First Industrial Realty Trust Inc (FR) 2016 Q1 法說會逐字稿

Good morning my name is Nicole and I will be your conference operator. At this time I would welcome everyone to the First Industrial First Quarter Results Conference Call. (Operator instructions.) I would now like to hand the conference over to Mr. Art Harmon, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Nicole. Hello, everybody and welcome to our call. Before we discuss our first quarter 2016 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 estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, Thursday, April 28, 2016.

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 a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at Firstindustrial.com under the Investors tab.

Our call will begin with remarks by Bruce Duncan, our Chairman, 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, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management.

Now, let me turn the call over to Bruce.

Thanks, Art. And thanks to all of you for joining us today on our call. Overall 2016 is off to a great start as we continue to execute on our plan to drive current and long-term cash flow growth. We ended the first quarter with occupancy at 94.8% reflecting the typical first quarter dip plus the impact of the 400,000 square foot move out in our Memphis assets we discussed on our fourth quarter call. Rest assured we are focused on the work to be done to achieve our occupancy objectives for the year.

We delivered strong cash same store NOI growth of 9.6%. This is primarily driven by a decrease in free rent, higher average occupancy, rental rate bumps and rental rate growth.

Based on the strength of our first quarter we increased our cash same store guidance, which Scott will walk through shortly. Cash rental rate were up 6.9% overall; our ninth consecutive positive quarter. GAAP rents were up 15.2% making it 17 positive quarters in a row.

Moving on to developments, I refer you to Page 20 of our supplemental. We have had some very good development leasing wins thus far this year. In the first quarter we successful leased and placed in service the final building of our 237,000 square foot $28 million First Park at Ocean Ranch in Southern California. We also leased 341,000 square feet at our 585,000 square foot First 33 Commerce Center in the Lehigh Valley where our total investment is approximately $44 million.

In the second quarter, we're also pleased to report that we are one 100% leased at our 188,000 square foot, First San Michele logistic center in the Inland Empire that will be completed next month.

At the end of the first quarter we had 1.1 million square feet of completed developments [not] placed in service. Comprised of the aforementioned project in the Lehigh Valley, plus buildings in Dallas and Phoenix. Our combined estimated investment on these projects is $75 million and they have a targeted initial GAAP yield of 7%.

They were 67% leased as of the end of the first quarter and as of today. We had 1.5 million square feet under construction at March 31 which include San Michele and our spec projects in Dallas and Chicago plus builder suits in Atlanta and Southern California. Our total investment for these developments is $94 million. They were 31% leased at quarter end and 44% leased today and they have a targeted GAAP yield of 7.3%.

So in total at quarter end, our development pipeline was 2.6 million square feet with a total estimated investment of $169 million and a combined targeted initial GAAP yield of 7.2%. That pipeline is 54% leased today.

With industrial fundamentals continuing to be strong, we identified and closed on several attractive investment opportunities. They were the primary driver of our decision to raise $125 million of equity. Scott will discuss the offering in more detail in a moment.

Let me walk you through some of these projects which are squarely aligned with our cash flow growth and portfolio objectives. Just last week we closed on the acquisition of a site in Southern New Jersey for $9.2 million. There we started development of the First Florence Logistics Center, a 577,000 square foot state of the art facility. Total investment is estimated to be $39 million with a targeted GAAP yield of 6.9%.

We expect First Florence to be completed in the first quarter of 2017. In the Inland Empire West submarkets of Chino Eastvale we acquired a 50 acre site for $22.8 million. This site will be the home of the ranch by First Industrial, a six building, 936,000 square foot park with buildings ranging in size from 50,000 to 300,000 square feet.

Total investment is expected to be approximately $90 million with a targeted GAAP yield in the low six's. We plan to start this park later this year and we will build all six buildings at one time with an expected completion in the third quarter of 2017. Also in the Inland Empire in the Riverside submarket, we acquired a 13 acre site for $4.8 million; there we plan to build a 243,000 square foot First Sycamore 215 Logistics Center. We will break ground in the second half of the year with expected completion in the first quarter of 2017. Total investment will be approximately $18 million with a targeted GAAP yield of around 6%.

Moving to Phoenix, we acquired a development site in the West Valley submarket for 12.9 million where we can build a total of 1.1 million square feet. We will kick off this project called First Park at PV303 by building a 600,000 square foot facility with a total investment of approximately $33 million and a targeted GAAP yield in the mid to high-seven's. We anticipate starting it in the third quarter with completion in the first quarter of 2017. We also have an option to acquire additional land at this site that could accommodate another 1.5 million square feet.

These four projects will have a total investment of approximately $180 million with an estimated combined GAAP yield in the mid-six's. One final note on development; we also added an 11 acre site for $1.7 million in the Inland Empire close to our Moreno Valley holdings. We expect to be able to build a 236,000 square foot facility on the site after we complete some entitlement works.

As we've commented on previous calls, the acquisition market is challenging. That said, year-to-date we've successfully closed two acquisitions in the Orlando market. As previously disclosed in the first quarter we acquired a 126,000 square foot building in Orlando that was a 100% leased. The purchase price is $9.3 million and the in-place yield was 7.8% reflecting above market rental rate.

In the second quarter, we acquired a recently completed 199,000 square foot facility for $14 million. The building is 100% leased on a long-term basis with an in-place yield of 6.6%.

Regarding dispositions, in the first quarter we sold five properties totaling 420,000 square feet for $16.3 million with a weighted average in place cap rate of 8.6%. These include properties in Indianapolis, Detroit and Chicago as well as our sole asset in Des Moines. Thus far in the second quarter to-date, we have sold five buildings comprise of 406,000 square feet for $15.4 million with properties in Detroit, Dallas and Chicago.

As we discussed last call, we expect to sell a $150 to $200 million of properties in total in 2016 with sales weighted [to the] second half of the year.

Now let me give you a quick update on our CEO search. The process is moving forward according to plan. We are pleased to have talented internal and external candidates that we are vetting and we will let you know when we have a decision. We have no specific timetable other than I plan to retire by year end.

In closing, the year is off to a great start. Our team's focus is squarely on driving cash flow growth now and in the future. Cash flow in turn drives our dividend which as you know we increased 49% from our prior rate to $0.19 per share in the first quarter. We're excited about the opportunities we have to deliver value for our shareholders throughout our business including the new investments I discussed.

With that let me turn it over to Scott. Scott?

Thanks, Bruce. Let me start with the overall results for the quarter. Funds from operations were $0.35 per fully diluted share compared to $0.20 per share in 1Q 2015. Funds from operations before onetime items, namely our acquisition costs in one Q1 2016, and hedge costs in 1Q 2015 were $0.35 and $0.31 per share respectively.

EPS for the quarter was $0.14 versus $0.02 one year ago. As Bruce noted, we finished the quarter with occupancy at 94.8% which was down 130 basis points from the fourth quarter but up 50 basis points year-over-year. Regarding leasing volume we commenced approximately 3.8 million square feet of long-term leases in the first quarter. Of these, half-a-million square feet were new, 3.1 million were renewals and 200,000 were development leases. Tenant retention by square footage was 70.6%.

Same store NOI growth on a cash basis excluding termination fees was 9.6%. This was primarily driven by a decrease in free rent, higher average occupancy, rental rate bumps and rental rate growth. Other items such as tax refunds and lower landlord expense contributed 110 basis points to our same store growth.

Lease terminations fees totaled $128,000 in the quarter and same store cash at NOI growth including terminations fees was 9.8%.

For the quarter, cash rental rates were up 6.9% overall. Breaking it down renewals increased 7.1% and new leases were up 5.8%. On a GAAP basis the overall rental rates were up 15.2% with renewals increasing 14.9% and new leasing up 17.2%.

As we previously disclosed, we issued 5.6 million common shares on April 5th. As Bruce discussed, we've been pretty active on the investment side and we thought it was prudent to raise additional capital to fund our strong development pipeline. I will discuss the impact of the equity offering on our 2016 FFO guidance shortly.

Other first quarter capital market actions were the planned payoffs of our $160 million, 5.75% unsecured notes and $58 million of secured debt with an interest rate of 7.75%. Recall that these payoffs were effectively pre-funded with the 3.39%, $260 million seven-year term loan that we closed in the third quarter of last year.

Moving on to our balance sheet metrics; at the end of 1Q our net debt plus preferred stock to EBITDA is 6.3 times. Adjusting EBITDA by normalizing G&A and excluding acquisition costs and adjusting debt by adding back loan fees. This is toward the low end of our target range of six to seven times. If you included the impact of the proceeds of the equity offering we would have been at 5.8 times. At March 31, the weighted average maturity of our unsecured notes, term loans and secured financing's is 4.7 years with the weighted average interest rate of 5.1%. These figures exclude our credit facility. Our credit line balance today is $242 million and our cash position is approximately $15 million.

Now reviewing our 2016 guidance for our press release last evening. Our NAREIT FFO guidance range remains unchanged at $1.41 to $1.51 per share even after the impact of the equity offering. The dilution from the equity offering would have been approximately $0.035 per share. This was primarily offset by the lease up of developments ahead of pro forma, higher capitalized interest due to the new planned construction starts as Bruce discussed, our strong first quarter same store performance, offset by sales dilution, net of acquisitions. The key assumptions are as follows.

Average in-service occupancy remains 95% to 96% based on quarter end results as we expect occupancy to increase throughout the balance of the year. Average quarterly same store NOI on a cash basis before termination fees is expected to be 3.5% to 5.5%, an increase of 50 basis points at both ends of the range reflecting our first quarter performance. Our G&A guidance range is $25 million to $26 million. As a reminder our G&A guidance reflects the costs related to our CEO search but does not reflect any potential changes in CEO related compensation.

Note that guidance includes the costs related to our developments under construction at March 31, as well as planned development starts in Southern California, New Jersey and Phoenix. In total for the full year 2016 we expect to capitalize about $0.03 per share of interest related to these developments which is $0.02 higher than the guidance we provided on our fourth quarter call.

Guidance also includes the impact from the acquisition and sales completed in the second quarter to-date. Our guidance does not reflect the impact of any future sales nor any acquisitions or developments other than those we discussed nor the impact of any future debt issuances debt repurchases or repayments. Guidance also excludes any future NAREIT compliant gains or losses, nor 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 to questions. I will wrap up our comments by saying that the industrial real estate sector remains healthy and continues to benefit from broad-based demand helped by the secular growth arising from ecommerce activity. We need to capitalize on this favorable backdrop by continuing to execute on the opportunities within our portfolio and from our new investments.

We are delighted that business remains good as evidenced by the development leasing wins I highlighted that have helped us to maintain our FFO guidance range for the year despite the impact of our equity offering.

Driving cash flow for investors is what our business is all about and our team embraces that mission. We look forward to keeping you apprise of our progress throughout the year. We will now it open up for your questions. As a courtesy to other callers we ask you limit your questions to one plus a follow-up in order to give the other participants a chance to get their questions answered. You are, of course, welcomed to get back in the queue. So operator can we open it up for questions?

(Operator instructions.) Your first question comes from the line of Craig Mailman with KeyBanc Capital.

Hey guys. Just on the development, I know you guys on the 180 it's about a mid-six yield but I'm just curious with -- at least on my numbers, the stock trading kind of at low to mid-six implied cap rate range. How do you guys think about starting new projects and what yields you kind of need for a threshold perspective apart from just kind of spread [versus] acquisition cap rate especially on the individual basis some of the Inland Empire projects coming in kind of low six cap rate range. Just curious kind of how you guys think about that from an [NAV] perspective.

All right, well let me have Jojo answer that but let me just give you just a highlight which is as we look at it, again, we like development for two reasons. We think that our risk adjusted return, we're getting good value for it and, again, we know we own it, we've got to deliver, but [Art], we've got a great team, our team is executed, we've shown great progress in terms of what we've done to-date and we're very excited about these new developments that Jojo can talk about.

But I would also say that it also helps upgrade the portfolio. And, again, when we're building these projects we're putting in extra bells and whistles, we're really focusing on making sure we've got a lot of parking, trailer parking and we're very excited about them and to us that also helps just with the overall portfolio valuation. But Jojo, do you want to talk -- add --

Yeah thanks Bruce. I mean, these developments will give us a [peer] of cash flow growth, [secure] a cash flow profile and so we're very excited about these investments.

When we look at these investments you know we're trying to achieve a 100 to 150 basis point spread over acquisitions, that's kind of well we look at it. In addition to that you know we look at the submarket level and we really try to build a product that we think is in demand and the demand will exceed supply.

In terms of spreads, as you know, you know the two projects are basically what we spoke about are in California and today California is in the low four's and then we also spoke about the building in South Jersey, that's in the low five to low fives so, you know, there is obviously a spread.

And in Phoenix, we're talking about the mid to high fives. So again overall weighted average basis is clearly within the range with what we're trying to do.

And Craig we're very excited about these developments.

Okay, and just on First Florence, I had read that Amazon was looking for a 600,000 square foot warehouse in Florence. Is that related to this project? Do you guys have any leasing on this?

Let me ask Peter to answer that.

Sure, so Craig this project, again as Bruce said, we just closed on the land. It's right at the intersection of the New Jersey Turnpike and the Pennsylvania Turnpike at Exit 6A, about 13 miles South of 7A. We can't comment specifically on activity in the market but certainly Amazon is looking at a lot of requirements around the country. We just broke ground last week and we expect to deliver the building in the first quarter of 2017. We'll be sure to keep everybody updated on our progress but no leasing activity reported today. As I said, we just started construction but we're excited about the project.

Great, thank you.

Your next question comes from line of David Rodgers with Baird.

Hey, good morning guys. Maybe a follow-up on Craig's first question. I guess what I want to try to understand is with the amount of acceleration and development that you talked about, how close you're going to be maybe run through some of the math in terms of kind of getting to your capital at risk targets with the speculative construction etcetera. Will you be able to stay within those targets and how close to that limit did you expect to be?

Good, that's a good question. Jojo, do you want to answer that?

Sure David, it's Jojo. So our speculative development cap is $325 million. If you put [it to] assume that you put it in the leasing that we've had in the first part Ocean Ranch in Southern California, First San Michele and First 33 Commerce Center and you include all the $180 million of development, our total number within the cap is $286 million so that imputes to a $39 million capability under the cap.

After taking into effect all these new investments.

Okay, that's really helpful. And then you know maybe the second part of it is can you talk a little bit more about what you're seeing in Houston and Dallas and some of the markets where new supply seems to be creeping up a little bit on you and how new supply might be factoring into some of these decisions?

Sure, let me ask Jojo to handle that.

Sure, you know, overall in terms of Houston, the demand is leveled off in the northwest submarket basically in the southeast markets, the market is still driven by downstream related activity primarily refining and petroleum.

As you know we have two newer assets basically, First North Commerce Center and Northwest Dallas, we've got about a 40,000 -- oh, in Houston and that's about 40,000 square foot remaining vacancy there and we're focused on getting that done. That's 88% leased and late last year we acquired a two-building new development and then at the time of acquisition it's about 13% leased and now it's 41% leased. This is the Southeast market right on the beltway. So as you can see there's been leasing activity there but our job is to get that all leased.

Overall in terms of our Houston portfolio, we're 98.5% leased today and year-to-date in terms of our leasing, we've achieved slightly over 6% cash and cash flow rate increase.

You mentioned David, Dallas. Dallas, yes, you know we do not have a big box development right now as we sit. What we have is a 50,000 square foot remaining vacancy at First Arlington Commerce Center, that's 67% leased and we're focused to get that done. We already leased to two tenants and that's a multi-tenant building and we're still under construction with the First Arlington Commerce Center [too] which is a 231,000 square foot multi-tenant building; that's mid-sized. The target there is the mid-sized tenants in a great southwest market of Dallas which we believe is under built today and where demand will continue to exceed supply.

Great, thanks.

(Operator instructions.) The next question comes from the line of Eric Frankel with Green Street Advisors.

Thank you. I was hoping you could touch upon your same store NOI growth forecasts. So just look at your first quarter results and you look at your revised forecast, it looks like second quarter and fourth quarter of same store NOI growth should be just over 2.5% per year. That seems a little bit conservative, can you touch upon that Scott?

Well, sometimes we call him Sandbag Scott but let me -- I would say you have to look at it's the first quarter in terms of, you know -- we'll look at it as we go through the rest of the year we'll update that but we just -- it's the first quarter we just --

Yeah, and Eric, I think we -- the same store we've got to look at the year because there could be some lumpiness in there. So if you look at our midpoint same store guidance of 4.5%, you get to about an average of 2.8%, say 3% for the rest on average for 2Q through 4Q.

Some of the items that could maybe possibly surprise on the upside is we give a range of occupancy so that might be able to help that out if we are able to achieve on that. The other thing is bad debt expense. Eric we've modeled in 750,000 per quarter, 2Q through 4Q. We came in first quarter at 265,000 [or bad] that's been coming in well. So if we're able to do better on that as well I think you might be able to get some upside there but any follow-up?

Yeah, are there any expense growth increases related to that? I mean, so if you had a tax refund on the first quarter, are there, is there, a potential for real estate tax increases just because property values are rising throughout the country and, you know, throughout the rest of the year?

I would say we probably have more of a surprise possibly for tax refunds as opposed to tax increases. I mean, we build in tax increases if we know of that in the same store numbers, Eric. On tax refunds we had some of that in the first quarter. It's hard to determine if or when you're going to get those. So there may be some of those in the second quarter to fourth quarter as well.

Okay, and can you just remind me what's you forecast, what you forecast, in terms of rent upon lease rollover in your same store forecast?

Overall in the rollover, Eric, we're looking for the year between 5% and 7% on a cash basis, rents to increase.

Okay, thanks. Do I have time for one more question or is that --

No, please keep going you're on a roll.

I appreciate that. Peter, I was hoping you could touch on the First Florence project? So I took note that your cost base is on the development at $16 per billable square foot but your overall basis is going to be about 70, so that's a pretty hefty construction cost number, so I was hoping you could touch upon construction costs, trends and whether that's just a unique project where there are some unique costs in there?

Sure Eric, there's nothing that that's unique. We have some site work on the property which as you know is always the biggest variable but this will be tilt wall concrete building and relatively straightforward. So we certainly like the basis we're at particular when you look where things have traded in New Jersey.

In this submarket, which is really benefiting as you probably know from the widening of the New Jersey Turnpike all the way down to South (inaudible), Exit 6 and 6A, it's helping to drive demand further down the turnpike where Exits 7A and 8A remain pretty tight. But, no, we're happy with the basis we certainly have seen some costs increase and some capacity issues on things like [precast] but nothing else that would really be unusual here.

Okay, I'll jump back in the queue. Thank you.

(Operator instructions.) Your next question comes from the line of John Peterson with Jefferies.

Oh great, thank you. I just had more of a high level question. Maybe just a little for my curiosity but, you know, over the last few quarters a lot of economic indicators have been trending fairly negative, the ones that are typically good indicators for general industrial demand. But demand from you guys, from all your peers tends to be really strong right now, it's almost obvious the ecommerce is what's driving that. So I'm just curious if you could kind of walk us through like maybe the last few years like what percent of leasing are you doing now that you would classify as ecommerce related relative to you know a year ago, two years ago, three years ago, like how much of the incremental demand is driven by that?

That's a hard one but Peter do you want to --

Sure John, it's Peter. You know, it's difficult to quantify exactly how much of the demand in leasing is ecommerce. It's easy to see the pure play ecommerce companies like Amazon, for example, that was mentioned earlier. But there are a lot of companies that are engaged in this whether it's logistics companies and transportation firms or third-party companies providing these services or even package delivery companies and part of the occupancy may be ecommerce and part of it may be more traditional warehousing but there's no doubt that we've been the benefit in the industrial business of ecommerce in the secular change and we continue to see it as a significant driver. But it's not the only driver. As we've talked about before there's pretty broad based demand across a number of industries but clearly ecommerce is helping.

Okay, and is there a certain type of business whether it's an ecommerce customer or otherwise where you're seeing, you know, more incremental demand. I know it's probably more market specific but different clear [heights] or different sized buildings or closer to kind of CBD areas of markets?

Jojo, do you want to try that?

Yeah, the demand has been broad-based you know on the immediate delivery or last mile we're seeing in our [info] portfolio that, you know, some tenants are going to do omnichannel which is both brick and mortar and direct fulfillment. But also not everybody needs a same day delivery item, so you see the Inland Empire benefiting from large [boxes] because, you know, again or other parts of the country too because in some deliveries, you know, customers are finding it sensible to get received in two to three days. So the demand has been are broad-based John.

Got it. All right, good quarter. Thanks for the color.

And you do have a follow-up question from the line of Eric Frankel with Green Street Advisors.

Thank you. Quick questions on Orlando, why are you looking to expand there?

Again, you know, we've been in Orland before, but Jojo do you want to talk about Orlando?

Sure, sure. Eric, we're familiar with Orland, we've been in Orland. That market, the vacancy rate continues to decline. Now they're at about 6% and there continues to be net absorption.

Orlando is the primary distribution market for Central Florida. So we think it's going to be staying that way for a long time. It's a decent sized market, 158 million square feet. And we found really good -- two good acquisitions we're very happy about and we'll continue to expand there but we will maintain our discipline because, you know, acquisitions are pretty competitive.

Okay, that's it for me. Thank you.

Okay, thanks Eric.

(Operator instructions.) And I show no further questions at this time. Bruce I'll hand it back to you.

Great, thanks operator and thank you all for joining us. If you have any questions please feel free to call Art or Scott or myself and we look forward to seeing some of you in June at NAREIT and we appreciate your support. Thank you.

This concludes today's conference call. We thank you for your participation and ask that you please disconnect your line.