Good afternoon. My name is Chantal, 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Art Harmon, Vice President of Investor Relations, you may begin your conference.
Thanks, Chantal. Hello, everyone, and welcome to our call. Before we discuss our Q2 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 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 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 ks 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 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 2nd quarter net absorption of 31,000,000 square feet and new completions of 41,000,000. That brings the year to date totals to 67,000,000 square feet of net absorption and 84,000,000 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 in the industrial market overall and in our portfolio. Our results are indicative of these strong fundamentals. Occupancy at quarter end was 97.3% and cash rental rate growth for 2nd 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 a 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-seven thousand eight hundred and eighty one in Central Pennsylvania with Ferrero USA Inc. That will commence by the Q4. 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 Q2.
We're building a 644,000 square foot facility on a site we acquired from our venture at the PB 303 Business Park. The building will be completed and occupied by year end. Our total estimated investment is $48,600,000 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 Q2. We're well underway on our 2 building 371,000 Square Foot First Grand Parkway Commerce Center in Houston slated for completion in the Q4.
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 Gunn 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 the 2 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 Q3, we pre leased 100 percent of our 120,000 square foot First Park at Central Crossing 3 in Central New Jersey.
We outperformed our underwriting to achieve a 6.4% cash yield on our total estimated investment of $12,700,000 The lease will commence at the start of the Q4. Summing up our development pipeline at June 30, we had a total of $449,000,000 of completed developments in lease up or under construction comprised of 6,000,000 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 Q2, we acquired 28 acres of land adjacent to our First Park 121 in Dallas for $7,400,000 This will enable us to build an additional 434,000 square feet in that park.
In the Q3 to date, we acquired a 6.9 acre site in an for $2,000,000 We've already commenced development of a 100,000 square foot building on the site with completion expected by the Q2 of 2020. Total estimated investment is $12,300,000 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 32,000 square feet for a purchase price of 7,100,000 dollars Our in place yield is 4.2 percent and we expect to achieve a yield of approximately 5% when we roll some near term expirations to market. In Denver's I-seventy quarter, we made a bolt on acquisition of an 85,000 square foot building located near our 1st Aurora Park.
Our purchase price was $9,000,000 and our yield is 5.3%. In addition to the Philadelphia development site I discussed, in the Q3 to date, we've also acquired 2 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 $5,600,000 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 7,300,000 dollars for which we are targeting a 5.9% stabilized yield. The land site is comprised of 2 acres in Fontana that we acquired for $1,600,000 on which we can build approximately 40,000 square feet.
Moving to dispositions. We sold 2 units in Miami totaling 12,000 square feet for 1,600,000 dollars Thus far in the Q3, we sold a vacant 110,000 square foot building in Northeast Pennsylvania for 6,000,000 dollars and a small land parcel in New Jersey for $244,000 Our balance sheet sales target remains $125,000,000 to $175,000,000 And as we discussed on prior calls, we'll be back end weighted. In our Phoenix joint venture, as previously disclosed, we sold a 147 acre site to a user with our share of the sales price totaling $18,200,000 The venture also sold 39 acres to FR for the aforementioned build to suit. Today, the venture owns 269 of the 5 32 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. 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 Q2, diluted EPS was $0.31 versus $0.36 1 year ago. NAREIC funds from operations were $0.43 per fully diluted share compared to $0.39 per share in 2Q 2018, primarily driven by an increase in NOI due to development lease up and same store growth. 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 3,100,000 square feet of long term leases. Of these, 446,000 square feet were new, dollars 1,900,000 were renewals and 724,000 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 and an increase in rental rates on leasing.
This was partially offset by a slight decrease in average occupancy as well as real estate tax tariffs for markets paid in arrears predominantly in Denver as we have explained previously. Lease termination fees totaled $443,000 and 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 percent 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 $150,000,000 of senior unsecured notes. The notes have a 10 year maturity and an interest rate of 3.97 percent, Reflecting the related settlement of interest rate protection agreements, the effective interest rate is 4.23%. Recall that these proceeds essentially refinance $72,000,000 of secured debt we paid off in the 1st quarter and $35,000,000 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 on to a few balance sheet metrics. At the end of 2Q, our net debt plus preferred stock to adjusted EBITDA is 4.9 times.
And at June 30, 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 on to our updated 2019 guidance for our press release last evening. Our NAREIT FFO guidance range is now $1.68 to $1.76 per share with a midpoint of $1.72 This is an increase of $0.02 from what we discussed in our Q1 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 percent to 97.75 percent.
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 G and A guidance range remains $27,500,000 to $28,500,000 and guidance includes the anticipated 2019 costs related to our completed and under construction developments at July 25. In total, for the full year 2019, we expect to capitalize about 0 point 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 $35,000,000 of expected secured debt payoffs I discussed the impact of any future gains related to the final settlement of 2 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?
Your first question comes from Craig Mailman with KeyBanc. Your line is open.
Hey, guys. Just a question, the cash rent spreads were impressive this quarter. I know it was more driven by renewals versus new. But as you guys however you guys look at it, the 20 roll 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% of the 2019 rollovers, we're up 13%. So that's a strong result. The markets are very, very tight.
Tenants don't have a lot of alternatives. It continues to be a landlord's market. So it's I think you'll see that kind of performance in the future.
And then just with the GLP portfolio going off in sort of the 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 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 we've certainly looked at doing some of that. Explore all avenues for driving value and price maximization in our dispositions. And to date, 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 the end users and 1031 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. Thank you. The assets that we're selling are not they're in different markets, an asset here and there.
They're not that conducive to getting the portfolio premium that you talk about.
Got you. All right. That's helpful. Thank you.
Your next question comes from Rob Stevenson with Janney. Your line is open.
Good morning, guys.
Peter, the cash rate index has dropped 5%, 6% the last couple of in each and last couple of months and 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 your clients as to what's going on? Is this just China tariffs signaling something else? Are any of the clients starting to feel any of this in their business?
What index I couldn't hear what you said at the beginning.
The cash rate index that came out, that just came out showing that the shipping is down.
So Rob, here's SoJo. What we track is the unloaded containerized cargo, the full, not the empties that we think that has the largest correlation to absorption in the port markets. So if you look at the biggest markets, whether it's Port of LA, Port of Long Beach or Port of New Jersey, the digit import containers are basically slightly up during the 1st 3 months of the year to 4 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 1. 2nd of all, what's been dry we have not heard any issues from our tenants from the reduction of the unloaded containerized cargo. Lastly, what we feel that drives really our absorption and rent growth is the tightest of these port markets. All the port markets where you invest in 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 LA. The occupancy rate, the market occupancy rate right now is sub-one percent.
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? And 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 yes. 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. Can you talk about your same store NOI guidance? Basically, you guys increased
a 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 fall out from a timing perspective?
Ki Bin, it's Scott. The 25 basis point increase in our midpoint same store guidance, it's first half outperformance and the lion's share 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 $1,000,000 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 $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 in the back half of the year also average occupancy is declining a little bit more than the first half of the year.
And keep it, remember, we had a really strong back half of twenty eighteen 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 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 part. This looks a bit more one off.
Anything to read into there? Are you kind of expanding what you want to develop, the 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 8 other buildings within that within about a 2 mile radius. So we like that submarket a lot, South Bay, Rancho Dominguez, you're familiar with all of these. And then so we will continue to find one offs on that area.
Where we acquired the other building, that's Inland Empire, where you know we're a big investor in for the right product in Inland Empire. So that's just a bolt 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 underserved 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 keeping in Seattle and that's just one vacancy in one building that we're having good activity right now.
All right. Thank you.
Your next question comes from John Guinee 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, noticed that you haven't tapped the ATM this year. Any thoughts on that, Peter?
So Chris, why don't you handle the first part? Yes. John,
this is Chris. As far as the OpEx, I think it's just on a quarter by quarter basis, you had some flexibility. If you look at Q1, we had some high CapEx or OpEx related to snow removal, but it's not anything of 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 retained capital, we'll have about $160,000,000 coming in. Our development spend back half of the year is $140,000,000 So in a good shape from that point of view, our leverage is low at 4.9 times. 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 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 in a little more detail. Obviously, you guys don't have explicit guidance on disposition. So I guess your usual bogey is about $150,000,000 in planned sales 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 changing and you just have less asset to sell or the market for dispositions isn't as strong as 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 125 to 175 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 just so happens that the sales this year are going to be more back end weighted than they even have been in the past. And we're really, Eric, focused on maximizing the value opportunity in these sales and less worried about what quarter they close in.
Okay. Thank you. Just a final question. Obviously, market fundamentals seem quite strong nationally, but maybe you could touch upon your markets. Are there any pockets or markets 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-eighty in Chicago and Central and Eastern PA.
And I would say 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 1000000 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 focus our new investment dollars over the near term.
Got
you. How about Denver, where obviously you now have a pretty big land position. And you have a pretty big building getting built there. Is there any concerns there?
So Eric, it's Peter Schultz again. I would say Denver has a little bit elevated supply, about 4,000,000 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 555 1,000 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 2 other existing buildings that we'll be competing with in our size and a couple that are smaller.
So we don't really view that as excess, 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.
Okay. Thank you.
Your next question comes from Caitlin Burrows with Goldman Sachs. Your line is
open. Hi, there. 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 11,000,000 square feet on land we currently own. That does not count the approximately 4,000,000 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 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. So 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? Strong
pushing hard on rent growth is certainly one of them. Strong pushing hard on rent growth is certainly one of them, minimizing concessions, extending terms where possible. And we're also mindful that it costs 4 or 5 times more to have to re tenant a building than to retain a tenant. But we're pushing rent strong. 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.
Got it. Okay, thanks.
Your next question comes from Michael Mueller with JPMorgan. 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?
Overall, we don't see really any difference between the bulk light and regional. The Flex 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?
Yes. That's been consistent maybe over the past 10 to 30 years. It's always been like that.
Got it. Okay. That was it. Thank you.
There are no further questions at this time. I'll 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.