Q2 2019 Earnings Call
After the speakers remarks, there will be a question and answer session.
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Art Harmon Vice President of Investor Relations you May begin your conference.
Thanks, Tim.
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 Federal Securities laws. These statements are based on managements expectations plans and estimates of our prospects today's statements maybe time sensitive and accurate only as of today's date Thursday July 25th 2019, we assume no obligation to update or 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 supplemental report earnings release, and our SEC filings are available at first industrial Dot com under the investors tab.
Our call will begin with remarks by Peter Pacelli, our President and Chief Executive <unk> 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 CBRN 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 total 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 base tenant demand the environment remains healthy for continued rent growth in 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 have now signed approximately 83% of our 2019 rollovers and then 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 a repeat customer.
As we discussed on our last call, we signed a long term lease for our 739000 square foot first logistics center at I 70, 881 in Central Pennsylvania, with Ferraro, USA Inc. that will commence by the fourth quarter.
We're pleased to announce that Ferraro will also be our tenant in a new build to suit in Phoenix that we started during the second quarter.
We're building a 644000 square foot facility on a site, we acquired from our venture and PV 303 business Park.
The building will be completed in 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 and some of our other developments during the second quarter, we're well underway on our two building 371000 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 57000 square feet.
Our 126000 square foot first to 90 and gun Road building in Houston is now fully leased.
We also leased 68% of our 67000 square foot first Glacier logistics center in Seattle.
And we already informed you on our last call about the two leases that brought our six building ranch project in southern California to 100% occupancy and our partial lease at first Joliet and Chicago.
Thus far in the third quarter, we pre leased 100% of our 120000 square foot first park at Central crossing three 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 Thirtyth, we had a total of $449 million of completed development and 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 part 121 in Dallas for 7.4 million.
This will enable us to build an additional 434000 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 have already commenced development of a 100000 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 a pair of buildings in the South Bay market of Los Angeles totaling 32000 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 expirations to market.
In Denver is I 70 corridor, we made a bolt on acquisition of an 85000 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 side 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 44000 square footer in the inland Empire, and we bought vacant for 5.6 million and leased up prior to closing to deliver a yield of 5.1%.
The second is a 41000 square foot vacant building in San Diego, we acquired for $7.3 million for which we are targeting a 5.9% stabilized deal.
The land site is comprised of two acres and fun Tana, we acquired for $1.6 million on which we can build approximately 40000 square feet.
Moving to dispositions.
We sold two units in Miami totaling 12000 square feet for 1.6 million, thus far in the third quarter, we sold a vacant 110000 square foot building in northeast, Pennsylvania for $6 million and a small land parcel in new Jersey for $244000.
Our balance sheet sales target remains 125 to 175 million.
As we discussed on prior calls will be backend weighted.
And our Phoenix joint venture as previous previously disclosed.
We sold a 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 of 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 will 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 know.
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. Thanks, Peter in the second quarter diluted EPS was 31 cents versus 36 cents one year ago.
Hey, Rick funds from operations were 43 cents per fully diluted share.
Compared to 39 cents per share in Two Q2 018.
Primarily driven by an increase in Hawaii due to development lease up in same store growth.
As Peter noted quarter end occupancy was 97.3%.
Flat from a quarter ago, and up 40 basis points from a year ago.
Regarding leasing volume in the quarter, we commenced approximately 3.1 billion square feet of long term leases.
Of these.
446000 square feet were new.
1.9 million were renewals.
And 724000 square feet were for developments and acquisitions with lease up.
Tenant retention by square footage was 73.1%.
Same store NOI growth on a cash basis, excluding termination fees was 3%.
This was driven by rental rate bumps in an increase in rental rates on leasing.
This was partially offset by a slight decrease in average occupancy as well as real estate tax true ups for market is paid in arrears predominantly in Denver as we have explained previously.
Lease termination fees totaled $443000, including termination fees cash same store NOI growth was 3.4%.
Cash rental rates were up 13.4% overall.
With renewals up 14.1% and new leasing up 9.9%.
On a straight line basis overall rental rates were up 27.3%.
With renewals increasing 29.5%.
And new leasing up 17.7%.
Moving now to the capital side.
Just this week, we closed on our private placement of $150 million of senior unsecured notes.
The notes have a 10 year maturity and an interest rate of 3.97%.
Reflecting the related settlement of interest rate protection agreements the effective interest rate is 4.23%.
Recall that these proceeds essentially refinance $72 million of secured debt, we paid off in the first quarter.
$35 million of secured debt, we will pay off in the second half of the year with an overall weighted average interest rate of approximately 7.7%.
The remaining proceeds will be used to fund new investments.
Quickly moving onto a few balance sheet metrics.
At the end of Twoq, you, our net debt plus preferred stock to adjusted EBITDA is 4.9 times.
And at June Thirtyth, the weighted average maturity of our unsecured notes term loans and secured financings was 5.6 years with a weighted average interest rate of 4%. These figures exclude our credit facility.
Moving onto our updated 2019 guidance per our press release last evening.
For new FFO guidance range is now $1.68 cents to $1.76 cents per share with a midpoint of $1.72 cents.
This is an increase of two cents from what we discussed in our first quarter call driven by better portfolio operations and an increase in capitalized interest.
The key assumptions for guidance are as follows.
Average quarter end occupancy of 96.75% to 97.75%.
We increased the midpoint of our same store NOI growth range 25 basis points and narrowed the range to 2% to 3%, reflecting our first half of the year outperformance.
Our guidance range remains at $27.5 million to $28.5 million.
And guidance includes the anticipated 2019 costs related to our completed in under construction developments at July 25th.
In total for the full year 2019, we expect to capitalize about four cents per share of interest related to our developments.
Our guidance does not reflect the impact of any future sales.
Acquisitions or new development 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 damage properties.
In 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.
At this time I would like to remind everyone in order to ask a question Press Star then number one on your telephone keypad, we'll pause for just a moment to compile the Q and a roster.
Your first question comes from Craig Mailman with Keybanc. Your line is open.
Hey, guys.
Just a question.
The cash rent spreads are impressive this quarter I know it was more driven by renewals versus new but as you guys.
However, you guys look out in the 20 role or 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 looking at what we're doing with our current year rollovers.
And as we mentioned we're through 83% in the 2019 rollovers were up 13%. So that's.
That's a strong results.
The markets are very very tight tenants don't have a lot of alternatives. It continues to be a landlord's market. So it.
I think you'll see you'll see that kind of performance in the future.
And then just with.
The GLP portfolio going off and toward the mid fours.
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 that's the bid for industrial overall I know we've talked about this in the past, but just curious if your thoughts have evolved on.
Kind of packaging more of the non core.
Assets or markets into bigger portfolios to try to accelerate.
The transition to kind of narrow that gap relative to peers.
Yes, so weve certainly looked at doing some of that we explore all avenues for driving value and price maximization and our dispositions.
And to date, we've been pretty successful unable to achieve strong values via the targeted sales that you've seen and those sales have been largely the end users.
And 10, 31 buyers and the like.
We're focused on driving value and if we think we can drive more value and using a different method, we'll certainly do that.
Okay, but it doesn't sound like today, you feel like you're still getting better pricing on the one offs.
We have that has been our experience so far yes.
Great. Thanks, the assets that were selling or not.
Net.
They are in different markets and asset here in there, they're not that conducive to.
Getting the portfolio premium that you talk about.
Gotcha all right that's helpful. Thank you.
Your next question comes from Rob Stevenson with Janney. Your line is open.
Hi, good morning, guys.
Peter the.
Cats freight indexes dropped five 6% the last couple of months in each of the last couple of months have been negative for us at the beginning of the year given that drops widespread across the truck rail air freight stuff was curious if you have any insights you hear from talking to your clients as to what's going on is this just China tariff signaling something else or any of the clients starting to feel any of this in their business.
What and I couldn't hear what you said at the beginning the cash sprayed index that came out that just came out.
So just showing that the shipping is down.
Yes, so rob here, so Joe what well we.
What we track is the a loaded container ace card goal no phone that began fees.
So we think that has the largest call correlation to absorption in the port markets. So if you look at the biggest markets whether it's part of L.A. part along these are important new Jersey, the loaded import containers are basically slightly up.
During the first three months of the year to four months and then be leveled off and then the last month. They are as you move it down so year over year, while we saw the loaded import containers was a decline of about 1.5% to 2%. Okay. So I give you that because we don't think its material number one second of all lesbians right. We have not heard any issues from our tenants from the debt reduction of via loaded country. Nice cargo lastly, we feel that drives really our absorption and rent growth is the tightness of the court markets. All the important markets, where you invest in our extremely tight patents don't really have a lot of choices. That's why we've been able to continue to push and push rents last note. So despite the for example, the slight decrease I'll give you. One example of a market South Bay overlay.
The occupancy rate the market occupancy rate right now is self 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.
Hey, Rob it's yet 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.
Okay. Thanks, guys.
Your next question comes from Ki bin Kim with Suntrust. Your line is open.
Thanks, Good morning out there.
Hi can you talk about your same store NOI guidance I basically you guys increased a little bit, but it does imply liberal but the acceleration I know you guys always tried to bake in a little bit of conservatism, what the bad debt.
Bad debt assumptions, but how much of it is just being conservative versus you see some couple leases that might fall out from a timing perspective.
Hey, Ki bin it's Scott the 25 basis point increase in our midpoint same store guidance. Its first half outperformance and the lions share of that was lower bad debt expense or bad debt expense for the first half of the year I think it was about a 180000 compared to $1 million per 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 that 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 $500000 per quarter in bad debt expense baked in the back half of the year.
In the back half of the year and then in the back half of the year also average occupancy is declining a little bit more than the first half of the year and Keven remember we were we had a really strong back half of 2018 with leasing we ended the year 98.3%.
Got it thanks for that and turning to some of the deals that you've done this quarter and year to date.
So the interesting land acquisition small buildings in southern California.
You've done a smaller deals, but usually part of a business park. This looks a bit more one off anything to read into there are you expanding what you want to develop the type of assets along develop at all.
I came in I saw Joe Thanks for the question.
In terms of the 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 rents are domingues, you familiar with all of these.
And then so we will continue to find one offs that area, where we acquired.
The other building Thats inland Empire, where you know, we're a big investor in Florida right for the right product in the inland Empire. So that does a both of these are examples over 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 its 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 100000 square feet is is not that different from the size. We've been building in Houston in Seattle and some other markets. So it's not a shift.
Thats right building right location right time, where we feel there are pockets of underserved demand as Peter commented.
Okay, and just last question the occupancy rate in Seattle on for the past couple of quarters, it 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 even in Seattle and so that's just one vacancy in one building that we're having a good activity right now.
Alright, thank you.
Again, if you would like to ask a question Press Star then number one on your telephone keypad. Your next question comes from John dining with Stifel. Your line is open.
Great. Thank you.
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 so strong.
And then second notice that you haven't tapped the ATM this year.
Any thoughts on that here.
So Chris why don't you handle the first part.
John This is Chris in spite of the add backs I think it's just on a quarter by quarter basis, you had some flux flux reality. If you look at first quarter, we had some hike capex or opex related to snow removal.
But it's not anything other than normal.
John This is Scott on the 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 is 140 million. So when a good good shape from that point of view or leverage is low at 4.9 times got plenty of liquidity on our line of credit. So I think we're going to be in a pretty good shape from a sources and uses point of view for the rest of 2019.
Perfect. Thank you very much.
Your next question comes from Eric Frankel with Green Street Advisors. Your line is open.
Thank you.
I just wanted to talk about your asset recycling program, a little more detail.
Obviously, you guys don't have explicit guidance on dispositions.
I guess your usual bogey is about $150 million than planned sales. This year. It looks like you have to achieve a fair amount of the sales in the back half of the year to achieve that.
So I just want to understand.
If your mindset changing and you just have less asset to sell in the market for dispositions isn't as strong as it was before and whether you can we deploy that acquisition. So just wanted 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 to 175.
It's still the guidance range, we feel comfortable with that that will 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 just so happens that the sales. This year are going to be more back end weighted than 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 then.
Okay. Thank you just a final question.
Obviously market fundamentals seems quite strong nationally, but maybe maybe you could touch upon your markets are there any pockets or market generally where there are problems there might be some pretty stronger construction pipelines.
Peter you want to sure had good morning, It's Peter Schultz.
I would say those sub markets continue to be the same as what we've talked about in prior quarters.
South Dallas Northeast Atlanta.
Hi, 80 in Chicago, and Central 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 account there are 12, 900 or a million square foot buildings offer 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 were active in are very very tight though was rising rents. So those obviously are going to be the areas. We focus our new investment dollars over the near term.
Not yet how about Denver, we're obviously going to have a pretty big land position.
Yet pretty big building a built there is there any any concerns there.
Okay, Eric its Peter So it's 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 our 555000 square foot building later this quarter.
I would say about half of the development is in that sub market and about half of that is build to suits.
And there are two other existing buildings.
That will be competing with and our size and a couple that are smaller.
So we don't really view that is.
As excessive certainly not relative to other markets demand continues to be good there we continue to see great great rent growth there.
And we will look forward to reporting to on our progress on our project.
Okay. Thank you.
Again, if you would like to ask a question Press Star then number one on your telephone keypad. Your next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, Hi, there.
I guess I was just wondering on that kind of supply.
Topic as it relates to you guys developing on 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 approximately 4 million square feet, we can bill and 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 off in the future.
Great and then maybe 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 or is that just kind of the way the quarter worked out and that could change in that.
Future. So we our team is continually trying to maximize the value of every lease that we have and obviously there are 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 cost four or five times more to have to re tenant. The building then to retain a tenant but were pushing rents strong I think thats evident in the 2019 rollover a number that we talked about.
And again I am trying to maximize the value of every lease is kind of how we look at the big picture.
Got it okay. Thanks.
Your next question comes from Michael Mueller with JP Morgan Your line is open.
Yes, hi.
So it looks like you break your portfolio up between bulk regional light and flex in terms of the major categories and I'm. Just curious are you seeing any notable cap rate differences as you move across those different categories.
So overall, we don't see really any difference between the ball outlay and regional the flex, which we own very little.
I'd say, it's a little bit higher cap rate.
Got it and has that been pretty consistent even even outside of the past six or nine months.
Oh, yes, there has been criticism, maybe you know over the past 10 to 30 years.
No the only thing like that.
Got it okay.
That was it thank you.
Again, if you would like to ask a question Press Star then number one on your telephone keypad.
Okay.
There are no further questions at this time I will now turn the call back over to Peter but Philly.
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.