First Industrial Realty Trust Inc (FR) 2018 Q1 法說會逐字稿

Good morning, my name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial First Quarter Results Conference Call. (Operator Instructions) Thank you. Mr. Art Hartman, Vice President of Investor Relations and Marketing, you may begin your conference.

Thanks, Christy. Hello, everybody, and welcome to our call. Before we discuss our first quarter 2018 results and guidance, let me remind everyone that our call may include forward-looking statements as defined by Federal Securities Laws. These statements 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, Wednesday, April 25, 2018. 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 would 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 Peter Baccile, our President and Chief Executive Officer; and Scott Musil our Chief Financial Officer, after which we'll 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 Peter.

Thank you, Art, and good morning, everyone. The first quarter of 2018 was a solid start to the year for First Industrial and for the industrial real estate market in general. Our occupancy at quarter-end was 97.1%, up 130 basis from a year ago and only a 20 basis point reduction since year-end, which is less than the typical first quarter dip. We also delivered cash same-store NOI growth of 6.1% and cash rental rate growth of 9.3%, reflecting the outstanding efforts of our team and the strength of our portfolio and the leasing markets.

As of today, we have signed approximately 70% of our 2018 rollovers at a cash run rate change of 7%. So the rent growth picture for the year is a good one. National statistics for the first quarter continue to evidence a disciplined market with good tenant demand. According to CBRE econometric advisor's preliminary first quarter report, net absorption was 42 million square feet versus completions of 35 million square feet. As we look across our markets, we continue to see strong broad-based demand. Tenants are investing for growth and to reconfigure their supply chain in an ever competitive marketplace. Given good overall demand for space, high market occupancy levels and continued discipline with new construction, tenants have fewer options. Our team is focused on maximizing cash flow from all leases, which involves not only pushing rents, but maximizing term, while minimizing improvements and of course, we're always mindful of credit quality.

On the development side, as discussed on our last call, in the first quarter we leased and placed in service our 243,000 square-foot First Sycamore 215 Logistics Center in Inland Empire. We currently have $291 million under construction, comprised of 4.2 million square feet with a projected cash yield of 7.2%. At this cash return, our projected margin on this batch of development is north of 50% based on prevailing market cap rates for comparable leased assets. We plan on delivering these projects over the next few quarters, and we're encouraged by the early leasing interest. Of this group, we will shortly wrap up construction on our 6 building project in Chino known as the Ranch. We're pleased to say that we just signed a lease for 100% of the 156,000 square-foot building with an international parcel delivery company. We will also complete our First Joliet Logistics Center in Chicago and our second building at PV 303 in Phoenix by the end of the second quarter.

Staying with Phoenix for a moment, we are developing the second building at First Park @ PV 303 on the heels of our successful lease of our first building there, which serves as UPS's new regional hub. We like the long-term position of the PV-303 Park given its strategic location, which has already attracted several major corporate users, and we think the presence of UPS will serve as an attraction for other prominent companies.

Earlier this year, we became aware of the opportunity to acquire the remaining entitled industrial site totaling 532 net acres at the park, inclusive of a site we already had under option. As I said, we love the PV 303 submarket and this site and wanted to capitalize on the opportunity to control its future development. However, the investment represented a significantly outsized allocation to Phoenix given the current size of our portfolio. Not wanting to lose the opportunity, we decided to find a project-specific joint venture partner for this site. We are very pleased to have engaged Diamond Realty, the U.S. real estate arm of Mitsubishi Corporation as our partner. Together, we acquired the site for $49 million in an all cash transaction, with our interest at 49%.

The venture will engage in speculative development as well as build pursuits and one-off land sales to users for their own build-to-suit needs. At approximately $2 per land foot, we believe we have a highly competitive basis. Target leverage for each speculative or build-to-suit project is 55% loan-to-cost and the venture will utilize nonrecourse construction loans.

First Industrial will earn development, asset management, property management, disposition and leasing fees, and we have the opportunity to earn and promote beyond an established return for the joint venture. This joint venture will be accounted for under the equity method of accounting. Let me be clear that we don't view this venture as a new line of business for us, but rather a specific means to control what we believe to be the premier distribution park under development in Phoenix and to capitalize on that opportunity without incurring outsized risk in that market.

Lastly, we will start our second building at our I-78/81 project in Pennsylvania in the coming weeks. We expect to complete this 250,000 square-foot building in the first quarter of 2019, and our estimated total investment is $17.5 million.

Moving to acquisitions. We had an active quarter, with $61 million in 5 buildings plus a land site. Our largest acquisition was a project we call First Park at Ocean Ranch 2 in San Diego. This is a 225,000 square-foot portfolio of 3 distribution assets that we acquired for $36.7 million at the end of the quarter. It's adjacent to the successful 3-building development project of comparable design and quality that we stabilized in 2016, so we are glad to have a parklike concentration of low-finish distribution assets, which are scarce and in high demand in this market. As with many of our acquisitions, this transaction had some complexity, which we used our platform to solve. We have a 67,000 square-foot vacancy to lease up and in-place rents are below market. We assumed an $11.7 million loan at closing with a 4.17% interest rate that matures in 2028. Our pro forma stabilized yield is 5.4%.

Other acquisitions in the quarter included an addition to our Orlando portfolio, a 94,000 square-footer for $8.7 million as well as the 35,000 square-foot purchase in Seattle for $5.6 million. The in-place cap rate on each of these acquisitions was 5.7%. We also added a Dallas development site as discussed on our last call.

Thus far in the second quarter, we have closed on a 4.6-acre site in the Inland Empire West in Fontana for $3.3 million, where we can build a low coverage, 77,000 square-foot building.

On the sales side, we sold 8 buildings and 1 land site for $42.4 million at a weighted average in-place cap rate of 7%. Our largest sale was a 322,000 square-foot portfolio of primarily light industrial and flex assets in Baltimore for $30 million. As a reminder, our sales target for the year is $100 million to $150 million, so we're off to a good start. We're very pleased to begin 2018 with strong results, and look forward to keeping you apprised of our progress towards our goals as we look to create value and drive long-term cash flow growth. With that, I'll turn it over to Scott.

Thanks, Peter. Let me start with the overall results for the quarter. Diluted EPS was $0.30 versus $0.19 1 year ago. NAREIT funds from operations were $0.38 per fully diluted share compared to $0.36 per share in 1Q 2017. Excluding the severance charge we discussed in our fourth quarter call and an impairment charge related to the anticipated sale of an excess land site, first quarter 2018 FFO was $0.40 per share. This compares to $0.37 per share in 1Q 2017 before the loss from retirement of debt.

As Peter noted, occupancy was 97.1%, down just 20 basis points from the prior quarter and up 130 basis points from a year ago. Regarding leasing volume, approximately 3.2 million square-foot of long-term leases commenced during the quarter. Of these, 327,000 square feet were new, 2.6 million were renewals and 305,000 square feet were for developments or acquisitions with lease-up. Tenant retention by square footage was 77%. Same-store NOI growth on a cash basis, excluding termination fees, was 6.1%. This was driven by rental rate bumps, increase in rental rates on leasing, an increase in weighted average occupancy and lower free rent. Lease termination fees totaled $93,000 and including termination fees, cash same-store NOI growth was 5.7%. Cash rental rates were up 9.3% overall, with renewals up 9.1% and new leasing up 10.5%. On a straight-line basis, overall rental rates were up 18%, with renewals increasing 16.6% and new leasing up 25.6%.

Moving now to the capital side. As discussed on our last call, during the first quarter, we closed on a private placement of $300 million of senior unsecured notes, with a weighted average interest rate of 3.91% and an effective interest rate of 3.83%, reflecting the treasury lock we settled in 4Q. We paid off $158 million of mortgage loans at a weighted average interest rate of 4.5% at March 1, bringing our secured debt as a percentage of gross assets ratio below 10% to approximately 8%.

During the quarter, we also received good news from the rating agencies. At the end of February, S&P Global Ratings upgraded our unsecured credit rating to BBB. So both Fitch and S&P have us rated at BBB flat.

Quickly moving on to a few balance sheet metrics. At the end of 1Q, our net debt plus preferred stock to adjusted EBITDA is 5.3x. And at March 31, the weighted average maturity of our unsecured notes, term loans and secured financings was 6.5 years with a weighted average interest rate of 4.41%. These figures exclude our credit facility.

Now moving on to our 2018 guidance through our press release last evening. Our NAREIT FFO guidance is now $1.53 to $1.63 per share with a midpoint of $1.58. Excluding the severance and the impairment charge, FFO per share guidance is $1.55 to $1.65 with a midpoint of $1.60. This midpoint is unchanged from our fourth quarter call. The key assumptions for guidance are as follows: average quarter-end occupancy of 96.5% to 97.5%; we increased the midpoint guidance for same-store NOI growth on a cash basis by 25 basis points to 4.5% and narrowed the range to 4% to 5%, reflecting our first quarter performance; our G&A guidance range is $26 million to $27 million and this guidance range excludes the $1.3 million severance charge recognized in the first quarter. Guidance includes the anticipated 2018 costs related to our completed and under construction developments at March 31, and our newly announced start of our second building at our I-78/81 project. In total, for the full year 2018, we expect to capitalize about $0.04 per share of interest related to our developments.

Our guidance does not reflect the impact of any future sales, acquisitions or development starts after this earnings call, other than the 250,000 square-foot second quarter start in Pennsylvania that Peter discussed. The impact of any future debt issuances, debt repurchases or repayments, the impact of any future gains related to the final settlement of 2 insurance claims from damaged properties. And guidance also excludes any future NAREIT compliant gains or losses, the impact of impairments and the potential issuance of equity. With that, let me turn it back over to Peter.

Thanks, Scott. 2018 is off to a strong start. We have a great opportunity to deliver value and cash flow growth from maximizing lease economics and through lease-up in our development pipeline as we capitalize on the favorable fundamentals and long-term demand drivers in our sector. With that, operator, would you please open it up for questions.

(Operator Instructions) Your first question comes from the line of Ki Bin Kim with SunTrust.

First off, congratulations on the BBB rating. I know that's a long time coming. And so first question, the land site in Phoenix is, obviously, the potential is huge per square footage and development dollars. Can you just give us more details on what the overall scope of the project looks like? What makes that -- what are the merits of this acquisition that make it attractive to users long term? And some details like JV fees or promos that might be involved?

So I'll start this and kick it over to Jojo for his input as well. But as you know its 532 acres. The plan here and the vision that we share with our partner is to sell off some of the sites to other users for their own build-to-suit needs, develop some of the land on spec as well as do it build-to-suit. We like this market, and we think we can develop to similar yields as we have already done in that marketplace. And so that's really the long-term plan. Ki Bin -- Jojo you want to talk?

So in terms of -- Ki Bin, in terms of Industrial Park, this is the best Industrial Park in servicing the Southwest, Phoenix market today. The Southwest Phoenix market today is the largest distribution and logistics submarket in the whole Phoenix area. And it's garnered the most of our net absorption over the last 10 years. Why it is the best? We feel it's the best, because it has the best access and the least amount of congestion. Coming off straight from 10 and basically getting off 303, which is to your major new highway. This park that we now control, basically sits between 2 full interchanges, which is Indian School Road and Camelback Road. So bar none, if you are a distributor, you cannot have better access than through this site servicing the whole Phoenix and the regional market. It has also garnered significant amount of blue-chip tenants and companies, UPS being one, which leads to our 618,000 square feet, Big Sporting Goods is there. Ball Corporation is there, REI, the fast-growing older companies also there. So you already see discriminating customers coming in their. Of course, we feel good about the future amenity that UPS will be providing tenants out there as well. Nothing really more to add to what Peter said in terms of the plan. We will pursue strategic land sales to users only, and then we'll engage in build-to-suit and speculative development. And in terms of JVs and in terms of JV we -- like we say we are -- we cannot disclose the financial terms of the economics. What we've disclosed so far of our 49% interest in the JV. We will earn asset management fees, leasing fees, development fees and property management fees and the potential incentive promote over hurdles. That is one -- that's what we can disclose.

Okay. And as you build out the project, obviously, your market exposure to that market will grow. Is there a certain kind of longer-term cap you want where you want to limit the Phoenix market to grow as a percent of your portfolio? So maybe you would self-lease assets not just always hold to long-term?

So as you know, we're going to own 49% of whatever is completed there by the venture. We -- this is going to be an evolving thing Ki Bin. We have 2.7 million square feet in Phoenix today that includes our UPS property as well as the building we're about to finish up. This development site, if you using that, you'll see in build several million square feet here. We are unlikely to have that much exposure to Phoenix at the end of the day. But again, this is a 5- to 7-year project and that outcome will evolve and -- over time.

Your next question come from the line of Craig Mailman of KeyBanc Capital Markets.

This is Laura Dickson here with Craig. Can you discuss the leasing in the development pipeline? You had the -- what you said the Ranch this quarter, but can you elaborate on the early leasing interest you're seeing on the rest of the space?

Sure, sure. This is Jojo. Let's stay with the Ranch for example. We're pleased to lease the 155,000 square foot to an international parcel delivery company. By the end of this quarter, we would have completed all of the 6 buildings there, and we are getting tours and inquiries on all of the buildings. And demand is broad-based, you have 3PLs, you have light industrial users, you have on omnichannel retailers, you have pure e-commerce companies, you have food and beverage companies. And we are experiencing this in all of the rest of the buildings, including PV 303, 640,000 square feet, First Logistics Center, the 78/81 building, the 78/81 split in PA. And even in First Nandina, which is our 1.4 million square foot in Inland Empire East, which we do not expect to complete until the end of this year, including the 78/81, we already getting tours and inquiries on that as well. And don't forget Gunroad, which is in Houston, that is inside the Beltway, very, very little supply for a high-quality, smaller midsize project there, 126,000 square feet. We're getting a lot of inquiries on that asset too.

Great. Can you also just discuss the construction cost trends in your markets?

Sure. Overall, they ranged from 4% to 5% nationally. The construction costs have increased a little bit more in the coast and that's because of subcontractor -- increases in subcontractor margins. We've seen a little bit more increase in PIs when you go to the smaller projects, because of the tightness of labor. As you know, steel has increased a bit on that. But overall, it hasn't impacted the overall yield on investment, because steel is becoming -- is really a smaller component of our construction cost. But overall, as we invest more also in a coast what we're finding is that construction cost is becoming a smaller and smaller part of our total investment as land prices continue to increase.

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

Scott, can you just clarify the difference between your GAAP and cash same-store NOI growth results?

Well, the difference -- we are primarily just going to have to do with free rent offered during the period and the rental rate bump stream in the new lease compared to the old lease.

Is that's free rent burn off? Is that related to the developments that are contributed the same-store pool? Or that just within the operating portfolio?

That's should just be in the operating portfolio, because the development leasing would not be in the cash rental rate increase number.

Okay. And then I'll jump back in the queue quickly, but just regarding the joint venture for the Phoenix development. Is there any particular reason why you only took a 49% ownership stake? Do you still have control what the venture does in the future?

Eric, this is Jojo. The -- in terms of control, every major decision is -- has to be decided by both partners equally.

(Operator Instructions) Your next question come from the line of Michael Mueller of JPMorgan.

Just following up on development leasing, for the First Park 94 building that's 50% leased, can you remind us when rent commenced or is expected to commence for that portion of it that's leased?

Well, it's 50% leased at this point in time, Mike, what we have in the model is at the end of the second quarter, we'll lease-up the remaining 50% of that project.

And the tenants of that -- that are there are came in at completion. Original completion.

Yes. So the original tenant came in end of first quarter, early first quarter of last year.

Got it, got it, got it. Okay. And then Scott, on the CapEx front, where do you see CapEx pencilling out for 2018 for normal course TI leasing commissions maintenance?

We think that number could be between $35 million and $37 million for 2018, Mike. And again, as we continue to sell properties that number may change, but I think that's a pretty good range at this point in time.

Our next question because of the line of Dave Rodgers with Baird.

Maybe for Peter, if you could split this one first. So last year you talked a lot about bad debt that was a benefit to your same-store number. But maybe a bigger question, I think, retail, I don't know what the number is, 90 million to 100 million square feet have gone dark. There's been a couple of additional high-profile bankruptcies or liquidations. Do you have a watch list that might be growing? Is this impacting your business at all? Have you just been, kind of, lucky to avoid it? Just kind of broader thoughts on, kind of, where bad debts are, impacts and those issues?

So we don't have a big exposure to retailers. I guess, our biggest exposure would be the Best Buy and they're actually doing pretty well, they've adopted a pretty strong e-commerce strategy. Other than that, we don't really have a big watch list. We try to avoid poor credit and there are deals that we turn down all the time where we're not so high on the credit. So we don't really have a long list of tenants that we're keeping a close eye on. Scott, I don't know if you have anything to add.

Dave, I would agree, we budgeted in our guidance $500,000 of bad debt expense in 1Q. It actually came in at $88,000. So again, the trend continues with lower bad debt expense. And as Peter mentioned, really no one that we're -- on our watch list at this point in time. And we look at our credit on a monthly basis.

We do -- we have an aging report, we go through every single tenant. We have quarterly operations calls as we go over. And so we get a pretty good look down the road on potential issues that could come up.

Sounds like a good position to be in. Scott on the same-store expense increase, I think it was 9% this quarter. Just from accruals in there what hit that and how does that trend the rest of the year?

Primarily, the increases, Dave, are due to real estate taxes and slow removal costs. The taxes, you'll probably throughout the year. Obviously, the slow removal, you won't see the next couple of quarters, maybe we'll get some in the fourth quarter of 2018. The good news about the expense increases though, Dave, it that -- it was almost offset dollar for dollar in an increase in recoverable income. So there was very minimal, if any leakage related the increase in expenses.

Okay, great. That's helpful. With regard to the development pipeline and leasing, how much is in your guidance for revenue, NOI, FFO, however you think about it, for leasing, up the development pipeline this year with the number of completions you have kind of second, third, fourth quarter? Do you have any...

For the developments, the $291 million, we have nothing built in other than the 156,000 square foot lease we just signed. We also have in the remaining lease up of our First Park 94 Building B at the second quarter, that's about $0.05 a share for the year. So really the only thing that we need to get done for the remainder of 2018 to hit our plan as far as development is concerned is to lease up the remaining 50% of our First Park 94 Building B project.

Your next question come from Zack Silverberg with Mizuho Securities.

Just looking at lease expirations, is there anything big in 2019 or 2020, that's a no or nonrenewal at this point?

Yes, for 2019 and 2020, the typical exposure there about 16% or 17% of our leasing rolling. If we're -- 2018 and rest of the year as you heard, very little rollover exposures, we've taken care of about 70% of our rollovers already.

And for 2019 and '20, it's not like we would hear at this point in time of the year if the -- if a tenant wasn't -- didn't want to renew the space, that'll be conversations that we have in the upcoming quarters related to '19 roll.

All right. Perfect. And are you guys seeing any early impact, I guess, on tax reform, anything unexpected that you've come across?

No, not really. Not a big reaction on the part of tenants. We do see some groups who want to own their properties that could be motivated by the tax changes. But by and large, no big impact.

(Operator Instructions) Your next question comes from the line of Ki Bin Kim with SunTrust.

So last quarter, you guys said you leased about 60% of leases that were set to expire this year at a 5.9% higher cash rent. So since then, what was the, kind of, the surprises that led you to post 9.3% cash rent growth in a relative short time?

Ki Bin, this is Chris. If you look forward to all the all the renewals that we're taking care for the 2018 rolls, that number is signed to about 7% for the year. So that number is a little bit better than expected. And then on new leasing, we just -- overall we've done a little bit better than we anticipated.

And Ki Bin, just remember on a quarterly basis when you just see the numbers, it’s the commenced leases in the quarter, so when we report that in our press release and in our commentary during this call its uncommenced. So we're just giving you a little viewpoint to the future there.

Okay. And is there any difference in demand for different types of configurations for warehouses or by age?

Ki Bin, it's Peter Schultz. I would say not really. We continue to see pretty broad-based demand across the country as Peter mentioned in his remarks. Across space sizes, across geography and great fundamentals and good demand from a broad base of industries. So no, it hasn't really been age-specific. Clearly, there's a lot of demand for new product in a number of markets, including where we're building, as Jojo described.

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

I know you don't forecast dispositions, so at least it's not included in guidance. But can you clarify or estimate how many assets you're probably going to put on the market for sale this year? Or what you have on the market now?

Well, let me say this, we guided to $100 million to $150 million of sales. It's a bit of a typical quarter, we don't normally closer such a high percentage of our sales in the first quarter. It just happened to -- out that way. And we feel good about being in that range at year end. I'm not sure I can really add anything to that, Eric.

Okay. And then Scott, the First Park 94 lease projections, is that based on ongoing negotiations? Or is that just a budget estimate?

We have people looking at this space, Eric. Obviously, nothing signed at this point in time. So I would say it's probably in between of a forecast and a signed lease. But again, we have that forecasted at the end of the second quarter.

We don't have anything signed at this point in time.

Okay. One more final question, there's going to be a couple of larger portfolios, either they're going to market, they're on the market for sale. Can you talk about, perhaps, your appetite for growing your portfolio in a large transaction? And what kind of primers would need to be set for that to occur?

So we like the strategy that we have in growing in our core markets. We will certainly look at anything that comes to market but it has to fit in to that strategy. So our interest will depend heavily on the makeup of any portfolio that might come to market and how it contributes to our ability to grow in the target markets that want to grow in.

(Operator Instructions) There are no further questions at this time. Back to you, Peter Baccile.

Thank you, operator, and thank you all for participating on our call today. Please feel free to reach out to Scott, Art or me with any follow-up questions. And we look forward to seeing many of you at NAREIT in early June.

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