First Industrial Realty Trust - Earnings Call - Q4 2016
February 23, 2017
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the First Industrial Fourth Quarter Results Conference Call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following today's prepared remarks. It is now my pleasure to turn the call over to Art Harman, Vice President of Investor Relations to begin. Please go ahead, sir.
Speaker 1
Thanks, Maria. Hello, everyone, and welcome to our call. Before we discuss our fourth quarter and full year twenty sixteen results, 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, Thursday, February 2337.
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 ks 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 Bacilli, our President and CEO and 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 Walters, Senior Vice President of Capital Markets and Asset Management. Let me turn the call over to Peter.
Speaker 2
Thanks, Art, and thank you to everyone for joining us today. 2016 was another excellent year for First Industrial. We continue to execute our mission of driving cash flow growth, creating long term value and taking care of our customers. Our talented team delivered strong results pushing our year end portfolio occupancy to 96%, achieving growth in cash rents on new and renewal leases of 6.6% and producing an increase in same store NOI of 6.1% on a cash basis. Our platform also delivered and placed in service 3,300,000 square feet of state of the art developments totaling $210,000,000 at an occupancy rate of 98%.
The weighted average first year GAAP yield on those developments is 7.4%, representing strong value creation based on the healthy spread we achieved compared to prevailing market cap rates for similar buildings. As a reminder, when we say GAAP yield, that's our first year cash NOI divided by our GAAP investment basis. During '16, we also acquired $57,000,000 of high quality buildings and $54,000,000 of land. The vast majority of that land was put into production via development. Lastly, we sold $170,000,000 of assets as part of our ongoing portfolio management efforts.
So thanks to all of my teammates for a job well done in 2016. I know you share my enthusiasm for getting that job done again in 2017, and we're certainly off to a great start. This week marked our return to the unsecured debt market as we agreed to terms on a $200,000,000 private placement of unsecured notes comprised of $125,000,000 with a ten year term and $75,000,000 with a twelve year term. Scott will discuss this in more detail in his remarks. Because of our achievements in 2016 and our expectations for continuing cash flow growth in 2017 as well as our strong balance sheet position, the Board of Directors authorized an increase in our dividend.
Per our press release, our first quarter dividend will be $0.21 per share, representing an increase of 10.5%. With respect to our markets, strong fundamentals continue. We see healthy leasing interest from a variety of users, which puts us in a position to drive rent growth. We're also seeing more supply. But contrary to many prognostications, demand has continued to exceed supply.
While we will continue to take advantage of the current environment, we're also operating under the assumption that we're closer to equilibrium than not. Against this backdrop, our focus on leasing, cost management, customer service and making disciplined investments remains paramount. Our development program is central to our efforts to serve more tenant demand, while contributing to our long term cash flow growth, value creation and portfolio enhancement. Developments will be a primary source of new investments as we continue to replenish our pipeline with targeted new sites. We are doing so in a disciplined fashion, applying bottom up fundamental analysis and risk mitigation before we put shovels in the ground.
And of course, we continue to operate under our self imposed $325,000,000 speculative cap. As of today, we have approximately $110,000,000 of capacity available for additional spec development or acquisitions with lease up opportunities. A great example of how we create value through new developments is our first Florence Logistics Center, our recently completed 577,000 square foot distribution facility in New Jersey. As we've done throughout the cycle, this investment was a case of our team identifying and acquiring land at an underserved location, adding value by securing entitlements, putting it into production and getting it leased at completion on a long term basis. As you know, we typically allow one year for lease up downtime from completion in our pro form a.
So we're very pleased to have this building leased upon delivery. At the end of the fourth quarter, we had four additional projects under construction totaling 2,400,000 square feet with a total estimated investment of $167,000,000 They include the Ranch By First Industrial, our 936,000 square foot six building park in the Chino submarket of the Inland Empire West, along with projects in the Inland Empire East, Chicago, and Phoenix. These are all spec projects, and our targeted GAAP yield is 6.9%. I refer you to Page 20 of our supplemental for details on our developments. Acquisitions remain tough given strong capital flows and tight pricing, but our team continues to seek profitable opportunities.
On our October call, we told you about the 63,000 square foot building in the Doral submarket of Miami near the airport. Recall that we paid $8,400,000 for this building and our GAAP yield is 7.4%. Since then, we also added 100,000 square foot building in Indianapolis for $4,100,000 with an in place yield of 7.9%. This building is in a park where we own several assets, so it was an attractive bolt on acquisition for us. In addition to investing in new developments and acquisitions, we continue to manage the portfolio through the sale of assets with lower cash flow growth.
In the fourth quarter, we sold 13 buildings totaling 1,300,000 square feet for $30,900,000 These sales were at a weighted average in place cap rate of 5.5% and a stabilized cap rate of 7.9%. As I noted earlier, for all of 2016, we sold $170,000,000 worth of properties. For 2017, our goal for sales is 150,000,000 to $200,000,000 as we continue to refine our portfolio. So we are enthusiastic about all aspects of our business. We have a great team and strong markets to propel us forward.
It's our job to continue to capitalize on the opportunities within our portfolio and our markets. With that, let me turn it over to Scott to walk you through some more details on the quarter and our 2017 guidance. Scott?
Speaker 3
Thanks, Peter. Let me start with the overall results for the quarter. EPS for the quarter was $0.20 versus $0.39 one year ago. Funds from operations were $0.38 per fully diluted share compared to $0.37 per share in 4Q twenty fifteen. Funds from operations before one time items, namely our acquisition costs as well as our gain on sale of non depreciable real estate in 4Q twenty fifteen were $0.38 in 4Q twenty sixteen versus $0.34 in 4Q twenty fifteen.
For the full year, EPS was $1.05 compared to $0.66 in 2015. Funds from operations for the full year 2016 were $1.45 per fully diluted share compared to $1.27 in 2015. Funds from operations before acquisition costs and NAREIT compliant gains in the hedge loss in 2015 were $1.45 per fully diluted share in 2016 versus $1.34 in 2015. As Peter noted, we finished the year with occupancy at 96%, up 60 basis points from the third quarter and down 10 basis points year over year. Compared to the third quarter, sales helped occupancy by 100 basis points and leasing helped by 30 basis points, which was partially offset by the 70 basis point impact of acquisitions placed in service.
Regarding leasing volume in the fourth quarter, we commenced approximately 3,600,000 square feet of long term leases. Of these, 578,000 square feet were new, 1,700,000 were renewals and 1,400,000 were developments. Tenant retention by square footage was 80.5%. Fourth quarter same store NOI growth on a cash basis, excluding termination fees, was 3.2%, primarily reflecting in place rental rate bumps, a decrease in free rent and rental rate growth on leasing. This was slightly offset by lower landlord real estate tax refunds in 4Q twenty sixteen versus 4Q twenty fifteen, which represents 70 basis points of a decrease to same store.
Lease termination fees approximated $200,000 in the quarter and cash same store NOI growth including termination fees was 3.1%. For the fourth quarter, cash rental rates were up 7% overall with renewals up 8.3% and new leasing at 3.9%. On a GAAP basis, overall rental rates were up 17.8% with renewals increasing 19.1% and new leasing up 14.4%. As Peter mentioned, on the capital side, we were pleased to return to the unsecured debt markets this week and enjoyed great support in the market. On Tuesday, we entered into a note and guarantee agreement to issue $200,000,000 of fixed rate senior unsecured notes in a private placement offering.
These notes are comprised of two tranches: $125,000,000 with a ten year term and $75,000,000 with a twelve year term. We anticipate closing and funding on or about April 20. We pay interest semiannually and the weighted average interest rate of the notes is 4.34%. We will use the proceeds to initially pay down our line of credit and reborrow later in 2017 to pay off our two unsecured debt maturities that total $157,000,000 at a weighted average interest rate of 6.5%. In addition, in the first quarter, we are prepaying $35,000,000 of secured debt that has an interest rate of 5.55%.
We will incur a prepayment penalty based on a fixed percentage, but we feel this is a good use of a portion of the proceeds from the note offering as we continue to lower the amount of our secured indebtedness. Moving on to our balance sheet metrics. At the end of 4Q, our net debt plus preferred stock to EBITDA is 5.5x, adjusting EBITDA by normalizing G and A and excluding acquisition costs and an easement fee. Debt was also adjusted by adding back loan fees. At December 31, the weighted average maturity of our unsecured notes, term loans and secured financings was four years with a weighted average interest rate of 4.96%.
These figures exclude our credit facility. Our credit line balance today is $240,000,000 and our cash position is approximately $26,000,000 Now reviewing our initial 2017 guidance for our press release last evening. Our NAREIT FFO guidance is $1.46 to $1.56 per share. Before the loss related to the early prepayment of secured debt I just discussed, our FFO guidance range is $1.47 to $1.57 per share. The key assumptions for guidance are as follows: average in service occupancy of 95.5% to 96.5% based on quarter end results.
As in recent years, we expect an occupancy dip in the first quarter of approximately 50 basis points. Cash same store NOI growth for the year of 2.75% to 4.75%. Our
Speaker 2
G
Speaker 3
and A guidance range is $26,000,000 to $27,000,000 Please note that the first quarter G and A will be higher than the implied quarterly run rate due to early vesting of incentive compensation for our former CEO. Note that guidance includes the anticipated 2017 costs related to our developments under construction at December 31. In total, for the full year 2017, we expect to capitalize about $03 per share of interest related to these developments. Our guidance does not reflect the impact of any future sales nor any acquisitions or developments other than those previously discussed nor the impact of any future debt issuances, debt repurchases or repayments other than those previously discussed. 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.
Speaker 2
Thank you, Scott. 2016 saw the first Industrial team build upon a track record of using the platform to drive value and deliver cash flow growth for our shareholders. The fundamental backdrop and long term secular trends are favorable in our industry. And as I mentioned, it's our job to capitalize on them, serve our customers well and grow our business profitably. I know my teammates share my enthusiasm for building upon that track record in 2017 and beyond.
Thank you. And now we'll open it up for your questions. As a courtesy to our other callers, we ask that 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're always welcome to get back in the queue. Operator, please open it up for questions.
Speaker 0
Thank you. Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets.
Speaker 4
Hey, guys. I
Speaker 2
was
Speaker 4
just curious, comments there on supply. I know you said you still think we're not yet at equilibrium, but just curious if there's any markets where you're getting increasingly cautious or where you guys are maybe taking a closer look during underwriting committee?
Speaker 5
Sure, Craig. Hi, it's Jojo. Demand continues to absorb the supply in the marketplace. So far, we've been focusing on the markets that we feel are somewhat underserved still like our projects under construction, is focused on Chicago, Phoenix and SoCal, two thirds of our acreage are SoCal. At this point, I would say you do not expect us to develop anything in Houston right now.
The demand is less supply is less, but demand is also less. So we don't see a healthy balance there. But so far overall, we still see demand exceeding supply.
Speaker 4
All right, great. And then just on occupancy, you guys are basically assuming flat for the year here. Some of your peers are pushing 97%. Just curious, do you think the portfolio you guys have in place today could accommodate further occupancy increases? Or do you feel like you're at frictional?
And then just also just Scott, what are you guys assuming for same store occupancy?
Speaker 2
So it's Peter. I'll take a quick shot at the first part of that question. Our guidance for year end quarterly average is 95.5% to 96.5%. We do think there's some upside, perhaps to 97%, but we would also feel like 97% is pretty full occupancy. Scott, I
Speaker 5
don't know if you have any same store?
Speaker 3
Yes. Same store occupancy growth, Craig, we're assuming that it's pretty flat between 2017 and 2016.
Speaker 4
Great. Thank you.
Speaker 0
Our next question comes from the line of Ki Bin Kim of SunTrust.
Speaker 6
Thanks. Peter, just a broader question. Could you share with us any views that you have in terms of how you want to run FR in the portfolio? Any kind of incremental changes in terms of market concentration, mix, asset quality, things like that?
Speaker 2
Sure. I have been here now for about five months. And in that timeframe, I've had the opportunity to go around and see most of our assets. I've met with all of our teams across the country. We just had a very successful strategy session in January.
And I think, Ki Bin, that we're really, really well positioned to continue to take advantage of the opportunities in our markets. I would have to say that our priorities or my priorities as I look across our business are to achieve smart and sustainable cash flow growth, long term value creation, maintaining a fortress balance sheet, and providing growth opportunities for our people. I think if we do these things really well, we're going to have really happy people. If we have happy people, we'll have happy tenants. And if our tenants are happy, our shareholders will be happy.
So I don't see us making any big changes in terms of markets. There's plenty of opportunities in the markets that we're in. We are well positioned to take advantage of opportunities should they arise in markets that we're not in. But I think we're in a good spot right now.
Speaker 6
And what's your personal philosophy on the cost and use of equity?
Speaker 2
Well, we're going to look at a lot of different factors on that. But certainly, as I mentioned a second ago, keeping a fortress balance sheet is important to us. So you're going to see us keep a capital structure that's similar to the one we have. And as we grow and it's necessary to issue equity, we'll issue equity.
Speaker 6
Okay. And maybe just one last quick one for Scott. What is the lease pressure assuming in your guidance for 2017?
Speaker 3
We are assuming 3.5% to 6.5% overall. That's cash basis, Ki Bin, new and renewal.
Speaker 6
Okay. Thank you.
Speaker 0
Our next question comes from the line of John Guinee of Stifel.
Speaker 7
Great. Thank you very much. First, great fourth quarter, great value creation as all your development delivered. But if I look at run to Page 20 and then also Page 23, which is land, can you walk through exactly what's going on, on your four development deals? For example, the Ranch by First Industrial, a name that will probably never be used by anybody.
Industrial parks are supposed to have one syllable names, one word
Speaker 3
standing out
Speaker 2
in that.
Speaker 5
Joe is a little bit more creative, John.
Speaker 2
Innovation, innovative.
Speaker 7
For example, that's nine and thirty six thousand square feet, six buildings. Are you building all six at once? Or is this really one at a time?
Speaker 5
Yes, John. We're building all six buildings at once and it's various size ranges from anywhere from 50,000 feet to 300,000 square feet. And the reason is that there's a severe lack of supply for high quality buildings across that side. In fact, if you were to go to the market right now, the China submarket, and if you were a customer tenant and say, hey, I want a high quality class a building anywhere from fifty, seventy, 90,000, 200,000 square feet or 300,000 square feet, the answer for you is zero. It's done.
So therefore, we're very excited about this project. You know?
Speaker 7
Okay. And anything else to comment on the other three developments?
Speaker 5
Sure. Sure. And so just to finish off the Ranch, we expect none of these developments are completed. We expect to finish the Ranch by the end of this year. In terms of our development in Phoenix, we do have activity in the building, but that's that's scheduled to be completed by the end of this first quarter.
So things are obviously with all these developments, we have a budget at a one year downtime. And everything is at budget at the quality and on time in terms of our schedule. In terms of First Sycamore 215, that's in Ilan Empire East right off the 215 corridor. It's between two full interchanges. We're very, very excited about that project.
That is scheduled to be completed Q2 of this year. And on First Park 94, that's Building B. That's a mirror image of the building that we built in that park that we successfully leased at completion as well long term and that is also scheduled to be completed Q2. All in all, this would be we're projecting about a 6.9% GAAP yield. And as you know, over roughly two thirds of it of the developments are in California where the exit values are in the four to low fours.
Speaker 6
So we expect a
Speaker 5
lot of value creation there, John.
Speaker 7
Great. Okay. And then second question probably for Scott. You have $0.38 in the fourth quarter. The midpoint of your guidance is $1.52 which is basically $0.38 a quarter on average.
I understand the first quarter will be low. Surprised if not a little bit more, have you included any development lease up in the in your assumptions? And what's holding back FFO for 2017?
Speaker 3
Well, John, first thing is in 4Q twenty sixteen, we also had included in there an easement fee, which was about $01 a share that was included in fourth quarter. So that might change your math a little bit. The four developments under construction that Jojo mentioned since they're all 2017 completions, we give ourselves a year, which pushes us to lease up in 2018. So there's nothing baked in our 2017 guidance relating to leasing to those four developments under construction.
Speaker 7
Great. And where do you run through your $01 of easement fee?
Speaker 3
It's running through NOI.
Speaker 7
Got you. Thank you. Thanks.
Speaker 3
Tenant recoveries and other income, I think, is a specific line item.
Speaker 7
Great. Thank you. Good job.
Speaker 0
Our next question comes from the line of Eric Frankel of Green Street.
Speaker 8
Thank you. It looks like you guys have done some good development leasing during the quarter. Could you discuss the nature of that leasing activity?
Speaker 5
I know you didn't disclose the tenant in
Speaker 8
New Jersey, but some color around the deal would be helpful. It also looks like the yield you guys earned on that deal is a little bit better than pro form a.
Speaker 9
Sure, Eric. Good morning. It's Peter Schultz. As Peter mentioned in the script, we are very pleased with our team's execution in New Jersey, acquiring building and leasing the entire building at completion on a long term basis. As most of the development leasing is that we've done, it's a supply chain story there.
The reason it's listed as undisclosed in the sup is that we're subject to a confidentiality agreement at this time with the tenant. So I can't give you any specific details or the nature of the or name of the tenant today. What I can tell you is at least on a long term basis, our TIs were right in line with our budget, nothing extraordinary there. And we did better than our pro form a across the board.
Speaker 8
Okay. Thanks. I'll jump back in the queue for other questions. But Scott, can you maybe touch upon your thought process in your debt offering in terms of comparing how placing notes in the public market compared to the private placement?
Speaker 3
Sure, Eric. We looked at both public and private and obviously we picked the private market for a couple of reasons. One is when we talk to our bankers, we think the spread that we got on the private placement deal was 20 or 25 basis points inside of public market execution. So that was great. Our sizing was $200,000,000 so that worked with private placement.
And we also love the delay draw feature. We signed the agreement on Tuesday of this week, but we're closing on April 20, which gets us pretty near to our first maturity in 2017, which is mid May. So those are the reasons for the picking the private placement over the public.
Speaker 8
Okay, thanks. I'll jump back in the queue.
Speaker 0
Our next question comes from the line of Michael Mueller of JPMorgan.
Speaker 2
Yes, hi. I'm just wondering for the dispositions, the 150 to 200 this year, can you give us any color on what you're expecting for cap rates? I'm not sure if you're going to if you have land embedded in there, if you're thinking about selling vacancy or if it's all leased assets?
Speaker 5
Basically, it will be similar to what you've seen in 2016. It will be those low growth cash flow growth assets, which we're in, we expect above average CapEx. It'll be that's part of our plan to asset manage it on a property by property basis. Give you Michael, we'll give you the stats when we at the close of every quarter of our sale.
Speaker 2
Okay. That was it. Thank you.
Speaker 0
At this time, I'm showing no further questions. I would like to turn the floor back over to Peter Bacilli for any additional or closing remarks.
Speaker 1
We just hold on a second. If Eric or you're going to get back in the queue, we're happy to take other questions.
Speaker 0
We do have a follow-up question from the line of Eric Frankel of Green Street.
Speaker 8
Thank you. Thank you. A quick follow-up. It does look like your land bank's a little bit depleted. Can you talk about the land acquisition environment?
It seems like all your additional development starts are mostly going come from new land purchases as they
Speaker 5
have in 2015. So maybe you
Speaker 8
can talk about pricing and entitlement process for land that you're trying to acquire that would be helpful. Thank you.
Speaker 5
Okay. Yes, Eric, basically in terms of our land bank right now, if you look at book value, it's slightly under 100,000,000 to roughly about 2% of our total enterprise value. In terms of additional pursuits, we're continuously looking for additional land sites where we think we can develop wherein demand continues to exceed supply. And in terms of pricing, land prices have increased and the reason is that rents have grown. And despite the fact that construction costs have grown anywhere from 3% to 5%, rents have grown much more than the 3% to 5% in a number of markets and therefore land prices have grown as well.
So but in terms of underwriting, we're doing exactly the same as we've done before. So we look at the market, we look at the current market deals are being done, we put in a one year downtime and we're both in place stabilized and total return investors. And so far in our current construction is 6.9% GAAP yield and we'll push for yields where we're above our cost of capital.
Speaker 8
Okay. That's it for me. Thank you.
Speaker 5
We
Speaker 0
have a follow-up question from the line of Ki Bin Kim of SunTrust.
Speaker 6
Okay. Thanks. Just a quick one here. Any guidance on the CapEx run rate for this year?
Speaker 3
Sure Ki Bin, it's Scott. We were about $42,000,000 in CapEx in 2016. We think we're going to be a couple of million dollars less than that in 2017. So that's helping grow cash flow in 2017 compared to 2016.
Speaker 6
And is $40,000,000 I know it's dependent on leasing, but is that generally have we seen the troughing out of the CapEx run rate, do you think?
Speaker 1
Or is there
Speaker 6
more to drop?
Speaker 3
Ki Bin, a lot of it does relate to leasing. We'd hope to see some further decrease in that number in the future because, again, we're continuing to reinvest in new properties that are new developments or acquisitions that are pretty new that we're not going to have a lot of CapEx on. So we'd hope to see a little bit of decrease from that $40,000,000 number.
Speaker 6
Okay. And going back to that cash lease spread guidance, in 2016, the cash rent growth on average was about 6.6%. So with that said, is the guidance for slightly moderating cash lease spreads just more being conservative? Or is it based on the leasing pipeline that you see so far into the year?
Speaker 10
Ki Bin, this is Chris. If you break down that 3.5% to 6.5% that Scott gave, you break that down between new and renewal. Renewal, that spread is probably about 5% to 7% in that range. The new is about 1.5% to 5.5%. And clearly on the new deals, there's probably a lot more volatility in there.
So take it as it is. That new could actually be a little bit higher. But definitely there's more volatility in the new. But overall, we're pretty much the same as far as the spreads on a cash basis from 2016 to 2017.
Speaker 6
Okay. Thank you.
Speaker 0
I would now like to turn the floor back over to Peter Bacilli for any additional or closing remarks.
Speaker 2
Thank you, operator, and thank you all for participating on our call today. As always, please feel free to reach out to Scott, Mark or me with any follow-up questions. We look forward to seeing many of you in sunny Florida the week of March 6. Thanks again.
Speaker 0
Thank you, ladies and gentlemen. This does conclude today's fourth quarter results. You may now disconnect.