First Industrial Realty Trust, Inc. (FR) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn it over to Art Harmon, Senior Director of Investor Relations. Please go ahead.

Thanks Steve. Hello everyone and welcome to our call. Before we discuss our second quarter 2012 results 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, 2011, filed with the SEC and subsequent 1934 Act reports. Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report available at firstindustrial.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, July 26, 2012. Our call will begin with remarks by Bruce Duncan, our President and CEO and our CFO Scott Musil, after which we will open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. So let me turn the call over to Bruce.

Thanks Art and thank you to everyone for joining us today. As you saw in our press release, we had a productive quarter on many fronts. I’ll begin my comments by talking about an important new lease and then discuss the new developments we have launched in the third quarter. We know that many of you have had your eye on our 692,000 square foot First Inland Logistic Center development in the Inland Empire. Rest assured, our management and regional agent teams have too. We’re delighted to announce that we recently signed a 15-year lease agreement with the facility with a leading specialty retailers. First Inland Logistics Center would serve as one of their critical distribution facilities on the West Coast; due to its proximity and access to the ports of LA and Long Beach. The lease also includes the excess truckyard which was the unique feature of our property that’s been our tenant need. The lease is expected to be reflected in our occupancy statistics in the fourth quarter. When we last spoke to you, we discussed how we believe additional developments could provide us with better investment opportunities and acquisitions and contribute to our goal of upgrading our portfolio. First Inland Logistics Center is a great example of the type of property in which we want to invest. To that end, in late June, we closed on the acquisition of three development ready land sites in our target markets and have launched those developments. Two of the sites are in Southern California and were acquired as a package. The first site is located in a constrained infill location in LA County, adjacent to the 710 Freeway, approximately 25 minutes directly north of the Ports of LA and Long Beach. There we are building First Bandini Logistics Center, a…

Thanks Bruce. First let me walk you through our results for the quarter. Funds from operations for the second quarter of 2012 were $0.15 per share compared to $0.24 per share in the second quarter of 2011. Second quarter results reflect a $0.07 per share loss in the retirement of debt due to our tender offers we discussed in our last call. Second quarter results also reflect a one-time charge of $0.06 per share related to our preliminary agreement with the IRS related to their audit of our 2009 tax year of our taxable re-subsidiary. I’ll discuss this in further detail shortly. Comparing 2Q 2012 to 2Q 2011 before one time items such as losses from early retirement of debt, restructuring costs, impairment of undepreciated real estate, and our tax agreement, funds from operations were $0.27 per share versus $0.21 per share in the year ago quarter. When you add together the loss from retirement of debt of $0.07 per share and the income tax charge of $0.06 per share, this sums to $0.13. The difference is due to rounding. EPS for the quarter was a loss of $0.16 per share versus a loss of $0.06 per share in the year ago quarter. Moving on to the portfolio, as Bruce discussed, our occupancy for in-service portfolio was 87.9%, up 50 basis points from 87.4% last quarter and a 180 basis points from 86.1% at June 30, 2011. In the second quarter, we commenced approximately 3.5 million square feet of leases. Of these, 0.5 million square feet were new, 2 million were renewals and 1 million were short-term. Tenant retention by square footage was 71% inline with our expected average retention for the year of 65% to 70% and consistent with our long-term track record. Same store NOI in a cash…

Thanks Scott. Before we open it up to questions, let me just say that we are excited about leasing our First Inland Logistic Centre. We are also excited about our new developments, both from a growth perspective and for their contributions to our mission to upgrade our portfolio. Leasing is at the heart of the value creation proposition for our new developments and our strategy to drive cash flow growth from our existing vacancies and enhance the value of our portfolio. We have work to do here and our team is up to the challenge. Lease up of our portfolio is also our path to reinstating the dividend. We will continue to evaluate our position with our Board as we execute our plan. And finally as I like to say to my FR colleagues, it's deeds, not words. We have a great team and platform. We have been executing on our plan and we look forward to continuing to show you our progress. We will now be happy to take your questions. As a courtesy to our other callers, we ask you to limit your questions to one plus a follow-up in order to give other participants a chance to get their questions answered. You're welcome to get back in the queue. And so now operator may we please open it up for questions.

(Operator Instructions). And your first question comes from the line of Mike Miller from JPMorgan. Your line is now open.

Scott, first a question on the same-store NOI guidance increase. How much did the increase of a 50 to a 100 basis points is attributable to kind of the one-time stuff that you mentioned that was in the same-store number for Q2 versus how much of it is a more of a recurring increase.

Yeah Mike as I mentioned on my comments, about 3.8% of the 5.3% change was due to occupancy-less free rent and rental bumps and 1.5% of the 5.3% change was due to restoration fees, real estate tax appeals and one-time items. So if you were to look at our first quarter same-store NOI guidance, we anticipated about 2.4% of same-store NOI growth, second, third and fourth quarter. If you look at our new same-store guidance this quarter and you do the averaging, we are expecting about 2.5% on average for the third and fourth quarter related to same-store growth, but that's at the midpoint.

Up marginally on more of a kind of core operating basis?

Up 21% compared to last.

21% got it, okay. And then I guess also on core growth thinking about the leasing spreads, low single-digit negative this quarter and last quarter, can you tell us what you are thinking about and what you are seeing for the second half of the year and then what were your expectations heading into 2012?

I would say our expectations for the year, we have a minus 5 to minus 10% spread and we have done better in both in the first and second quarter. So we are pleased with that, we are making progress there. I think some of it also is related to we have been doing more renewals, so that has an impact too. But we are encouraged, the market seems to be firming up and let’s see how we do the balance of the year, but we have kept our guidance as minus five to 10.

Your next question comes from the line of John Stewart with Green Street Advisors. Your line is now open.

Bruce, could you give us a bit of color on the terms of the lease you signed on the logistic center in the Inland of (inaudible).

I would say that let's just compare it to in terms of our pro forma, we achieved our pro forma rate on that.

Which was?

Well Jojo, in terms of rents in general in that market, why don’t you just talk about in general in terms of what we were thinking?

Yes rents in general is in the low 30 per square foot per month, low 30s for the building only and just like as Bruce had mentioned we had leased an 8.34 acre truck yard. So that rent is in addition to the low 30s.

And any free rent on the deal?

Yeah there is going to be free rent of about five months.

One more and I will jump out of the queue. Just Bruce, for those of us who don't have the benefit of being a fly on the room, a fly on the wall in the boardroom, how would you characterize your discussions with the board when the dividend policy comes up. Is it – we just need to make a little bit more progress on some of these large vacancies or let's continue to batten down the hatchet as things look uncertain and we will put up a dividend as long as we can.

I think people are encouraged. I think that if you look at where we are though, we picked up 50 basis points in occupancy in the second quarter, but that just brought us even to what we lost in the first quarter. So we are even to what we were at the end of 2011. So we need to make more progress. As you know we have got a goal to hit 92% occupancy by the end of 2013. So we got to make some progress on where we are right now, but I think we are encouraged. But we want to see more, the board would like to see more [leases].

(Operator Instructions). And your next question comes from the line of Daniel Donlan from Janney Capital Markets. Your line is now open.

Just real quick Bruce for Jojo, what's driving the difference in your development yields between different spots in California and then PA, so just your going in land cost?

Sure, Jojo you want to handle that?

We are a total return investor, so well the price is our estimation of rent growth, so we expect higher rent growth in California, we would develop at a lower return. We expect rent growth in Central Pennsylvania as well, but not as much as in California. In addition to that, when we look at our yields we want to look at exit values, so for lease part for example in the LA County market those properties have a lease in the five to 5.25 range; and thus in the Empire property it stays in a 5% to 6% range and then in the Central PA it should reflect a 7% range. We are long-term investors, but we look for total return at the end of the day, but we also want to jump post that to where the value is today. I hope that answers the question.

That more than answers the question. And then just what gives you confidence to build the spec ability and is this that do you expect as a percentage of online retailers potentially moving into California. I know Amazon has talked about it, but what gives you the confidence that you can build these and lease them up by the time you deliver?

Well, here, number one, we had success first in logistics, number two, if you look at these site, the Bandini site is a fantastic site right off of 710 and if you look at the competition you know first off it’s a very tight submarket in terms of the market that (inaudible) you know the occupancy is very high, the vacancy is very low and this is a new facility, state of the art and so we are very bullish on this piece of real estate, I mean it’s a great long term add to our portfolio and Chino too is an infill sort of left in the Empire Market and the markets tied there, so we like that. And in Central PA that market’s tied and there is not a lot of buildings over 500,000 square feet available and we've got a good track record there. We developed as I said in my comments over 9 million square feet here very successful in 2000. So we are very excited about that opportunity as well. But again, the proof is in the pudding; its our job to get these up built and leased as we did with First Inland Logistics.

Right; and just a quick follow-up to that, do you have a couple of tenants on mind, you think you can pick off of the buildings or are you still just that confident in the market?

We feel confident in the market.

Your next question is a follow-up from the line of John Stewart with Green Street Advisors. Your line is open.

Scott, could you give us a bit of color on the decision not to capitalize G&A on these new projects?

Sure John, and basically we looked at what the dollar amounts would have been and the dollar amounts for immaterial, so we decided not to capital G&A related to those projects. So it’s basically a decision on the cost for material.

Okay, and Bruce, I was hoping you could give us a bit of color on the -- or help us understand how you are feeling about the disposition target based on what you've got in the queue for the second half?

I feel we kept the guidance the same John at $75 million to $100 million. We like to hit what we say, so we know we have work to do. But our guidance $75 million to $100 million, we will let you know when we close that.

Okay, and then lastly I was just hoping you could share with us your thoughts on -- we've heard from several of your industrial peers this week kind of I guess mixed messages in terms of the momentum on the ground. I was wondering if you could share with us what you are seeing real time sort of last 30 to 60 days?

I think when we come into the summer and there is a little bit of slow down in activity, again we’ve seen this last year too but if you look overall, there are people out there looking for space and we’re working hard on it. I would say tenants taking longer to make decisions and commit and we had a couple of situations where we thought we’re at the finished line and they’ve come back and say we are going to take another look. We are going to delay it another two or three months and not finalize it. So I mean that was frustrating but that happens but the good news is when you look at it in these markets across the country, occupancy is going up. There is less space available and you are seeing activity but you know, it’s less than it was three months ago. But this is the summer and it slows down a little bit. So we’ll have to wait and see. But our mission is lease up the spaces and we made progress in the second quarter. We want to make profits this coming quarter.

Your next question comes from the line of Ki Bin Kim from Macquarie. Your line is now open.

If we go back to the development side, what are your longer-term plans for financing those projects and given that interest rates are low, at least temporarily would you be willing to maybe let your (inaudible) right up a little further instead of share equity?

Did you [tap] ATM in the third quarter?

We have not tapped the ATM in the third quarter.

Okay. And just last question when you look across your land bank I know the new deals you bought land but how much of the land bank you have currently is close to the enviable for may be involvement?

We have got a number of great sites. Joe, do you want to just talk about those ones in Pennsylvania and the other?

Sure, what Bruce mentioned is our site which we are positioned to build. So we are waiting for the right time, we want to make sure just like when we identify developments and Bruce announced here that, that we'll wait for the time in the market where demand is exceeding supply and that’s too large [DCs] in the market.

Totaling about 600,000 square feet.

Totaling about 600,000 square feet and then again in a number of sites that we have the demand does not exceed supply and there is not an acute shortage so we will wait for the right time.

We -- when the time is right we will put it in the development but right now in terms of --- the out of town site we know there is something about that will be available for (inaudible) tenants were.

(Operator Instructions) And your next question is a follow-up from the line of Daniel Donlan with Janney Capital Markets. Your line is open.

Just real quick going back to the development, I'm sorry if I missed it. Did you guys provide a first-year yield, GAAP yield on that project?

On which one?

Sorry, First Inland.

First Inland, we did not provide it. If you look at our written down basis, I think it's about 8.1 and if you look at our non-written down basis, our total cost, it was about 6.6.

And then you had mentioned some talk about short-term leases. I think you said 200 basis points. What needs to happen to get those to be a long-term tenants and how much of that is just your typical short-term, you know tenant occupancy, your 3PL stuff like that?

Well, a lot of it is a typical 3PL occupancy in terms of people doing that and sometimes though they get more comfortable at times where actually they want to sign a longer-term lease with you. So it's a lot of that, but you know again these are relationships you had where a lot of them goes up and down over time.

Right well I guess the question of how many of these short-term leases that do you keep signing them or they have been in place for you know over well over a year?

You know the overall as far as the short-term, it's – our run rate, it's pretty typical you know as far as that, we are typically in the short term, but a 1 million, a 1.2 million square feet and then month to month another 900,000 square feet. So you know it's been historically right around there. You know while those turn into longer-term deals.

As you look out to the back half of the year and into 2013, what percentage of the leases that you have rolling do you think are subject to the high escalators that you guys have been able to achieve, call it 4%-5%-6% or even more than that, could you maybe give us a ballpark number there.

Yeah. What I can give you is in 2012 all the leases that we have signed there for that population, the annualized rent [there] is about 3.6%. So again compared to our long-term historical average of 2.5% to 3%, we are still higher than that historical average. So that's probably pretty difficult going forward.

Okay, in terms of the expiring leases or excuse me leases that are renewing or just leases that are currently in the pipeline, how many of those are subject to the higher escalators?

Historically, they have been about 65% leases of that and had the box built into them.

And there are no further questions at this time. I will turn the call back over to Bruce Duncan.

Great, thank you operator and we thank you all for participating on the call today and please feel free to call us if you have any questions. Thanks again.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.