First Industrial Realty Trust Inc (FR) 2015 Q2 法說會逐字稿

Good morning, my name is Tabitha and I'll be your conference operator today. At this time I would like to welcome everyone to the First Industrial second-quarter results conference call.

(Operator Instructions)

I'll now turn the call over to Mr. Art Harmon, Vice President of Investors Relations. Please go ahead.

Thanks Tabitha. Hello, and welcome to our call. Before we discuss our second quarter 2015 results, let me remind everyone that our call may include forward-looking statements as defined by Federal Securities laws. These are based on Management's expectations, plans, and estimation of our prospects.

Today's statements may be time sensitive and accurate only as of today's date, July 31, 2015. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings.

You can find the reconciliation of non-GAAP financial measures discussed in today's call in our supplement supplemental report in our earnings release. The supplemental report, earnings release and SEC our filings, are available at firstindustrial.com under the investors tab.

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 are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President for our East Region; Chris Schneider, Senior Vice President of Operations; and Bob Walters, Senior Vice President of Capital Markets and Asset Management. Now I'd like to turn the call over to Bruce.

Thanks, Art. And thanks to everyone for joining us on our call today. Our team delivered an excellent second quarter. I am particularly proud of the fact that we hit our year-end occupancy target of 95% ahead of schedule.

We finished the second quarter at 95.1%, up 80 basis points from the end of the first quarter. You will recall that we established the goal of achieving occupancy of 95% by year end 2015 at our investor day back in November of 2013, when our occupancy was at 91.2%. This achievement is a function of the focused leasing execution by our team around the country as well as contributions from our continuing portfolio of management efforts. I congratulate all of my teammates for making this goal a reality.

Our second quarter, same store cash NOI was up 4.7%. Primarily, as a result of our occupancy increase, rental rate bumps and continuing low bad debt expense. As a result of our performance to date, we have raised the midpoints of our average quarterly same store NOI guidance by 50 points to 4.5%. Scott will walk you through the increase in our FFO per share guidance and other changes shortly.

Cash rental rates on new and renewal leasing were up 4% and have now been positive 6-quarters in a row. On a GAAP basis, rental rates were up 11.9%, and we have now been positive on this metric for 14 consecutive quarters. These results reflect the underlying strong sector fundamentals as tenant demand continues to be healthy and out pace new supply.

Moving onto investments, during the second quarter, we placed in service two developments. The first was a 377,000 square foot property at our two-building, First Pinnacle Industrial Center development in Dallas. As previously reported, this building is 100% leased on a long-term basis to a beverage company. Our GAAP yield, based on the first year cash NOI over the GAAP investment basis, was 7.6%. Our total estimated investment is $15.9 million.

The second development placed in service was our 556,000 square-foot, First 36 Logistics Center in the Inland Empire, for which we signed a long-term full building lease with an auto manufacturer in the second quarter. Our GAAP yield on this facility was 7% and our total estimated investment is $33.1 million.

At June 30, we had three additional completed developments that are not yet in service, located in Houston, Dallas, and Minneapolis. These total 716,000 square feet and are a combined 79% leased.

Let me quickly walk you through these projects. The first is our 352,000 square-foot, First Northwest Commerce Center in Houston. They're 78% leased. Second is our 222,000 square-foot First Pinnacle II building in Dallas, that is now at 100% after we successfully released up the remaining 8000 square-foot space. Lastly, our 142,000 square-foot development in Minneapolis remains 50% leased. Our total investment for these three completed developments is $40.2 million and our projected first year GAAP yield is 7.9%.

As of June 30, we had four projects under construction, comprised of seven buildings, totaling 1.4 million square feet that are 17% preleased. This figure includes our second quarter start of First Park Tolleson on a 21-acre sight in Phoenix we recently acquired.

First Park Tolleson is a 386,000 square-foot multi-tenant project which is 44% preleased. Recall that our tenant from one of our nearby properties required additional space growing from 80,000 to 170,000 square feet. We expect to complete this facility by the end of the first quarter of 2016.

Total investment is expected to be $21.5 million and our targeted stabilized GAAP yield is 7.8%. For these four projects under construction, our estimated investment is $102.3 million and our targeted first year GAAP yield is 6.8%. I refer you to page 20 in our supplemental for details on all of our developments.

As part of our ongoing efforts to replenish our development pipeline during the second quarter, we also added a 24-acre development site in the great southwest sub market in Dallas where we can build up to approximately 300,000 square feet in a two-building configuration.

Regarding future capital deployment, given our increased portfolio occupancy, strengthened balance sheet, and successful development execution, our self-imposed revolving spec cap is now $325 million. We believe development and value added acquisitions continue to provide superior risk-adjusted returns, while enhancing our portfolio. We are always mindful of the supply demand equation when doing so. But again, the market remains in balance, so we are actively using our platform to identify new opportunities.

Regarding acquisitions as previously disclosed, we were successful in adding to our portfolio in southern California by acquiring two 100%-leased properties during the second quarter. One was a 172,000 square foot distribution center for $14.8 million in Riverside in the Inland Empire. The other was a 45,000 square footer in the South Bay of Los Angeles for $5.4 million. The weighted average in place cap rates for these prospects was approximately 5%.

Moving onto dispositions, in the second quarter we completed $16 million of sales comprised of three buildings totaling 384,000 square feet in Detroit, Southern New Jersey, and Atlanta, and one small land parcel. In the third quarter to date, we have completed the sale of a small building in Tampa and a land parcel in the Milwaukee market for a total of $1.3 million. Year to date, we have closed $43.9 million in sales, on pace for our full year target of $75 million to $100 million.

To wrap it up, before I turn it over to Scott, our team delivered an excellent quarter. And I look forward to what we can accomplish in the second half of this year in capitalizing on opportunities to grow cash flow and further enhancing our portfolio for the benefit of our shareholders.

With that, Scott?

Thanks, Bruce. Starting with the overall results for the quarter, funds from operations were $0.35 per fully diluted share compared to $0.28 per share in 2Q, 2014. Results include a $0.01 per share gain from the interest rate protection agreement we settled during the quarter. Before this charge in acquisition costs, as well as losses from the retirement of debt and a portion of a one time restoration fee in the year-ago quarter, funds from operations were $0.34 per fully diluted share versus $0.28 in the year-ago quarter.

EPS for the quarter was $0.13 versus $0.04 one year ago. As Bruce noted, we finished the quarter with occupancy at 95.1%, which was up 80 basis points from the first quarter and up 210 basis points year-over-year. Sales had a 5-basis point impact on our second quarter occupancy results.

Regarding leasing volume, we commenced approximately 3.5 million square feet of long-term leases in the second quarter. Of these, 0.9 million were new, 1.5 million were renewals and 1.1 million square feet were development leases. Tenant retention by square footage was 83.4%.

Same store NOI growth on a cash basis, excluding termination fees and the one-time restoration fee we recognized in 2Q14 was 4.7%. Same store growth was primarily the result of our increase in occupancy, rental rate bumps and bad debt expense coming in below plan.

Lease termination fees totaled $620,000 in the quarter and same store cash NOI growth including termination fees, but excluding the one time restoration fee in the year-ago quarter, was 5.3%. Cash rental rates in the quarter were up 4% overall. Breaking it down, renewals increased 6%, and new leases were up 0.7%. On a GAAP basis, the overall rental rate change was a positive 11.9%.

Moving onto our balance sheet metrics, at the end of 2Q, our net debt plus preferred stock to EBITDA is six times excluding the impact of the interest rate hedge settlement and acquisition costs. This is at the low end of our target range of 6 to 7 times. At June 30, the weighted average maturity of our unsecured notes, term loan, and secured financings is 4.1 years with the weighted average interest rate of 5.6%.

These figures exclude our credit facility. Our credit line balance today is $217 million and our cash position is approximately $9 million. Now, reviewing our updated 2015 guidance per our press release last evening. Our NAREIT FFO guidance range is $1.21 to $1.29 per share with a midpoint of $1.25 per share, which is a $0.04 per share increase from the prior midpoint, and we also narrowed the range one penny at both ends.

The $0.04 per share increase is primarily attributable an increase in our occupancy expectations for 2015, lower bad debt expense in the second quarter compared to prior guidance, as well as a one-penny per share pickup due to the settlement of our interest rate protection agreement in the second quarter. Excluding the impact of the settlement of the interest rate hedge, our FFO guidance is $1.31 to $1.39 per share, which is a $0.03 increase compared to our previous guidance.

The key assumptions are as follows: average in service occupancy to 94.5% to 95.5%, based on quarter end results, an increase of 100 basis points at the midpoint. Average quarterly same store NOI on a cash basis before termination fees of 4% to 5%, an increase of 50 basis points at the midpoint and a narrowing of the range. Note that this excludes the one time restoration fee in the comparative period of 2014.

Our G&A range remains the same at $24 million to $25 million. Guidance reflects the anticipated fourth quarter, 2015 no cost prepayment of approximately $23 million of secured debt at 5.58%. This loan is scheduled to mature in the first quarter of 2016. Guidance includes the costs related to our developments in process in Dallas, Pennsylvania, Southern California, and Phoenix. In total, we expect to capitalize about $0.02 per share of interest related to our developments in 2015.

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 compliance gains or losses, or the impact of impairments, or the potential issuance of equity.

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

Thanks Scott. Before I open it up for questions, I want to make a few final points.

Achieving our 95% occupancy goal for the year ahead of schedule demonstrates the strength of our portfolio and our platform. As does our solid same-store, and rental rate performance.

Fundamentals, in the industrial real estate market are strong, as is our position as a landlord. This is reflected in our occupancy and our 6th consecutive quarter of positive cash rental rate growth on new and renewal leasing. While we are pleased with our results, we are not satisfied. We have the opportunity to continue to grow cash flow by driving up average occupancy in our existing portfolio, leasing up our developments, pushing rental rates, and further reducing capital costs.

Our platform also continues to make an impact by enhancing our portfolio and value for shareholders through our development, acquisition, and disposition efforts. To further showcase these strengths to you, and the opportunities we see ahead, we ask you to mark your calendars to join us Thursday, November 12, in New York city for our investor day. Additional details will be forthcoming.

So with that, we'll now open it up for 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, of course, welcome to get back into the queue. Tabitha may we now open it up for questions?

(Operator Instructions)

Your first question comes from Ki Bin Kim, Suntrust Robinson Humphrey.

Thank you. It's one month into the third quarter, just curious -- and you hit 95% occupancy already. If you look at what's in the visible path line going forward, any known material move-outs or move-ins that might change your occupancy in the near term?

Ki Bin, this is Chris. If you look at our lease expiration for the rest of the year, it's only 3.6% of the portfolio, so a pretty small number, so we should be in pretty good shape.

Okay. And -- because looking ahead, a little bit more forward, like make 18 months or a couple of years, if I look at the average for rents that are expiring in your portfolio, it is pretty static. 2015, before we start rolling, because the 2015 average rent was $443, the average rent per square foot in 2016 is $437, so it seems -- I'm sure the mix could be different, but from a rent perspective, pretty static.

How should we think about this, and given what vintages at 2016 leases are, I'm not sure if they're more favorable or less favorable, but should the lease press get better than what we have seen or similar?

Ki Bin, again, we're not going to talk about 2016 guidance. We welcome -- we encourage you to show up for Investor Day because we're going to go through a lot of detail, but the general thing, the world is getting better, rents are stronger. We're very encouraged by what we're seeing, so again, we'll have a lot more detail when we get together on Investor Day in New York city on November 12. Okay. Thank you.

Your next question comes from the line of Dave Rodgers with Baird.

Good morning, guys. First, maybe on acquisitions, I know you spent a small amount in the quarter on acquisitions but you've continued to buy. I think cap rates were right around 5%, but based on your kind of spec development cap, sounds like you really expect development to ramp up. So I guess one on the acquisitions, what gets you excited about buying at a 5% and can you get that number up quicker in the near term? And two, how do you look at allocating additional capital to acquisitions here in the near term?

Well, again, I think we're very excited about the acquisitions we did in Southern California. We like that. It's our largest market. If you look at the one property in the South Bay, mainly in terms of 98% market, in terms of occupancy, so we really like that. The other was in the Empire near other properties, we have new building right off the highway, and we think it's a very good piece of real estate.

We think you're going to have substantial rent growth out there, and we're very encouraged by those assets. That being said, we are focused more on development. We think that the development opportunity, we continue to be able to execute using our platform, and we're very excited about the opportunities we're seeing.

And so that's -- given that and given the strength of our balance sheet, that's why we increased our spec cap rate, and again, that spec cap rate includes when we buy buildings that have vacancy. It covers both buying buildings that might be not fully leased as well as doing new developments. We're pretty encouraged by what we're seeing.

And maybe a follow up for Scott. Scott, I was going to ask about the lower expenses in the quarter and then I think in your prepared comments, you made a comment about bad debt. So maybe could you recap the bad debt comment for us, and how you see OpEx running for the rest of the year?

Yes, bad debt was very low in the quarter. It was $100,000, and we model in about $750,000 in the quarter, so that did come in a little bit lower. I'll turn it over to Chris in operating expenses for 3Q and 4Q and what we're seeing.

As far as what we're seeing, we're not seeing -- in the past few years or quarters, we had that impact from the weather related. We're not really seeing that. We're not expecting that going forward. It should be pretty flat going forward.

Great. Thanks, guys.

Thank you.

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

Thank you. Much congratulations on the development success. So obviously, you plan to increase your development starts, I'm sure, over the next few quarters. I was hoping you can share some color on the financing strategy?

Eric, this is Scott. As we mentioned in our prepared comments, we've got sales guidance this year of $75 million to $100 million, so we're going to have some money coming in the last six months from sales. Also, based upon our AFFO payout ratio between 50% and 60%, we're low 50%s for the first six months. We're going to have excess cash flow coming in from that. So I would assume that the two major sources of funding development are going to be property sales and that excess cash flow.

I appreciate that color. Given that asset prices are so high, and obviously, you guys haven't been acquiring as much property as you were several years ago, I was wondering why you guys are keeping your disposition pipeline pretty steady? I was -- I would have, perhaps, thought that disposition proceeds would increase over the next couple of quarters.

That could be Eric, again, we're at $44 million now. Our goal is $75 million to $100 million. We'll be disappointed if we don't come in the high range of that or exceed it. We'll see how we do on that. But we're focused, again, I think our disposition team is doing a great job maximizing the value of the assets that we're selling and we've been very pleased with the pricing but we're continuing on our strategy of continuing to enhance the portfolio through selective dispositions.

Sounds great. Thanks. I'll jump back in the queue.

(Operator Instructions)

Your next question comes from the line of Michael Mueller with JPMorgan.

I was wondering for the 80 basis points sequential occupancy gain, were there any geographies or assets that really helped contribute to that stood out?

Not really. It was really a broad bush in terms of seeing everything. Peter, do you have any thoughts?

Mike, there was one building in Baltimore that accounted for a little bit more than 10 percentage points of occupancy in that market that we re-leased, so that certainly helped as well as some improvement in Atlanta.

Okay. And Scott, I think I missed it, did you say about 5 points of it that was tied to the occupancy just from moving in and out of the portfolio was just 5%; is that correct.

5 basis points was sales related to second quarter; that was the impact on occupancy was 5 bips, Mike.

So of the 80 basis points increase in occupancy, 75% was leasing and 5% was from dispositions.

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

Your next question comes from Erin Aslakson with Stifel.

Good morning out there. Quick questions for you on what's the current mark-to-market on your -- the 17% of AVR that's expiring in 2016?

Aaron, this is Scott. We don't -- we're not giving guidance on 2016 at this point in time. We'll do that in our fourth quarter call. But I think what we can say is what we're seeing in the markets are very good things. It's turning more into a landlord market, and we're hoping to continue to see positive increases in leasing spreads in 2016. Again, we'll give you more color on that in our fourth quarter call.

Okay. And then just in regards to the land that was purchased, it looks like $5 million an acre in Phoenix, but $11 million an acre in Dallas, what's -- what does that imply about Dallas? Is Dallas, in your opinion, or is that submarket becoming land constrained? it seems like a high number.

Jojo, do you want to talk about it?

Well, in terms of this we're very excited about the acquisition. That's a site that we acquired the upper DFW, and basically that's a very large submarket in Dallas where absorption is very strong. Again, we have had success there as well, and so our plan there is to build two buildings, and expect us to build some during the near term.

In terms of Phoenix, again, we're very pleased with that basis there, as we mentioned to you, it's about a 7.8% yield. Again, that was also helped by the pre-leasing, a 44% pre-leasing we achieved in that project. So we look forward to announcing further leasing in that project to achieve our target.

Okay. Thank you.

And you have a follow-up from the line of Ki Bin Kim, SunTrust Robinson Humphrey.

Sorry but I was trying to get out of the queue. All my questions have been answered.

(Operator Instructions)

You have a follow-up on from the line of Dave Rodgers, Baird.

All right. I guess since we've got some time, I've some questions about some of the markets. I was looking through and it looks like Indiana and Minneapolis are still lagging in terms of occupancy, and I think your Minneapolis development is still leasing up a little slower. So I guess I'd love a comment on competition there, or asset quality, the reason that those might be lagging and then a second part to that question would be it looks like Atlanta, Miami, and Tampa in the same-store pool all have rents down year over year, so I'm just wondering if that's a mixed shift, an asset issue, competition or what? So I guess the comments on those five markets might be helpful from the team. Thanks.

Sure, Dave, this is Peter. On Minneapolis, as we talked about last call, we had a large move-out in the fourth quarter of about 312,000 square feet, one tenant in a couple of buildings. We have re-leased a portion of that and are certainly seeing interest.

It's not an asset quality issue. It's really just finding the right sized tenants to fit the spaces. There certainly is more new supply in Minneapolis, in the northwest market. As to Indianapolis -- or I'm sorry, you asked about the development in Minneapolis as well.

Remember, that was a two-building development. The first building was fully leased at completion. The second building is half leased. We are seeing interest there, and the balance of the space could accommodate either one or two tenants, and we'll certainly keep you updated on our progress there.

In Indianapolis, we had a first quarter move-out of 311,000 square feet in a portion of a larger multi-tenant building. This space divides for one or two tenants, and we have seen some interest yet, but nothing there to report, and that is a large space for us in that market. It's a little bit over 10 percentage points of occupancy there, so certainly we have work to do, and that will be a significant improvement there, and again, we'll keep you up to date on our progress. I'll turn it over to Chris for your other question.

Dave, in the overall, in the same-store rental rates, as far as those couple markets, really, it's just not that you have seen the trend overall is going up. If you lease a different mix of the property types, if you have a lower rent or higher finished rent. So it's really kind of the mix in those markets is why there's a slight drop.

And Dave, you specifically asked about Atlanta. This is Art. We had some sales of some flex properties over the past couple of quarters. So you've got a change in the mix there.

Great. That's helpful. Thanks.

Thank you.

You have follow-up from the line of Eric Frankel with Green Street.

Thank you. Just very quickly. On your new leasing for the quarter, I know the leasing costs were fairly high so I'm wanting to understand that number a little bit better. Thank you.

And really, the function of the cost per square foot of the leasing is really a function of the lease term. The lease term, overall, we're about 4.9 years. That's higher than it's been in the last quarters. If you average in the development, actually we're about seven years on the average lease terms, so more a function of that.

Great. Thank you.

You have a follow-up from the line of Erin Aslakson with Stifel.

Two quick ones. Term fees in second quarter 2015?

A little over $600,000, Aaron.

About $600,000. Okay. Thank you. Can you just remind us of your plans for the $160 million bond coming due in January 2016?

Sure. We continually look at the -- monitor the capital markets and our sources and uses. To the extent that something changes on our timing, we'll report it at that point in time, Aaron. Right now, we (multiple speakers) --

Do you plan to refi?

We've got capacity currently on our line, Aaron. We've got $217 million outstanding on a $625 million line, so we're in pretty good shape.

Okay. Thank you.

(Operator Instructions)

You have a follow-up from Ki Bin Kim, SunTrust Robinson Humphrey.

Yes, a quick one. What is your average rent escalation for your portfolio now?

Chris, do you want to talk?

Yes, if you look at the commencements that we had in 2015, our bumps annualized about 2.6%, and that was on 87% of all our leases greater than 12 months.

But that's for what you signed, right, but on the portfolio level?

On the entire portfolio is very similar to those numbers.

Okay. Thank you very much. All right. Thanks.

At this time, there are no further questions. I'll turn the call back over to Bruce Duncan, please go ahead.

Thank you. Thank you, and thank you all for participating on our call today. As always, please feel free to reach out to Scott, Art or myself with any follow-up questions, and we appreciate your interest in First Industrial. Thanks a lot. Bye.

Thank you. That does conclude today's First Industrial second quarter results. You may now disconnect.