First Industrial Realty Trust, Inc. (FR) Q4 2012 Earnings Report, Transcript and Summary

We are continuing to execute on our strategy to drive shareholder value through leasing. With our sites set squarely on our 92% occupancy goal for year-end 2013, as well as through our efforts to grow and enhance our portfolio. As you saw in our press release, on the strength of our fourth quarter performance, as well as our outlook for 2013, we recommenced our common dividend. I will discuss the dividend in more detail shortly, but first, let me review our operating results. In the fourth quarter, we gained 140 basis points of occupancy, with all the gain coming from leasing, and no impact from sales, to finish the year at 89.9%. Contributions came from many markets, and across a range of tenants. For the year, we grew occupancy 200 basis points, with approximately 50 basis points due to the impact of sales. These year-over-year occupancy gains were reflexed in our same-store growth of 7% in the fourth quarter, excluding termination fees. Including termination fees, same-store was up by more than 12%, as we successfully recovered back rent from a prior tenant. In the third quarter, recall that we launched three new developments, comprised of 1.5 million square feet, with a total expected investment of $108 million. Including the $7.7 million lease, 156,000 square foot expansion in Minneapolis, that we brought online in the fourth quarter, our total starts for the year were $115 million. We are pleased to report that we successfully leased First Chino Logistics Center, our 300,000 square foot development in Southern California, prior to completion. We signed a long-term lease with a specialty food retailer and supplier, who will take occupancy by the middle of the second quarter. Approximately one year ahead of Pro Forma, and at terms that were also ahead of Pro Forma. Remember…

Thanks, Bruce. First let me walk you through our results for the quarter. Funds from operations were $0.18 per-share, compared to $0.23 per-share in 4Q 2011. Comparing 4Q 2012 to 4Q 2011, before onetime items such as losses from the early retirement of debt, the loss from the partial redemption of our Series J preferred stock, and impairment of un-depreciated real estate, funds from operations were $0.23 per-share, versus $0.23 per-share in the year ago quarter. EPS for the quarter was a loss of $0.09 versus a loss of $0.05 in the year ago quarter. For the year, FFO per-share was $0.88 versus $0.89 for 2011. Excluding onetime items, such as NAREIT-compliant gains, losses from the early retirement of debt, the loss from the partial redemption of preferred stock, the charge from the IRS settlement, impairment of un-depreciated real estate and restructuring cost, FFO per-share was $1.02 versus $0.88 in 2011. Moving on to the portfolio, as Bruce discussed, our occupancy for our in-service portfolio was 89.9%, up 140 basis points from 88.5% last quarter, and 200 basis points from 87.9% at year-end 2011. In the fourth quarter, we commenced approximately 5.4 million square feet of leases. Of these, 2.3 billion square feet were new, 1.9 million were renewals, and 1.2 million were short-term. Tenant retention by square footage was 77% for the quarter, and our average for the year was 69%. For 2013, we expect retention to be a little higher on average, helped by improving supply demand fundamentals. For the quarter, same-store NOI on a cash basis, excluding termination fees, was positive 7%. 5.6% of this gain was driven by occupancy growth, the impact of rent bumps, lease rollovers, and less free rent. The balance of the increase was primarily due to lower real estate taxes, resulting from…

Thanks, Scott. Before we open it up to questions, let me just say that 2012 was a good year with a strong finish. And our team is focused on building upon our accomplishments. Our lease at our First Chino Logistics Center development is a great step in that direction. We can drive incremental cash flow through leasing, by meeting our 92% year-end occupancy goal that we set at Investor Day in November 2011. Because of our progress towards that goal, and our outlook, we brought back the common dividend. At our guidance mid-point, we can deliver approximately 5% FFO growth, excluding one-time items. We are methodically selling our non-strategic assets, and using our platform to find new growth opportunities through development and acquisitions. And as I have said to our team, we look for 2013 to be more of the same, with an emphasis on more. By doing so, we can continue to enhance value for our shareholders. We will now be happy to take 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 other participants a chance to get their questions answered. You are of course welcomed to get back into the queue. So now operator, may we please open it up for questions.

(Operator instructions). Your first question comes from the line of Craig Mailman with KeyBanc Capital. Your line is now open. Craig Mailman – KeyBanc Capital Markets: Good afternoon, guys. Scott, I just want to clarify, so the occupancy assumption and guidance assumes no impact from potential sales?

That’s correct. Craig Mailman – KeyBanc Capital Markets: Okay, and then I’m just trying to reconcile kind of the 1 to 3% same-store with you’re going to have a couple hundred basis points of occupancy lift. I know you said that, you know, renewals are going to be positive or flat to positive but you’re going to have a little bit of drag from new leasing. I’m just trying to get a sense of how conservative you guys are being with the same store outlook versus maybe what you guys are actually underwriting on a blended basis for rent spreads?

Craig, why don’t we do this. Why don’t we have Chris talk about 2012 and what our experience was and the breakdown.

Sure. Some things we had going on in 2012, we had a very low historical number for our bad debt in 2012. So 2013, you know, we’re assuming more return to our historical number so that’s – bad debt is going up in the assumptions. Also, we had some significant income from some restoration fees and also some real estate tax refunds, which you know, right now we don’t expect to have at the same consumer levels in 2013. So when you factor in those positive impacts from 2012, the overall number 2013 is going on about 300 basis points so then you get closer to our guidance, our midpoint of 2%. Craig Mailman – KeyBanc Capital Markets: What’s kind of baked in there through for a blended rents spread?

Overall, the rent spread is slightly negative so we’re about, you know, dropping about 3% on the blended rent spread for new and renewal deals. Craig Mailman – KeyBanc Capital Markets: Great. Thank you.

Again, that’s on a cash-on-cash basis.

Your next question comes from the line of John Guinee with Stifel Nicolaus. Your line is now open. John Guinee – Stifel Nicolaus: Okay, nice job guys. I can’t remember how many questions you gave me so I’ll ask one with a few pauses. First, of the 76 million of debt – of early repay, how much cash out the door above and beyond the repayment of the debt will you expect to incur? Second, the average dividend in the industrial, your peer group of Duke, Liberty, DCT, East Group is about 4% which would equate to around 60 or $0.65 a share, so why didn’t you kind of try to be within that peer group? And then the third question is what do you think roughly or economic occupancy was for the fourth quarter of ’12?

Okay, John, this is Scott Musil. I’ll take the first question. On the $72 million of repayments that we’ve got baked into our guidance, we expect to incur about $2 million of a loss from retirement of debt, that’s the $0.02 per share that we reference in our remarks.

And John, on the dividend question, again, we wanted to start out using a conservative payout ratio of 50 to 60% and to us we want to be able to retain some cash to be able to grow the business in terms of take care of some amortization as well as new investments so it gives us room to grow the dividend over time and as we grow cash flow, we hope to continue to grow the dividend. John Guinee – Stifel Nicolaus: And your economic occupancy for 4Q ’12, any idea what that was?

Yeah, John, I think what you’re asking is kind of the average occupancy if you’re looking at the average month-in occupancy it was 88.7% versus where we finished the quarter at 89.9%. John Guinee – Stifel Nicolaus: So 88 or 89% of tenant in place paying rent?

Correct, yes. John Guinee – Stifel Nicolaus: Okay, thank you. Great.

Your next question comes from the line of Dave Rodgers with Robert W. Baird. Your line is open. Dave Rodgers – Robert W. Baird: Hey, Bruce. I know the asset sale program has really been opportunistic and it sounds like it will continue to be that way. How close are you to the end of what I would call the cleanup phase in ready to enter the capital recycling phase in a more maybe aggressive way? And any thoughts about how much is left in that program?

Yes, if you look at , at sort of in our minds our non-strategic pool, we have about $180 million of assets that we want to dispose of so I would anticipate that would be done over the next couple of years. Dave Rodgers – Robert W. Baird: Okay, and I guess as a follow up to that, are you seeing any better pricing on what you’re going to market with now? Is that part of the market improving at all or you’re not really seeing that?

I would say, you know, we have to report on that as we go through the year but in general, there’s more dollars looking at property, so we’re encouraged by that, but again, it’s a one-off type of thing so we’ll report into each quarter on how we’re doing in terms of going after our targets.

Your next question comes from the line of John Stewart with Green Street Advisors. Your line is now open. John Stewart – Green Street Advisors: Thank you. Look, I think what you guys have done on the balance sheet front make a lot of sense and continues to do so. But my question is, you know, I’m a little curious that there’s no equity issuance baked into the guidance and Bruce, I’d love to get your thoughts on why it might not make sense to de-lever by issuing some equity?

John, we never put guidance – we never put guidance that we’re going to issue equity, but what we saw over time is that [inaudible] we do it as an arrow in our quiver. If you look at what we’ve been able to do in terms of bringing debt to EBITDA down to 6.8 times and debt [inaudible], we’re making good progress on that. We want to continue to de-lever over time. The best way we can do that is leasing up the portfolio but again, we have issued equity in the past and but we were judicious and mindful dilution. Dave Rodgers – Robert W. Baird: Okay. Bruce, I’m curious in terms of the – really the next act, both I guess specifically for First Industrial and then too, if you could comment on your plans beyond the end of your employment agreement in the next year.

I serve at the pleasure of the Board and you know, from my standpoint, we’ve had a – we’re in a good position here at First Industrial. We’re able to be an offensive in terms of our new developments. We’re very excited about those. You know, we’re having good success with that. We’ve got to continue to have good success. We’re going to continue to develop in our key target markets. We want to continue to grow this business. We do think there’s an opportunity to continue to de-lever because we have some high cost debt and we’ve been successful over the last two years of being able to take that out at fairly good attractive pricing. So again, it’s more the same, but I think in terms of the – where we’re going, the world’s getting better, we’ve got a good platform and we’re utilizing that platform. So I think it’s a pretty good time. Dave Rodgers – Robert W. Baird: How much longer do you expect to be doing this?

You know what, I would say I signed up for two additional years as an option to three more years after that, so we’ll just see how it goes and see how the Board feels about my performance. Dave Rodgers – Robert W. Baird: I like your chances. Thank you.

Your next question comes from the line of Michael Muller with JP Morgan. You line is now open. Michael Muller – JP Morgan: Yeah, hi. Two quick ones. First of all, Scott, on the debt – the mortgage maturities that you’re going to prepay, what’s the timing of those in 2013?

They’re spread out each quarter, like there’s some in the first, second, third and fourth quarter. There’s a little bit more in the fourth quarter than the previous three. Michael Muller – JP Morgan: Got it. Okay. And I just want to confirm, clarify something. When you were talking about the same store goal, or the goal of 92% occupancy by year end, you did say that that was more of a same store type metric so we should be comparing that to the 89.9 at year end so we’re thinking 89.9 going to 90 to give us the target, excluding any disposition or acquisition impact?

Yes. Michael Muller – JP Morgan: Okay. Thanks.

(Operator Instructions). Your next question comes from the line of Michael Salinsky with RBC Capital Markets. Your line is now open. Michael Salinsky – RBC Capital Markets: Thank you. This is a follow up to Dave’s question. The 180 million of non-core you talked about, how much are you actively marketing at this point? And then, you know, kind of as a second question, trying to fit with the one question rule, as you think about your land bank, how much of that – should we look for any land sales this year and how – if you’re marketing it to market today, how much appreciation do you think you’ve seen on that?

This is Bob. Mike, on the marketing question, you know, we’re constantly looking at various assets and putting them in the market, taking them out of the market. I would also remind you that a lot of our sales are very user focused and those tend to be not really marketed exercises per se. So I would say it’s hard to say at any given time how much is technically in the market or not.

The best thing we can do is when we close, we’ll let you know how we did with that. The second question was… Michael Salinsky – RBC Capital Markets: The land bank at this point.

The land market, I would not anticipate big sales of the land. We like our land position, you know there could be some one-off sales of not serious dollars, the dollar amount, but other – the $50 million we have, you know, we like what we have. We think it’s good value. We don’t really look at it and sort of say how much could we mark it up for because we’re anticipating utilizing that in terms of new developments. Michael Salinsky – RBC Capital Markets: Thank you.

Your next question comes from the line of Milton Dresner with Milton Dresner Investments. Your line is now open. Milton Dresner – Milton Dresner Investments: Yes, Milton Dresner. When do you think you’re going to start issuing dividends on the up-reach shares?

Milton, this is Scott Musil. It will be at the same timing that we’re going to do it on the common shares. So for the first quarter, the payment date is going to be April 15th. Milton Dresner – Milton Dresner Investments: Thank you.

Your next question comes from the line of Stewart (Henley), a shareholder. Your line is now open. Stewart (Henley) – Shareholder: Thank you. This question would probably be for Scott if you’re able to answer it. Could you provide an estimate of the 2013 tax care characteristics on the dividend assuming it remained at this level for the year and based on your guidance?

Stewart, we don’t give a specific amount of guidance on our taxable income but I’ll give you some general parameters when we look at our taxable income compared to our common dividends and our preferred dividends there’s a fair amount of cushion between the two. Stewart (Henley) – Shareholder: Thank you.

Your next question comes from the line of Dave Rodgers with Robert W. Baird. Your line is now open. Dave Rodgers – Robert W. Baird: Hey guys. I just wanted to follow up on the smaller spaces in the portfolio. I think we’ve asked it before, but just to get an update on the trend, how is activity in the smaller spaces, say under 50,000 square feet? Are you beginning to see more traction there or are we seeing the volume still at the high end of the spectrum? And I guess as a follow up to that, your spread that you talked about, are you seeing a big divergence in the spreads or lease rates for those spaces relative to the larger spaces?

Dave, let me ask Peter Schultz to comment on that.

Sure, Dave. We’re seeing pretty good activity in the smaller spaces, both new deals as well as expansions from existing spaces. So we continue to be happy with that. And certainly, as there’s a pickup in the recovery in the housing market, that may offer additional demand in those spaces. Dave Rodgers – Robert W. Baird: Okay, thank you.

(Operator Instructions). Your next question comes from the line of John Stewart, Green Street Advisors. Your line is now open. John Stewart – Green Street Advisors: Thank you. I was hoping you could give us just a quick update or status report on where we stand on the top ten vacancies that you outlined for us at the investor day?

Sure. Bob?

Yeah, John, the – at the end of the fourth quarter, that’s at about 130 basis points and as you’ll recall at the investor day it was 325 basis points. John Stewart – Green Street Advisors: Any specific transactions or progress to report?

You know, I think as Peter said, and I would echo his comments, we’re seeing, you know, good activity across all these – all of our top ten vacancies and continue to market them very actively. John Stewart – Green Street Advisors: Okay. And then just on the agreement with the IRS, I just noted that it’s still – the language characterizes it as preliminary. I just wanted to get a status report there.

Sure, John, this is Scott Musil. Just to refresh everyone’s memory, we made a written agreement with the Regional Office of the IRS on our audit settlement in the third quarter of last year. The last hurdle was for the Joint Committee of Taxation located in Washington D. C. to review our case. We’ve been informed by the IRS that our file has been sent to the Joint Committee. What our IRS agent has told us, the one that’s reviewing us said that within the next couple of months that review should be taken care of. So hopefully we will know some news in the next couple of months about the finally of that matter. John Stewart – Green Street Advisors: All right, thank you.

Your next question comes from the line of John Guinee with Stifel Nicolaus. Your line is now open. John Guinee – Stifel Nicolaus: Hi. Just a curiosity question I think for probably Scott. If I look at page 3, you’ve got construction in process of about 26 million and then if you look at page 35, which is your NAV page, you’ve got construction in process plus associated land of 72 million. Is the difference between the 72 and 26 all the land?

That’s correct. That’s the fair share of the difference. So if you look at the title on page 35, it’s CIP and Associated Land so that includes the land for those developments. The CIP line item on page 3, which is the balance sheet is all the costs other than the land. So that’s correct. John Guinee – Stifel Nicolaus: Got you. Okay. Thank you.

Your next question comes from the line of Craig Mailman with KeyBanc Capital. Your line is now open. Craig Mailman – KeyBanc Capital Markets: Bruce, could you maybe just give a little bit of color around the lease in Chino? I know you said it came in above pro forma on rents, just maybe give us a sense of length of the lease and kind of expected yield?

Craig, let me have Jojo take care of that because he did all the hard work and got it done.

It’s a specialty foods resale supply company, primary service area would be the West. In terms of yields and rents, last quarter we mentioned to you that we were going to project a 7.1% yield. I’m happy to report that we would exceed that yield on a Gap basis because we’ve outperformed the rent expectations. Now, I would not be able to give you the actual rate but I will mention to you that on average these sizes of buildings in Chino, California would rent in the 450 net range. And that would be roughly, for California, you would think about that on a monthly basis as roughly $0.38 a square foot net. Craig Mailman – KeyBanc Capital Markets: What does that translate into on a cash basis and how long is the lease, the initial term?

The lease is long-term and in terms of cash basis terms of yield, is that your question? Craig Mailman – KeyBanc Capital Markets: Yes.

Yes, cash basis to yield, it would be exceeding the 7.1% pro forma yield on a GAAP basis cash that we mentioned to you last quarter. Craig Mailman – KeyBanc Capital Markets: Okay. And then just for Bruce, I know you’re comfortable maybe ramping the development pipeline to 200 million. You guys are at 108 now. Where – what projects could you see taking off in the near term and do you think you need to go out and buy any pieces of land or are you kind of good with what you have right now?

First off, we’re less than 108 because the 108 included Chino and now that that’s leased you can take another 20 million off that. So we’re at about 88 if you will. So we’ve got about $120 million [inaudible] new development. In terms of land, we do, again, we’re working on entitlements in a couple sites in Pennsylvania, we’re close to getting those finalized. I don’t know if we’ll go spec on those. One we wouldn’t go spec on, it would be a build-to-suit. We’re having – we’ve got conversations going on with some other places that we have. Again, whether it’s our land or whether we’ll buy like we did with Chino and [Inaudible] , we went out and bought the land and started a development. So we’ll look at that as well. Again, we’re going to focus on our target markets and we’re excited about the product that we’re being able to deliver, the quality, the locations and being able to lease them up. You know, again, we’ll continue to execute and get these projects built on time, on budget and get them leased up. So far we’re having success and I continue to expect we will have success. We’ve got to prove it every day. Craig Mailman – KeyBanc Capital Markets: Great. Thanks, guys.

(Operator Instructions). Your next question comes from the line of Sam Shami with First Industrial. Your line if now open. Sam Shami – First Industrial: Yeah, hi. I have two questions. One is on the sales of your property, do you find that you’re selling to users that are occupying the buildings or to the out market because we find that everybody that we’ve been selling to in our market here has been buying to users of people that occupy the building and have their own lines of credit for financing.

We – this is Jojo. We sell properties to users and investors and just to give you a sense, in 2012 overall 2/3rds sold to users and going forward, you know, we’re about, like Bruce had mentioned, we’re about maximizing value when we look at our strategic properties to sell. What we’re trying to do is that we’re trying to make sure that we get the best value. So if we feel that it’s a user type buyer that will give us the maximized value, that’s where – that’s what we’re targeting. And if we continue to lease the space there too, we would target investors because as we all know, investors pay the maximum value for lease product.

There are no further questions at this time. I’ll turn the call back over to Mr. Duncan.

Great. Well, we appreciate your interest. If you have any questions, please follow up with Scott, Art or myself and we look forward to seeing some of you down at Fun in the Sun down at the Citibank Conference in a couple of weeks. Thank you.