Good morning. My name is Sia, and I will be the 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. Mr. Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead, sir..

Thanks, Sia. Hello, everyone, and welcome to our call. Before we discuss our second quarter 2018 results and guidance, let me remind everyone that our call may include forward-looking statements as defined by Federal Securities Laws. These statements are based on management’s expectations, plans and estimates of our prospects.

Today’s statements may be time sensitive and accurate only as of today’s date, Thursday, July 26, 2018. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors, which 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 supplement report, earnings release and our SEC filings are available at firstindustrial.com, under the Investors tab.

Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we 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. With that, let me turn the call over to Peter..

Thank you, Art, and good morning, everyone. Our team delivered another good quarter as fundamentals in our sector remain strong. At quarter-end, our occupancy stood at 96.9%, cash same-store NOI grew at 4.5% and cash rental rates were up 7.7%.

As of today, we have signed leases for approximately 85% of our 2018 rollovers at a weighted average cash rental rate change of 8%. Our team and portfolio continue to deliver some strong numbers for rent growth reflective of the health of the market. Nationally, the positive trend continues.

According to CBRE, our clinometric advisors, preliminary second quarter report net absorption was 59 million square feet, exceeding completions by 10 million square feet. For the first half of the year, net absorption was 105 million square feet, exceeding completions of 90 million square feet.

Our trade policy is very much in the headlines and bears watching. We don’t see it impacting tenant decision-making today as both new and renewal leasing activity remains strong in all of our markets. Most tenants view their logistics space as a critical part of their offensive strategy to better serve their customers and generate revenue growth.

With limited available space options, Industrial real estate needs remain top of mind. This demand is evident in some of our recent leasing wins at the Ranch, our six building project in the Inland Empire West, where we completed construction last month.

As previously announced, we signed a lease for the entire 156,000 square-foot building, which commenced and was placed in service in the second quarter. Since our last call, we have also signed three more long-term full building leases at the park.

The leases for the 301,000 and 50,000 square footers will commence in the third quarter and the 71,000 square footer will commence in the fourth quarter. In total, we have leased 62% of the Ranch approximating 578,000 square feet.

That leaves us with just two more buildings to lease there, 137,000 and 221,000 square feet and we continue to see good interest. In summary, at June 30, we have 1.4 million square feet of completed developments in lease up and Phoenix and Southern California with an expected cash yield of 7.4%. These projects are currently 30% leased.

We also had 2.9 million square feet of developments in the markets of Southern California, Chicago, Central Pennsylvania and Houston scheduled to be completed in the third and fourth quarter with an expected yield of 7.2%. This group includes our second quarter start of the 250,000 square-foot second building at our I-78/81 project in Pennsylvania.

Estimated total investment is $17.5 million with the cash yield of 6.9%. In addition to the developments, we are also excited about the opportunities in our pipeline, where we can deliver strong margins relative to leased acquisitions while further enhancing our portfolio. We raised some equity in early May to support these growth efforts.

We will have four new starts in the coming weeks totaling approximately $96 million. They include our first building at our new First Aurora Commerce Center and Denver’s I-70/E sub-market. We acquired the 138-acre site in the second quarter for $8.8 million and we will execute a fade build out of up to five buildings and 1.9 million square feet there.

The first building at the park will be 556,000 square-foot distribution center. Total investment for this building is estimated at $38.3 million with a targeted cash yield of 7.2%. We also will start Phase-1 our First Park 121 in the North West Dallas submarket of Louisville, which serves the fast-growing cities of Frisco and Plano.

Phase-1 will be comprised of two buildings, a 220,000 and a 125,000 square footer. Total estimated investment is $27.5 million with the projected cash yield of 7.1%. In the future, we can build another two buildings totaling 380,000 square feet at that park.

Given our leasing success and the strength of the Southern California market, we’ll also begin construction of the first Perry Logistics Center in the Inland Empire East. First Perry will be 240,000 square feet with a total estimated investment of $20.5 million and a targeted yield of 5.9%.

Also, on the West Coast in Seattle’s Kent Valley, we bought a site in the second quarter, where we will start the 67,000 square-foot First Glacier Logistics Center. Total investment will be $9.9 million and the estimated yield is 5.5%.

During the quarter, we also added a site in Dallas for $1.8 million that can accommodate 199,000 square-foot facility. On the acquisition front, we bought a vacant 171,000 square-foot distribution center in Southern California for $20.7 million in the Santa Clarita submarket.

We are currently redeveloping the interior of this property and our targeted yield for the building upon lease-up is 5.6%. Moving to sales. We had a successful quarter with dispositions totaling $56 million with an in-place cap rate of 5.6%.

Our largest sale was a 446,000 square-foot multi-building portfolio of smaller, higher finished assets in Fort Worth for $29 million. In the third quarter to-date, we have two additional sales both in Indianapolis. The first, a vacant 54,000 square-foot building for $1.7 million and the second, a land site also for $1.7 million.

Including those two dispositions, our year-to-date sales total is $101 million. Our prior sales guidance for the year was $100 million to $150 million and based on our pipeline, we now expect to be at the top end of that range.

I would also note that in our Phoenix joint venture we sold a 21-acre site to a corporate user, our share of the proceeds was $1.9 million. So, thanks to my teammates for a good quarter and good first half and across all aspects of our business. With that, Scott will walk you through some additional details on the quarter and our guidance..

Average quarter-end in service occupancy of 96.5% to 97.5%. Same-store NOI growth range is now 4.5% to 5.5% with the 50 basis point increase driven by our second quarter results. Our G&A guidance range is unchanged at $26 million to $27 million, which excludes the $1.3 million severance charge recognized in the first quarter.

Guidance includes the anticipated 2018 costs related to our completed and under construction developments at June 30th, and our planned third quarter starts First Aurora Commerce Center in Denver, First 121 in Dallas, First Perry in Southern California, and First Glacier in Seattle.

In total, for the full year 2018, we expect to capitalize about $0.05 per share of interest related to our developments. Our guidance does not reflect the impact of any future sales or acquisitions after this earnings call, our new development starts other than what we just discussed.

The impact of any future debt issuances, debt repurchases or repayments, the impact of any future gains related to the final settlement, two insurance claims from damaged properties and guidance also excludes any future NAREIT compliant gains or losses, the impact of impairments and the potential issuance of equity.

With that, let me turn it back over to Peter..

Thanks, Scott. We’re pleased about where we are at the midway point of the year throughout our business. Fundamentals remain strong and we're excited about the profitable opportunities we have under construction and in our pipeline. With that, operator, please open it up for questions..

[Operator Instructions] And the first question will come from Craig Mailman with KeyBanc Capital Markets..

Hey guys, maybe just to go little more depth into the Ranch leasing. Congrats by the way on that.

Just can you give some more color on kind of the types of tenants that took the space and maybe relative where the rent came in relative to the expectations and also just the timing on those? kind of where – if there is any expansion on that relative to previous expectations?.

Sure, sure, Craig. This is Jojo. The tenants get named these give you a decisive industry, one is a very active third-party logistics provider in the West Coast, another one is an international vitamin supplement company, who serves – will use the ability to serve customers nationally.

And the last one is related to focusing on the industrial power solutions for mid and large size businesses and specifically to the lot of via power solutions stores equipment and machines. In terms of our rates, overall it did perform quite a bit. And so we're very pleased about it.

And it exceeded our expectations of course, the lease have exceeded our expectations on downtime. Because we typically our standard modeling is one-year downtime post completion..

And as you guys look at leasing up the next two buildings, it sounds like there is good interest.

What's the competition look like in that submarket for those side spaces?.

So, what’s remaining is 137,000 foot and 221,000 square footer. There are few choices in the Chino East Hill [ph] market today, Craig..

All right. And then lastly, Scott, you kind of went through a little bit second quarter drove the upside in same-store NOI guidance.

Could you comment was it at most the occupancy, rent spread, bad debt, kind of what was the biggest driver in those 50 basis points?.

Craig, it was a couple of pieces, bad debt expense was one of them, we recognized under $100,000 of bad debt expense in the quarter, compared to $500,000 per our guidance. So, that was a positive.

we also had a positive due to property sales of sales being taken out of the portfolio and then that was slightly offset by an increase in landlord expenses. So, those are three major pieces of the outperformance..

How much was the change in pool?.

It was about 50 basis points..

So, almost the whole increase was just the pool change?.

Yes. You had 50 basis points related to bad debt expense, that was pretty much offset by the increase in landlord expenses and then the pool change helped by 50 basis points as well..

Okay, great. Thanks..

This in one minus..

The next question will come from Ki Bin Kim with SunTrust..

Thanks. Good morning all there. So, you obviously had some really higher tenant retention at a very high lease spread.

Can you just help us look under the hood a little bit and just understand what happened in that quarter?.

Yes, Ki Bin. Overall, we had – you noted, we did have high retention. With that, we’re still able to push our rental rates and the renewals. So renewals for the quarter are up 7.3%. So we’re really pleased in the high retention to get pushing rents..

And Ki Bin, as I mentioned in the comments that the high retention percentage was driven by the Amazon lease. That was 1.3 million square foot lease, that was about, I think, about 47% of our renewal leasing during the quarter. So that was a big driver in pushing up that retention level..

I see, and are you starting to see any change from tenants where these may be preferred to own the building versus lease as rents have gone up?.

Ki Bin, it’s Peter. So, I would say, no, the tenants and users continue to look primarily to lease space certainly, a part of our sales or to users and that's something we see continuing to happen. I wouldn't say it's changed one way or the other..

Okay. And just last one on development, I think, the last NAREIT Investor Day, I think, you showed that you have about 58% developed margins, which is I think one of the highest in the sector.

How does the next round of assets that you're looking develop in your pipeline? How do those profit margins look like?.

So, Ki Bin, it’s Peter. Yeah. You’re right. The assets that we are leasing up now, the margins are in the range that you mentioned the projects that we’ve just announced that were about to start. The margins average more in the 40% to 45% range.

We're still targeting as we always doing our underwriting kind of 100 basis points to 150 basis points spread, I think, we can achieve that. And over the past several years between rent growth and leasing of the assets well within our 12 months assumed downtime we’ve been able to generate the very high margins..

Okay. Thank you..

[Operator Instructions] The next question will come from Rich Anderson with Mizuho Securities..

Hi, Zack Silverberg here with Rich. Just couple of quick ones, since the equity proceeds will generally be used to fund development.

What is the timeline to recover that temporary dilution from the offering?.

This is Scott, Zack. We're using $96 million of the $146 million of proceeds to fund the new starts that we have there. So for our underwriting, it's probably going to be nine months construction cycle. And then we put another year of lease-up. So it could be a year and half to two years. That's what we're underwriting.

Having said that, we've been leasing these developments more quickly than that, we also use some of the equity proceeds on second quarter acquisitions that was about $37 million, the lion's share of that was in acquisition we did in Southern California that we think we can stabilize cap rate of 5.5%.

That's the redevelopment property that we've given ourselves a year to lease that up. So that's probably more a middle of 2019 when we get those dollars in the door. So there is going to be over a year delay on that, Zack..

Okay, great.

And as you continue to make progress on development, any insists where land cost are an issue? Or do you foresee land cost being an issue in the future?.

Well, land cost have continued to grow. And so total replacement or total investment cost per square foot will continue to grow, but the rents have justified the growth in land cost. And so we expect land cost – if rents continue to rise, we expect land cost to continue to rise proportionally as well..

Hey, it’s Rich here. I mean, just chime on that last question.

So are there instances, we've been hearing about rising construction costs in general and how that might compared to how NOIs are growing and maybe the math is still in the favor of NOIs exceeding construction cost, is that what you're generally seeing across your markets?.

Yes, exactly that. So the increase in rent – market rent offsets to increase in land cost and construction cost. One more thing, you have to consider is that cap rates have compressed a bit.

And so if you factor that in, although it's more comparable to the market, primarily because there is more entrance in the market, the cap rate compression kind of maintain to spread or help the spread a little bit..

Have you seen any impact from tariffs, NOIs like in terms of material cost and what have you?.

Yes, on steel prices, yes, but that steel is not a large component of a – industrial building construction. And in fact, steel – the bear components are today is the rest of the construction cost materials. Sub-contractors profit margins in land increases. Those are the bigger components of the increase..

Got you with that. That’s all for us..

The next question will come from Eric Frankel with Green Street Advisors..

Thank you.

Scott, can you just explain the expense growth increase?.

Are you talking same-store pool? Are you talking increase quarter? What period did you talking here?.

Call it the same-store pool, but I guess across the board of seems like?.

Okay. So same-store pool, they were up quite a bit, increase in real estate taxes. So let me break the expenses out there, common area and then there is landlord. So the common area expenses were driven by real estate taxes and snow removal expenses.

That for the most part, was recovered almost one for one with additional recovery and come, so very minimal if any leakage there. And then the landlord expenses, as I mentioned in the same-store, we did have some increases there, primarily the big increase in landlord expenses were on the real estate tax side as well..

Okay.

Do you foresee that being an issue going forward in terms of how that actually is going to affect the bottom line?.

Well, the common area, it's not going to impact the bottom line much just because the occupancy level where at 96.9%. That's not going to have much leakage on the landlord, Eric. We have a handful of jurisdictions that we pay taxes in a rears, which means we're paying 2018 taxes in 2019. So we have to do expense what we think we're going to pay.

So I look at that as non-cash. So that is hard to say, what impact that will have on a go forward basis..

Okay. Thanks.

You guys touched – I think some of the other callers have touched upon tariff zone a little bit, but have none of your customers expressed any concern about how some of the larger threat in tariffs are going to affect their business or the volume of goods that are imported and have a bit of affect their respective supply chains?.

So, the short answer is that we haven’t heard anything from the tenant base in the way of concern or complaint. In general across our portfolio, our tenants down stores, the items that are so far being cared after under threat of tariff that could, of course, change. Especially, if there are a lot more tariffs on things like consumer goods.

And that would have an impact. I think the biggest focus for us is, are we going to actually have a policy here that does something to significantly negatively impact consumption or GDP, that would be a big factor.

You do have – despite all that, you do have the somewhat mitigating factor of e-commerce and the growth and the evolution of the supply chain there. So, it’s really more of a question of order of magnitude on the tariff front. But right now, we haven’t seen or heard anything so far that’s negative for the tenants..

Great. Just a final question, I’ll make sure I’ll be back in the queue. But I know you’ve framed from a risk perspective, how much you want to limit development at risk in terms of a dollar volume; I think it is around $400 million, correct me if I’m wrong.

Certainly that you need to support that with a land bank and so I want to understand better if you have any parameter surrounding how much land you want to hold in your balance sheet?.

Well, as you know what we really focus on is trying to acquire land that is near-term developable. So that we’re productive and we’re not creating a lot of drag on the balance sheet. Going forward, we would like to have a couple of years of land in the inventory. I think that’s probably a prudent place to be.

The dollar number, that’s hard to say, it depends where we buy it and if it’s – certainly, if it’s on the course, it’s going to be a higher number than if it isn’t. So, I think the best way to just answer that, Eric is to say we’re looking at the couple of years of inventory..

And Eric, just to be clear the spike of relative development cap is $475 million today..

Okay, fantastic. Thank you..

[Operator Instructions]. The next question will come from Bill Crow with Raymond James..

Good morning, guys. Peter, I think, two questions for you. And I guess it relates to the tariff and trade situation, but it seems like autos are, maybe one of the more vulnerable sectors in the economy today. And you do have some exposure among your top 20 tenants.

Are you seeing anything there? Would you be more reluctant to expand your presence in the auto space or auto parts space today?.

Yeah. We do have some tenants in the auto parts space. We do have tenants in the tire business. but so far that hasn’t been impacted, but the amount of the proportion of our leases that are in that space are really low, low single-digit percentages.

So I don’t – I would think at this point, that we’d be avoiding tenants in that space, especially if they have good credit and the strong business. We’d certainly look at it, but, I don’t think we’ll be avoiding it per se to draw a line and then stay in there..

All right. The second question is really about the capital allocation, and you talked about First Glacier, I think, 5.5 or 5.6. And the redev in Southern California, that’s going to be a mid-5.

I’m just curious about the strategic fit of those assets versus the alternative of these kind of low 7% development yields?.

Right. So we think in those markets, rent growth is going to be significant over the near- and medium-term. And we don’t we try to predict beyond that. And so when you look at the total of return on those investments, we like what we see.

And yes, when we can build to a 7-plus percentage cash yield in some of the other markets like Dallas and Denver, that looks interesting to us as well, assuming there are grounds up analysis shows us that those assets can be competitive for the long-term.

So, from a capital allocation standpoint, we’re really trying to put our money into the highest growing assets that we can in terms of a rent growth to create long-term cash flow growth. And if that works, obviously, over time, you’re creating a lot of value for shareholders..

And I just want to add that these are prime stuff markets. First Glacier is right in the heart on Kent Valley, which is the largest industrial market in Seattle, that’s the deepest and the market that has one of the lowest vacancy rates. And First Perry is right off our success in the Moreno Valley submarket.

As you may recall, we developed 187,000 square feet at San Michele and Dallas lease before completion. We also built 242,000 square feet, first 215,000 and that was also successful lease of our pro forma. And so now we’re just continuing that success..

Okay. I get the rent growth. I guess, I’m just thinking of stabilization means that are leased up and you’ve got three or four or five years before the next opportunity to raise the rent to come. So, you’re really looking out quite the ways to get up in north of the 6, right or 6.5? Is that….

We also have rent bumps in those leases as you know..

That’s right. Sure..

Generally, there’s 3%. and with a total return, again, on those assets is going to be strong. And they’re going to be asset that over – they’re going to withstand pressures in the markets over the long-term. And that’s really what we’re trying to create..

Fair enough. Appreciate it. Thanks guys..

The next question will come from Michael Mueller with JPMorgan..

Just a question on acquisition.

I’m just curious, what sort of cap – what sort of competition are you seeing when you go out to acquire a vacant building, compared to something that maybe more stabilized, fully occupied? Are you seeing a lot of competition? Is it last, I mean, how would you characterize that?.

Yes. there is significant, Michael, there is significant amount of competition for both, vacant, value add, acquisition deals and fully leased. This was an off-market deal. We’ve been tracking this building for a while. We’ve been in contact with the owner.

The history in this is that the owner built this facility and outgrew it, this quality building and they had to move. And so we made an unsolicited offer through our relationship and that's how we got a deal. If this one's in the market, it would have gone – be more expensive..

Got it, okay. That was it. Thank you..

The next question is from Jon Petersen with Jefferies..

Great, thank you. So just wanted to touch on the development pipeline a little bit. Obviously, you've got what five projects underway right now, that are 0% leased. You guys have a great track record of leasing-up once they're completed.

But I'm just kind of curious, I guess, given the amount of spec development there, what the appetite is to expand that pipeline realizing, I know you guys have a cap, forget exactly what level? But then, to the extent that you're looking to start new development project, I guess, in which market do you feel like you need to have more shovels at the ground?.

So again the cap is $475 million. Today, we have about $81 million-ish in capacity on that. That changes as we lease developments are completed or vacant acquisitions. So that's a moving number every month or two. We are also focusing – we are largely a spec builder, we’re focused also on responding to our piece in the build-to-suit, with build-to-suit.

And we have some sites in Kenosha, for example, in Atlanta and in Dallas, where we could develop build-to-suit. And you'll see us continue to invest capital in developed markets that we've been most active in. So again, it's the West Coast, its Dallas, Houston, South Florida, Chicagoland, when the market's right.

I don't know if that answers your question, but that's kind of a walk through our thinking around development..

Well I mean I guess how do you think about the spreading out the development in the different markets. So you're ready to get two projects in Pennsylvania right now, you've got a fair amount in Southern California.

I guess, would you still be looking for new opportunities to start there? Or you don't have anything in Dallas right now and a small thing in Huston? Would you be more inclined [ph] now I don't think, I see anything in Atlanta, more inclined to start something there? I guess that's more of the question..

We’re looking for great development opportunities in all the target markets, notwithstanding activity. We're going to continue look at Pennsylvania even though we have a lot going on there. We'll continue to look in California, obviously, even though we have a lot of going on there. So we're not – we're really looking at how we can make money.

Yes, we look at our risks, we do a round up analysis, we understand submarket by submarket or we think the unmet demand is, but just because we're active in one market doesn't mean we wouldn't want more opportunity there.

Jojo you want to add something?.

Yes let me just add. One thing we don't do is we don't realize on our development. So your case in point. So we're on track to complete our 1.4 million feet in First Nandina, in the Inland Empire. And so we're not going to go wild and build a million spec rate, no.

So that's why we just continued as an example, we now are going to start 240,000 square-foot building, different sizes range because there's activity in that size range. So that – you will see that strategy.

So, for example, like in the Chicago market, we have 100, 300, 55,000 square footer, where you won't see us build a current 400,000 footer because then I'll just compete with our current space. And if you look at the rest of the developments, our one-off in Seattle, a new one-off 555,000 in Denver.

So you'll see, we're spreading our investments, but at the same time really trying to grow after that space size range. You know that tight. Let me turn it over to Peter for the PA..

Right, so John, Pennsylvania, those two buildings are on the same site and when we bought that site it was our plan to develop both buildings and roughly at the same time it was our plan to develop both buildings and roughly at the same time frame because they service different size ranges in the market and back to Peter's point, we're focused on developing where there is great demand and rent growth..

And in the last example that in our two buildings in Louisville, one is a front load shallow bay and one is a deeper load basically a front load. So why is that? Because in that submarket, there are tenants looking for a front load or rear load. And depending on what kind of exposure they want of the street.

So these buildings are designed based on what we think the market needs..

Great that’s really helpful. Thank you..

[Operator Instructions] And we do have a follow-up from Eric Frankel with Green Street Advisors..

Thank you.

Just one quick question, on 4020 S Compton can you just explain what exactly happened with that transaction, how you came up?.

Sure Eric. So the building burned down and luckily, nobody got hurt. When the building burned down, it saw some substantial destruction. We then sat back and decided whether we should build or we should sell. And so when we looked at the market, there was a higher and better use actually for that and primarily residential.

So, Eric, we ended up selling it to our residential buyer. If you add the expected insurance proceeds we got from the fire insurance, plus the sale price, it approximates $129 per land foot, which we're very, very happy about because that is something that we've not even close to seeing in the industrial land sale..

Right.

How does the insurance proceeds – how do they fulfill your financial statements?.

Eric, it's Scott. Some of that impact is bled through in prior periods. As I mentioned in my comments and guidance, there could be other recoverable dollar amounts that we get related to this insurance claim. We do not have anything embedded to guidance related to that.

If we do recognize some of that on a go forward basis, we'll back it out to get to our core FFO. So there could be future recovery in that, if there is, we'll let you know, does not impact same-store. So anyway, that's our how that will be handled on a go forward base..

Thanks. That’s helpful. I just actually thought of one final question. I've noticed that Amazon is still quite active in the market in building – and they're really active in bidding their larger facilitating centers that are seemed to be even more automated with more mezzanine levels. It looks like that cost is becoming pretty steep for developers.

Do you guys have a take on what the economics of those types of buildings are now?.

Eric, it's Peter Schultz. As you know they operate under a very tight confidentially agreement with all of their development partners and landlords. But our view is, yes, those buildings are becoming more expensive as they continue to think about their next evolution of what they're doing..

And are they having an issue getting that financed by developer, they're not really or developer is just kind of eating or taking on the additional risk?.

No Eric, I couldn't answer that because we're not doing any of those today. But certainly, they have had success, awarding new deals to developers. But I can't give you any color on the economics..

Okay thanks. That’s all I’ve got..

At this time there are no further questions. I would like to turn the conference back over to Peter Baccile for any closing comments..

Well thank you operator and thank you all for participating on call today. Please feel free to reach out to Scott, Art or me with any follow-up questions. Have a great day..

Ladies and gentlemen, thank you for participating in today’s conference call. You may now disconnect..