Welcome to the First Industrial Fourth Quarter Results Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Art Harmon, Vice President of Investor Relations, to begin. Please go ahead, sir..

Thanks, Maria. Hello everyone and welcome to our call. Before we discuss our fourth quarter and full-year 2016 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 23, 2017. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements; and factors which could cause this, are described in our 10-K and other SEC filings.

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

Our call will begin with remarks by Peter Baccile, 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 Walter, Senior Vice President of Capital Markets and Asset Management. Let me turn the call over to Peter..

Thanks, Art. And thank you to everyone for joining us today. 2016 was another excellent year for First Industrial. We continued 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 gross and 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 3.3 million square feet of state-of-the-art developments totaling $210 million and 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 2016, we also acquired $57 million of high-quality buildings and $54 million of land. The vast majority of that land was put into production via development. Lastly, we sold $170 million of assets as part of our ongoing portfolio management efforts. So thanks to all 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 markets as we agreed to terms on a $200 million private placement of unsecured notes comprised of $125 million with a 10-year term and $75 million with a 12-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'll 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're 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 million speculative cap.

As of today, we have approximately $110 million of capacity available for additional spec development or acquisitions with lease up opportunities. A great example of how we create values 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 forma, 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 2.4 million square feet, with a total estimated investment of $167 million.

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 gap 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 $8.4 million for this building and our gap yield is 7.4%.

Since then we also added a 100,000 square foot building in Indianapolis for $4.1 million, 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 1.3 million square feet for $30.9 million. 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 million worth of properties. For 2017 our goal for sales is $150 million to $200 million as we continue to refine our portfolio. So we're 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?.

average end 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 G&A guidance range is $26 million to $27 million.

Please note that the first quarter G&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 $0.03 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..

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 a (inaudible) 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..

[Operator Instructions]. Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets..

I was 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 are maybe taking a closer look during the underwriting committee..

Craig, hello. It's Johannson. Demand continues to serve the supply in the marketplace. So far we've been focusing on the markets that we feel are still somewhat underserved still. Like our projects under construction which is focused on Chicago, Phoenix and So Cal. Two-thirds of our construction is in So Cal.

As of this point I would say 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..

Great. 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 ike you're at frictional? And then also just Scott, what are you guys assuming for same-store occupancy?.

It's Peter. I'll take a quick shot at the first part of that question. Guidance 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..

Same-store occupancy growth, Craig we're assuming that it's pretty flat between 2017 and 2016..

Our next question comes from the line of Ki Bin Kim of SunTrust..

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 and the portfolio, any kind of changes in terms of marked concentration, mix, asset quality, things like that?.

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. 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. 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're 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..

And what's your personal philosophy on the cost and use of equity?.

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. You'll see us keep a capital structure similar to the one we have. As we grow and as it's necessary to issue equity, we'll issue equity..

Okay. Maybe just one last quick one for Scott.

What is the lease pressure assuming in your guidance for 2017?.

We're assuming a 3.5% to 6.5% overall. That's cash basis Ki Bin, new and renewal..

Our next question comes from the line of John Guinee of Stifel..

First, great fourth quarter. Great value creation as all your development delivered. But if I look at -- run to page 20 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. (Laughter).

Next time we'll consult you..

Industrial parks are supposed to have one syllable names. (Laughter).

A little bit more creative, John. Innovation. Innovation..

For example, that's 936,000 square feet. Six buildings.

Are you building all six at once or is this really one at a time?.

Yes John, we're building all six buildings at once and it's various size ranges, anywhere from 50,000 square feet to 300,000 square feet and the reason is that there's a severe lack of supply for high quality buildings across that size range.

In fact if you were to go to the market, the Chino submarket, if you were a customer, tenant and say I want a high quality class A building anywhere from 50,000, 70,000, 90,000, 200,000 square feet or 300,000 square feet, the answer for you is zero. There's none. Therefore we're very excited about this project..

Anything else to comment on the other three developments?.

Sure. 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 not -- that's scheduled to be completed by the end of the first quarter so things are obviously with all these developments, we have a budget and 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 the Inland Empire East, right off the 215 corridor. It's between two full interchanges. We're very, very excited about that project. That's scheduled to be completed Q2 of this year.

And First Park 94, that's Building B, a mirror image of the building that we built in that park that will be successfully leased, completion as well long term. That's also scheduled to be completed Q2.

All in all, we're projecting about a 6.9% gap yield and as you know, over roughly 2/3 of it, the developments are in California where the exit values are in the 4s to low 4s. So we expect a lot of valuation there..

Great. 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 it's not a little bit more.

Have you included any development lease up in your assumptions and what's holding back FFO for 2017?.

John, first thing is in 4Q 2016 we also had include in there an easement fee which was about a penny a share that was included in the fourth quarter so that might change your math a little bit.

The four developments under construction that Johannson mentioned, since they're all 2017 completions, we give ourselves a year which pushes us to lease up in 2018. There's nothing baked in our 2017 guidance related to leasing to those four developments under construction..

Where do you run through your penny of easement fee?.

It's running through NOI..

Got you. Thank you..

Tenant recovery is another income I think is a specific line item..

Thank you. Good job..

[Operator Instructions]. Our next question comes from the line of Eric Frankel of Green Street..

Thank you, it looks like you have done some good development leasing during the quarter. Could you discuss the nature of that leasing activity? I know you didn't disclose the New Jersey but some color would be helpful. Also looks like the yield you earned are deals a little bit better than pro forma..

Sure Eric, good morning. It's Peter Schultz. As Peter mentioned in the script, we're 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 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 name of the tenant today. What I can tell you is it's leased on a long term basis. Our TIs were right in line with our budget.

Nothing extraordinary there and we did better than our pro forma across the board..

Okay. I'll jump back in the queue for other questions.

But Scott, can you 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?.

Sure, Eric. We looked at both public and private and obviously we picked a private market for a couple reasons. One is when we talk to our bankers, we think the spread 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 million. That worked with private placement.

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. Those are the reasons for picking the private placement over the public..

Our next question comes from the line of Michael Mueller of JPMorgan..

I was wondering for the distributions 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 land it in there if you're thinking about selling vacancy or if it's all leased assets..

Basically it will be similar to what you've seen in 2016. It will be those slow growth cash flow growth assets where we expect above average CapEx. That's part of our plan to asset manage it on a property by property basis. Michael, we'll give you the assess when we close every quarter of our sale..

We do have a followup question from the line of Eric Frankel of Green Street..

Thank you. Quick followup. It does look like your land bank is a little bit depleted. Can you talk about the land acquisition environment? It seems like all your additional development starts mostly come from new land purchases since 2015. Maybe you can talk about pricing and titling process for land that you're trying to acquire. That would be helpful.

Thank you..

Eric, I know basically in terms of our land bank right now if you look at book value, it's slightly under $100 million, roughly about 2% of our total enterprise value. In terms of additional pursuits, we continue to look for additional land sites where we think we can develop where the demand continues to exceed supply.

In terms of pricing, land prices have increased and the reason is that rents have grown. 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.

In terms of underwriting, we're doing exactly the same as we've done before. We look at the current market deals are being done. We put in a one-year downtime. And we're both in place, stabilized, total return investors and so far in our current construction of 6.9% gap yield and we'll push for yields where about cost of capital..

We have a follow up question from the line of Ki Bin Kim of SunTrust..

Thanks. Just a quick one here.

Any guidance on the CapEx run rate for this year?.

Sure, it's Scott. We were about $42 million in CapEx in 2016. We think we're going to be a couple million dollars less than that in 2017 so that's helping grow cash flow in 2017 compared to 2016..

And is $40 million, I know it's dependent on leasing, but generally have we seen the topping out of the CapEx run rate do you think or is there more to drop?.

A lot of it does relate to leasing. We hope to see some further decrease in that number in that future. Again, we're continuing to reinvest in new properties under 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 million number..

Going back to the 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?.

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 spreads about 5% to 7% in that range. New is about 1.5% to 5.5%.

Clearly on the new deals there's probably a lot more volatility in there so you take it as it is, that new could actually be a little bit higher but definitely there's more volatility in the new. Overall we're pretty much the same as far as the spreads on a cash basis from 2016 to 2017..

I would now like to turn the floor back over to Peter Baccile for any additional or closing remarks..

Thank you, operator. Thank you all for participating on our call today. As always, please feel free to reach out to Scott, Art or me with any followup questions. We look forward to seeing many of you in sunny Florida the week of March 6. Thanks again..

Thank you, ladies and gentlemen. This does conclude today's fourth quarter results. You may now disconnect..