Good day, and thank you for standing by. Welcome to the First Industrial Second Quarter 2021 Earnings Conference Call. I would now like to hand the conference over to your host Mr. Art Harmon, Vice President of Investor Relations. Thank you. Please go ahead, Sir.

Thank you, Katrina. Hello, everybody, and welcome to our call. Before we discuss our second quarter 2021 results as well as updated guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time-sensitive and accurate only as of today's date, Thursday, July 22nd, 2021. We assume no obligation to update our statements or the other information we provide.

Thanks, Art, and thank you all for joining us. Our team delivered another great quarter highlighted by strong operating results, robust development leasing and more investment for growth. Our efforts were supported by the overall economy and the industrial real-estate sector continue to gain momentum throughout the second quarter. Due to strong second quarter performance and the overall strength of the sector, we are increasing our FFO guidance which Scott will walk you through shortly. Per CBRE flash report, net absorption was a healthy 85 million square feet in the second quarter, while completions came in at a three-year quarterly low of 52 million square feet. Completions were impacted by reduced construction activity in 2020 as well as the continuing limited availability of readily developable land in highly sought-after locations. Through the first half of this year, net absorption was 150 million square feet outpacing new supply of 106 million. In the second quarter we were successful in driving occupancy while continuing to increase rental rates on new and renewal leasing. In-service occupancy at quarter end was 96.6%, an increase of 90 basis points from the end of last quarter. This increase in occupancy was accompanied by a 15.7% increase in cash rental rates on new and renewal leasing. The strength and breadth of tenant demand also carried over to our development investments evidenced by 1.2 million square feet of development leases signed in the second quarter and third quarter to-date. We are pleased to announce that our 250,000 square foot building at First Logistics center at 78.81 in Central Pennsylvania is now 100% leased to a leading consumer products company. This takes care of the largest vacancy among our completed developments.

Thank you, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.48 per fully diluted share compared to $0.40 per share in 2Q 2020 and our same-store NOI growth for the quarter on a cash basis, excluding termination fees was 2.1% helped by an increase in rental rates on new and renewal leasing, rental rate bumps embedded in our leases and lower bad debt expense slightly offset by a decrease in occupancy and an increase in real-estate taxes. Summarizing our leasing activity during the quarter, we commenced approximately 3.5 million square feet of leases. Of these, 1.1 million were new, 2 million were renewals, and 400,000 were for developments in acquisitions with lease-up. Tenant retention by square footage was 71.1%. Cash rental rates for the quarter were up 15.7% overall with renewals up 12.1% and new leasing up 22.7%. And on a straight line basis, overall rental rates were up 29.5% with renewals increasing 27% and new leasing up 34.4%. Moving out to the capital side. Peter mentioned we closed on two financing transactions this month for which the pricing demonstrates the strength of our balance sheet. First, we amended our line of credit which was scheduled to expire this October. Our new deal was for $750 million; it matures in four years with two six-month extension options. The interest rate is LIBOR plus 77.5 basis points, a pricing reduction of 32.5 basis points from our previous facilities credit spread. We also financed our $200 million term loan that was due to mature earlier this month. The new term loan matures in July 2026 and has an interest rate of LIBOR plus 85 basis points. This is a 65 basis point reduction in the credit spread compared to our previous term loan. With our interest rate swaps in place, the new fixed interest rate on the term loan is 1.84%. Given the strength of our credit matrix, the line of credit and term loan provide for pricing at the BBB+/Baa1 level which is one notch better than our current credit ratings of BBB flat/Baa2. This favorable pricing will be maintained as long as our consolidated leverage ratio as defined in the applicable agreements remains less than 32.5%. We would like to thank our banking partners for the many years of strong support for First Industrial. Reflected by these two executions, the weighted average maturity of our unsecured notes, term loans and secured financings was 6.5 years with a weighted average interest rate of 3.4%. At June 30th, our net debt plus preferred stock to adjusted EBITDA is 4.9 times.

Thanks, Scott. And thanks again to the FR team for another great quarter as we continue to achieve success on all fronts. Importantly, our pipeline of future projects is the strongest we've seen since the great recession which positions us well to continue to drive long-term growth and value for shareholders and serve the space requirements of our tenants. With that, operator, would you please open it up for questions. We ask that you please limit your questions to one plus follow-up and then you're welcome to get back in the queue.

Thank you, Sir. Our first question is from Craig Mailman from KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys. Could you just discuss a little bit of the prospects activity at the Pier 1 space and maybe what is it about the building or the submarket that is elongating the backlog process there?

Peter?

Sure, Craig. Good morning, it's Peter Schultz. Activity in the submarket continues to be good. The pipeline for new supply is very limited and tenants have relatively few choices. The lease signings to date have been in a couple of buildings that were bigger than us or smaller than us. Our building is positioned for immediate occupancy which is really important to the environment where we're seeing elongated permitting process and delays on materials. So, we're ready to go. We've seen a couple of shorter-term deals and that's not really our preference. And some of the longer-term deals are a little slower moving. So, we remain optimistic about our success there in the mark-to-market and as Scott said in his remarks, given the strength of leasing in the portfolio otherwise that more than offsets that. And we still have that as upside for the rest of the year. So, we'll keep you posted on our progress.

Yes Craig, with even with pushing out that lease up to 2022, we still plan to end the year around 97% occupancy. So, all things being equal, the lease-up of Pier 1 is about 1% percentage point of occupancy that would push us to about 98% which is verified air in the industrial sector.

I guess, Peter, are you guys close with the tenants or is it like your prospect pipeline is tenants point?

Craig, I would just reiterate, there is good activity in the market. We're evaluating a number of things as I said. Our preference would not be to do shorter-term deals and some of the longer-term deals are just slower moving.

And we would prefer, Craig, for it to be a single-tenant building as well. So, the size requirements in the market just needs to match up or just need to find the right match.

Okay, that's very helpful. Then Scott, as we think about your same-store guidance, you guys are running around a little over 2% for the first half of the year. Is it just going to be a big spike in 4Q as you lap the Pier 1 move outs that's just going to get you to the midpoint?

Yes, exactly. So, if you do the math based upon our annual midpoint guidance of 4.25% that implies about a 6% same-store growth rate for back half of the year. And Craig, you're right, the two main drivers, one is occupancy. So, we're going to do better in occupancy on the back half of the year which will add about 2.3 percentage points to the same-store. We're also going to do a little bit better on the back end of the year with increasing rental rates on new and renewal leasing. That's about a 0.6% increase compared to the first half of the year. And that takes care of the majority of the weighted to get us to this 6% of plus or minus that we think we'll achieve the back end of 2021.

Great, thank you.

Our next question is from Ki Bin Kim from Truist. Your line is open.

Thanks and good morning, guys.

Good morning, Ki Bin.

Good morning. So, you guys have made some pretty interesting investments in the Phoenix market. You're obviously bought PV303 and the remaining portion of lands to a 100% ownership and you have the Camelback plan as well. Can you just talk about the supply and demand dynamics in that market especially given that there seems to be about 23 million square feet that's being delivered in that market and only 25% pre-lease? I'm not sure how these broker reports are but I just want to get your take on it.

Sure, Ki Bin, hi this is Jojo. Phoenix, I would say has had a record first half; obviously there's been no absorption and it clearly trumped the completion by almost double. The first half of the year, year-to-date of sorts of net absorption of about almost 12 million square feet which is one of the highest rates I've seen in the last 15 years. So, again, very big demand. A lot of 3PL's, a lot of ecommerce rated, a lot of omni-channel. Manufacturers have come in as well. And a lot of demand for data centers. Historically if you look at what we have, every building that we develop we'll lease. Actually either before completion or right after completion; minimal downtime. As you know, we have a 547,000 square feet on balance sheet development and expandable to about 925. And now we're actually being proposed as we speak on that. So, we've got proposals and now we're looking at other options. This insurance I'll keep in the land that we bought. You look at that basis, that basis is sub-4, in fact about 360 per square foot. I can tell you to-date there's about 45% to 50% below market. So, right off the bat we believe we're in the money and we think of in the future that will yield that will give a base and we're in the rest out today that should be over six easy inside of the wheels. So, we're very bullish and now we're feeling good about our current investment. And by the way our portfolio there existing portfolio is about 98% leased today and going to a 100% pretty shortly.

Okay, thanks for that. And for you Scott, I know sometimes you guys give some color on the lease spreads for deals that are fine but not committed. So, when you look at the pipeline of deals that you have currently, what kind of spreads should we continue to expect?

So, there is well of the stat they were seeing as of today we've got 84% of the leases that are expiring this year signed. Even so that coupled with the new leasing that we've done for 2021, we're looking at a cash increase in rental rates of about 14.5%. So, it's very healthy when you include the renewals which we pretty much made it through the year and the new leasing that we've done.

Okay, thank you.

Our next question is from Rob Stevenson from Janney. Your line is open.

Good morning, guys. Can you talk a little bit about the Central PA land purchase and the 1.1 million square foot property you're building there? I mean, the land cost alone is nearly two times which you paid on a per-acre basis for the Inland Empire Parcel. Not used to seeing Central PA trading at that big of a premium to the California land. And then where should rents be here versus the $5 per square foot on your existing Central PA portfolio?

Rob, good morning. It's Peter Schultz. So, a couple of things. In Pennsylvania, as we've said on prior calls, bigger continues to be better. Demand has been most active and consistent in the 700 million square foot range and plus. So, that demand profile has been really strong. When you look at the supply, there has certainly been a fair number of million square footers that have been constructed, they're essentially all leased. There is only one other building today that's under construction in addition to ours in Central Pennsylvania. So, very limited choices for tenants with strong demand. The site as Peter mentioned in the remarks, this is very close to Harrisburg to the parcel hubs and the intermodals and importantly a much better labor story than some of the sites along the southern 81 corridor or up in North East PA. So, we really feel great about that combination of factors and location. In terms of the price, that's about $46 on a FIR basis. So, it's under the building which is a site that is fully entitled and permitted ready-to-go. So, we started construction the day after. So, Jojo can talk about the California site that is going through the entitlement process. But we think the opportunity here to create value is quite good with cap rates in that market at 3.75% and going lower today. Jojo, you want to talk about?

Yes. That in the net per-lease market, I wouldn’t want to pick that as market because that's way below market. We got that deal by assembling six parcels to two different sellers at the tip of the year, off market and right across the street, there was already a sale that's about 60% of our basis. So, that then hit the market where thanks to the team, so our LA Inland Empire team for getting that deal done. That's definitely in that market. If you look at it, that's under $7 a foot. Less prices there are where we have decided to be close to mid-teens. So, I would say you shouldn’t use that price as market because that's never hit the market.

Okay. And then second question. The pipeline now is about $500 million; you've got 80 million rough numbers completed in to be completed in the third quarter and there's a similar amount of announced starts. You guys have been doing a lot of significant pre-leasing on the pipeline. Do you sit here at this $500 million'ish level and is that where you're comfortable today? Do you let that drift up as demand pulls you in that direction? Does it fall back to a more sort of $350 million to $400 million'ish? As you look forward, how should we be thinking about the pipeline?

Yes, it's Peter. We can construct about 12.5 million square feet on our owned land, which translates to approximately one, excluding the 291 million we mentioned earlier. This represents about a $1.3 billion investment. Additionally, we have control over land that allows for another $320 million investment, and our portion of the Camelback joint venture accounts for an extra $340 million. When you total these amounts, net of the 291 million discussed, it approaches $2 billion in investment. Our volumes have increased recently, and moving forward, you should anticipate our development volumes to exceed historical levels. Remember, our company is significantly larger now than it was two or three years ago, so the figures you're discussing are more relevant to our future than they are to past performance.

Okay. Thanks guys, I appreciate it.

The next question is from Caitlin Burrows from Goldman Sachs. Your line is open.

Hi, good morning. Maybe just a follow-up on that last one. I guess, given the land then that you have and that investment opportunity that you have, what keeps you from moving forward more quickly as it just takes time to assemble or is there anything else that is keeping it from moving markedly?

Well, every single project has a story and a timeline and it's really just working through that. We haven’t tied the entitlement process takes a long time. We do face as everyone else does, potential delays with commodity inputs as you know there are shortages on steel and other commodity inputs. So, that influences the timing. You know we have speculative development and leasing cap. We have to manage that. We want to make sure that we continue to lease these new developments in a timely way. Building is great but if you don’t lease the buildings, that's not good. And so far as you've seen we're way ahead of schedule or ahead of pro forma on the lease-up of many of these projects where they're being leased at or near completion, in some cases before we even go vertical. So, the market's very strong where we only have great sites and now we're going to continue to roll them out as they're ready to go.

Got it, okay. And then maybe if you could just talk a little bit on what types of tenants you're seeing the most interest from and how deep that is. And if there's any visibility to how you think that these demands can continue forward then supporting those lease and spreads that you were talking about earlier.

Peter and Jojo, you want to add some color to that?

Sure. Hey, Caitlin. So, demand is very good across markets and very fragile. The most active industries would include transportation and logistics companies, ecommerce, food & beverage, consumer products, some apparel, some home building, home improvement. It continues to be very good. Tenants need space and we continue to see a lot of activity across the portfolio. Jojo?

Nothing really major but the existing tenants and not necessarily know this are just reconfiguring supply chains because their online business is continuing to increase. So, they just need to add more space.

Hey, Caitlin. Peter. Then we're not seeing any slowdown to your question of demand at all.

Got it. Okay great, thank you.

Our next question is from Michael Carroll from RBC Capital Markets. Your line is open.

Yes, thanks. Can you guys provide some color on I guess current market rents and how has that changed I guess over the past three to six months. And maybe highlight what type of rents that you were able to achieve on the 1.2 million stack development leasing this quarter versus underwriting. If you can provide details on that, would be great.

Guys, you want to talk about market rents?

Sure. For the first half of the year, market rents accelerated at one of the highest paces over the three-to-five year period. I would say the range would be 5% to 15%. It's hard to pick that number because it's different market by market. And towards the higher range would be the West Coast and immediately behind that would be East Coastal markets and then everything in between in terms of rent growth. So, it's been very robust. The thing is that what's happened in the market for the first half of the year is that supply did not meet the demand and that's why there is a squeeze.

And Mike, it's Peter. In terms of underwriting in general, all of the projects have leased earlier at higher rents at lower costs. As we've talked about, we've had a couple that took a little bit longer but in general we beat our underwriting across the board.

Great. Can you provide an update on the development margins you have achieved from the projects that were stabilized at the end of 2020? Additionally, could you share any insights on the developments that are currently in process and are fully leased? How are those performing right now?

Sure. So, like Peter said, out of the $605 million of development under construction at the end of the quarter plus the newly launched developments, our margin there is roughly 50%. And so, if you look at the recently announced, they're closer to the low-40's. Still, and recently above our targeted margins. So, in terms of trending, I would say that overall first half of this year could be the first half of last year. The margins have compressed a bit and here's the reason why. 1) Land costs, land prices have gone up and 2) construction costs have gone up. But the impact of that was much overly basically overcompensated by rental rate increases across markets and cap rate compression. So, you have some margin compression a little bit but that's primarily outweighed by the rental rate increases and cap rate compression. Does that answer your question?

It does. It's perfect. Thanks.

And our next question is from Dave Rodgers from Baird. Your line is open.

Yeah. Good morning everybody. Just wanted to ask about size ranges in terms of where rent growth is at. If you mentioned it, I missed it. And I apologize I can go back. But can you talk about maybe some broad size ranges and how rent performance has been or trended even since the beginning of the year?

Yeah, Dave, this is Chris. As far as from a size perspective, it's been pretty broad-based across all our size ranges. We're seeing healthy double-digit increases across all our size ranges.

Okay. That's helpful. And then has that changed what you're seeing in terms of maybe cap rate compression either between sizes or what we've seen, I guess, year-to-date from a market-by-market perspective? I think there's been some greater compression either in Bs and center of the country assets. It sounds like maybe would that also be starting to hit some parity, do you think? Or are you still seeing some differences in performance on cap rates?

Hi Dave, it's Jojo. The situation regarding capex compression is widespread. Investors are interested in all sizes of real estate, from large portfolio buyers to individual properties, and they are highly competitive. There is a significant amount of capital available across various segments, including acquisition, leasing, redevelopment, and development opportunities. Competition exists in every aspect of the market today in industrial.

I'd say cap rates have probably come in based on depending on the market, primary versus secondary, kind of 25 basis points to 50 basis points.

Anything above. Yes.

Okay. Yes. Thanks for that color. Peter Baccile, I think you mentioned the comment of development being larger going forward, sizing up with the company. Maybe we'd argue on this number. But one thing you haven't really sized up is the disposition program, I think relative to the size of the company, as you accelerate your development this year, and it sounds like into next year and continue to have success. I mean, should we start to think about an increased level of asset sales, repositioning even more aggressively than you have been in funding development that way? Or do we think about it more from an equity perspective?

I think the timing of sales and the volume of sales, there are a lot of different inputs. One is certainly the position of the particular assets that we're focused on, whether they're fully leased. We're looking to obviously maximize value on those assets. The volumes, I think, going forward, are going to be closer to that $100 million to $150 million range than maybe a few years ago when we were selling $225 million, $240 million. But that can change. Sometimes we get some unsolicited offers that we can't refuse on assets that maybe we didn't have at the top of our list to dispose of, in which case we'll take that opportunity to dispose of those assets. So yes, we're not going to probably move up the disposition volume like we are. The development pipeline is really the answer to your question.

Thanks. I appreciate that. Scott, one for you on bad debt. Can you tell us what that was in the quarter and the impact? I think you said it did have a positive impact on same-store and that's been the case, I guess, for kind of many years now. But can you give us an update on that?

Dave, it was effectively zero for the second quarter, which means for the first six months of this year at zero bad debt expense. So credit metrics are doing fabulously and that added about 17 basis points to our same store, which is one of the reasons why we increased our guidance. So very good showing, very low bad debt.

All right. Thank you for that. Last one, I'm just going to go back to Pier 1. Is that a long-term hold asset for you guys if you get it leased up? I guess going back to Craig's very first question is, I mean does it have the parking, the truck courts, the height, the column spacing that you want in a building long term?

So we really like that. It's Peter Schultz, Dave. We really like that submarket. As we've talked about in prior calls, high barriers, supply constrained. And we look at all of our assets as we say, asset management is an ongoing basis. So we'll continue to evaluate that. But we like that submarket. The assets are very functional. There's this one and the one next to it, which is a little bit smaller, certainly meet the market and compete favorably.

Okay. Thanks, everyone.

And our next question is from Vince Tibone from Green Street. Your line is open.

Hi. Good morning. I had a follow-up on your disposition commentary. I'm just curious, given the strength of the transaction market, why not be a little bit more active on property sales, not because you necessarily need the funds, but more to expedite portfolio goals, about going more coastal, I mean less flex that you laid out at the last Investor Day?

Yes. So we certainly think about that a lot. It's a good question. The nature of the buyers for what we're selling are typically focused on one-off deals, maybe they buy a couple at a time. Users buy about 30% of these assets that we're selling. You have the 1031 buyer who is active in these assets. And then you've got the local regional high net worth family offices who are also actively looking at the assets that we're selling. So they don't really lend themselves to big portfolios and the way that we can maximize the present value of those assets is to sell them the way we have. It doesn't mean that we don't consider from time to time trying to pull some together and taking a look at the market that way. So we evaluate all the potential options. And so far, the way we've been doing it has really been the best way to maximize value.

So I mean is it possible to increase volumes in this kind of the way you're doing it? Or you're kind of this $100 million to $150 million range is really the, I don't know, just maybe from a human capital perspective, all we're able to dispose of doing it one at a time?

No. I mean we have the resources internally to handle a bigger portfolio sale. And if you've seen in the last five years, we've sold to $200 million, $230 million in a crack. So that's not an issue. We're just, again, trying to maximize value and pace it out to do so.

Got it. That's helpful color. That's all I have. Thank you.

Thank you very much. And thanks everyone for participating on our call today. And as always, please feel free to reach out to meet Scott or Arthur with any follow-up question. And we look forward to connecting with many of you in the near future. Be well.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating; you may now disconnect.