Senior Director, Investor Relations. Please go ahead, sir.

Thanks, Jody. Hello, everyone, and welcome to our call. Before we discuss our fourth-quarter and full-year 2013 results and 2014 guidance, 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, 2012, filed with the SEC and subsequent Exchange Act reports.

Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report, available at First Industrial.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, February 26, 2014.

Our call will begin with remarks by Bruce Duncan, our President and CEO, as well as Scott Musil, our CFO, 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, Art, and thanks to all of you for joining us today. 2013 was another successful year for First Industrial throughout our Company -- in leasing, in caring for our customers, in upgrading our portfolio, and in strengthening our capital position. I would like to thank all of my teammates for their outstanding contributions.

We finished the fourth quarter at 92.9% occupancy, up 170 basis points from the end of the third quarter and 300 basis points for the year. Importantly, we exceeded the 92% year-end goal for 2013 that we first established back at our November of 2011 investor day. Leasing carried the day, accounting for 134 basis points of our gains, with sales contributing the other 36 basis points.

At our latest Investor Day in November, we walked you through our potential opportunity to deliver total AFFO growth of as much as 70% to 90% by 2017. With the benefit of our good leasing results in the fourth quarter, along with our outlook for improving cash flow in 2014 as we begin to realize that opportunity, our Board of Directors declared a dividend of $0.1025 per share for the first quarter, an increase of 20.6% versus the prior dividend of $0.085 per share.

The leasing market continues to be active as demand for space has increased, driven by the broader growth in the US economy. Fundamentals remain strong as the market has experienced positive net absorption for 14 consecutive quarters, while supply remains well below historical levels and concentrated in markets where demand supports it.

The leasing progress we made during the year was evident in many of our markets across the country. Additionally, demand from small- to mid-sized users was robust, which we saw in our portfolio in the form of occupancy gains in our non-bulk warehouse categories.

We expect to capture additional demand and grow occupancy again this year, as reflected in our guidance. For the first quarter, as we have experienced historically, we expect occupancy to dip. And this quarter's decline may be larger than we have seen in recent years, due to an anticipated 400,000-square-foot move-out in Atlanta. We then see occupancy ramping up from there throughout the year.

We made good strides in the fourth quarter in our strategy of targeted sales to further improve our portfolio -- or addition by subtraction, as we like to say. Sales totaled $75.8 million in the fourth quarter and brought our full-year total to $144.6 million, well ahead of our 2013 sales goal of $75 million to $100 million.

In the fourth quarter we sold 48 properties, totaling 1.4 million square feet and two parcels of land. Sales included a 384,000-square-foot, 27-building portfolio, plus a land parcel in Salt Lake City for $18.7 million; and a high-finish portfolio of 6 buildings in Dallas, totaling 245,000 square feet for $12.4 million. We also completed two separate sales in Denver, both of which had significant office components, comprising 157,000 square feet for a combined $20 million. Overall, fourth-quarter dispositions were 73% occupied at the time of sale, with an in-place cap rate of 6.8%, and at 40% over book value, including the land.

Thus far in the first quarter, we have sold one building in Detroit for $1.3 million. We also completed two sales in our net lease joint venture as we continue our strategy to wind it down, with the goal of maximizing value for our partner and us.

For 2014 we are again targeting sales of $75 million to $100 million, as active portfolio management is a core element of our overall strategy. We would expect these sales to be back-end loaded.

On the capital side, we have been active in the first quarter to date. We successfully completed a new seven-year unsecured term loan totaling $200 million that we swapped to an effective initial fixed rate of 4.04%. This loan essentially pre-funds our 2014 and 2015 maturities. We are pleased with this execution and appreciate the continuing support of our bank group.

With the benefit of our fourth-quarter sales, we are in the process of retiring the entire $50 million of our Series F preferred stock and all $25 million of our Series G preferred stock, which had dividend rates of 6.275% and 7.236%, respectively, as of the first quarter.

Our solid capital position enables us to invest for growth and enhance our portfolio through targeted acquisitions in development. Competition for quality acquisitions remains strong, but we have had a few recent successes.

As we discussed on our last call, in October we acquired a 627,000-square-foot distribution center in the southeast Wisconsin submarket of Chicago for $26.3 million. The building is 100% leased with an in-place yield of 6.7%.

Thus far in the first quarter, we acquired a well-located 252,000-square-foot bulk warehouse in Minneapolis that is 100% leased for $13.4 million at a 7.3% cap rate. Development continues to offer us the opportunity to deliver higher risk-adjusted returns while adding high-quality buildings to our portfolio.

Updating you on our current projects, we are on budget and on schedule with our 555,000-square-foot First 36 Logistics Center at Moreno Valley in the Inland Empire. Our estimated total investment is $32 million, with a planned second-quarter completion.

Our $9 million, 43,500-square-foot First Figueroa Logistics Center in the South Bay of LA is also on budget and on track to be completed in the second quarter. Recall that we allow ourselves one year from construction completion for lease-up of our speculative projects. Our 250,000-square-foot expansion for Rust-Oleum will be complete in the third quarter.

During the fourth quarter of 2013, we completed the 489,000-square-foot First Bandini Logistics Center in the Vernon Commerce submarket of LA, as well as the 708,000-square-foot First Logistics Center at I-83 in York, Pennsylvania. Recall that our investments last year also included the second-quarter acquisition of a 509,000-square-foot distribution center at the intersection of I-55 and I-80 in the Chicago market. We have nothing to report at this time in terms of new leases for these three buildings.

Next up for our development pipeline are two projects we discussed at our Investor Day. In the next few weeks we expect to commence our First Pinnacle Industrial Center in Dallas. First Pinnacle will be a two-building, totaling 598,000 square feet, with an estimated investment of $26 million. We are also close to securing final approvals for the 351,000-square-foot First Northwest Commerce Center in Houston that we expect to start in the first half of this year. Estimated investment for First Northwest is $20 million.

So before I turn it over to Scott, let me say that our focus has been and continues to be on driving cash flow and value. Leasing up our existing portfolio and new investments are at the center of that opportunity as we push towards our new goal of plus or minus 95% occupancy for year-end 2015 that we set at Investor Day.

Escalations built into our existing and new leases will contribute to our growth. We will also reduce leasing costs as we move toward 95% occupancy, since new leasing is significantly more costly than renewals. And on the capital side, we will continue to capture long-term cost savings as opportunities arise, like our recent term loan.

We will also be pushing for higher rates to capture further recovery in market rents. This year we expect our cash rental rates to be about flat overall. As we discussed at Investor Day, we did not directly factor in market rent increases when outlining our potential cash flow opportunities, as the impact is difficult to pinpoint. But as an owner of industrial real estate, we like the direction they are going. As we laid out in Investor Day, we believe our potential cash flow growth is a tremendous opportunity for our Company and for our shareholders, and our job is to continue to deliver.

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 $0.27 per fully-diluted share compared to $0.18 in 4Q 2012. Fourth-quarter results included a $389,000 loss on retirement of debt; acquisition costs of $331,000; and $547,000 of NAREIT compliant gains from land sales.

Before one-time items, namely the impact of the early retirement of debt and preferred stock redemption, NAREIT-compliant land gains, and costs associated with our fourth-quarter acquisition, funds from operations were $0.28 per fully diluted share versus $0.23 in the year-ago quarter. EPS for the quarter was $0.18 versus a loss of $0.09 in the year-ago quarter.

For the full year FFO per share was $0.98 versus $0.88 for 2012. Excluding one-time items such as NAREIT-compliant gains, losses from the early retirement of debt, losses from the redemption of preferred stock, our IRS settlement in 2012, and costs associated with our property acquisitions, FFO was $1.08 versus $1.02 in 2012.

Moving on to our portfolio, occupancy was 92.9%, up 170 basis points from the third quarter and up 300 basis points from a year ago. Regarding leasing volume, we commenced approximately 4.9 million square feet of leases in the quarter. Of these, 1.4 million square feet were new, 2.9 million were renewals, and 0.6 million were short term. Tenant retention by square footage was 87.2%.

Same-store NOI on a cash basis, excluding termination fees, was a positive 3.5% due to year-over-your occupancy growth, the impact of contractual rate bumps, partially offset by rental rate roll-downs and higher free rent. Same-store NOI growth, including termination fees, was negative 1.1%. As you may recall, we had a large lease termination fee in the year-ago quarter. For the fourth quarter, lease termination fees totaled $453,000.

Cash rental rates in the quarter were down 4.7% overall, with renewals a positive 2.6% and new leases down 14.6%. On a GAAP basis, the overall rental rate change was a positive 2.8%. Leasing costs were $2.43 per square foot.

Moving on to our capital market activities and capital position, in the fourth quarter, as we discussed on our last call, we paid off $32 million of mortgages with a weighted average interest rate of approximately 6.5%. As Bruce already discussed, we were pleased to close out our new seven-year unsecured term loan totaling $200 million. The rate is LIBOR plus 175 basis points at our current leverage level.

We entered into swap agreements to effectively fix our initial rate at 4.04%. This all-in rate is based on our current leverage level and can be adjusted with changes to our leverage ratios or movements along the investment-grade scale.

The $200 million of proceeds represents about 37% of our total maturities through 2017 that we outlined during Investor Day. The proceeds from this loan are sufficient to allow us to retire our 2014 and 2015 maturities and prepayment opportunities that total of approximately $150 million.

The weighted average interest rate of these maturities is 6.4%, so we will capture those savings long term. This leaves us with approximately $50 million of additional proceeds we are using to pay down the line of credit, effectively costing us $0.01 per share of dilution in 2014.

One other capital goal we discussed at Investor Day was to achieve investment-grade for our unsecured notes by the end of 2014. As you may have seen on Friday, we were pleased to note that S&P was the first firm to upgrade our unsecured debt rating to investment grade at a BBB- rating.

Regarding our leverage metrics, at 4Q 2013 our net debt plus preferred stock to EBITDA is 6.6 times, in line with our target range of 6 to 7 times. At December 31 the weighted average maturity of our unsecured notes and secured financings is 4.7 years, with a weighted average interest rate of 6.2%. These figures exclude our credit facility. Our credit line balance today is $21 million, and our cash position is approximately $29 million.

Moving on to our 2014 guidance through our press release last evening: our FFO guidance range is $1.12 to $1.22 per share. Guidance includes $0.01 per share combined impact of the losses from the redemption of our Series and F and G preferred stocks and a significant one-time restoration fee of $0.02 per share. Excluding these items, FFO per share is expected to be in the range of $1.11 to $1.21.

The other key assumptions are as follows: average in-service occupancy, end of quarter, of 92.5% to 93.5%; average quarterly same-store NOI on a cash basis of positive 3% to 5% -- this range excludes the one-time restoration fee I just discussed; G&A of $23 million to $24 million. Full-year JV FFO is expected to be approximately $400,000, which includes the impact of the sale of the two properties in the first quarter of 2014.

Guidance includes the costs related to the planned development starts in Houston and Dallas and the incremental costs related to the First 36 Logistics Center at Moreno Valley, the First Figueroa Logistics Center, and the Rust-Oleum expansion. In total for 2014, we expect to capitalize $0.01 per share of interest related to our developments.

Guidance assumes the lease-up of the First Bandini Logistics Center and First Logistics Center at I-83 in the fourth quarter, as well as the Chicago distribution center we acquired last year, by the end of the second quarter. Recall that each of their pro formas assume one year for lease-up.

Guidance reflects the impact of the $13.4 million Minneapolis acquisition completed in the first quarter. And lastly, guidance assumes the payoff of $44 million of secured debt at an average interest rate of 6.8% and our 6.42% 2014 notes in the amount of $82 million.

Other than what I have noted, our guidance does not reflect the impact of any future debt issuances; the impact of any future debt repurchases or repayments; any additional property sales, acquisitions, or further developments; any future NAREIT-compliant gains or losses, or the impact of impairments; nor the potential issuance of equity.

With that, let me turn it back over to Bruce.

Thanks, Scott. Before we open it up for questions, let me say that 2013 was a great year for First Industrial. But as I often say, there's no future in the past. Given our achievements in 2013 and our outlook for 2014, we raised the dividend by more than 20% while maintaining our conservative AFFO payout ratio range of 50% to 60%.

We are focused on realizing the potential long-term cash flow opportunities that we laid out at Investor Day, and the first step is with executing on our 2014 plan. We look forward to keeping you apprised of our further progress throughout the year.

With that, we will now 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. You are welcome, of course, to get back into the queue.

Operator, may we now open it up for questions?

(Operator Instructions) Craig Mailman, KeyBanc Capital Markets.

Just on Bandini and the Pennsylvania development, I think, Scott, you just said guidance assumes they are leased by the fourth quarter. I'm just curious what the activity level has been at those two assets. Do you think we could come in a little bit ahead of that? Just thoughts there.

Let me take that in the sense of -- you know, we budget, as Scott said, a one-year downtime before we get things leased up. But we are encouraged in terms of the activity.

Peter and Jojo can talk about the specific assets. But we'll be disappointed if we don't have them leased by then. But again, it is our job to make that happen.

Thanks, Bruce. In terms of First Bandini, our 489,000-square-foot building in Commerce, California, we have had showings, and we continue to have showings from various type of users. And our job is to get those leased, and we will report to you once we get that done.

And then, Craig, it is Peter. In Central Pennsylvania at our building in York, the activity has definitely increased as the building was completed. We continue to view the supply/demand dynamics in that market as very positive.

There has been no new speculative supply started in central Pennsylvania since we started this building in Q3 of 2012. Today there's only one other direct competitor in the same size. And if you expanded a little bit to 500,000 square feet or more, there are only another two buildings.

As Bruce said, we would be disappointed if we didn't -- either beat our year-end target, but I have been pleased with the increase in activity that we're seeing since completion.

That is helpful. And then just staying on occupancy here, so the 400,000 square feet in the first quarter, that looks like it's about 60 basis points. How big could the drop be in 1Q before we see that ramp into the back half of the year?

Craig, if you look at the last three or four years, we have probably dropped between 30 and 50 basis points. And so if you add this in there at 400,000 feet, you are right, it is about 60 basis points. So it will be more than the 30 to 50 basis points that we have historically had.

Okay.

But as we have said, the market is good, and we anticipate picking that back up over the year and ending up the year at -- our goal is 94%.

Is any piece of that 400,000 already released? Or is it all coming back to you guys?

Craig, it is Peter. This is a tenant that has been more of a short-term occupant of the space. And we do have activity on the space, but we will keep you posted on that on future calls.

Great. Thank you.

Ki Bin Kim, SunTrust.

Thanks for the -- I guess you provided more color on Page 12 of your supplemental, giving a little more details on your lease spreads. Maybe you could spend a couple of seconds on it.

There seems to be a pretty wide spread between the GAAP rent on rollovers for new versus renewal. Could you maybe -- if you could just talk a little bit about it? Is that fairly typical? Is that what should we expect going forward, at least for 2014?

Ki Bin, this is Chris. Yes, if you look at overall in the GAAP rental rate increases versus the cash, we have historically been about a 500 basis point spread. So that has been pretty typical the last couple of years, and we expect that going forward.

And then --.

I'm sorry, Ki Bin, go ahead.

I meant the difference between new and renewal.

Ki Bin, there is always going to be -- usually -- differences between new and renewal leases. On renewals we have more leverage, because the tenant is currently in the space. And new leasing is a little bit more competitive in the marketplace, just because the tenant has other options to look at. So there is always going to be some sort of spread there.

And when you are looking at 2014, we think we're going to be, overall, new and renewal, negative 2.5% to positive 2.5%. So the midpoint is flat. And we think our renewals are going to be flat to 5%, so we still see positive traction there.

And flat on GAAP or cash?

These are cash that I am giving you estimates on.

Okay. And my second question: going back to your comments about the activity you are seeing for some of your development assets and, then, the Chicago building that you guys bought, I think, a couple of quarters ago -- and it's not a concern yet; it is early on, so I don't want to make it sound worse than it is -- but is the whole -- I guess not delay, but are you guys holding back on leasing these assets because there just isn't a ton of traffic -- a ton of demand? Or is it you are looking for the right price? If you could describe some of the dynamics going on when you are actually sitting down with tenants trying to lease these type of spaces.

No, I would say we feel pretty good about where we stand right now. We like the product we have built. And let's say of the two new developments, the product is great, fits the market very well. And we are encouraged by the activity. But again, we have got to get it leased.

But we are very -- I would say, just look at the growth we have had in occupancy in the fourth quarter. The market is strong. The market in Southern California is strong. Central PA is strong. So we are encouraged.

Chicago -- Chicago, we bought that building in the second quarter, end of the second quarter of last year. And we haven't leased it yet. I'll be disappointed if it's not leased by June of this year when they close the in-service portfolio. But we have a lot of activity on it. But again, we've got to convert. As Jojo said, we have got to convert this to leasing, and we're all over it.

Okay. Thank you, guys.

John Guinee, Stifel.

Thank you, guys. Nice job. Just out of curiosity, you are selling $100 million, $150 million worth of assets; and you will clearly be always pruning the portfolio. But you -- and correct me if you have already said this -- but there is a point at which you say, I like what I have. We have got the core. We're in the markets we want to be in, and anything else is just incremental versus part of a strategic plan. What is the number in order to get down to the strategic plan level before you switch to incremental?

I would say, John, we probably have another $100 million to $125 million before we get down to sort of the strategic --.

The core.

The core.

Does that include -- is that in addition to what you allocated for 2014? Or should we just assume another $100 million to $150 million for 2015, also?

I would assume that 2014 would be included in that number.

Got you. And then is it safe to assume that you look at your AFFO at about $0.70 to $0.80 going forward, given the new dividend?

John, this is Scott. Our mid-point AFFO is about $0.79 a share, so like our FFO guidance, deduct $0.05 and add $0.05 for a range.

Got you. Thank you.

Dave Rodgers, Robert W. Baird.

Bruce or Jojo, maybe give a little bit more color on the dispositions. Obviously accelerated into the end of the year. Sounds like you're expecting another healthy year of dispos this year.

Is that just a healthier First Industrial that can afford to kind of sell these assets off? Is it truly a better market for these vacant or nearly-vacant assets that you are selling? And I guess if the latter, can you talk about the users and the buyers of the space that you are seeing now surfacing for the assets?

Sure. Like we said, our dispositions is really part of our active asset management plan. And as we went into fourth quarter, interest and activity significantly picked up. And as we have also told you in the past, we are focused on getting appropriate value.

And during the fourth quarter, we were really pleased. We felt we got appropriate value for those assets. That is why -- the market is strong with the appropriate values were going to be executed.

In terms of users versus private investors, for the year, for 2013, probably 48% was users by volume and 52% was to investors by volume. Does that answer your question?

Yes, it does. It sounds like the market continues to get better. Pricing was obviously better.

And maybe flipping then to capital deployment, one, and maybe for you, Bruce -- think about or tell us how you think about development yields, development returns relative to your cost of capital, relative to acquisitions. Are you seeing those spreads? And how do you feel about putting new money to work in development today, given the returns where they are?

We're very encouraged in terms of putting more money to work in development, especially if you look at the developments we talked about in Houston and Dallas that we are going to start, hopefully in the first half of this year, the returns are 7.5% and 8% for those two, respectively. So we're very happy with those. And we would like to do more.

As you know, we are entitling a site in Southern California for 1.3 million square feet plus. And we've got a good site in Allentown. And we have a site in Covington where our Diapers.com building is, we can do another 500,000 feet.

So those are all good opportunities for us going forward, and we're excited about those. And we also have a great piece of land in Stockton -- that is probably a few years out, but it could do 1.2 million square feet.

So we like -- again, development does two things. We think the risk-adjusted returns is higher than -- you know, they're better risk-adjusted return; and we think that we are getting high-quality properties. Again, the properties have a lot of parking and a lot of trailer parking, and car parking, and state-of-the-art product.

So we are excited about that. And again, our job, as it always is, is to get these things built on time, on budget, and get them leased up at pro forma or ahead of pro forma within 12 months. And we are on it.

On the acquisition front, can you talk a little bit about the acquisition strategy -- how you think about putting money to work in development versus acquisitions today? And how we should think about the dispositions funding acquisitions? Are you going to kind of be a net investor on the acquisition front going forward?

Jojo?

Yes. Of course, you know, at the end of the day long term, of course, we want to be a net investor. In terms of the acquisitions, this is -- remember, we are all-in a total return investor. So as a total return investor, we focus on where market rents are and where we can grow rents. So the focus is growing rents and our basis in the investment.

And so in terms of strategy, we will use our platform. You won't see us spending 100% of our time in auction bid-type situations, because there is no value in it. So we will use our platform, just like we have used it in the past. We will focus on total returns.

And in terms of development, just adding a little bit of color to what Bruce had said: if we go to development, we always would try to look for 100 to 150 basis points premium in terms of yields. And that is adding our cost of capital, so we can get a risk-adjusted return, a higher risk-adjusted return.

Does that answer your question?

It does. Thank you very much.

(Operator Instructions). Mike Mueller, JPMorgan.

Just have two follow-up questions to prior questions that came up. First of all, if we are thinking about disposition volumes, so once we get past 2014, does it feel like a number of $25 million to $50 million a year, something like that, is a good number to think of for the lower level of recycling that will be occurring?

I probably would keep it at, like, the $75 million to $100 million, because we are going to be continuing, you know, sort of in every market continuing to upgrade the portfolio. And asset management is an ongoing process, and we're focused on that. So I would say that -- I would probably keep that number.

Okay, great. And then second question, going back to the AFFO comment: what is the CapEx expectation for 2014?

It is going to be around the $50 million area, which is about $0.45 a share, Mike.

Got it. Okay, that was it. Thank you.

Eric Frankel, Green Street.

I just have a question regarding development. Can you provide a little bit more color on the land market? It certainly seems like it seems that it's staying a little bit more competitive out there.

Land prices have increased year over year, and it continues to increase. Of course, it varies market by market. And we do believe, though, that overall, land prices will probably not increase on a percentage basis compared to year over year last year, just because rents still have to grow before -- have to grow a bit in order for some markets to develop. But in some other markets, I think they will continue to increase.

So at the end of the day our job is to use our platform, our team, our boots on the ground, to identify land sites that would fit our criteria.

Okay, thank you. And Scott, can you just give a little more color on the restoration fee? What state is it in? Is it related to Atlanta, or is it somewhere else?

It is a restoration fee that we have on a roof. It is about $0.02 a share. And the reason that we are just calling it out on the call is because we know about it, and it is a one-time big item. So we adjusted it out of our FFO before one-time items.

Okay, thank you.

(Operator Instructions). Eric Frankel, Green Street.

Maybe talk about your G&A guidance for next year? It seems like it is a little bit higher than in the past year. Is it related to the increased development starts?

No, it is not. Our guidance is $23 million to $24 million. Our G&A for 2013 came in a little bit higher than our top end of our G&A guidance. So when you look at the difference, it's really just normal expense increases from 2013 to 2014. But nothing out of the ordinary, Eric.

Okay, terrific. Thank you.

There are no further questions at this time. I will now turn it back over to Mr. Bruce Duncan for closing remarks.

Thank you, operator. Again, we appreciate your interest. If you have any questions, please contact Scott, or Art, or me. And we look forward to seeing some of you down at the fun in the sun -- at the Citigroup thing next week. So, again, thank you very much.

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