Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Art Harmon, Vice President of Investor Relations and Marketing. You may begin your conference.
Thanks, Christy. Hello, everybody, and welcome to our call. Before we discuss our first 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, Wednesday, April 25, 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 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'll open it up for your questions. Also on the call today are Johannson Yap, our Chief Investment Officer, Peter Schultz, Executive Vice President, Chris Schneider, Senior Vice President of Operations, and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Let me turn the call over to Peter.
Thank you, Art, and good morning, everyone. The first quarter of 2018 was a solid start to the year for First Industrial and for the industrial real estate market in general. Our occupancy at quarter end was 97.1%, up 130 basis points from a year ago, and only a 20 basis point reduction since year-end, which is less than the typical first quarter dip. We also delivered cash same-store NOI growth of 6.1% and cash rental rate growth of 9.3%, reflecting the outstanding efforts of our team and the strength of our portfolio and the leasing markets. As of today, we have signed approximately 70% of our 2018 rollovers at a cash rental rate change of 7%. The rent growth picture for the year is a good one. National statistics for the first quarter continue to evidence a disciplined market with good tenant demand.
According to CBRE Econometric Advisors' preliminary first quarter report, net absorption was 42 million square feet versus completions of 35 million square feet. As we look across our markets, we continue to see strong, broad-based demand. Tenants are investing for growth and to reconfigure their supply chains in an ever-competitive marketplace. Given good overall demand for space, high market occupancy levels, and continued discipline with new construction, tenants have fewer options. Our team is focused on maximizing cash flow from all leases, which involves not only pushing rents, but maximizing term while minimizing improvements, and of course, we're always mindful of credit quality. On the development side, as discussed on our last call, in the first quarter, we leased and placed in service our 243,000 square foot First Sycamore 215 logistics center in the Inland Empire.
We currently have $291 million under construction, comprised of 4.2 million square feet, with a projected cash yield of 7.2%. At this cash return, our projected margin on this batch of developments is north of 50% based on prevailing market cap rates for comparable leased assets. We plan on delivering these projects over the next few quarters, and we're encouraged by the early leasing interest. Of this group, we will shortly wrap up construction on our six-building project in Chino, known as The Ranch. We're pleased to say that we just signed a lease for 100% of the 156,000 square foot building with an international parcel delivery company. We will also complete our First Joliet Logistics Center in Chicago and our second building at PV 303 in Phoenix by the end of the second quarter.
Staying with Phoenix for a moment, we are developing the second building at First Park at PV 303 on the heels of our successful lease of our first building there, which serves as UPS's new regional hub. We like the long-term position of the PV 303 park, given its strategic location, which has already attracted several major corporate users, and we think the presence of UPS will serve as an attraction for other prominent companies. Earlier this year, we became aware of the opportunity to acquire the remaining entitled industrial site totaling 532 net acres at the park, inclusive of a site we already had under option. As I said, we love the PV 303 submarket and this site and wanted to capitalize on the opportunity to control its future development. The investment represented a significantly outsized allocation to Phoenix, given the current size of our portfolio.
Not wanting to lose the opportunity, we decided to find a project-specific joint venture partner for this site. We are very pleased to have engaged Diamond Realty, the U.S. real estate arm of Mitsubishi Corporation, as our partner. Together, we acquired the site for $49 million in an all-cash transaction with our interest at 49%. The venture will engage in speculative development as well as build to suits and one-off land sales to users for their own build-to-suit needs. At approximately $2 per land foot, we believe we have a highly competitive basis. Target leverage for each speculative or build to suit project is 55% loan to cost, and the venture will utilize non-recourse construction loans. First Industrial will earn development, asset management, property management, disposition, and leasing fees, and we have the opportunity to earn a promote beyond an established return for the joint venture.
This joint venture will be accounted for under the equity method of accounting. Let me be clear that we don't view this venture as a new line of business for us, but rather a specific means to control what we believe to be the premier distribution park under development in Phoenix, and to capitalize on that opportunity without incurring outsized risk in that market. Lastly, we will start our second building at our I-78/I-81 project in Pennsylvania in the coming weeks. We expect to complete this 250,000 square foot building in the first quarter of 2019, and our estimated total investment is $17.5 million. Moving to acquisitions, we had an active quarter with $61 million in five buildings plus a land site. Our largest acquisition was a project we call First Park at Ocean Ranch 2 in San Diego.
This is a 225,000 square foot portfolio of three distribution assets that we acquired for $36.7 million at the end of the quarter. It's adjacent to the successful three-building development project of comparable design and quality that we stabilized in 2016. We are glad to have a park-like concentration of low-finish distribution assets, which are scarce and in high demand in this market. As with many of our acquisitions, this transaction had some complexity, which we used our platform to solve. We have a 67,000 square foot vacancy to lease up. In-place rents are below market. We assumed an $11.7 million loan at closing with a 4.17% interest rate that matures in 2028. Our pro forma stabilized yield is 5.4%.
Other acquisitions in the quarter included, in addition to our Orlando portfolio, a 94,000 square footer for $8.7 million, as well as the 35,000 square foot purchase in Seattle for $5.6 million. The in-place cap rate on each of these acquisitions was 5.7%. We also added a Dallas development site as discussed on our last call. Thus far in the second quarter, we have closed on a 4.6-acre site in the Inland Empire West in Fontana for $3.3 million, where we can build a low coverage, 77,000 square foot building. On the sales side, we sold eight buildings and one land site for $42.4 million at a weighted average in-place cap rate of 7%. Our largest sale was a 322,000 square foot portfolio of primarily light industrial and flex assets in Baltimore for $30 million. As a reminder, our sales target for the year is $100 million-$150 million.
We're off to a good start. We're very pleased to begin 2018 with strong results and look forward to keeping you apprised of our progress toward our goals as we look to create value and drive long-term cash flow growth. With that, I'll turn it over to Scott.
Thanks, Peter. Diluted EPS was $0.30 versus $0.19 one year ago. NAREIT funds from operations were $0.38 per fully diluted share, compared to $0.36 per share in 1Q 2017. Excluding the severance charge we discussed on our fourth quarter call and an impairment charge related to the anticipated sale of an excess land site, first quarter 2018 FFO was $0.40 per share. This compares to $0.37 per share in 1Q 2017 before the loss from retirement of debt. As Peter noted, occupancy was 97.1%, down just 20 basis points from the prior quarter and up 130 basis points from a year ago. Regarding leasing volume, approximately 3.2 million square feet of long-term leases commenced during the quarter.
Of these, 327,000 square feet were new, 2.6 million were renewals, and 305,000 square feet were for developments or acquisitions with lease-up. Tenant retention by square footage was 77%. Same-store NOI growth on a cash basis, excluding termination fees, was 6.1%. This was driven by rental rate bumps, increase in rental rates on leasing, an increase in weighted average occupancy, and lower free rent. Lease termination fees totaled $93,000, and including termination fees, cash same-store NOI growth was 5.7%. Cash rental rates were up 9.3% overall, with renewals up 9.1% and new leasing up 10.5%. On a straight-line basis, overall rental rates were up 18%, with renewals increasing 16.6% and new leasing up 25.6%. Moving now to the capital side.
As discussed on our last call during the first quarter, we closed on our private placement of $300 million of senior unsecured notes with a weighted average interest rate of 3.91% and an effective interest rate of 3.83%, reflecting the treasury lock we settled in 4Q. We paid off $158 million of mortgage loans at a weighted average interest rate of 4.5% on March 1st, bringing our secured debt as a percentage of gross assets ratio below 10% to approximately 8%. During the quarter, we also received some good news from the rating agencies. At the end of February, S&P Global Ratings upgraded our unsecured credit rating to BBB. Both Fitch and S&P have us rated at BBB flat. Quickly moving on to a few balance sheet metrics. At the end of 1Q, our net debt plus preferred stock to adjusted EBITDA is 5.3 times.
At March 31st, the weighted average maturity of our unsecured notes, term loans, and secured financings was 6.5 years, with a weighted average interest rate of 4.41%. These figures exclude our credit facility. Moving on to our 2018 guidance for our press release last evening. Our NAREIT FFO guidance is now $1.53 to $1.63 per share, with a midpoint of $1.58. Excluding the severance and the impairment charge, FFO per share guidance is $1.55 to $1.65 with a midpoint of $1.60. This midpoint is unchanged from our fourth quarter call. The key assumptions for guidance are as follows. Average quarter-end occupancy of 96.5%-97.5%. We increased the midpoint guidance for same-store NOI growth on a cash basis by 25 basis points to 4.5% and narrowed the range to 4%-5%, reflecting our first quarter performance.
Our G&A guidance range is $26 million to $27 million. This guidance range 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 March 31st and our newly announced start of our second building at our I-78/I-81 project. In total, for the full year 2018, we expect to capitalize about $0.04 per share of interest related to our developments. Our guidance does not reflect the impact of any future sales, acquisitions, or development starts after this earnings call, other than the 250,000 sq ft second quarter start in Pennsylvania that Peter discussed, the impact of any future debt issuances, debt repurchases, or repayments, or the impact of any future gains related to the final settlement of two insurance claims from damaged properties.
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. 2018 is off to a strong start. We have a great opportunity to deliver value and cash flow growth from maximizing lease economics and through lease-up in our development pipeline as we capitalize on the favorable fundamentals and long-term demand drivers in our sector. With that, operator, would you please open it up for questions?
At this time, if you would like to ask a question, please press star, the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Good morning, guys.
Morning.
First off, congratulations on the BBB rating. I know that was a long time coming.
Thank you.
First question. The land site in Phoenix is obviously the potential is huge for the square footage and development dollars. Can you just give us those more details on what the overall scope of the project looks like? What are the merits of this location that make it attractive to users long term, and some details like JV fees or promotes that might be involved?
I'll start this and kick it over to Jojo for his input as well. As you know, it's 532 acres. The plan here and the vision that we share with our partner is to sell off some of the sites to other users for their own build-to-suit needs, develop some of the land on spec, as well as do a build-to-suit. We like this market. We think we can develop to similar yields as we have already done in that marketplace. That's really the long-term plan. Ki Bin, Jojo, you want to talk?
Sure. In terms of, Ki Bin, in terms of industrial park, this is the best industrial park in servicing the Southwest Phoenix market today. The Southwest Phoenix market today is the largest distribution and logistics sub-market in the whole Phoenix area. It has garnered the most amount of net absorption over the last 10 years. Why this is the best? We feel it's the best because it has the best access and the least amount of congestion coming off straight from 10 and basically getting off 303, which is the major new highway. This park that we now control basically sits between two full interchanges, which is Indian School Road and Camelback Road. Bar none, if you are a distributor, you cannot have better access than to this site servicing the whole Phoenix and the regional market.
It has also garnered significant amount of blue-chip tenants and companies, UPS being one, which leased our 618,000 sq ft. DICK'S Sporting Goods is there. Ball Corporation is there. REI, the fast-growing outdoor company, is also there. You already see discriminating customers coming in there. Of course, we feel good about the future amenity that UPS will be providing tenants out there as well. Nothing really more to add to what Peter said in terms of the plan. We will pursue strategic land sales to users only, we will engage in build-to-suit and speculative development.
How about in terms of JV?
In terms of, Ki Bin, in terms of JV, like we said, we cannot disclose the financial terms of the economics. What we've disclosed so far, we're 49% interest in the JV. We will earn asset management fees, leasing fees, development fees, and property management fees, and a potential incentive promote over a hurdle. That's what we can disclose.
Okay. As you build out the project, obviously, your market exposure to that market will grow. Is there a certain kind of longer-term cap you want, where you want to limit the Phoenix market to grow as a % of your portfolio? Maybe you would sell some of these assets, not just always hold long-term.
As you know, we're going to own 49% of whatever is completed there by the venture. This is going to be an evolving thing, Ki Bin. We have 2.7 million sq ft in Phoenix today. That includes our UPS property as well as the building we're about to finish up. This development site, if you do the math, you'll see you can build several million sq ft here. We're unlikely to have that much exposure to Phoenix at the end of the day. Again, this is a 5-7-year project, and that outcome will evolve over time.
Okay. Thank you.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey, everyone. This is Laura Dickson here with Craig. Can you discuss the leasing and the development pipeline? You had the lease at The Ranch this quarter, but can you elaborate on the early leasing interest you're seeing on the rest of the space?
Sure. This is Jojo. Let's stay with The Ranch, for example. We're pleased to lease the 155,000 square foot to an international parcel delivery company. By the end of this quarter, we would have completed all of the six buildings there. We are getting tours and inquiries on all of the buildings. The demand is broad-based. You have 3PLs. You have light industrial users. You have omni-channel retailers. You have pure e-commerce companies. You have food and beverage companies. We are experiencing this in all of the rest of the buildings, including PV 303, 360, 40,000 sq ft. First Logistics Center, the I-78/I-81 building, the I-78/I-81 split in PA. Even on First Nandina, which is our 1.4 million square feet in the Inland Empire East, which we do not expect to complete until the end of this year, including the I-78/I-81.
We are already getting tours and inquiries on that as well. Don't forget Gunn Road, which is in Houston. That is inside the Beltway. Very, very little supply for a high-quality, small or mid-size project there, 126,000 square feet. We're getting a lot of inquiries on that asset, too.
Great. Appreciate the color. Can you also just discuss construction cost trends in your markets?
Sure. Overall, they ranged from 4%-5% nationally. The construction costs have increased a little bit more on the coast, and that's because of increase in subcontractor margins. We've seen a little bit more increase in TIs when you go to the smaller projects because of the tightness of labor.
As you know, steel has increased a bit on that. Overall, it hasn't impacted the overall yield on investment because steel is really a smaller component of our construction cost. Overall, as we invest more also in the coast, what we're finding is that construction cost is becoming a smaller and smaller part of our total investment as land prices continue to increase.
Great. Thank you.
Your next question comes from the line of Eric Frankel with Green Street Advisors. Please go ahead.
Thank you. Scott, can you just clarify the difference between your GAAP and cash same-store NOI growth results?
Well, the difference, Eric, primarily is going to have to do with free rent offer during the period and the rental rate bump stream in the new lease compared to the old lease.
With that free rent burn-off, is that related to the developments that were contributed to the same-store pool, or is that just within the operating portfolio?
That should just be in the operating portfolio because the development leasing would not be in the cash rental rate increase number.
Okay, thank you. I'll jump back in the queue quickly, just regarding the joint venture for the Phoenix development, is there any particular reason why you only took a 49% ownership stake? Do you still have control of what the venture does in the future?
Eric, this is Jojo. In terms of control, every major decision has to be decided by both partners equally.
Okay, thanks. I'll jump back in the queue.
At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Michael Mueller with JPMorgan. Please go ahead.
Thanks. Just following up on development leasing. For the First Park 94 building that's 50% leased, can you remind us when rent commenced or is expected to commence for that portion of it that's leased?
It's 50% leased at this point in time, Mike. What we have in the model is at the end of second quarter, we'll lease up the remaining 50% of that project.
The tenants that's there came in at original completion.
Yeah. The original tenant came in end of first quarter, early first quarter of last year.
Got it. Okay. Scott, on the CapEx front, where do you see CapEx penciling out for 2018 for normal course, TI, leasing commissions, maintenance?
We think that number could be between $35 million and $37 million for 2018, Mike. Again, as we continue to sell properties, that number may change, but I think that's a pretty good range at this point in time.
Got it. Okay. That's it. Thanks. Bye.
Our next question comes from the line of David Rodgers with Baird. Please go ahead.
Hey, good morning, guys.
Hey, Dave.
Maybe for Peter or Scott, you could split this one first. Last year, you talked a lot about bad debt that was a benefit to your same-store number, but maybe a bigger question, I think retail, I don't know what the number is, 90 million-100 million square feet have gone dark. There's been a couple of additional high-profile bankruptcies or liquidations. Do you have a watch list that might be growing? Is this impacting your business at all? Have you just been kind of lucky to avoid it? Just kind of broader thoughts on kind of where bad debts are, impacts, and those issues.
We don't have a big exposure to retailers. I guess our biggest exposure would be to Best Buy, and they're actually doing pretty well. They've adopted a pretty strong e-commerce strategy. Other than that, we don't really have a big watch list. We try to avoid poor credit. There are deals that we turn down all the time where we're not so high on the credit. We don't really have a long list of tenants that we're keeping a close eye on. Scott, I don't know if you have anything else to add.
Dave, I would agree. We budgeted in our guidance $500,000 of bad debt expense in 1Q. It actually came in at $88,000. Again, the trend continues with lower bad debt expense. As Peter mentioned, really no one that were on our watch list at this point in time. We look at our credit on a monthly basis.
We have an aging report. We go through every single tenant. We have quarterly operations calls. We go over it. We get a pretty good look down the road on potential issues that could come up.
That sounds like a good position to be in. Maybe Scott, on the same-store expense increase, I think it was 9% this quarter.
Right.
Just some accruals in there, what hit that, and how does that trend the rest of the year?
Well, primarily the increases, Dave, are due to real estate taxes and snow removal costs. The taxes you'll probably see throughout the year. Obviously, the snow removal you won't see the next couple of quarters. Maybe we'll get some in the fourth quarter of 2018. The good news about the expense increases, though, Dave, is that it was almost offset dollar for dollar in an increase in recoverable income. There was very minimal, if any, leakage related to the increase in expenses.
Okay, great. That's helpful. With regard to the development pipeline leasing, how much is in your guidance for revenue or NOI, FFO, however you think about it, for leasing up the development pipeline this year with the number of completions you have kind of second, third, fourth quarter? Do you have any in there?
For the developments, the $291 million, we have nothing built in other than the 156,000 square foot lease we just signed. We also have in the remaining lease up of our First Park 94 Building B at the second quarter. That's about $0.005 a share for the year. Really, the only thing that we need to get done for the remainder of 2018 to hit our plan as far as development is concerned, is to lease up the remaining 50% of our First Park 94 Building B project.
Okay, great. Thank you, guys.
Your next question comes from Zachary Silverberg with Mizuho Securities. Please go ahead.
Hi. Thanks, guys. Just looking at lease expirations, is there anything big in 2019 or 2020 that's a known non-renewal at this point?
For 2019 and 2020, typical exposure there, about 16% or 17% of our leasing rolling. For 2018, the rest of the year, as you heard, very little rollover exposures. We've taken care of about 70% of our rollovers already.
For 2019 and 2020, it's not like we would hear at this point in time of the year if a tenant didn't want to renew the space. That'll be conversations that we have in the upcoming quarters related to 2019 roll.
All right. Perfect. Are you guys seeing any early impact or, I guess, on tax reform, anything unexpected that you've come across?
No, not really. Not a big reaction on the part of the tenants. We do see some groups who want to own their properties that could be motivated by the tax changes. By and large, no big impact.
All right. Thanks, guys.
As a reminder, if you would like to ask a question, that is star one. Your next question comes from the line of Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Last quarter, you guys said you leased about 60% of leases that were set to expire this year at a 5.9% higher cash rent. Since then, what was the kind of the surprises that led you to post 9.3% cash rent growth in relative short time?
Ki Bin, this is Chris. If you look forward to all the renewals we've taken care of for the 2018 rolls, that number signed is about 7% for the year. That number is a little bit better than expected. Then on new leasing, just overall, we've done a little bit better than we anticipated.
Ki Bin, just remember, on a quarterly basis, when you see the number, it's the commenced leases in the quarter. When we report that in our press release and in our commentary during this call, it's on commenced. We're just giving you a little viewpoint to the future there.
Okay. Is there any difference in demand for your different types of configurations for your warehouses or by age?
Ki Bin, it's Peter Schultz. I would say not really. We continue to see pretty broad-based demand across the country, as Peter mentioned in his remarks, across space sizes, across geography, and great fundamentals and good demand from a broad base of industries. No, it hasn't really been age specific. Clearly, there's a lot of demand for new product in a number of markets, including where we're building, as Johannson described.
Okay. Thank you again.
Your next question comes from the line of Eric Frankel with Green Street Advisors. Please go ahead.
Thank you for taking my follow-up questions. I know you don't forecast dispositions or at least it's not included in guidance. Can you clarify or estimate how many assets you're probably going to put on the market for sale this year? What you have on the market now?
Well, let me say this. We guided to $100 million-$150 million of sales. It's a bit of an atypical quarter. We don't normally close such a high percentage of our sales in the first quarter. It just happened to work out that way. We feel good about being in that range at year end. I'm not sure I can really add anything to that, Eric.
Okay. Scott, the First Park 94 lease projections, is that based on ongoing negotiations or is that just a budget estimate?
We have people looking at the space, Eric. Obviously, nothing's signed at this point in time. I would say it's probably in between of a forecast and a signed lease. Again, we have that forecasted at the end of the second quarter.
Okay, great.
We don't have anything signed at this point in time.
Okay, thanks. I kind of lied. One more final question. There's going to be a couple larger portfolios, either they're going on the market or they're on the market for sale. Can you talk about perhaps your appetite for growing your portfolio in a large transaction, and what kind of parameters would need to be set for that to occur?
We like the strategy that we have in growing in our core markets. We will certainly look at anything that comes to market, but it has to fit into that strategy. Our interest will depend heavily on the makeup of any portfolio that might come to market and how it contributes to our ability to grow in the target markets that we want to grow in.
Okay. Thank you.
At this time, I just want to remind everyone, in order to ask a question, that is star one. If there are no further questions at this time, back to you, Peter Baccile.
Thank you, operator, and thank you all for participating on our call today. Please feel free to reach out to Scott, Art, or me with any follow-up questions, and we look forward to seeing many of you at NAREIT in early June.
This concludes today's conference call. You may now disconnect.