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Edited Transcript of FR earnings conference call or presentation 25-Oct-18 3:00pm GMT

Q3 2018 First Industrial Realty Trust Inc Earnings Call

CHICAGO Oct 31, 2018 (Thomson StreetEvents) -- Edited Transcript of First Industrial Realty Trust Inc earnings conference call or presentation Thursday, October 25, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur J. Harmon

First Industrial Realty Trust, Inc. - VP of IR & Marketing

* Johannson L. Yap

First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region

* Peter E. Baccile

First Industrial Realty Trust, Inc. - President, CEO & Director

* Peter O. Schultz

First Industrial Realty Trust, Inc. - EVP of East Region

* Scott A. Musil

First Industrial Realty Trust, Inc. - CFO

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Conference Call Participants

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* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Mei Wen Tan

JP Morgan Chase & Co, Research Division - Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

* Zachary D. Silverberg

Mizuho Securities USA LLC, Research Division - Research Associate of Americas Research

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Presentation

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Operator [1]

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Good morning. My name is Jason, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Industrial Third Quarter Results Conference call. (Operator Instructions) I would now like to turn the call over to Mr. Art Harmon, Vice President of Investor Relations. Sir, you may begin your conference.

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Arthur J. Harmon, First Industrial Realty Trust, Inc. - VP of IR & Marketing [2]

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Thanks, Jason. Hello, everybody, and welcome to our call. Before we discuss our third 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, Thursday, October 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 can 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 will open it up to 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.

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [3]

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Thank you, Art, and good morning, everyone.

Continued strong performance by our team, our portfolio and the industrial real estate market overall drove another excellent quarter. We grew occupancy 70 basis points to finish the quarter at 97.6%, cash same-store NOI grew at 6.8% and cash rental rates were up 9%. These metrics and others provide a firm foundation for continued strong rental rate growth in 2019.

As we've done in the past, let me give you a snapshot of our 2019 rollovers signed to-date. We've already inked approximately 40% of next year's roll at a cash increase of 10.7%.

We note that this is only a portion of leases to roll, but directionally, it's a useful data point for you on 2019 rents at this point in time.

We are in the early phases of our budgeting process and we'll be able to give you an updated picture for the full year on our fourth quarter call in February.

Moving on to the bigger picture, fluctuations in the stock market, concerns over trade and tariffs and the increase in interest rates, rightly have many wondering about the direction of the economy.

However, the U.S. economy is strong, with solid GDP growth, high consumer confidence and record or near-record unemployment that is driving a strong labor market and some real wage growth.

From our viewpoint, we continue to see tenants investing in their supply chain to accommodate future growth and consumption.

CBRE Econometric Advisors' preliminary third quarter report is consistent with this view. New additions to supply are not keeping up with tenant demand in most markets.

Third quarter net absorption was 63 million square feet compared to completions of 50 million and year-to-date net absorption was 166 million square feet, with completions at 141 million square feet.

So for the first 9 months of this year, we've seen tenants continue to grow their businesses, while facing limited alternatives for their industrial space needs.

We are taking advantage of this dynamic to drive strong cash flow and NAV growth.

Let's turn to development leasing. During the third quarter, we were successful in leasing our 644,000 square footer at First Park @ PV 303 in Phoenix, on a long-term basis to XPO Logistics.

Our total investment was $41.1 million and our cash yield was 7.8%. The lease will commence during the fourth quarter and the building will also be placed in service at that time.

As discussed on our last call, during the third quarter, we leased 3 additional buildings totaling 422,000 square feet at The Ranch by First Industrial in the Inland Empire to bring that project to 62% occupied.

We placed in service the 301,000 square footer and the 50,000 square footer during the third quarter. The lease at the 71,000 square footer will commence during the fourth quarter and it will be placed in service then as well.

At September 30, we had completed developments in Southern California, Phoenix and Chicago totaling 1.4 million square feet. Total investment for this group is $103 million, with an expected cash yield of 7.5%. These projects are currently 50% leased.

As we discussed on our last call, we had 4 new starts during the third quarter totaling 1.2 million square feet. These were comprised of our First Aurora Commerce Center in Denver, First Park 121 in Dallas, First Perry Logistics Center in the Inland Empire East and First Glacier Logistics Center in Seattle.

Total investment for these buildings is estimated at $96.5 million and our targeted stabilized cash yield is 6.7%.

We have 3 projects totaling 2.5 million square feet, for which we're wrapping up construction in the fourth quarter, namely: our First Nandina project in Southern California; our 2-building development, First Logistics Center @ I-78/81 in Pennsylvania; and First 290 @ Guhn road in Houston. In total, we had 3.7 million square feet of speculative investments under construction at September 30, with a total investment of $261 million and a targeted stabilized cash yield of 7%.

In the third quarter, we continued to build our development pipeline by closing on 2 adjacent 5-acre sites for a total of $3.9 million in the Inland Empire, right near First Nandina and several of our other successful developments in Moreno Valley.

The combined site will support a 231,000 square footer, for which we are working on entitlements.

In the fourth quarter to date, we closed on the acquisition of a 121,000 square-foot building, with an adjacent development site in New Jersey at Exit 7 off the Turnpike for a total purchase price of $16.6 million.

The purchase price allocation to the building was $12.9 million and the building is 100% leased to 3 tenants, with an in-place cash yield of 6.3%.

We intend to build a similar 120,000 square footer on the land parcel. We're finishing some permitting and design work, and expect to start that development in the early part of 2019.

Moving on to sales, we had a successful quarter with dispositions totaling $22.5 million, which included 4 buildings and 3 land parcels. In the fourth quarter to date, we've had 1 additional sale, an 84,000 square-foot building in Southern New Jersey for $4.2 million.

Including this fourth quarter sale, we've completed $125 million of sales year-to-date.

As noted in our last call, our original guidance for the year was $100 million to $150 million and we now expect to be at or above the top end of that range.

While the overall demand picture is good, we would be remiss by not acknowledging the recent and well-documented challenges faced by some retailers. The most visible being Sears and its Kmart subsidiary. And I note that we do not have any exposure with them.

We do have leases with both Mattress Firm and American Tire Distribution (sic) [American Tire Distributors], which both filed chapter 11 bankruptcy earlier this month. We leased 170,000 square feet to Mattress Firm in Phoenix and we leased 2 spaces to American Tire Distribution (sic) American Tire Distributors , namely 119,000 square feet at our only building in Salt Lake City and 126,000 square feet in Orlando.

In total, leases to these firms represent 72 basis points of our third quarter net rent.

We've received October rent for both of these tenants and as of this call, we have not received any formal notice of lease rejection. We're closely monitoring both situations, but feel good about the long-term positioning of these buildings and our ability to retenant them, if necessary, at similar or higher rental rates.

So thanks to all my teammates around the country for an excellent quarter. I know you share my enthusiasm for our growth opportunities and putting the finishing touches on a successful 2018.

And with that, Scott will walk you through some additional details on the quarter and our guidance.

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [4]

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Thanks, Peter. In the third quarter, diluted EPS was $0.24 versus $0.36 1 year ago. NAREIT funds from operations were $0.41 per fully diluted share compared to $0.41 per share in 3Q 2017. Excluding the approximately $0.01 gain from land sales, third quarter 2018 FFO was $0.40 per share. This compares with FFO of $0.39 per share in 3Q 2017, excluding the mark-to-market of interest rate protection agreements.

As Peter noted, occupancy was 97.6%, up 70 basis points from the prior quarter and up 40 basis points from a year ago.

Regarding leasing volume, approximately 1.8 million square feet of long-term leases commenced during the quarter. Of these, 512,000 square feet were for new leases, 904,000 were renewals and 415,000 square feet were for developments and acquisitions.

Tenant retention by square footage was 84.3%.

Same-store NOI growth on a cash basis, excluding termination fees, was 6.8%, driven by higher average occupancy, rent bumps, an increase in rental rates on leasing and lower free rent.

Results were also helped by 160 basis points from lower landlord real estate taxes compared to the year ago quarter. Recall that we had a tax true-up in 3Q '17 that negatively impacted our same-store results a year ago.

Lease termination fees totaled $88,000 and including these fees, cash same-store NOI growth was 6.6%. Cash rental rates were up 9% overall, with renewals up 9% and new leasing up 8.9%.

On a straight line basis, overall rental rates were up 19.7%, with renewals increasing 18.8% and new leasing up 21.5%.

Quickly moving on to a few balance sheet metrics. At the end of the third quarter, our net debt plus preferred stock to adjusted EBITDA is 4.8x. And at September 30, the weighted average maturity of our unsecured notes, term loans and secured financings was 6 years, with a weighted average interest rate of 4.24%. These figures exclude our credit facility.

Now moving on to our updated 2018 guidance for our press release last evening.

Our NAREIT FFO guidance is now $1.56 to $1.60 per share, an increase of $0.01 at the midpoint and tightening of the range compared to the second quarter call. Excluding the gain from the third quarter land sales and the severance and impairment charge recognized in the first quarter, FFO per share guidance is $1.57 to $1.61, with no change to the midpoint and tightening of the range.

The key assumptions for guidance are as follows: ending in-service occupancy for the fourth quarter of 97% to 98%, which implies an in-service quarter-end occupancy of 97.1% to 97.4% for the full year, an increase of 25 basis points at the midpoint; fourth quarter same-store NOI growth on a cash basis, a 4.5% to 6%, this implies a quarterly average same-store NOI range of approximately 5.5% to 5.9%, an increase of 70 basis points at the midpoint driven by our third quarter results. Our G&A guidance range is now $26.5 million to $27.5 million, an increase of $0.5 million at the midpoint related to an increase in our expected performance-based compensation cost

This 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 September 30. In total, for the full year of 2018, we expect to capitalize about $0.05 per share of interest related to our developments.

Our guidance does not reflect the impact of any future sales or acquisitions after this earnings call or new development starts, the impact of any future debt issuances, debt repurchases or repayments. Guidance does not reflect the impact of any future gains related to the final settlement to insurance claims from damaged properties. And finally, guidance also excludes any future NAREIT-compliant gains or losses, the impact of impairments and a potential issuance of equity.

With that, let me turn it back over to Peter.

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [5]

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Thanks, Scott. Our team and our portfolio are delivering excellent results in a strong market environment. We're excited about our new development investments, which will drive long-term cash flow and NAV growth, while allowing us to serve the logistics needs of our tenants.

The economy is strong, wages are growing and consumption reached an all-time high of $12.8 trillion in the second quarter.

With the ongoing secular shift in demand from e-commerce, more and more of what is consumed is moving through our facilities. We expect this trend to continue and look forward to taking advantage of new growth opportunities and to driving shareholder value. With that, operator, would you please open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Craig Mailman from KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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Peter, maybe just going back to your comment that 40% of next year's roll is already in the bag. Just curious kind of how you guys approached the decision to renew early in an environment where, as you said, most markets aren't even at equilibrium between supply and demand. So just kind of the view there on the burn the hand versus letting it ride a little bit to maybe see where market rents go and where that mark-to-market could trend?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [3]

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Well, first of all, obviously, in this kind of a market, we're not the ones pushing that conversation. The tenants typically do, if they're paying attention to when their lease is supposed to roll. And the results from it, as our team is out there really trying to maximize the value of all of our lease conversations, all aspects. There's a lot of different inputs. And the results, so far, are pretty outstanding. So we absolutely are focused on trying to maximize term, maximize rate, minimize any kind of concessions. And the timing of those discussions is really, in large part, up to the tenant. Again, we wouldn't choose to have them until a little bit later.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [4]

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And then, just as we think of it, with -- I know you guys aren't giving guidance yet, but just kind of maybe talk about trajectory or magnitude with 40%, kind of, in the bag, kind of, those near 3% escalators. I mean, it seems as though initial guidance should probably trend higher on same-store relative to maybe what you guys gave in the fourth quarter of '17 for initial '18 outlook. I guess, besides maybe the Mattress Firm and the American Tire exposure, what are the big potential drags there that would prevent same-store from continuing to be sustained in that 5%-plus range next year?

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [5]

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Craig, it's Scott. You're right. I mean, you're going to be able to count on rental rate bumps and increases in rental rates for same-store growth next year. The other 2 items that we're looking at, we're going through our budget process and we'll give you an idea of our guidance range in our fourth quarter call, as what our average occupancy is going to be in 2019 compared to '18. And also, what our free rent assumptions are going to be. So like I said, I can tell you that 2 of these, we're definitely going to get increases on, occupancy and free rent, we're going through our budget process now and we'll give you an update on our fourth quarter call.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [6]

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So maybe if I can just sneak one last one in, a clarification. On the New Jersey acquisition, the 6.3% cap, is that on the existing asset? Or is that blended once you guys develop the land parcel as well?

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Peter O. Schultz, First Industrial Realty Trust, Inc. - EVP of East Region [7]

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Craig, it's Peter Schultz. So the 6.3% is in place on the existing asset and we haven't set what the yield is going to be on the new asset, as we're finishing some permitting and design. We'll do that in our next call.

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Operator [8]

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(Operator Instructions) Your next question comes from the line of Rob Stevenson from Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [9]

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Are there any markets right now where you're seeing significant changes in the supply, either the supply mounting or the supply dissipating that you expect to influence 2019 operating fundamentals?

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [10]

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Sure. Not big -- not a big change -- it's Jojo, by the way. Not a big change. If you look at, for example, South Dallas, there is -- I mean, earlier this year, tenants had already a number of choices to lease big box. And that environment, that situation still remains the same. I'd say, Northeast Atlanta, there's still some product to cycle through. But not a major change. There's been a lot of absorption in the markets, but also continued additional supply. But not a major change. Most markets continue to be tight. In most markets, absorption still continues to exceed completion.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [11]

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Okay. And then, are you guys seeing any changes in leasing behavior as a result of the accounting change on the onboarding of the leases going forward? Is that changing anybody's thought in terms of how long a lease they want to sign? Or whether or not they're going to wind up deciding to own stuff rather than lease?

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [12]

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This is Scott. No impact. I mean, these lease rules have been, probably for the last 5 to 6 years, people knew they were coming along and we haven't seen any differences in what the tenants want. They're looking at the same lease terms. So no change.

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Operator [13]

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And your next question comes from Eric Frankel of Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [14]

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Scott, can you share the rationale for the fairly wide range in same-store NOI growth outlook for the fourth quarter? Is that just a caution regarding some of these bankrupt retailers in your portfolio?

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [15]

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Yes, Eric, it's going to be -- we gave a range of occupancy that could be and it could be bad debt expense as well. The 2 tenants that we referred to, they paid October rent. But if for some reason they rejected the leases and didn't pay in November and December, that alone would be about $0.5 million impact to our same-store. So those are going to be the main drivers, Eric.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [16]

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Okay, that's helpful. And then, I know you've touched -- your team has touched upon, kind of, the fluctuations in the stock market and the cost of your equity capital. Can you comment next year on your ability to potentially self fund your growth if it came to that?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [17]

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Well, as you know, we're -- our debt-to-EBITDA is 4.8x, so that's pretty low. We've got no drawings on our credit facility. And we will, as we have done in the past, continue to dispose of assets, taking capital out of the lower-growth assets and looking to reinvest in higher-growth opportunities. So we've got plenty of liquidity.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [18]

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And would the asset sales cause any taxable gain issues?

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [19]

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Are you talking for 2019, Eric?

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [20]

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Yes, like you ask yourself, right, is the base low enough will it be available like on the product development...

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [21]

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Yes, they could. But I mean, in general, if you look at '18, at least, we had excess dividends above taxable income, excluding gains. This year, we were very successful in doing 1031 exchanges. We can still do the same thing in 2019. And keep in mind, we still have the $47 million of NOLs that we generated back in 2009 and 2010. So we've got a lot of tools to manage taxable income.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [22]

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Can you just comment when those NOLs expire? I don't know the rules behind that.

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Scott A. Musil, First Industrial Realty Trust, Inc. - CFO [23]

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Around 2029, 2030, so we got plenty of time to use them.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [24]

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Yes, sure. Just final question. Any particular comment on the lease of some of your larger development projects, maybe First Nandina or your development in Pennsylvania?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [25]

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We continue to see a lot of good activity around those assets and really, around all of our development assets and recently completed projects. We don't have anything to report yet on the assets that you mentioned. But Peter, I don't know if you want to add any color on Pennsylvania?

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Peter O. Schultz, First Industrial Realty Trust, Inc. - EVP of East Region [26]

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Sure, Eric. I would just say that we continue to respond to RFPs and see interest. Both of those buildings are just wrapping up this quarter. So we look forward to reporting to you on future calls on that activity.

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [27]

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Jojo, on Nandina?

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [28]

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Yes. Same here. We're having inquiries and tours. No lease to report yet. We like the demand-supply situation there. If you're a tenant today looking for anything over 1.2 million square feet, our building is the only one available.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [29]

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Are there that many tenants looking for a space that size on a speculative basis?

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [30]

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Yes.

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Operator [31]

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Your next question comes from the line of Zach Silverberg from Mizuho Securities.

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Zachary D. Silverberg, Mizuho Securities USA LLC, Research Division - Research Associate of Americas Research [32]

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I see that new starts are expected to achieve around 6.7%, below the 7% you've been achieving in the past. Is that a market-specific dynamic? Or do you see that 6.7% number turned up as you gain more knowledge about the market?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [33]

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Look, I'll start and Jojo can respond as well. There's no question that it's going to be difficult to maintain the margins that we've achieved over the last 4, 5 years. As you know, they've been kind of north of 50% or so. But we do believe we can continue to earn 100 to 150 basis points above prevailing cap rates. And so you'll see the yields come down a little bit. And we also have rising construction cost.

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [34]

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Yes, in addition to what Peter mentioned, these assets, which you mentioned, which are in the market of Seattle, Northeast Dallas, Denver and Inland Empire, these should be trading today Class A in the low 4s to high 4s. And so we're still very, very pleased with the spread. But yes, you're absolutely right, it has come down from 7%. And the reason for that, Peter started to say, is land prices have increased, construction costs have increased. Rental increase has partially offset that and also you have a competitive environment. We're still comfortable that we can meet our goal of 100 to 150 basis points spread on exit.

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Zachary D. Silverberg, Mizuho Securities USA LLC, Research Division - Research Associate of Americas Research [35]

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All right. That's helpful. And I guess switching gears here, lately Amazon's gotten into a bit of bad press, whether it's paying their warehouse workers or customers' privacy with the data or growing too big. Do you see any headline risk to Amazon at all? Or has that changed how you think about them?

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Peter O. Schultz, First Industrial Realty Trust, Inc. - EVP of East Region [36]

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This is Peter Schultz. We haven't seen or heard of any impact in the markets. We obviously can't comment on any specific leases we have with them, given the tight confidentiality. But there's no buzz I've heard about that from anybody in the market.

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [37]

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The thing I want to add there is that, that's really good for our industry. Any growth by Amazon just shows that the direct fulfillment in consumers is increasing. And we expect again that, that this business does increase. Also note, that it's not only Amazon that's in the market for -- there are a significant amount of new startup e-commerce companies trying to do the same thing and also omnichannel retailers. So if Amazon is successful with increasing, we would expect the whole business environment to increase their sales on a direct fulfillment with basically e-commerce, which is good for our business.

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Operator [38]

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And your next question comes from Bill Crow of Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [39]

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Two questions. First, a follow-up to a prior discussion. On construction cost increases, one of your peers mentioned a week or so ago that the inflation in the cost to develop and construct has come down to maybe 4% or 5% -- 4% to 6%, somewhere in that range from 10% to 20%. Is that consistent with what you're seeing?

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [40]

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Okay. Bill, this is Jojo. Basically, year-to-date, costs -- construction costs have increased anywhere from 5% to 15% on our projects. And it depends on the size of buildings and the markets you're in. The West and the East Coastal markets have increased a little bit more than the middle part of the country. And if you go down to some of our buildings, the costs have also increased. So yes, it has been at a higher rate than typically, over the past couple of years, construction costs have increased closer to the 3% to 4.5% range. So we think going forward, it'll moderate a bit and -- going forward. But yes, year-to-date, it has increased. For us, it's been 5% to 15%, depending on market and size of building.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [41]

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Great. Peter, my other question is for you, I think. And appreciate the fact that you outlined very limited exposure to some of the troubled retailers. How do you think about the overhang that a bunch of potentially vacant distribution centers from Sears and Kmart and Mattress Firm and others might have on your markets? Are there any markets, in particular, that you're worried about with looming vacancies?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [42]

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So we've -- we're familiar with many of the assets that companies like Sears and Kmart and JCPenney have. They're not what we would call, typically, functional or in locations where they would be competing with what we own. So we're not as concerned about that in terms of the go forward. And Toys"R"Us has facilities out there too. Again, they fall in the same category. They're just not located nor do they have the functionality that we are providing in the assets that we're developing today.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [43]

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Are there -- is there any opportunity to acquire these assets and make them functional and capture a better yield?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [44]

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We haven't broken them down but the economics of those trades are probably going to be tough to pencil up.

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Operator [45]

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(Operator Instructions) And your next question comes from Ki Bin Kim of SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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So if I think about your development pipeline, I think an overwhelming majority, maybe 100%, of your projects have been spec. So what is it about what you're seeing or your strategy that makes you want to do more spec versus build-to-suit?

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [47]

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So we basically have opportunities to do both, but we feel that -- look, we -- the strategy really belongs to our belief of where demand will exceed supply on the -- on a particular size range. So if we see that situation, what typically happens is that, almost all the time, our yields and our spreads are significantly higher than build-to-suits. So -- and the reason is, is that at that point of time when we finish our building, tenants have fewer choices. As you all know, when you are in a build-to-suit, and there's nothing wrong with building build-to-suits, the typical build-to-suit tenants have more time and have the ability to basically shop their business. And so, so far, we've been very successful in developing to a higher risk-adjusted return. And so -- and also the other thing I want to add is that we do not have a big land bank. So if you look at how we've done our land strategy, we've usually put into service and put into production land that we buy. And so that's another thing, if you have a big land bank, you should be more aggressive in build-to-suits. And we don't have a big land bank.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [48]

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Okay. And for your next round or 2 of development projects, and this might be more of an industry-wide question, but are you finding that, maybe, you have to target a different risk spectrum or maybe you have to go out another kind of outer ring from the core city to find good land sites? And how much tougher is it getting for the next round of development?

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [49]

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Sure. A couple of comments here. Number one, I mean, land -- I mean, development investment is getting a bit more difficult because, of course, environment is very competitive, construction costs have -- are increasing, rental rates kind of offset that. But to give you an example, so for example, in our new starts, we're building -- we don't really have to go much further -- Southern Kent Valley, we're developing a 66,000 square feet, that's First Glacier. On Inland Empire East, we're developing -- we are -- we've started 240,000 square feet. So that's not a large big box, but that just comes off our success of developing First San Michele, if you'll remember, and leasing up First 215. Now Aurora, we're building this 555, in the most active corridor, I-70 East. So that's not going away very fast. We were able to opportunistically buy a land site there, somewhat off market. And the last asset is definitely more of a infill type investment in Dallas, where it's Northeast Dallas. It's our First Park 121 wherein we see a growing need, because this is one of the -- this is right in the middle of one of the fastest-growing cities in Dallas. It's in the middle of Flower Mound, Frisco and servicing McKinney, which is the top 3 growing cities in the market. And that's where we're building multitenant products, servicing the smaller to midsize tenants rather than the big box. So I guess, Ki Bin, I mean the strategy here is really you really need to be on the ground, trying to ascertain where there's a shortage of supply and where demand will continue to exceed supply.

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [50]

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And the small assemblage we just did in California.

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [51]

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Yes. Just like Peter noted, this -- we just bought 2 parcels, this is a 2 land assemblages of 5 acres each, both off-market deals. And one actually is dealing with a seller we dealt before. So one-off opportunities like that are critical in our continued success.

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [52]

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And Ki Bin, because we're a profit shop and not a volume shop, we can -- and we have 16 offices across the country and people on the ground, we think we can continue to generate the kind of growth that we have been in the center of these -- the core of these high-barrier markets.

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Operator [53]

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And your next question comes from Sarah Tan of JP Morgan.

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Mei Wen Tan, JP Morgan Chase & Co, Research Division - Analyst [54]

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I'm on for Michael Mueller. So you mentioned coming in towards the higher end of your disposition guidance of a $100 million to $150 million for the year. I know you guys haven't exactly given 2019 guidance yet, but how can we think about the cash flow recycling plans going forward in terms of developments on acquisitions and sales?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [55]

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Right. So as you know, we don't guide on development starts or acquisitions. In terms of sales, we haven't really determined what that's going to look like for '19 yet. We'll let you know on our next call. But generally speaking, the volume is probably going to be similar to what it has been in the last few years.

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Operator [56]

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And your next question comes from Eric Frankel of Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [57]

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Just one quick follow-up. It was related to Amazon but maybe not specific to them. There seems to be a lot more automation and more specialized features in new warehouses, some -- a lot of it driven by Amazon with the mezzanine levels and extra-high ceiling heights. Can you comment on how those types of improvements are being valued by the market, if there's any particular transactions that you're aware of?

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Peter O. Schultz, First Industrial Realty Trust, Inc. - EVP of East Region [58]

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Eric, this is Peter Schultz. I might approach it a little bit differently. So as we think about design and development of our buildings today, we're designing in features to accommodate more power, more air conditioning, whether it's for cooling for automation or we run the automation and things like that. Because we think that's an important element on a go-forward basis as more and more buildings add more and more automation to them. And Jojo probably has a comment to add as well.

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Johannson L. Yap, First Industrial Realty Trust, Inc. - Co-Founder, CIO & Executive VP of West Region [59]

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Sure. And in terms of building design, we also want to make sure that we build for the long term, that -- and not that multistory mezzanine is not long term, but for now there's a lot of broad-based tenants who wants the 36 to 40 clear heights, a lot of loading, not a lot of mezz. We're designing it to be really functional and generic for a broad-based tenant, plus the ability to multitenant. So we're sticking to that to make sure that we have a long-term asset. In terms of -- there's not a lot of trades out there, Eric, in terms of how investors value like multistory, 3-, 4-, 5-story buildings that are warehouse distribution. There's not a lot of trade, so I can't comment on that. But surely in terms of our design, we're sticking to what we think would be appealable to the broad-based tenant base.

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Operator [60]

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(Operator Instructions) And we do have a question from [Sam Shamie] of [Shamie Development].

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Unidentified Analyst, [61]

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Yes, is there any chance in the next 6 months to a year, that you're going to be increasing your common dividend to the shareholders?

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [62]

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So that's a conversation that we will review with our board in the coming months. We haven't really determined yet what the dividend's going to be for 2019, but we will let you know when we have figured that out.

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Operator [63]

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And there are no further questions in queue. I would now like to turn the call over to Peter Baccile.

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Peter E. Baccile, First Industrial Realty Trust, Inc. - President, CEO & Director [64]

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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 the NAREIT Conference in San Francisco in a couple of weeks.

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Operator [65]

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Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.