Good afternoon. My name is Sheental, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial Second Quarter Results Call. [Operator Instructions]. Art Harmon, Vice President of Investor Relations, you may begin your conference..

Thanks, Sheental. Hello, everyone, and welcome to our call. Before we discuss our second quarter 2019 results and guidance, let me remind everyone that our call may include forward-looking statements as defined by the 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 25, 2019.We assume no obligation to update our statements or the 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 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, 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..

Thank you, Art, and thanks to everyone joining us today. Our team delivered another excellent quarter of strong operating results and investment for growth. Before we get into some of those details, let me provide you with a quick update on the state of the industrial market.

On a national level, CBRE Econometric Advisors reported preliminary second quarter net absorption of 31 million square feet and new completions of 41 million. That brings the year-to-date totals to 67 million square feet of net absorption and 84 million square feet of completions.

With high occupancy levels across our markets and continuing broad-based tenant demand, the environment remains healthy for continued rent growth and the industrial market overall and in our portfolio.Our results are indicative of these continuing strong fundamentals.

Occupancy at quarter-end was 97.3%, and cash rental rate growth for second quarter commencements was up 13.4%, the highest quarterly result in our history. The full year picture is also very strong. As of today, we've now signed approximately 83% of our 2019 rollovers and a cash rental rate change of 13%.

We continue to develop profitable high-quality facilities to meet pockets of underserved tenant demand.

We're doing just that with several new starts, including a new build-to-suit for our repeat customer.As we discussed on our last call, we signed a long-term lease for our 739,000 square-foot First Logistics Center at I-78/81 in Central Pennsylvania with Ferrero U.S.A., Inc. that will commence by the fourth quarter.

We're pleased to announce that Ferrero will also be our tenant in a new build-to-suit in Phoenix that we started during the second quarter. We're building a 644,000 square-foot facility on a site we acquired from our venture and PV 303 business park. The building will be completed and occupied by year-end.

Our total estimated investment is $48.6 million with a cash yield of approximately 6.6%. Now let me bring you up-to-date on leasing at some of our other developments during the second quarter. We're well underway on our two building 371,000 square-foot First Grand Parkway Commerce Center in Houston slated for completion in the fourth quarter.

We're off to a good start on leasing as we've already inked a deal for 57,000 square feet.Our 126,000 square-foot First 290 at Guhn Road building in Houston is now fully leased. We also leased 68% of our 67,000 square-foot First Glacier Logistics Center in Seattle.

And we already informed you on our last call about that two leases that brought our 6-building Ranch project in Southern California to 100% occupancy and our partial lease at First Joliet in Chicago. Thus far, in the third quarter, we preleased 100% of our 120,000 square-foot First Park at Central Crossing III in Central New Jersey.

We outperformed our underwriting to achieve a 6.4% cash yield on our total estimated investment of $12.7 million.The lease will commence at the start of the fourth quarter.

Summing up our development pipeline at June 30, we have a total of $449 million of completed developments in lease up or under construction comprised of 6 million square feet, which is 64% leased as of today.

For this batch of developments, our projected cash yield is 6.5%, which would translate to an average margin of approximately 38%, based on prevailing market cap rates for comparable leased assets. To replenish our pipeline and drive future growth, we continue to seek out quality land sites.

In the second quarter, we acquired 28 acres of land adjacent to our First Park 121 at Dallas for $7.4 million.This will enable us to build an additional 434,000 square feet in that park. In the third quarter to date, we acquired a 6.9-acre site in an infill location in Northeast Philadelphia for $2 million.

We've already commenced development of a 100,000 square-foot building on the site with completion expected by the second quarter of 2020.Total estimated investment is $12.3 million, and our targeted yield is 6.1%. Moving on to acquisitions.

During the quarter, we acquired apparel buildings in the South Bay market of Los Angeles, totaling 32,000 square feet for a purchase price of $7.1 million. Our in-place yield is 4.2%, and we expect to achieve a yield of approximately 5% when we roll some near-term explorations to market.

In Denver's I-70 quarter, we made a bolt-on acquisition of an 85,000 square-foot building located near our first Aurora Park. Our purchase price was $9 million, and our yield is 5.3%. In addition to the Philadelphia development site I discussed, in the third quarter to date, we've also acquired two buildings and a land site in Southern California.

The first building is a 44,000 square footer in the Inland Empire that we bought vacant for $5.6 million, and leased up prior to closing to deliver a yield of 5.1%.The second is a 41,000 square-foot vacant building in San Diego we acquired for $7.3 million, for which we are targeting a 5.9% stabilized yield.

The land site is comprised of 2 acres in Fontana that we acquired for $1.6 million, on which we can build approximately 40,000 square feet.Moving to dispositions. We sold two units in Miami totaling 12,000 square feet for $1.6 million.

Thus far, in the third quarter, we sold a vacant 110,000 square-foot building in Northeast Pennsylvania for $6 million, and a small land parcel in New Jersey for $244,000. Our balance sheet sales target remains $125 million to $175 million, and as we discussed on prior calls, will be back-end weighted.

In our Phoenix joint venture, as previously disclosed, we sold 147-acre site to a user with our share of the sales price totaling $18.2 million.The venture also sold 39 acres to FR for the aforementioned build-to-suit. Today, the venture owns 269 of the 532 acres originally acquired and has returned 107% of the originally invested capital.

We're very pleased with the economic performance of this partnership.

I'll turn it over to Scott in a minute to walk you through additional details on the quarter and our updated guidance, but I have one more item I'd like to note.We recently celebrated our 25th anniversary as a public company, and we were honored to ring the closing bell at the New York Stock exchange to commemorate the occasion.

Reaching this milestone speaks volumes about the resiliency of our organization and the support of so many key stakeholders. Our First Industrial team, present and past, our customers, our business and financial partners, the communities, in which we live and work, and our investors.

We thank you all for being an important part of what we've accomplished and are excited about our opportunities ahead. With that, Scott over to you..

The impact of any future sales, acquisitions, or new developments starts after this earnings call; the impact of any future debt issuances, debt repurchases or repayments after this earnings call, other than $35 million of expected secured debt payoffs I discussed; the impact of any future gains related to the final settlement of two insurance claims from damaged properties; and guidance also excludes the potential issuance of equity.

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

Thanks, Scott. And thanks again to our team for another great quarter. Demand for Industrial continues to be strong, and we are focused on capturing opportunities for rent growth and profitable new investments to further enhance our portfolio.

With that, operator, would you please open it up for questions?.

[Operator Instructions]. Your first question comes from Craig Mailman with KeyBanc..

Just a question. The cash rent spreads were impressive this quarter. I know it's more driven by renewals versus new.

But as you guys -- however, you guys look at it, the '20 rollover portfolio wide, do you have a sense of where the mark-to-market is going forward?.

Well, Craig, as you know, we don't really track mark-to-market. We think a great indicator of what's happening in our portfolio and with rents generally is what looking at what we're doing with our current year rollovers. And as we mentioned, we're through 83% of the 2019 rollovers, we're up 13%. So that's the strong result.

The markets are very, very tight, and just don't have a lot of alternatives, it continues to be a landlord's market. So it's a -- I think you'll see that kind of performance in the future..

And then just with the GLP portfolio going off and sort of that mid-4s. You guys still kind of trade wide of that, you're one of the few. And I don't know if it's still kind of the perceived market footprint that you guys are in versus others.

I'm just curious with kind of the portfolio premiums people are paying out there and that's the bid for industry overall.

I know you talked about this in the past, but just curious if your thoughts have evolved on kind of packaging more of the noncore assets or markets into bigger portfolios to try to accelerate the transition to kind of narrow that gap relative to peers?.

Yes. So we've certainly looked at doing some of that. We explore all avenues for driving value and price maximization in our dispositions. And today, we've been pretty successful and able to achieve strong values via the targeted sales that you've seen, and those sales have been largely to end users and 1031 buyers and the like.

We're focused on driving value. And if we think we can drive more value using a different method, we'll certainly do that..

Okay.

But that doesn't sound like today, you feel like you still get a better pricing on the one-offs?.

We have. That has been our experience so far, yes. The assets that we're selling are not -- they're in different markets. And asset here and there, they're not that conducive to getting the portfolio premium that you talk about..

Your next question comes from Rob Stevenson with Janney..

Peter, the cash freight index has dropped 5%, 6% the last couple of -- in each of last couple of months and have been negative for -- since the beginning of the year.

Given that drops widespread across the truck, rail, airfreight stuff, was curious if you have any insights here from talking to our clients as to what's going on? Is this just China tariffs signaling something else? Or any of the clients starting to feel any of this in their business?.

What in the -- I couldn't hear what you said at the beginning?.

The cash freight index that came out, that just came out, showing that the shipping is down..

Yes. So Rob, here's Jojo. What we track is the loaded containerized cargo. The full, not the empties, we think that has the largest correlation to absorption in the port markets.

So if you look at the biggest markets whether it's part of L.A., part of Long Beach or part of New Jersey, the loaded import containers are basically slightly up during the first three months of the year to four months and then, they leveled off. And then the last month, they were actually a little bit down.

So year-over-year, what we saw in the loaded import containers was a decline of about 1.5% to 2%.Okay. So I give you that because we don't think it's material, number one. Second of all, what's been -- we have not heard any issues from our tenants from debt reduction of the loaded containerized cargo.

Lastly, what we feel that drives really our absorption or rent growth is the tightest of these port markets. All the port markets where we invested are extremely tight, tenants don't really have a lot of choices that's why we've been able to continue to push rents. Last note, so despite the -- for example, the slight decrease.

I'll give you one example of a market, South Bay of L.A. The occupancy rate -- the market occupancy rate right now is sub-1%..

Okay. And then I know you guys did your typical dividend increase at the beginning of this year.

But Scott, how close are you guys currently to minimum payout levels? Are you either going to be forced to raise the dividend more frequently and/or by a greater rate going forward, given the strong growth that you guys continue to have?.

Rob, it's Scott. We grow our dividend with cash flow. And if you looked at our projected taxable income this year, our dividends -- we have dividend cushion there. So we think we're in pretty good shape from that point of view..

Your next question comes from Ki Bin Kim with SunTrust..

Can you talk about [indiscernible] NOI guidance? Basically, you guys increased that little bit but it does imply a little bit of a deceleration. I know you guys always try to bake in a little bit of conservatism with the bad debt assumptions.

But how much of it is just being conservative versus you see some couple of leases that might follow from a timing perspective?.

Hey, Ki Bin, it's Scott. The 25 basis point increase in our midpoint same-store guidance, it's first half outperformance and the lion share of that was lower bad debt expense. Our bad debt expense for the first half of the year I think was about $180,000 compared to $1 million for model.

I think the second question you're getting at is, if you look at the first half of the year our cash same-store is about 3% growth rate, and implies about a 2% growth rate for the last half of the year. You're right, one of the big reasons for that decline is we do have $500,000 per quarter in bad debt expense baked in the back half of the year.

If our bad debt expense, if we're fortunate enough to have that come in at the back half of the year, the same as the front, that 2% the back half goes to about 2.5%. So we get a little bit back if we're fortunate enough on that. The other two pieces have to do with a little less free rent burn off in the back half of the year.

And then at the back half of the year, also, average occupancy is declining a little bit more than the first half of the year. And Ki Bin remember, we were -- we had a really strong back half of 2018 with leasing. We ended the year 98.3%..

And turning to some of the deals that you've done this quarter and year-to-date, some interesting kind of land acquisitions, small buildings in Southern California. You've done smaller deals but usually part of a business park. This looks a bit more one-off.

Anything to read into there? Are you kind of expanding what you want to develop and type of assets you want to develop at all?.

Ki Bin, Hi, it's Jojo. Thanks for your question. In terms of the properties in South Bay, we actually own an additional eight other buildings within that -- within about a two mile radius. So we like that submarket a lot, the South Bay, Rancho Dominguez, you're familiar with all of these. And then so we will continue to find one-offs in that area.

Where we acquired the other building that's Inland Empire, where we're a big investor in -- for the right product in Inland Empire. So that's just a -- these are examples of just bolt-on acquisitions because we know the market. We feel very good about the rent growth, and we'll continue to do this..

And Ki Bin, it's Peter Schultz. On the site in Philadelphia, that's a very infill location in an area where we've owned assets in the past and that 100,000 square feet is not that different from the size we've been building in Houston and Seattle and some other markets. So it's not a shift.

It's the right building, right location, right time where we feel there are pockets of unreserved demand, as Peter commented..

Okay. And just last question. The occupancy rate in Seattle, for the past couple of quarters, looks a bit lower than your other markets.

What's the story behind that?.

It's just really one building. We have a small portfolio, Ki Bin, in Seattle, and that's also -- that's just one vacancy in one building that we're having good activity right now..

[Operator Instructions]. Your next question comes from John Guinee with Stifel..

Couple of questions. Look like your OpEx was very, very low this quarter. Was that abnormal? Or is your OpEx, as a percent of rents, going down because your rent growth is still strong.

And then second, noticed that you haven't tapped the ATM this year, any thoughts on that tier?.

So Chris, why don't you handle the first part....

John, this is Chris. As far as the OpEx, I think it's just on a quarter-by-quarter basis, you have some fluctuality. If you look at first quarter, we had some high CapEx or OpEx related to snow ruble but it's not anything other than the normal..

John, this is Scott. On the equity front, we look at our sources and uses. And if you look at the back half of this year with sales and retain capital. We'll have about $160 million coming in. Our development spend back half of the year was $140 million. So we're in a good shape from that point of view. Our leverage is low at 4.9x.

We've got plenty of liquidity on our line of credit. So I think we're going to be in a pretty good shape from the sources and uses point of view for the rest of 2019..

Your next question comes from Eric Frankel with Green Street Advisors..

I just wanted to talk about your asset recycling program in a little more detail. Obviously, I don't have explicit guidance on disposition. I guess your usual bogey is about $150 million and plan to sell this year. It looks like you have to achieve a fair amount of sales in the back half of the year to achieve that.

So I just wanted to understand if your mindset is changing? And you just have less asset to sell? Or the market for dispositions isn't that stronger than it was before? And whether you can redeploy that as acquisitions? So I just want to get your thoughts..

Sure. No. I mean, there's really nothing to read into the -- where we are year-to-date in terms of sales, our guidance range of $125 million to $175 million is still the guidance range. We feel comfortable with that, that we'll be within somewhere in that range. We've got a number of projects that we just took to market.

We have others that we're going to take to market. And it's just so happens that the sales this year are going to be more back-end weighted than they even have been in the past. Now we're really, Eric, focused on maximizing the value opportunity in these sales and less worried about what quarter they close in..

Okay. Just a final question. Obviously, market sentimental seems quite strong nationally.

But maybe you could touch upon your markets, are there any pockets or market is generally where there might be some pretty stronger construction pipelines?.

Peter, you want to?.

Sure. Eric, good morning. It's Peter Schultz. I would say those submarkets continue to be the same as what we've talked about in prior quarters. South Dallas, Northeast Atlanta, I-80 in Chicago in Central and Eastern PA, and I would say that, that most of the supply pressure there in all those markets are the larger buildings.

In Pennsylvania, as an example, by our count, there are 12, 900 square foot or 1 million square foot buildings up or under construction and while there continues to be a fair amount of activity, that still feels like a little bit of excess supply to us..

The other submarkets that we're active in are very, very tight though with rising rents. So those obviously, are going to be the areas we focused our new investment dollars over the near term..

Got it. How about Denver, where obviously, you now have a pretty big land position.

I mean, you have a pretty big building that you've built there? Is there any concerns there?.

Eric, it's Peter Schultz, again. I would say, Denver has a little bit elevated supply about 4 million square feet.

It's spread out across the metro area Northeast, Northwest, some on the south side, where our project is our Aurora Commerce Center project, where we're delivering or 555,000 square-foot building later this quarter, I would say about half of the development is in that submarket and about half of that is build-to-suits.

And there are two other existing buildings that we'll be competing with in our size and a couple of other are smaller. So we don't really view that as excessive, certainly not relative to other markets. Demand continues to be good there. We continue to see great rent growth there.

And we'll look forward to reporting to you on our progress -- on our project..

[Operator Instructions]. Your next question comes from Caitlin Burrows with Goldman Sachs..

I guess I was just wondering on the kind of supply topic as it relates to you guys developing.

In terms of buying land and getting entitlements, are you seeing anything to make you think that First Industrial wouldn't be able to keep its development volumes at least as high as they are today for next year as you go forward?.

So for starters, we can build about 11 million square feet on land we currently own. That does not count the approximately 4 million square feet we can build in our Phoenix joint venture. And we're also working through our platform across the country of about 16 offices and our team is constantly looking for new development sites.

We feel confident in our ability to continue to drive value-creation through our speculative development pipeline, and we don't see anything right now that would cause us to worry about potential volume drop-offs in the future..

Great. And then may be just one in terms of, I know you guys mentioned earlier that it is a landlord's market. When we look at the leasing spreads that you guys recognized. They were up, retention was down a little. And that definitely can make sense.

I guess I was wondering, are you trying to be tougher with pricing now than maybe you had been in the future? Is that just kind of the way the quarter worked out and that could change in the future?.

So our team is continually trying to maximize the value of every lease that we have and obviously, there's several inputs there. Strong -- pushing hard on rent growth is certainly one of them. Minimizing concessions, extending terms where possible.

And we're also mindful that it cost 4 or 5x more to have to retain a building than to retain a tenant, but we're pushing rents strong. I think that's evident in the 2019 rollover number that we talked about. And again, trying to maximize the value of every lease is kind of how we look at the big picture..

Your next question comes from Michael Mueller with JP Morgan..

So it looks like you break your portfolio out between bulk, regional, light and flex in terms of the major categories.

I am just curious, are you seeing any notable cap rate differences as you move across those different categories?.

Overall, we don't see really any difference between the bulk, light and regional. The flights which we own very little trades a little bit higher cap rate..

Got it.

And has that been pretty consistent even outside of the past 6 or 9 months?.

Oh, yes. There's that's because it's maybe over the past 10 to 30 years. So it's been like that..

[Operator Instructions]. There are no further questions at this time. I would now turn the call back over to Peter Baccile..

Thank you, operator, and thanks to everyone for participating on our call today. Please feel free to reach out to Scott, Art, or me with any follow-up questions, and enjoy your summer..

This concludes today's conference call. You may now disconnect..