Good morning. My name is Christie, 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 speakers' remarks, there will be a question and answer session.
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 Q1 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 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'll open it up for your questions.
Also on the call today are Jojo Yap, our Chief Investment Officer Peter Schultz, Executive Vice President Chris Schneider, Senior Vice President of Operations and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now, let me turn the call over to Peter.
Thank you, Art, and good morning, everyone. The Q1 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 1st 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%.
So the rent growth picture for the year is a good one. National statistics for the Q1 continue to evidence a disciplined market with good tenant demand. According to CBRE Econometric Advisors preliminary first quarter report, net absorption was 42,000,000 square feet versus completions of 35,000,000 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 are always mindful of credit quality. On the development side, as discussed on our last call, in the Q1, we leased and placed in service our 243,000 Square Foot First Sycamore 2 15 Logistics Center in Leland Empire. We currently have $291,000,000 under construction comprised of 4,200,000 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 6 building project in Chino known as The Ranch. We're pleased to say that we just signed a lease for 100 percent of the 156,000 square foot building with an international delivery company. We will also complete our 1st Joliet Logistics Center in Chicago and our 2nd building at PV 303 in Phoenix by the end of the Q2. Staying with Phoenix for a moment, we are developing the 2nd 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 PB 303 Park given its strategic location, which has already 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 5.30 2 net acres at the park, inclusive of a site we already had under option. As I said, we love the PV-three zero three submarket and this site and wanted to capitalize on the opportunity to control its future development. However, the investment represented a significantly outsized allocation to Pfenex 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 $49,000,000 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 nonrecourse construction loans. First Indochio 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 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 2nd building at our I-seven thousand eight hundred and eighty one project in Pennsylvania in the coming weeks. We expect to complete this 250,000 square foot building in the Q1 of 2019 and our estimated total investment is $17,500,000 Moving to acquisitions. We had an active quarter with $61,000,000 in 5 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 3 distribution assets that we acquired for $36,700,000 at the end of the quarter.
It's adjacent to the successful 3 building development project of comparable design and quality that we stabilized in 2016, so 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 and in place rents are below market. We assumed an $11,700,000 loan at closing with a 4.17% interest rate that matures in 2028. Our pro form a stabilized yield is 5.4%.
Other acquisitions in the quarter included in addition to our Orlando portfolio, a 94,000 square footer for $8,700,000 well as the 35,000 Square Foot Purchase in Seattle for $5,600,000 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 $3,300,000 where we can build a low coverage 77,000 square foot building. On the sales side, we sold 8 buildings and one land site for $42,400,000 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 $30,000,000 As a reminder, our sales target for the year is $100,000,000 to $150,000,000 So we're off to a good start.
We're very pleased to begin 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. Let me start with the overall results for the quarter. Diluted EPS was $0.30 versus $0.19 1 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 in our Q4 call and an impairment charge related to the anticipated sale of an excess land site, Q1 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 3,200,000 square feet of long term leases commenced during the quarter. Of these, 327,000 square feet were new, dollars 2,600,000 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 Q1, we closed on our private placement of $300,000,000 of senior unsecured notes with a weighted average interest rate of 3.91 percent and an effective interest rate of 3.83 percent reflecting the treasury lock we settled in 4Q. We paid off $158,000,000 of mortgage loans at a weighted average interest rate of 4.5% on March 1, 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 and P Global Ratings upgraded our unsecured credit rating to BBB. So both Fitch and S and 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 5.3x. And at March 31, 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. Now 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 the midpoint of $1.60 This midpoint is unchanged from our Q4 call. The key assumptions for guidance are as follows: average quarter end occupancy of 96.5 percent to 97.5 percent. 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% to 5%, reflecting our Q1 performance.
Our G and A guidance range is $26,000,000 $27,000,000 and this guidance range excludes the $1,300,000 severance charge recognized in the Q1. Guidance includes the anticipated 2018 costs related to our completed and under construction developments at March 31st and our newly announced start of our 2nd building at our I-seven thousand eight hundred and eighty one 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 square foot 2nd quarter start in Pennsylvania that Peter discussed, the impact of any future debt issuances, debt repurchases or repayments, the impact of any future gains related to the final settlement of 2 insurance claims from damaged properties, And guidance also excludes any future NAREIT compliant gains or losses, the impact of impairments and the potential issuance of equity. With that, let me turn it back over to Peter.
Thanks, Scott. 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?
Your first question comes from the line of Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Good morning, guys. Good morning. First off, congratulations on the BBB rating. I know that was a long time coming.
Thank you.
And so first question, the land side in Phoenix is obviously the potential is huge for square footage and development dollars. Can you just give us more details on what the overall scope of the project looks like? What makes it 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?
So I'll start this and kick it over to Jojo for his input as well. But 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.
And so that's really the long term plan. Ki Bin, Jojo, you want to talk?
Sure. In terms of Ki Bin, in terms of an 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 submarket 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 part that we now control basically sits between 2 full interchanges, which is Indian School Road and Camelback Road. So 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 1, which leased our 618,000 square feet. Dick's Sporting Goods is there.
Ball Corporation is there. REI, the fast growing outdoor company is also there. So 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, and we will engage in build to suit and speculative development.
And how about
the And in terms of keeping in terms of JV, we 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 is one that's what we can disclose.
Okay. And 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 percent of your portfolio? So maybe you would sell some of these assets, not just always hold long term?
So 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 2,700,000 square feet 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 1000000 square feet here.
We're unlikely to have that much exposure to Phoenix at the end of the day. But again, this is a 5 to 7 year project and that outcome will evolve over time.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.
This is Laura Dixon 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, sure. This is Jojo. Let's stay with The Ranch. For example, we're pleased to lease 155,000 square foot on international parcel delivery company. By the end of this quarter, we would have completed all of the 6 buildings there and we are getting tours and inquiries on all of the buildings.
And 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. And we are experiencing this in all of the rest of the buildings, including PB Field, 3,640,000 Square Feet First Logistics Center, the 7,008,801 building, the 7,801 Split in PA and even on First Nandina, which is our 1,400,000 square foot in La Napa East, which we do not expect to complete until the end of this year, including the 7,801, we are already getting tours and inquiries on that as well. And don't forget Gun Road, which is in Houston, that is inside the Beltway, very, very little supply for a high quality, smaller midsized project there, 126,000 square feet. We're getting a lot of inquiries on that asset too.
Great. I appreciate the color. Can you also just discuss construction cost trends in your markets?
Sure. Overall, they ranged from 4% to 5% nationally. The construction costs have increased a little bit more in the coast and that's because of subcontractor 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.
But overall, it hasn't impacted the overall yield and investment because steel is becoming is really a smaller component of our construction costs. But 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 run rate increase number.
Okay. Thank you. And then I'll jump back in the queue quickly. But 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 is have to be decided by both partners equally.
Okay. Thanks. I'll jump back in the queue.
Your next question comes from the line of Michael Mueller with JPMorgan. Please go ahead.
Thanks. Just following up on development leasing for the 1st Park ninety four 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?
Well, it's 50% leased at this point in time, Mike. What we have in the model is at the end of Q2, we'll lease up the remaining 50% of that project.
And the tenants that's there came in at completion, original completion.
Yes. So the original tenant came in end of Q1, early Q1 of last year.
Got it, got it, got it. Okay. And then, 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 $35,000,000 and $37,000,000 for 2018, Mike. And 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.
Your next question comes from the line of Dave Rodgers with Baird. Please go ahead.
Hey, good morning, guys. Maybe for Pierre 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, 90,000,000 to 100,000,000 square feet have gone dark. There's 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. So we don't
have a big
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. And there are deals that we turn down all the time where we're not so high in 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
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 So again, the trend continues with lower bad debt expense. And as Peter mentioned, really no one that we're on our watch list at this point in time, and 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. So we get a pretty good look down the road on potential issues that could come up.
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 Q4 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. So 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, 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, Q4? Do Do you have any
in there? For the developments, the $291,000,000 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 2nd quarter. That's about $0.05 a share for the year. So 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 1st Park 94 Building B project.
Okay, great. Thank you, guys.
Your next question comes from Zack 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 no non renewal at this point?
For 2019 2020, typical
exposure there, about 16% or 70% 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.
And for 2019 2020, it's not like we would hear at this point of time of the year if the tenant wasn't didn't want to renew the space. That will be conversations that we have in the upcoming quarters related to 'nineteen roll.
All right, perfect. And 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, but by and large, no big impact.
Your next question comes from the line of Ki Bin Kim with SunTrust. Please go ahead.
Thanks. So 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. So 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 the all the renewals we've taken care of for the 2018 rolls, that number is signed as about 7% for the year. So that number is a little bit better than expected. And then on new leasing, just overall, we've done a little bit better than we had anticipated.
And Ki Bin, just remember on a quarterly basis, when you see the number, it's the commenced leases in the quarter. So when we report that in our press release and in our commentary during this call, it's uncommunced. So we're just giving you a little viewpoint to the future there.
Okay. And 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. So 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 Jojo 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 which is not included in guidance, but can you clarify or estimate how many assets you're probably going to put on the market for sale this year or what you have on the market now?
Well, let me say this. We guided to $100,000,000 to $150,000,000 of sales. A bit of an atypical quarter. We don't normally close such a high percentage of our sales in the Q1. It just happened to work out that way.
And we feel good about being in that range at year end. I'm not sure I can really add anything to that, Eric.
Okay. And then, Scott, the 1st 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 signed at this point in time. So I would say it's probably in between of a forecast and a signed lease. But again, we have that forecasted at the end of the second quarter. Okay.
But 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 of larger portfolios either they're going in 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 set for that to
occur? So 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. So, 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.
There are no further questions at this time. Back to you, Peter Baccile.
Thank you, operator, and thank you all for seeing many of you at NAREIT in early June.