First Industrial Realty Trust, Inc. (NYSE:FR) Q4 2023 Earnings Call Transcript February 8, 2024
First Industrial Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the First Industrial Realty Trust, Inc. Fourth Quarter Results Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead.
Art Harmon: Thanks very much, Dave. Hello, everybody and welcome to our call. Before we discuss our fourth quarter and full year 2023 results and our initial '24 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, February 08, 2024. 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 with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now, let me hand the call over to Peter.
Peter Baccile: Thank you, Art and thank you all for joining us today, and thank you to all of the members of the First Industrial team who navigated a challenging 2023 to once again produce some great results. We delivered another record year of cash rental rate growth on new and renewal leasing and then laid the groundwork for another strong year in 2024. We executed on both sides of the transaction ledger with attractive new investments and impactful sales. We finished a year with some key leasing wins in our in-service portfolio and our developments. Moving now to the broader industrial market, the increased level of tenant traffic we saw towards the end of 2023 has continued into 2024. With the overall economic picture and interest rate environment becoming a bit more clear and with slightly lower market volatility, more businesses are revisiting their space needs for growth.
On the supply side, as you know, starts nationally ramped up in 2022 and early 2023 to meet customer demand driving national vacancy to around 5%, still low by historical standards. Those projects have made and are making their way into inventory with completions for 2023 totaling $487 million square feet compared to net absorption of 239 million square feet according to CBRE. Importantly, the market has responded to this imbalance appropriately with new starts down around two-thirds from the peak. Within our portfolio, broader activity has resulted in several signed leases in both our in-service portfolio and new developments. We're pleased to announce two big long-term leasing wins in Baltimore. We leased 100% of the 644,000 square foot old Post Road asset to a government-related 3PL and 50% of our neighboring 349,000 square foot asset.
In our development portfolio, inclusive of our Phoenix Joint Venture, we signed a total of 651,000 square feet of leases since our last call. In the fourth quarter, we signed a 209,000 square foot lease at our First Park 94 building in the Kenosha submarket of Chicago. We also signed a 26,000 square foot lease at our first loop development in Orlando. So far in 2024, we've signed a 40,000 square foot lease at our first 76th Logistics Center in Denver. Also, in our Phoenix Joint Venture, we signed two leases at the 376,000 square footer to bring that building to 100% lease prior to completion. We've now fully leased two of the three JV buildings with the thirds slated to be completed in the second quarter. For the developments we placed in service in the third and fourth quarters of 2023 that are not currently fully leased, we have approximately 240 basis points of occupancy opportunity.
We're seeing prospect activity at most of these assets, so we hope to have more progress to report throughout 2024. As I mentioned in my opening remarks, we set a new annual record for cash rental rate increase for new and renewal leasing in 2023 of 58.3%. 2024 is also off to a good start. To-date regarding lease signings related to 2024 commencements, we've taken care of 53% by rental income at a cash rental rate change of 39%. We have a few leasing opportunities within our Southern California portfolio over the balance of the year, which we expect will bolster this metric. Overall for 2024, we're currently forecasting cash rental rate growth on new and renewal leasing of 40% to 52%. Moving now to the investment side, we brought home a few attractive deals during the fourth quarter for an aggregate purchase price of $37 million.
In Southeast Houston, we added a fully leased 54,000-square-foot building at our Energy Commerce Business Center asset. With this addition, we now own all five buildings totaling 676,000 square feet in this well-located park with frontage on Beltway 8. We also completed a sale leaseback transaction for a 69,000-square-footer in the Inland Empire West. Longer term, this investment provides us an opportunity to build a new 175,000-square-foot building on the site when the lease expires. Lastly, we acquired a nine-acre land site in Orlando for which we have a built-to-suit tenant in tow for 112,000-square-foot project. Our total investment, including the land, will be approximately $21 million, and the tenant is expected to take occupancy in 2025.
A construction site of a new industrial facility, emphasizing the company's developer capabilities.
Moving now to dispositions. In the fourth quarter, we sold 785,000-square-feet for $64 million. The largest sales were two buildings in Cincinnati for $23 million and a 264,000-square-footer in Central PA for $21 million. For the year, we sold 1 million-square-feet plus two land sites for a total of $125 million. With these property sales, we ended the year with 95% of our rental income in our 15 target markets, meeting the goal we laid out at our 2020 investor day, and 57% in our coastal markets, which exceeded the 55% high end of our target range. Scott will update you shortly on how we performed on our $260 million AFFO opportunity. Thus far in 2024, we closed on a five-building, 278,000-square-foot sale in Cincinnati for $33 million. For the full year 2024, we expect sales of $100 to $150 million.
Regarding our dividend, given our performance and outlook for growth, our board of directors has declared a dividend of $0.37 per share for the first quarter of 2024, or an annualized rate of $1.48. This represents a 15.6% increase from the prior rate and a low payout ratio of approximately 70% based on our anticipated 2024 AFFO, as defined in our supplemental. With that, I'll turn it over to Scott to provide additional details on our performance and our 2024 guides.
Scott Musil: Thanks Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.63 per fully diluted share compared to $0.60 per share in 4Q 2022. For the year, NAREIT FFO per share was $2.44 compared to $2.28 in 2022. Excluding $0.02 per share of income related to the accelerated recognition of a tenant improvement reimbursement associated with a departing tenant, 2023 FFO per share was $2.42. As a reminder, our fourth quarter and full year 2022 results included a penny per share of income related to the final settlement of insurance claims for damaged properties. Excluding this impact, fourth quarter and full year 2022 FFO per share was $0.59 and $2.27 respectively. Our tax same-store NOI growth for the fourth quarter excluding termination fees was 7.2% and for the year it grew 8.4%.
Our 2023 results were driven by increases in rental rates on new and renewal leasing, rental rate bumps embedded in our leases, and lower free rents were partially offset by a slightly lower average occupancy and an increase in real estate taxes. We finished the quarter with in-service occupancy of 95.5%, 10 basis points from the prior quarter helped by leases in Baltimore and Chicago partially offset by developments placed in service. Now we'd like to take a moment to recap our $260 million AFFO opportunity that we laid out at our 2020 Investor Day. We discussed the opportunity to grow our AFFO as defined in our supplemental to $260 million or $1.97 per share on a steady-state basis by fiscal year 2023, including the $41 million potential NOI impact related to the funded portion of our unleashed developments for 2023 AFFO approximates $289 million, $2.13 per share, which is well above the opportunity we discussed at our 2020 investor day.
Before I review guidance, let me remind you that on the capital fund we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in two of our bank loans. Also with our planned 2024 asset sales that Peter discussed and our expected excess cash flow after capital expenditures and dividends, we will have sufficient funding to complete our developments and process. Moving on to our initial 2024 guidance for our earnings release last evening, our guidance range for AFFO is $2.56 to $2.66 per share. Note that guidance excludes approximately $3 million or $0.02 per share of accelerated expense related to accounting rules that require us to fully expense the value of granted equity based compensation for certain tender employees.
Including this $0.02 per share of expense, our NAREIT AFFO per share guidance range is $2.54 to $2.64. Key assumptions for guidance are as follows. We are projecting quarter and average occupancy of 96% to 97%. Same-store NOI growth on the cash basis before termination fees are 8% to 9%, primarily driven by increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases. Note that the same-store calculation excludes the 2023 tenant reimbursement that I discussed earlier. Guidance includes the anticipated 2024 costs related to our completed and under construction developments at December 31st. For the full year 2024, we expect to capitalize about $0.05 per share of interest. Our G&A expense guidance range is $39.5 million to $40.5 million.
This includes the roughly $3 million in additional expense I referred to earlier. We expect first quarter G&A expense to be higher than each of the remaining quarters. Lastly, guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or repayments, nor the potential issuance of equity after this call. Let me turn it back over to Peter.
Peter Baccile: Thanks, Scott. Thanks again to my teammates for all of their efforts in 2023. We're excited about the opportunity to drive cash flow growth by continuing to capture market rent growth in our portfolio from new and renewal leasing, the embedded NOI opportunity within our completed and in-process developments and from our annual escalators and our leases. Also, we are well-positioned with coastally oriented land sites that can be put into production and provide attractive risk-adjusted returns as market conditions warrant. Operator, with that, we're ready to open it up for questions.
