First Industrial Realty Trust Inc (FR) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Industrial Realty Trust second quarter results conference. At this time all participants have been place on a listen-only mode and the floor will be open for your questions and comments following the presentation. I would now like to hand the floor over to First Industrial. You may begin.

Good morning, everyone. And thank you for joining us today. Before we review the quarter let me remind you that this conference call contains forward-looking information about First Industrial.

A number of factors could cause the company's actual results to differ materially from those anticipated including changes in economic conditions generally and the real estate market specifically, legislative and regulatory changes including changes to laws governing the taxation of real estate investment trusts, availability of financing, interest rate levels, competition, supply and demand for industrial properties in the company's current and proposed market areas, potential environmental liabilities, slippage in development or lease up schedules, tenant credit risks, higher than expected costs and changes in generally -- general accounting principals, policies and guidelines applicable to real estate investment trusts.

For further information on these and other factors that could effect the company's -- the company and the statements contained herein, reference should be made to the company's filings with the Securities and Exchange Commission.

I will now turn the call over to Mike Brennan, President and CEO. Mike?

Thank you, Mike, and welcome, everybody to our second quarter 2002 conference call.

With me today is Mike Havala, our Chief Financial Officer, and Yap, our Chief Investment Officer, and , our Director of Investor Relations and Corporate Communication.

Our agenda today -- I'm going to begin with an outlook on the operating environment to take you through the progress of our plan. Mike, as he has in the past, will give us further financial detail on our operating results and our balance sheet and will finish up by giving you a discussion of our investment and portfolio performance including a discussion of our activities in the corporate real estate arena.

So let me begin on the operating environment. And let me say that our outlook overall remains one of continuing challenges throughout 2002. And I would also say, too, that perhaps our outlook differs a bit from that of the peers or some of the commonly expressed beliefs that we will have a recovery in the third and fourth quarter.

As we said in the past, the drop in corporate profits has led and continues to lead to a sharp retrenchment in capital spending for plant and equipment. Specifically business investment dropped 11 percent from the fourth quarter of 2000 versus the first quarter of 2002.

And net capital spending we think is one of the most significant things that drives absorption. And that drop in capital spending has led to negative absorption and that has led to increasing vacancy, which has led also to downward pressure on rents.

That I think is the real truth of the environment today. The other thing that maybe is not fully appreciated or discussed as much that we've discussed in the past in February and April is the issue of over capacity.

While manufacturing output did rise by about .8 percent in June, remember that plant utilization still stands at 76 percent versus the 30 year average of 82 percent. And that's very important because despite where vacancy goes, in order for somebody to become a customer they've got to burn through over capacity.

So the two things that our industry has to consider and not to underestimate is both the vacancy and the issue of overcapacity. Now I certainly see some bright spots in the market. There's no question about that. I think first is -- we're very pleased to see that construction continues to decline.

By our estimations we've seen about a 30 percent decrease over levels in 2001 and we've also seen increases in the absolute amount it takes -- of space taken, which we call gross absorption. And certainly that is positive.

The imbalances in inventory we think have largely been worked off. Another bright spot in the market is obviously something that we continue to benefit by as the high prices paid for industrial properties fueled in part by low interest rates in part by the perceived stability of the sector and in part due to lack of investment alternatives. Industrial properties -- both good and bad news -- continue to be highly sought out by investors. And that has obviously a good side to it.

And, finally, the heightened level of corporate real estate activity. As I've spoken to you before, when we go around and we talk to our customers -- and I think this is not -- no surprise -- everybody's looking for three things -- to get more efficient, to have their earnings increased and there's an increasing need for liquidity.

With respect to efficiencies -- supply chain reconfigurations and consolidations are picking up momentum. Back in 2001 we discussed that this would occurred. Well, this is really picking up in a significant way. Just this quarter we were active participants in two very significant supply chain reconfigurations -- General Motors and Maytag, for instance.

There is obviously a need for earnings. And real estate holdings contain large reservoirs of gains for companies. So that will be a consideration as they sell these properties. And also there's a need -- and I think an increasing need -- for liquidity among companies as there's less internally-generated cash to fund what capital needs they do have.

And there's also an increasing cost to capital. Remember that obviously as earnings go down there is less coverage, there's less capacity to leverage. So that gives them less options for financing expansions through increases in debt. And obviously when stock prices go down there's less of a willingness or an ability to finance through equity raises.

So therefore -- and you're seeing this in increasing numbers -- real estate can improve obviously efficiency, it can improve in earnings, it can improve liquidity. So firms will place an increasing emphasis on real estate sales in the future.

So, having talked about the good things and the bad things, when will this market change? Well, our view is that it will not change in 2002. And our recent guidance reflects that view. The mid point of our guidance now was the low end of our guidance in the first quarter of 2002. We simply think that there's too much space, think there's too much excess capacity and the corporate managers that we see continue to limit capital spending to only the most pressing needs.

But our expectation is to expect gradual improvement throughout 2003 and I think that I can point -- we can point to some tangible evidence that that recovery is underway.

Now I mentioned that manufacturing posted its .8 percent increase this quarter but I think it's also significant to point out this is the first year over year increase since January 1st. And 17 out of the 20 firms that report into that particular -- that survey reported gains versus 18 out of 20 that reported decreases in the first quarter of '01. So that's clearly a positive sign.

Obviously we need -- and there is over capacity. This obviously is an indication of decreasing in over capacity but one that still exists. Second, the vigorous steps that we're taking in 2001 to reduce inventories we think is largely over. So that the move-outs that we're occasioned because of that or the lack of ability to lease up -- I think that particular aspect of the market has largely played itself out.

And, finally, there are certainly, as I mentioned, accelerating declines in construction especially in early start construction and that is very important because I think -- I think everybody would agree that there will be far less starts in 2003. So that sets the stage for a -- much stronger fundamentals in 2003. And I don't think we could have said any of these things at the beginning of 2002. Let me now just transition into our results for this quarter. Despite the difficult environment we accomplished much this quarter.

With respect to our portfolio, we increased occupancy. Our retention was strong at 67 percent. We posted positive rental rate growth and we had significant new leasing activity. In fact, this was one of the very best quarters that we've had in six quarters on leasing activity and better than the first quarter.

With respect to our investment activity, the last time that we spoke I had said that obviously it was a good time to sell but a tough time to buy but we would not sacrifice -- we would not cheer dilution at the cost of buying capital losses or lowering our investment standards. And we were able to navigate through this issue and this quarter.

As will talk about, we achieved a 250 basis point spread on buys versus sells and we generated internal rates of return of 19.2 percent, which is the highest that we've had in about 18 months.

Finally, our corporate real estate activities integrated industrial solutions never had a better quarter. Just this quarter we closed General Motors for 1.8 million square feet. That was four buildings throughout the United States.

We finished Maytag's East Coast supply chain reconfiguration for 1.1 million square feet.

Today we have 2.5 million square feet of corporate acquisitions under agreement. And just this quarter we signed or started 1.1 million square feet of new build to suit.

The other thing I can tell you is that in and around the office here we have close to $250 million of new submittals in our office. We assume we are not going to buy all of them -- don't know how many we will buy. But that submittal activity, which is obviously the first start is very, very active.

So before I hand it over to Mike I just want to finish up on where are we going from here? I think the first thing I want to tell everybody -- mention -- is that I think it is important -- we've made the decision as a company to make our projections based upon as is conditions in the market.

So when we spoke to you in the first quarter I think we did and I think others presupposed that there was going to be a recovery in the third and fourth quarter and there may still be one. But we're no longer going to base our expectations on that -- we're going to base our expectations on as is conditions in the market.

So there has been no -- there has been no change at First Industrial. We've continued in I think every endeavor that we've had to make progress. But obviously if the market is going to stay where it is, we may not be able to make headway on our occupancy.

So the second -- so off of that, the second thing we're going to is we think that we will continue to make progress on our leasing. This is -- our occupancy went up this quarter and although it did not go up by much, this was the first occupancy gain that we've had since '01 in a very tough environment.

And we made big progress on our development pipeline as well by both leasing and selling certain buildings in that pipeline to users. But we clearly know that we have work to do on the leasing side and we're very well aware of that.

The last thing is -- that we're going to do as we go forward is capitalize on corporate real estate activity. This is a very unique period in corporate America. I don't want to say it's a historic period but it's certainly a very unique one.

It's a very unique one which penetrates with our unique service and source of significant value. And we are seeing that and this is an opportunity that we have and we're going to continue to press that.

So, with that, I'd like to turn it over to Mike Havala.

Thanks, Mike. There's three areas that I'd like to cover here.

First, I'll provide some more detail on the second quarter numbers. Second, I'll talk about our guidance. And then, third, I'll talk about some added disclosure that we're doing starting this quarter.

With respect to additional detail in the quarter, let me first give you a quick snapshot of our balance sheet. We had 1,465,000,000 of debt and that's composed of 1,212,000,000 of unsecured notes, 97 million of mortgage debt and $156 million drawn on our line of credit.

We also had 250 million of preferred stock and then 1,528,000,000 of common stock. So our total capitalization was a little over $3.2 billion. I should also mention we had about $42 million of cash on the balance sheet as well.

In talking about the balance sheet I just want to remind people about the strength of our balance sheet. When you look at it from a quantitative point of view, our debt to asset value is about 41 percent, interest coverage -- 3.1 times, fixed charge coverage is 2.4 times -- very strong, healthy ratios.

I should also mentioned that with respect to our coverages -- and I'll talk about this a little bit later -- is our coverages went down a little bit this quarter really had the result of the dilution that was resulting from our bond offering. Again, I'll get into that in a little more detail later.

But our coverages should go back up in the third quarter because of the dilution that will be gone.

When you look at our balance sheet from a more qualitative point of view -- our debt we have -- 100 percent of our permanent debt is fixed rate debt, we have longer, staggered maturities and we have very little secured debt -- less than three percent of our capitalization is secured debt.

Next we'll be talking about capital market activities. As we mentioned on our last quarterly call in April, we closed a $250 million bond offering. And that was broken into two tranches -- $200 million of 10 year notes and a seven -- or a six and seven-eighths coupon and then 50 million of 30 year notes at a seven and three-quarters coupon.

We're very please about the execution and the pricing of it is especially on the 30 year note deal.

We used the proceeds of the offering to pay off 85 million of unsecured notes, 100 million of preferred Series B that we redeemed and then the rest we used to pay down our line of credit.

We will used in the next six months about $75 million to pay down some secured debt when we can get to it. So once we accomplish that and pay off about 70 million of secured debt, we'll have very, very little -- only about 27 million of secured debt left at that point, which will be less than one percent of our capitalization.

A couple of items with respect to the bond offering -- the impact of it. First, we had an increase in our weighted average maturity -- up to 12.2 years, which is substantially longer than the peer average, which is about six years. That's very beneficial.

Also from an earnings point of view, as I eluded to before, we had about two cents a share dilution in the second quarter as a result of our bond offering. And that was simply because we completed the bond offering in April but could not pay down the permanent capital that we were refinancing until May.

So that dilution obviously is gone and was a one-time event in the second quarter. And if you look at it on an annual basis, say, out into 2003 and beyond, the bond offering should have about a four cents a share positive impact toward earnings.

On the ratios, as I mentioned before, in the first quarter our fixed charge was about 2.6 times. In the second quarter it went to 2.4 times -- but, again, that was really a function of additional interest expense as a result of the dilution from the bond offering.

So in the third quarter we expect our fixed charge to go right back up to the 2.6 times. The next thing I want to talk about is our fund with the cap H. Let me give you an update here. In the second quarter the fund acquired an additional 14 million of properties, bringing our total in the fund to about $118 million. Remember, this fund is anticipated to grow to close to $300 million.

Let me provide you with some additional detail in the quarter. On same store our same store NOI went down about two percent. And if you look at the components, our same store revenues went up by 1.9 percent and our same store expenses went up by 12.5 percent.

Same store expenses went up mostly because of various repairs and maintenance items including snow removal and insurance and so forth. And I will also say that same store expenses went up on a percentage on a lower base -- borrow-over base than you have on same store revenues.

The good news is most of the increase in same store expenses were recovered from the tenants and that's reflected in the same store revenue number. Next when we talk about our guidance -- as you saw in the press release, we're comfortable at 210 to 230 in EPS and $3.70 to $3.80 in FFO per share.

In the press release we provided the key drivers and assumptions so I won't repeat those here but let me just say, and as Mike mentioned as well, that change in our guidance is solely due to our view of not embedding a possible recovery in our second half numbers.

And specifically we're looking at and expecting our occupancy to remain flat through the course of the year at about 91 percent. Previously that was projected out to be about 93 percent. So that's the difference.

For 2003 guidance we're going to provide this guidance on our next call, which will be when we announce our third quarter results. A that time we'll just have some better visibility on the economy and the portfolio and our timing of sales and so forth.

The last item I want to talk about is disclosure. And, as you know, we've long provided both substantial and detailed disclosure. Many of you who are familiar with our 60-page supplemental I'm sure would agree with it.

But in order to continue this we made some additional improvements to our supplemental. A couple things that we added -- actually a number of things that we've added. We've added cap rates on investments and sales on a quarterly basis. We've added information on the portfolio including same store, rental rate increases, tenant retention, cap ex, weighted average lease term. We've added some more information on development including pre-leasing percentage and funding percentage. And we've added some more footnote disclosure as well .

One of the other things that we've done with the supplemental to make it a little bit more user friendly is we have taken the property listing out, which lists each one of our 900 properties and we have that up in another area on our Web site. That way when you print the supplemental you don't have to have all of that information print out, too. The supplemental information is still about 40 pages, so still a ton of information of that.

One thing I should also mention is while we've added a lot to the supplemental, a good portion of that information we've already disclosed and we have been for a long, long time. It's just a matter of that information was disclosed in other places, for example, the press release or talking about it in our conference calls.

We thought this way now with all of this inter-supplemental we'll have one document that people can go to, to get all of this information.

So, with that, let me just conclude and say that the second quarter was a solid quarter for us especially in this environment. From a financial point of view, First Industrial is in very good shape and we continue to make the right long-term decisions for the company. With that, let me turn it over to .

Thanks, Mike. I will first discuss the portfolio followed by investments and then by discussing .

In terms of portfolio results, occupancy at the end of the quarter was 90.9 percent. We were pleased that we were able to increase occupancies despite an increase in the national vacancy rate.

This increase versus the national trend is a result of our increased focus on leasing and it's also a result of our product type and submarket investment choices we've made in the past.

Here are some occupancy statistics on the selected markets. Our lowest occupied markets are national at 80 percent, Grand Rapids at 81 percent, Cincinnati at 84 percent and Harrisburg at 85 percent.

The highest occupied markets are Los Angeles at 99 percent, Portland at 97 percent, St. Louis at 97 percent and Atlanta at 96 percent.

We experienced a negative same store performance primarily due to a lower occupancy of 90.9 compared to 93 percent in the second quarter of 2001 but slightly offset by two percent rental rate increase this quarter.

The average term of our leases was 5.5 years, which is within the historic norm. We expect an increase on non-incremental leasing costs. That is substantially due to the fact that we have made more -- we have more space to lease and, secondarily, we -- that we have made a decision to increase tenant improvement allowances and financial incentives to brokers to give our vacancies additional competitive advantage.

Regarding our accounts receivable level, it shows no significant variance from the past levels.

Our tenant base remains very diversified with only one tenant exceeding one percent of total base rent at 1.9 percent, which is General Motors.

In terms of 2002 lease expiration -- we have renewed or replaced 60 percent.

Regarding portfolio uplift -- we still anticipate flat to moderately increasing occupancies for the rest of the year.

In some of our stronger markets, such as New Jersey, Philadelphia, Denver and Los Angeles, we should continue to deliver our stronger occupancies and rent growths for the end of the year. But in most markets the volume is off and customers needing industrial space have moderated coupled by some tenants taking longer time to make leasing decisions.

If you take all of this into consideration, we think we will see flat occupancy over the remainder of the year averaging 91 percent -- maybe slightly higher.

We see same store NOI growth at about level. And, finally, we see rental rate increases for the remainder of the year to be flat to two percent.

Regarding sales, we continue to take advantage of the robust demand for industrial properties. We sold $98 million at 8.8 cap rate and delivered a 19.2 percent unleveraged return.

We were able to do this by selling each property to the most strategic buyer and we did this through 24 separate transactions across 12 different markets.

As in the past, the buyer pool was diversified. Users three percent at 35 percent, 10-31 exchange investors -- four percent, private investors -- 46 percent and investors at 15 percent.

As in the past, users and exchange investors paid the lowest cap rate in the low eight percent rate.

With regard to acquisitions, by maintaining our high investment standards, we were able to invest $88 million at an 11.3 percent cap rate and expect a 13 percent unleveraged return.

One reason we were able to accomplish this was by assisting GM in configuring their national parts distribution logistics network. We earned this assignment by being very responsive and providing a multi-market solution to GM. That differentiated us from the competition.

The acquisition consisted of buying four well-located distribution buildings in established markets such as South Bay of Los Angeles, in Chicago, Bucks County in Philadelphia and in Reno, Nevada.

These assets are functional, very well built and well maintained -- typical of a Fortune 50 owner.

Previous to this, I just wanted to remind everybody that we've built for GM a $400 per square foot distribution facility in Indianapolis. We would not have completed this GM transaction if not for our infrastructure and our IS focus.

We're also please on the fact that we invested 43 percent of our funds in the South Bay area of Los Angeles. This area is very , supply constrained where we have had very good historical portfolio experience.

In fact, our occupancy in this market to date ranks the highest in our portfolio at 99 percent.

Concerning development, we placed in service $13.7 million in the second quarter with a yield of 11.3 percent. We made good progress in leasing our speculative development pipeline despite the negative absorption in the market.

In 2002 alone we leased 1,000,600 square feet in our spec pipeline, which brought our occupancy to 23.5 percent to date.

We're more please to report that over a million square feet of our speculative development pipeline is under agreement to be sold to users for $34 million.

Our occupancy would be 31 percent when you take these sales into account.

To remind everybody, our development pipeline remains diversified across product types and across 41 projects in 13 cities. We still expect to achieve a 10.4 percent cap rate on the portfolio which could provide us a wider gross profit margin over our projected investment of $211 million.

Needless to say, we remain focused on leasing the rest of the vacancies.

Regarding , we had a very busy quarter. We delivered $10.17 million of income. We did this by executing on separate -- 17 separate transactions for merchant development and redevelopment, single tenant building sales and landfills.

Our transactions in the quarter included the sale of three buildings to our venture with , a redevelopment of the former manufacturing facility for , the sale of a building in Philadelphia, one of four buildings just purchased from GM.

Additionally, GM exercised their option to acquire a state-of-the-art 390,000 square foot distribution building that we built for them.

Regarding pipeline, it totals $450 million a day. These are properties in our balance sheet that we have identified to be sold plus our fee development.

Additionally, as Mike Brennan mentioned, we have numerous other opportunities under consideration.

This pipeline remains diversified and is generated from merchant development and redevelopment sales, development fees, single tenant user sales and landfills. Let me give you the breakdown.

Merchant development and redevelopment is at 288 million. The build to suit pipeline is at 47 million -- approximately one million 1,200,000 square feet.

This represents five build to suits under final documentation or under construction.

Under final documentation is 80,000 square feet to a gaming device company headquartered in Germany, 250,000 square feet to one of the top three automakers, 425,000 square feet to a worldwide logistics company.

The two remaining build to suits that total 450,000 square feet is under construction for and for .

In terms of single tenant and user buildings, our pipeline today is $100 million. Land sites are valued at $15 million according to the balance of our pipeline

In terms of income competition, we expect roughly 60 percent will come from merchant development and redevelopment, 39 percent from single tenant user sales and one percent from land sales.

Finally, we've been chosen as the preferred provider for a worldwide logistics company. Under this arrangement we will be one of two exclusive providers of industrial space within the United States.

Currently this company leases 11 to 12 million square feet of space nationwide. Historically, they've added a million square feet each year of net absorption, which we hope to service.

In summary, we're pleased with our results for the quarter. We have raised the occupancy despite a decrease in national occupancy. We have invested the majority of our sales proceeds -- excellent deterrence despite a competitive acquisition environment. We have leased over two million square feet of space in our spec development pipeline and build to suits despite negative absorption of market. And, finally, we've delivered ion income and continue to uncover significant opportunities in the corporate real estate arena.

At this point I'll turn it back to Mike Brennan.

Thank you, . And just a few comments and I'd like to open it up for question and answer.

First, as we have pointed out, our call on market fundamentals just simply reflects no reprieve in current market conditions. Obviously we hope that improves but that's the basis upon which we are -- which we're going to operate and project today.

Second, we fully intend to stay the course. We know that we have some work to do in our leasing but we also know that -- we certainly believe that the has perfect construct for this market. It's got great diversification and we've got a great offensive weapon for our corporate real estate opportunities that we're seeing in the market today.

So, with that, I'd like to open it up for questions and answers. Moderator?

Thank you. The floor is now open for questions. If you have a question or a comment, we ask you to please press the numbers one followed by four on your touch-tone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask all parties to please pick up their handsets while posing their question to insure optimum sound quality. Thank you. Our first question is coming from Larry Raiman at Credit Suisse First Boston. Please state your question.

Hi -- a couple questions. First, could you talk about your G&A expenses? They went up in the quarter on the year over year basis -- and for the six months as well -- despite the fact that NOI is down?

Could you describe what's going on, on that front?

OK. Yes, Larry. The reason G&A went up is really not any one specific reason. It's just really increased cost whether it's payroll or other type of costs.

We also are doing some additional corporate marketing and associate it with -- our program -- and so that's an increased cost that we're having in 2002 versus 2001 as well.

Clearly there's a return hopefully on that advertising with respect to higher income and so forth. But there's nothing -- there's nothing -- no one single item that's the main component of that.

Is there any plan on that front given the fact that your operating is whatever -- 10 percent lower than it was a couple of years ago to reduce overhead as well proportionately.

Larry, this is Mike. No -- no specific plans that I could detail for you today. We're looking at different things where we can increase efficiency on G&A.

But I think -- I really think the different thing that you have in the numbers now that you didn't have before is just the marketing. If you just wanted to isolate one single thing, that would be it.

And we think it's important to do. It's one of our most profitable businesses.

And if we were to extract that out, you would have a different picture. We think it's -- we think it's the right thing to do at the right time although we have to spend money to do it.

Larry, let me also just put things in perspective. We do have one of the lowest G&As of any of our peers, too. So just on a relative basis our G&A is -- we did very well.

OK. And with regard to your operating margins, in the quarter your property expenses actually rose despite the fact that your operating revenue declined substantially. So your margin, as a consequence, went down.

Could you describe what's going on, on that front? I know, Mike, you talked about snow removal and ...

Yes -- it's really ...

... insurance. Could you describe whether that is going to actually return margins to former levels?

Sure. It's really a function of decreasing occupancy. When you have decreasing occupancy obviously your revenues go down. Your expenses are generally still there and your recoveries go down as well. So it's really a main result of decreasing occupancy.

So when occupancies go back up then we expect our margins to go back up as well.

OK. Then two other very quick questions. Cap ex -- and I guess Mike as well, you mentioned cap ex would likely be going up in order to induce tenants -- mentioned this -- in order to induce tenants to occupy space and concessions would be rising. Could you quantify that to any degree?

Yes, Larry. The increase was primarily due to the increased square footage. We lease approximately 1.2 to 1.3 million square feet of space this quarter more than at the end of the -- end of the second quarter 2001.

There was no material change in the tenant improvements or leasing cost per square foot -- just a slight change -- maybe in the 15 percent area. But that is basically where it's coming from.

But you said on a going forward basis. Would cap ex rise on a per square foot basis, concessions rise as you try to lease space and get your occupancy back to former levels?

Right -- yes.

: Could you quantify that?

Yes. We're -- our leasing cost per square foot right now stands at about a buck 53 per square foot. That is somewhat higher than Q2 of 2001.

So for right now you can use that as a run rate, Larry.

: OK. And then, finally, Mike Havala, on straight line rent could you guide us with regard to future forecast there?

Sure -- yes. Straight line rent is always a little bit hard to project because it's dependent not only on what your existing but what you sell and then what you take on and what you lease and so forth. But ...

: Sure.

... when you look at your year to date number of 684, I would think that it's somewhere in the $1 to $2 million would be our number for all of 2002.

: Got it. And any forecast for '03 at this point given for leasing?

No. We're not providing any guidance or any information on 2003 yet.

: OK -- thank you.

Yes -- thanks, Larry.

Thank you. Our next question is coming from Seth Glickenhaus of Glickenhaus & Company. Please state your question.

I got on rates -- you may have answered this. But I was just curious -- is there anything new with the Amazon property that was up for sublease?

Seth, this is Mike Brennan. Good morning.

Good morning.

No -- there is nothing new with it. There -- it is not subleased, it is still empty and they're paying the rent and they're still current.

I'll tell you, that there are -- there are a number of opportunities that they -- that we think they have. And I'm not saying anything bad about their leasing ability. But unwillingness to cut it up hurt them in the market.

There are not to many 800,000 square foot tenants walking around Atlanta these days. So that's the story on Amazon.

Thank you ever so much.

Thank you. Our next question is coming from Ronald Muller of REM Capital. Please state your question.

Hi, there. This is a question for I think Mike Brennan. Mike, what I was wondering about is your stock trades at a discount to your peers largely, some people have said, are because of the question of sustainability of your gains and losses from your corporate real estate activity -- the .

But when I look at two of your peers, and CenterPoint, they're running on their corporate about 35 to 45 percent of their FFO. And that averages about I think more or less 50 percent of yours.

Another one of the peers, , seems to be getting close to 20 percent from their other income.

So what am I missing here? Can you fill this in for me?

Good morning, Ron.

Hi.

Well, there's a lot of people on this call that have an opinion about that but let me -- let me try to answer it as distinctly as I can.

First, I do think an inconsistency exists. I don't think there's any question about that with respect to that issue. And it means that either our income stream related to that is undervalued or it means that the income stream related to it from the peers is overvalued because we're in the same business. This is a business -- we're selling industrial buildings for gains or losses and it's no more complicated than that.

Now the concerns expressed that I have heard as these. Number one is a question of sustainability. Can you keep going? And I think what -- the way I would answer it to you and the way I would answer it to others is that I think they need to understand what is all about.

This is a multi-market, multi-product business where we're leasing, buying and building for corporate America all across the nation. So, therefore, we have a great ability -- greater ability to serve customers. So, therefore, we have a greater ability to invest dollars.

I think the evidence for that is that we went from $3 million to $40 million dollars in three years. So I think it took us -- really it took us three years to do what some of our other peers who have been at it a bit longer or are a bigger company -- it took them 10 to six years to do.

So I think really, while I am concerned about sustainability -- I will not tell anybody not to take a cautious view -- I will not tell anyone that it is easy to do -- I think that the income quality of this is not only equal to that of the peers but arguably superior.

A second issue that I've heard is volatility. Even if it's sustainability is it -- is it volatile? And I would tell you that I concede that point. But what is -- what is true for us is also true for others that are engaged in that activity. So I concede that a volatility issue exists.

And I would also concede that the business is not perfectly suited for quarter to quarter reporting. But that's the real nature -- that's the real economic nature of this business. And that's why the peers that you mentioned -- that's why almost really every industrial peer is engaged in it today.

Now I think the last thing that we have heard is reporting of gains and losses. And specifically is it economic gain or is it booked gain?

Now I'll give you -- give you a simple example. You buy a building for $10, you sell it for 12, we depreciate it to eight. Is the gain four or is the gain two? Well, the gain's two. It's always economic gain. It always was and it always will be and we've made fairly great pains to disclose that both in the press release and in the supplemental.

But that is an issue that is still out there.

I went to an industry meeting -- a Salomon Smith Barney meeting -- in March and was asked that question. When and I and Mike Havala and I were on the road in April -- got asked that question again. And at NAREIT in June they're still asking whether it's economic or booked gain.

So I think -- I don't want to make too long of an answer on it -- but I think that is as about as complete an answer as I can give you on the issue. But I do think an inconsistency exists in it. And I think that while I would always advise people to take a cautious view on it, I certainly wouldn't want them to take as cautious a view as they seem to be taking on it today.

Let me see if I got this. One point back to sustainability -- are you saying that you are basically a multi-dimensional approach -- both multi-product and multi-market? And that gives you greater flexibility and a greater ability to mitigate risk as well as maximize returns? And and CenterPoint are what?

Well, you said it better than I would say it but -- yes -- I think that's true. I think we like our chances better than others.

I think I've mentioned this to you in the past. We operate in many markets. One of our peers operates in one, another of our peers primarily is in the bulk warehouse business. So while they can do a good trade there, the fact that we've got multi-product opportunities for our stock gives us that greater ability to service and greater ability to invest -- yes.

Good -- got it. Thank you.

Thanks.

Thank you. Our next question is coming from Brian Legg of Merrill Lynch. Please state your question.

Yes -- hi. I just wanted to go back to Larry's earlier question about the increasing. And your blended number of $1.53 -- could you break that out by new leases? And existing leases, renewal leases? And what do you expect for renewals?

Let me -- let me get the information.

OK.

First of all, 50 are leasing -- 45 percent was new leasing in the quarter and for a total -- for a total of 55.

Out of the portfolio 66 percent was renewal leasing and roughly 33 percent was new leasing. The grand total is a buck 53 per square foot.

For non-incremental renewal leasing it was 96 cents a square foot. For the weighted average for new leasing it was $2.38 a square foot.

OK. And just looking forward, do you expect your renewal percentage to be about two-thirds?

Yes. It's been -- it's been in that range for the past couple of years.

OK. And looking at your lease expirations -- I don't -- I don't have the supplemental in front of me but what's the percent of your leases that rollover that are not committed in '02 and '03?

Could you ask that question again? What's the rollover percentage for ...

Yes. How much of your -- how much of your leases roll in '02 that you don't have leases signed? And what's that number in '03?

OK. It's nine percent remaining. E have renewed 60 percent over a total of a total of 2002 lease expiration.

And do you know what that number is for '03?

About 22 percent.

Twenty-two percent? OK.

Mike, looking at your income -- I thought it was going to be back-end loaded. If you -- but if you look at the first half of the year -- they -- the income fits squarely within your $40 to $45 million range.

I assume then it's going to be pretty equally weighted?

: ... volatility we're talking about.

Right -- OK. And then just looking at the unleveraged returns this quarter. They're 21 percent. That's double the typical range you give us of nine to 11 percent.

I assume in -- over the next couple of quarters it will be more along the historical ranges, right?

: , I think we were talking about unleveraged versus cap rates.

OK.

: So I think the first number you quoted was an unleveraged number.

OK -- on your income? OK.

: Yes.

OK. And, -- I'm sorry -- I missed when you were breaking out for the income. Did you give any -- you still had for your $450 million pipeline it sounds like 61 percent would be from development -- merchant development -- and 39 percent would be from existing user sales. But I thought in '03 those percentages flip? Is that correct?

First of all, your numbers are right for 2002.

Yes.

The question is do those numbers flip?

Yes. In other words, in 2003 does it become 60 percent existing property -- because obviously you're burning off some of your development -- and 40 percent development?

OK. As of this point we do not see it changing that significantly. By the way, if we do sell our development, it would still be falling under merchant development. And if it's a redevelopment it will be -- still it will be falling under merchant redevelopment and development.

So going forward we actually expect more redevelopment because we do expect more acquisitions from the corporate real estate arena. So we don't see that mix changing to more existing buildings. In fact, we feel that this would be a good run rate -- 60, 39 and one -- and one being landfill.

OK. And can you give us a sense for -- I know you have a projection of flat NOI growth for the rest of '02. Can you give us a sense of what leasing activity -- you said this is a strong quarter for leasing. But, in general, are you seeing a pick up in people touring your properties and interest in your properties?

Yes. We -- in fact, we did do a lot of leasing. And -- yes -- one of the things then -- we're just not talking of that and that's the reason why we're also making sure that we provide enough financial incentives and increase tenant improvement allowances to make our space competitive.

But let me just give you a couple of -- a couple of parts of the industry that we're seeing activity.

I'll just give you some of the large leaders that we've done. Maytag for rough a million square feet, which includes build to suits. They're in the home appliances business, as you know.

American Standard -- 300,000 square feet. That's a diversified company that manufactures air conditioners, bathroom and kitchen fixtures and some automotive braking and controls.

One -- the market has been active. If you look at all of the third party logistic companies that we signed a business with. They approached 600,000 to 700,000 square feet. And most of the business they're doing right now is for consumer goods.

We did another 300,000 square foot deal with another that's actually doing business for JC Penney. So that's where it's coming from.

was a big lease -- 230,000 square feet. They're home appliances.

-- 430,000 feet. What they do is they provide electronic and conventional and digital printing services.

So if you look at -- a lot of home accessories business and a lot of home products business -- bought 190,000 feet. They're in personal care and household products.

So that is where we see the strength.

Where we don't see the strength is technology related although we didn't really have a lot of exposure in technology related companies. But we still -- that's really a very soft to non-existent -- and telecom suppliers and telecom related companies.

Does that answer your question?

Yes. I just wanted to get a general sense of is there maybe more interest in leasing and not necessarily leases signed but are -- generally are tenants touring your properties more?

Yes -- those -- from those industries that I mentioned -- yes, we are.

OK. And last couple of questions. Mike Havala, how much were lease termination fees in the quarter?

About $1 million, .

OK. And what's the average? Is it typically 500,000?

Something like that -- 500,000 to 600,000 is a typical quarter for us.

OK. And if you were to expense options, how much would that charge be?

That would be about two cents a share in 2002.

OK -- thank you.

Thank you. Our next question is coming from Gary Boston of Salomon Smith Barney. Please state your question.

Good morning. First of all, thanks for the additional and efficient disclosure. I appreciate that.

I had a couple of questions, Mike, in terms of the cap ex and trying to get back to or fill in the gap between what you guys are showing in terms of the acquisitions plus the non-incremental versus the purchases and additions to real estate that you're showing on the cash flow statement. Just as a reference point, in '01 it looked like there was about $160 million dollars of difference and I was just wondering what would be in that -- in that number?

Let me -- Gary, I guess what I would suggest is that we maybe this afternoon go through it because I think it would take awhile to discuss all of the details in the reconciliation and so forth. So I think maybe after this call we can reconvene and go through all of that detail.

: Sure -- that's not a problem.

OK.

: In terms of -- in terms of your development pipeline, can you give us a sense on how much G&A gets capitalized into your development projects?

Sure. Let me just give you a point of reference. Roughly our G&A is in the four to five percent range of our development costs. So if we have a little over $200 million of development in process that would mean that somewhere in the $8 to $10 million of that number would be capitalized in it.

Obviously that's development that's being performed over a series of quarters -- not -- it doesn't fall obviously in one quarter -- it falls over a year or two.

: Right. And in terms of whose salary gets capitalized into that number -- is it -- is it just the development guys or is it some overhead as well?

No, it's just the direct development guys. In other words, the over -- the other overhead like some of us in this room -- all of us in this room would not be capitalized in the development.

: OK. Can you -- and it may be in the supplemental that I didn't get until late -- is there -- the capitalized interest for the -- for the quarter and any forecast you think for the balance of the year?

Sure. The capitalized interest for the second quarter was about $2.3 million. And I would anticipate that number goes down over the course of the year -- the rest of the year -- because we'll have less development existing as we sell off and lease and sell.

: OK -- great. I appreciate it.

Sure.

Thank you. Our next question is coming from Alexis Hughes of Bank of America Securities. Please state your question.

cowen|Lee|Cowen|| Bank of America Securities|m: Hi -- it's and Alexis Hughes. Two questions. The first -- could you share your view of your underlying net asset value and what cap rates you used to get there for both the core business and the business.

OK. , this is Mike Brennan. Well, I think -- I'm going to -- I'm going to just ask Mike to fill in. Mike might fill in on some of the specifics. But with respect to the -- to the core portfolio I would say a couple of things. First of all, in doing the methodology today when we buy a building or we sell a building, we don't take -- we don't allow us -- we don't allow anybody to buy it at 91 percent and hit a cap rate against 91 percent.

So the first -- the first thing I would suggest that people do is take a more normalize occupancy of 94 to 95 percent.

The second thing that I would -- it's just a guess on a cap rate was -- if people look back at the cap rates that we have been able to sell things for over the last six -- the last two years -- add all of those up -- that might be a good proxy for what it's worth.

Now that would be probably in the sub nine area. Some people may be uncomfortable with that.

But on a portfolio basis I would probably agree with that but on a -- since we're selling them individually.

So I would say -- I would say certainly it should be in the nine percent cap rate range. Again, that's just based on all of the sales, which included exit market sales, sales of some older properties that we finished in 1999. And certainly that's supportable today. Certainly we get 8.8 percent cap rates in this quarter and I think it's certainly not getting any weaker.

With respect to , this is -- this is my simple rule of thumb on it. I -- you obviously know, , and you obviously know, Alexis, how passionate I feel about the business but certain people take a more cautious view in it.

If you gave the- if you gave the -- if people didn't think that 40 or what odd million of was sustainable, a simple rule of thumb for me would be -- well, pick that portion that you do think is sustainable -- let's say it's half or let's say it's three-quarters and then multiply that portion by the portion that you would give a multiple to a sustainable business. Really I think it's really that simple.

The amount that you want to handicap is, of course, a question for you. Once you've handicapped it by that amount I would think that would be a fair methodology to use.

Now with specific numbers on -- Mike?

Sure. , let me just make sure I understand the question. Are you just asking -- when we do the calculation in our supplemental, what is the math or were you looking more from a qualitative point of view?

I'm sorry -- ? Maybe you can't punch back in again. But, if you can hear me, try and punch back in.

His line is live at this time, sir.

OK -- thank you. Well, I think Mike has answered the question for the most part but let me just add that in our supplemental -- in a footnote -- we demonstrate a calculation of the in great detail. And so it's all in that -- in that footnote and on that page. And so I won't reiterate the numbers here.

And I will also say that's a demonstration of the net asset value. Obviously there's a number of different methodologies that people have to calculate numbers. One is their -- to come up with a number as well as provide people with detailed information so that they can come up with their own numbers depending on how they model it and analyze it.

OK -- well, I think we might have lost Alexis and . So we'll go on to the next question.

Unfortunately this does end the question and answer session. I would now like to hand the floor back over to the moderators for any final comments.

OK -- well, thank you, everybody. I -- the moderator has said that there was no further questions so thank you very much for calling in and we look forward to speaking with you.

Thank you for your participation, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.