First Industrial Realty Trust Inc (FR) 2002 Q3 法說會逐字稿

Good morning Ladies and Gentlemen and welcome to your First Industrial Realty Trust Q3 Results conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. It is now my pleasure to introduce your host, First Industrial Realty Trust. Gentlemen you may proceed.

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 companies actual results to differ materially from those anticipated including changes in economic conditions, legislative and regulatory changes, availability of financing, interest rate levels, competition, supply and demand for industrial properties and the company's current and proposed market areas, potential and environmental liabilities, slippage in development or lease up schedules, tenant credit risks, higher than expected costs and changes in general accounting principles, policies and guidelines applicable to real estate investment trust.

For further information on these and other factors that could impact the company and 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 Q3 conference call. Before we begin, I would like to introduce the members of management who are here today. Mike Havala who is our CFO, Jo-Jo Yapp our Chief Investment Officer and Mike Daley our Director of Investor Relations.

On today's agenda I am going to start with just a brief review of the progress of our plan and discuss the economic outlook with specific emphasis on its direct impact on our business and our industry. Mike Havala will talk about financial detail and our operating results. We will discuss our recent capital markets activity and some further financial detail on our guidance. Jo-Jo will finish up with a discussion of our investment and portfolio performance, including our corporate real estate activities.

A few comments on the results and I will keep this brief because most of it is contained in the press release and Jo-Jo will talk about it. Earnings were $0.94 and that was within our range and about $0.08 higher than the Q2. The difference between Q2 and Q3, half of that $0.08 is attributable to increases in net operating income and about one half of that is attributable to a decrease in our G&A and an increase in our IIS (Integrated Industrial Solutions)income.

I am especially pleased with our leasing progress that we have made in this quarter. Specifically, 34% of our entire speculative pipeline was leased or put into service in Q3, which was an outstanding achievement, especially given the softness that we have. Third, I am very pleased with the corporate real estate program and our IIS earnings. We have produced record results this quarter, so I feel that we have been in the right place at the right time with that initiative.

Let me talk a little bit about the operating environment at this point. Obviously the single biggest indicator of what our operating climate is going to be and has been is the level of corporate profits and by our estimations, corporate profits overall about at '98 levels when you look at absolute numbers and that of course, as I said in Q1 and Q2" has led to a drop in capital spending which is contributed to the drop in space absorption and that has led to drops in occupancy levels. So the direct effect on our business is obvious, analyzed the decline in vacancy has increased, you have seen a decline in development activity throughout the nation, both in spec and built pursuit. But on the positive side, there have been significant declines in construction, specifically about a 48% decline in 02 versus 01 and we continue to expect those numbers to drop in 03. But the decline in corporate profitability also has a positive effect on our business if you have the infrastructure to be able to capitalize on it. When there is a drop in corporate profitability obviously there is an increasing need for efficiency related activity, increasing need for companies to look for alternate earnings sources. A drop in earnings also has the effect of increasing the cost of capital as stock prices decline and bond spreads increase and also as pointed out fairly dramatically in the Barron's article this weekend, increases pension fund liabilities as stock prices fall with earnings decline.

To understand the direct impact that has on our business, consider what a corporation's alternatives are in order to help solve or take advantage of some of these things. Pension-fund liabilities and efficiency-related activities cannot, in many cases, be fully financed with internal or external financing so one source is obviously asset sales. The declines in stock prices and increase in bond yields can offer, in many cases, a very compelling use of proceeds. But again in the absence of being able to finance it internally or externally, many firms are going to look at asset sales. And finally, the general decline in earnings in an absence of any pick-up in the general economy defined alternate earning sources many firms again are going to look at asset sales.

So when you combine all of these things that are going on in corporate America, the direct effect on our business is that these trends help to contribute to another record setting quarter for our corporate real estate program and also apparent in this quarter, as in previous quarters, was the importance of being a fully integrated provider. To be able to have the infrastructure and delivery system to be able to handle complex needs. So at this point I just want to turn to direction and navigation, especially as we look towards 03. The question I want to give you a little insight to is how do we navigate through this? And specifically, under what assumptions should we set our expectations for shareholders?

Let me begin with the assumptions in our plan for Q4 and 03. In our planning we have assumed that we are not going to see any improvement in Q4 or the full 2003-leasing environment. There is just simply too much vacancy and too much capacity, we haven't seen the resumption of capital spending. Second is that we do not at this point anticipate any reprieve in the re-investment environment both good and bad, where selling conditions are very strong but acquisitions are more difficult to come by. Third, we are forecasting our IIS profits to grow by 10% even though we have beaten that growth rate handily over the past three years, especially when we consider the unprecedented opportunities that we have there, we hope we can meet or beat that. So therefore, we are initiating our 2003 FFO guidance with a range of $3.55 to $3.75 as I said for 2003.

Now, the biggest challenge that we face in '02 and '03, not only us, but our industry is leasing. Tactically what we have focused on was increasing our tenant and brokering incentives, and that is simply something that we're going to have to do to move occupancy up. Secondarily, we're going to work on the completion of certain sales that are now under Letter of Intent that if completed, will further improve our occupancy. And Finally, I wanted to talk a little bit about strategically and assure our shareholders and analysts that our company intends to stay the course. Specifically we will invest purely in industrials, we have before and continue to hold our investment standards high even though in the short term that will cause dilution. We intend to remain an investor in what we regard as the nation's top 25 market and specifically I also mean that we intend to remain a domestic investor only.

We intend on continuing to invest in our range of diverse facility types, for some obvious reasons. Number one that inherent diversity and number two because we have seen how important it is when customers make choices and improving their supply chain and three it also helps us broaden our investment options and that helps us keep our investment standards high.

Finally, we are committed to growing and improving our full service capacity at the local levels and again we do this for obvious reasons not only for operational control but also because it is a very important delivery system to which our IIS customers are serviced. Without that delivery system and that infrastructure we would not have had the success that we have had today in that particular arena. So with that I would like to pass the discussion to Mike Havala.

Well thank you Mike. There are two areas that I would like to cover with you this morning. The first I am going to provide some more detail on the Q3 numbers and second I will talk more about our guidance for 2002 and 2003. With respect to Q3, let me first give you a quick snap shot of our balance sheet. These are as of September 30th, we had $1.418 billion of debt and that is broken down into $1.212 billion of unsecured notes, $96 million of mortgage debt and $110 million drawn on our line of credit. We also had $250 million of preferred stock and then $1.441 billion of common stock so our total capitalization was just over $3.1 billion as of quarter end. Also I should mention we had $28 million of cash on the balance sheet as well.

In talking about the balance sheet I would also like to remind you about the strength of our balance sheet. When you look at it from a quantitative point of view and when you look at ratios such as debt to asset value which is about 42%, interest coverage which is 3.1 times and fixed charge coverage which is 2.5 times, these are very strong healthy ratios, especially when you look at it in light of this economic downturn.

Also when you look at the balance sheet from a more qualitative point of view, you look at some of the features of our debt, there are some very positive numbers here as well. When you look at our maturity schedule, our permanent debt has a weighted average maturity of twelve years and that is one of the longest in the entire lease industry. 100% of our permanent debt is fixed rate and then we have very little secured debt, we have less than 3% of our capitalization is secured debt, which again is one of the best in the lease industry.

Next we will talk about some capital market activities. In September, we closed the early renewal of our $300 million unsecured credit facility. This credit facility was originally scheduled to mature in June of 2003 but we thought that now was a good time to do it in light of where the credit markets are. We had some strong support from our existing bank group and we were able to reduce our pricing to LIBOR plus 70 so we are very pleased with the execution of this. I should also mention that our maturity is now September 30th of 2005. On October 1, obviously after the close of quarter end so it won't be reflected in the numbers - I just wanted to mention this - we paid off approximately $33 million of the secured loan that we have. We did this just in our ongoing effort to increase our unencumbered asset fold which is already high, but now we are up to over 93% and that it was one of the highest in the lease industry as well.

Finally, let me give you an update on the fund that we have with the Kuwait Finance House, KFH, in the Q3 the fund acquired an additional $53 million of properties, bringing our total to about $174 million right now in the fund. If you remember this fund is designed to go up to about $300 million in total. Also I should just remind you that this fund and the purpose of it is to serve as a lower purchase commitment to our merchant development business. We're shelved up at more certainty on both the pricing and timing of the profits from this business.

Next let me give you some more information on the same store for the quarter. As you saw in the press release our same store NOI declined by 2.5%, and this is broken down in an increase in same store expenses of 11.7%, mostly because of real estate taxes and repairs and maintenance, which by the way we have almost fully recovered from our tenants. There is also an increase in our same store revenue of 1.3%. Next we will move over to guidance. For 2002, as you saw in the press release, we are comfortable at $2.20 to $2.30 and GAAP EPS and $3.62 to $3.68 in FFO for shares. We outlined in the press release the key driver is assumptions so I won't repeat those here. But I do want to talk about our change in guidance during 2002.

Really this is a function of two items. The first is dilution, we were a net seller in the Q3 and we expect to be a net seller to the tune of about $30 million in Q4 as well. Originally in our estimations we anticipated that there would be a matching between our investment and divestment, so this dilution of being a net seller in Q3 and Q4 impacted our guidance. In addition, the second item that impacted our guidance was the portfolio NOI, which has come in slightly less than we expected, just because of this continual soft environment that we have seen in the leasing area.

Let me talk about 2003. For 2003, as Mike mentioned, we are initiating our guidance, in other words, we have not given any previous guidance for 2003 up to this point. We are comfortable at $2.00 to $2.20 in GAAP EPS and $3.55 to $3.75 in FFO per share. Let me talk a little more about what components are in these numbers and Mike touched on some of this as well. Our NOI we expect to be flat throughout the end of 2003, so basically if you look at our Q3 2002 run rate, that's what we are expecting the next several quarters to be as well. From an IIS point of view, we anticipate that that will grow by about 10% in 2003. On the investment side, both sources and uses, we have laid it down in the press release, we expect that to be about matched in 2003.

One other thing that I'd like to mention about that as well is that embedded in the sales expectations that we have for next year, are the sales of about $130 million of development projects which are currently not that leased right now. So the net impact of that will be fairly meaningful accretive number to us next year as we sell assets that are not generating much NOI today and we use the proceeds from those sales to re-invest it in income earning assets.

The last item I want to mention about 2003 is that we anticipate having a lower capitalized interest in 2003. The result of that is that as we have more developments being completed and so forth, just from a GAPP accounting point of view, more of our interest expense will be expensed rather than capitalized in just under the GAAP rules. It doesn't affect our Cash flow, it just means more will be expensed than capitalized. So with that let me conclude and just say that the Q3 was a very solid quarter for us, especially when you consider the environment that we're in. From a financial point of view, as I have gone over the balance sheet with you, I think we are in very good shape.

With that let me turn it over to Jo-Jo.

Thank you Mike. I will first discuss the portfolio followed by investments and end by discussing integrated industrial solutions. In terms of portfolio results, we ended the quarter with occupancy of 90.3%. We're pleased that we are able to beat the market occupancy by 140 basis points. This is the result of increased focus on leasing and it is also the result of our product type and investment choices that we have made in the past. Here are a couple of occupancy statistics. Our lowest occupied markets are Nashville 82%, Harrisburg at 85%, Salt Lake City at 86% and Baltimore at 86%. Our highest occupied are Philadelphia at 97%, Atlanta 96%, Portland and Los Angeles at 95%. We experienced a negative same store performance primarily due to a 2.3% lower same store occupancy compared to Q3 2001. That was slightly obscured by a 2.3% overall real rate increase this quarter.

The average term of our leases was 5.5 years, which is within the historic norm. We can see an expected a slight increase in non-incremental leasing costs primarily due to the fact that we have more space to lease and also this is the decision to increase financial incentives to brokers to give our vacancies a competitive edge. Regarding our account receivable level, it shows no sign of significant variance from historic levels. We have one of the lowest, if not the lowest accounts receivable level in our peer group. Our tenant base remains very diversified with only one tenant exceeding the limit of total base rent at 1.5%, which is General Motors. In terms of 2002-lease expiration, 81% was already renewed or replaced. In terms of our portfolio outlook we expect fixed space stable occupancy through the rest of the year. In most markets, the form and velocity of most customers needing industrial space is relatively at low levels.

Tenants are taking their time in making leasing decisions primarily because of their view of the economy and the wider availability of space options. On average, new rents on current vacancies are about 5% lower than the proceeding year's rents. Remember though, that numerous tenants have contractual escalation and extension options at higher rents. In addition, we currently are not experiencing real rent declines or increases or renewals. If you assume a lower rate of over 65%, which is certainly achieved historically, then net net the real rate decline in new leasing should have minimal impact for our same store NOI. Taking all of this into consideration, we see same store NOI and real rate growth to be stable through to 2003. I just wanted to remind everybody that we are very focused on maintaining our occupancies. Our vacancies show very well and are competitively priced. We will continue to offer our brokers financial incentives to lease. We are re-developing selective properties to gain a competitive edge over competing properties. Finally we are simultaneously pursuing sales of buildings at larger vacancies to users as an additional tactic in a quest to retain occupancy. Implementation of these tactics allow us to deliver 5.9 million square feet of growth absorption in this quarter.

Regarding sales, we continue to take advantage of the robust demand for industrial properties. We sold $128 to the Chief at 8.6 Cap rate delivered a 24% un-leveraged return. We were able to do this, just like in the past, by selling each property to the most strategic buyer and we did this through 23 separate transactions across 13 different markets. As in the past, the buyer pool was diversified. Users represented 43%, and 31 exchange investors 3%, private investors 12% and institutional investors 42%. With regard to acquisitions we were able to invest $40.3 million to find opportunistic transactions where we expect to earn a 12% un-leveraged return.

Concerning development, we have had our stronger yet this year. We placed in service $54.3 million at the yield of 10.7%. We made outstanding progress in leasing our developments despite the weakness in the market. We started the year at 12.7 million square feet of vacancy and reduced it by 2.8 million square feet. This is a 60% reduction. 1.4 million square feet of that absorption occurred in Q3. Today, our development and progress is 44% leased and of that $177 million projected investment. This continues to be diversified by markets across 32 buildings and 14 cities. We expect a 10.3% stabilized yield and this represents a 30% gross profit margin given today's excellent cap rates. Needless to say we remain very focused on leasing the rest of the vacancies. Regarding our integrated industrial solutions we had a very busy quarter. We delivered $11.3 million of IS income. We did this by executing on 18 separate transactions, from merchant re-development to single tenant building sales to land sales.

The notable transactions in the quarter included the sale of seven buildings, totally 1.1 million square to our venture with Kuwait Finance House. The sale of a 472,000 square foot building to a customer who needed to provide logistic services to Craft Incorporated. The sale of a 44 acre land site to a customer Rooms To GO, a home furniture retailer. We proposed our site and assisted them in re-zoning that allows them some level of retail use, a higher and better use that they needed. Of course, we sold the industrial site at prices well above comparable industrial land. We also made a profit by signing a contract position on a 1.2 million square foot sale and leaseback from Caterpillar. In this transaction we retain control of a 30 acre accept land site that we plan to sell immediately or build to suit. We also earned a fee from Motorola for providing a standby, forward commitment to purchase a building in the event that they are not successful in selling it to a user. Lastly, we sold a building in Chicago that was leased to GM. This was one of the four buildings just purchased from GM last quarter. In this transaction we also retained the extended land for a build pursuit and we are ready and in negotiations with a food company.

Regarding our IIS pipeline, it totals $440 million today. The break down of our IIS pipeline is as follows. Merchant development and re-development totals $200 million. $168 million of that pipeline is the value of our speculative development pipeline. The remaining $32 million is our re-development pipeline. The build to pursuit pipeline is at $61 million and composes five projects. The building under construction include 80,000 square feet for an Electronics company, a gaming device company headquartered in Germany; 250,000 square feet for Ford Motor company; 425,000 square feet for Ego and APL logistics providing logistics services to Dell computer; and 390,000 square feet for Maytag. Those under final documentation include 130,00 square feet for a food-processing company, and finally 300,000 for a plastic packaging company.

In terms of single tenant buildings, we have over 30 buildings with an approximate value of $169 million currently on the market for sale. Approximately $34 million of these buildings are already under contract or letter of intent. Finally, land sites are valued at $10 million and constitute the balance of our $440 million pipeline. Additionally, we have numerous other opportunities that are in consideration. We are currently in active conversation with 109 companies of which we are pursuing anywhere from a one off back-to-back acquisition all the way to a multi-market re-configuration of the supply chain that will result in multiple re-development, sale and leaseback and development pursuits. These were not included in our pipeline but these should give you some feel for our potential business.

We believe this activity will compare for the following reasons. Companies continue to re-configure their supply chains to achieve efficiencies; these activities result in out-sourcing, plant closings, consolidation, relocation and expansion that require a real estate solution. In a tough environment, more and more companies are selling real estate to shore up their balance sheet. This is then re-invested into their balance sheet and generates earnings. In addition, some companies are trying to unwind out of their synthetic leases with traditional sale-leasebacks. Finally, companies continue to look at their real estate as a source of capital that they can re-invest back in their core business, retire debt, re-purchase stock and in some cases, fund pension fund liabilities.

In summary we are very pleased with our results for the quarter, in essence we have maintained occupancies despite a decrease in national occupancies and a strong focus in leasing. We took advantage of the strong sales market and sold buildings profitability and at low cap rates. We invested the majority of our sales proceeds in acquisitions and development in a competitive investment environment. We have leased and sold, 1.4 million square feet in our speculative development pipeline despite generally weaker softness in the market. Finally we delivered on IIS income and continued to uncover significant opportunities in the corporate arena. At this point I will turn you back to Mike.

OK, thanks a lot Jo-Jo. I just want to make a few summary and concluding remarks about our comments today. First, there is no getting around the fact that this is a tough operating environment and therefore the plan reflects that we are going to operate in a soft market for the next five quarters. But at the same time I think that it is very important that we, as an organization and we communicating to the shareholders understand that the same softness that hurts us on the leasing is going to allow us, I think, some fairly unprecedented opportunities in the corporate real estate arena. I have seen it time and time again over the last year and a half and we think that is going to improve.

Finally, we think it is also important that these times, more than any other, these are the times that you stick with your strategy if you really believe in it rather than make forays into different product lines or markets that you don't know. So we have no intention of doing that as I said before and we will stay the course with what we feel will be successful over the long term. So these are times where, as an organization, we think that execution matters most and that is what we are going to be working on and trying to make further improvements to as we go along in 02 and 03.

So with that moderator, could you please open us up to questions, thank you.

Our first question is coming from Larry Rayman of Credit Suisse First, your line is live.

Would you discuss two items. One is capital expenditure and tentative improvements and particularly non-incremental cutbacks went up on a year-on-year basis to over $8 million. Could you discuss what you are seeing in the market place on that front and what your expectations are for the next year? And the second thing Mike Havala, you talked about capitalized interest and I don't have access to your full supplemental yet, could you maybe provide some guidance as what you expect capitalized interest to be for calendar year 02 and 02?

Larry, hi, this is Jo-Jo. Let me just discuss tentative improvements and these improvements are basically on planning incrementals to full leasing costs. It increased from our Q3 last year and it is primarily due to vacancy leasing. Our renewal and total leasing costs has stayed within the norm but that, as we discussed in the past, one of the things that we are doing is increasing financial incentives to brokers to lease and we are increasing our Tenant Improvement allowance to make sure we hit our goal of increasing or maintaining occupancy. So we are seeing an increase in tenant improvements of leasing commissions.

On the Capex side for the buildings overall we are not seeing any significant variance. When I say Capex I am talking about square lots per square foot basis and we are not seeing any significant variance from the past. The main culprits here, again to summarize, leasing costs and tenant improvements associated with existing vacancies.

So what does is that specifically? Can you quantify any metric that you are seeing that you take guidance from?

Sure, correct. Let me give you some metrics. The year-to-date average, using Q3 run rate on leasing costs, is $1.51, and if you just took the year today and divide by three, which is three quarters. Let me give you the 99 numbers 1999, $1.43, 2000 $1.56, 2001 $1.41. If you look at the average between 99, 200 and 2001, your averaging $1.47, today we are averaging $1.51 so you are already seeing the increase. If you continue on this rate, the Q3 rate is $1.84, so if you continue at this rate it is of course going to go higher. We feel that we are hitting, sort of like, the market where you have to be aggressive in tenant improvements and beef up realtor commissions. We do not think that there is any run rate but I just gave you the trend from a couple of years ago.

Larry on the second part of your question about capitalized interest let me give you a couple of numbers here. For our 2002, we anticipate the full calendar year number to be in the $7.5 to $8 million range. And then for the full calendar year for 2003 we expect that to go down to about $2 million. Our run rate on that has been decreasing pretty measly over the year 2002 and into 2003 as we reduce our developments in process.

Great, thanks very much.

Our next question is coming from Lee Schalop from Bank of America Securities, your line is now live.

Hi, Alexis Hues is here too. Could you break down your guidance for 2003 into the core component and the IIS component?

Okay the core components; if you are referring to the portfolio and NOI we are looking at that to be flat for 2003. Basically Lee if you take the Q3 NOI and the run rate there and just run this out to the end of 2003, that's how we are modeling this and estimating and including in our guidance. With respect to the IIS number we are expecting that to be in the $45-50 million range in 2003.

On the core portion are you assuming that you have each component is flat, or are you assuming some increase in expenses and an increase in occupancy and or revenue to offset that increase in expenses?

In terms of same store we are assuming a run rate that we are not going to increase occupancy. In terms of run rate what you see in our portfolio is that we have contractual escalation's in most of our leases and if you assume that we renew 65% of our tenants, what you see is that in the renewals we are holding for those vacancies we are holding about 5%. At net if you take all of that into consideration, we do not see a meaningful impact on our same store NOI. That's why we are keeping our same store NOI guidance at the same level.

Again on the expense side, we would then anticipate there to be some rise in expenses but again almost all of that is recovered from the tenants so that really does not have any real bottom line impact.

Alexis has a question.

Mike, just as a follow up to Lee's question. The forecast for 10% growth in IIS income, what are the components of that? Should we follow the components of the pipeline in terms of percentages? From merchant development?

Yes, Alexis let me give you sort of a background. If you look at year-to-date margin in terms of IIS income over the volume that we're running at a 12.1% run rate. We are assuming that going forward we are going to come in at about a 10% margin after taxes and after transaction costs. So we're looking at IIS sales in the range of about $375-400 million but in addition to that, we are earning fees on development. If you look at the run rate, of the volume of sales, you would see that merchant development was in the $175 million range, re-development $50 million range, existing properties at the $175 million range and land at the $10 million range. So if you add all of that you would have $410 million sales.

So $10 million land, $175 million for existing, how much for re-development?

Re-development would be about $50 million.

$50 million.

Yes and then you need to add to that would be the fees that we have earned in the development.

OK, I don't have the supplemental package but what were the totals for this year? For the components of the IIS income.

Let me give you the year date numbers and I think it is in the press release. Year to date our IIS income in total was about $31.7 million and that composed over $24.5 million for merchant development.

I'm sorry Mike I've got that. I am trying to compare and I'm wondering what your G&A for the IIS component will look like for next year? Is the G&A driven largely by the development in the IIS business?

No. The G&A is part of our overall program and our IIS officers so the G&A that is reflected in our IIS income should remain about the same for next year and that run rate when it is netted is then anywhere from about $1 million to $1.5million per quarter.

Was it $668,000 this quarter, $658,000?

Yes, but there was another component of that as well and the total is about $1.4 million for this quarter. You're looking at the footnote. There is another component in there that is a very long footnote where we are trying to provide additional disclosure. If you want, I can talk to you after the call and go through all of the detail of it.

I have another couple of questions about the G&A. Is restricted stock amortization of $1.3 million is that included in the $3.1 million G&A expense?

Yes, it's divided up between where it is allocated to. Some of it, and this is just from accounting rules, some of it is related to G&A, some of it may be related to a development person as part of our development cost and so forth.

OK Some development some G&A, should I assume half or is the majority regular G&A?

The majority is regular G&A, yes.

If I took that out of $3.1 million, that leaves about $1.8 million for G&A in total for the company excluding what you said there was for IIS of $1.4 million roughly per quarter, that leaves about $3.2 million for G&A. I'm just wondering is there another G&A expense somewhere else in your income statement?

I don't fully understand Alexis the exact question that you were asking. The G&A is the G&A and it is about 3.1 million. If you are looking for a run rate for 2003, if you take the year-to-date 2002 number, I think this is a reasonable run rate for G&A for going into 2003.

OK, but the $3.2 million run rate for quarter roughly including the IIS G&A, I assume that I believe from the proxy your top 5 senior officers make let's say about $1 million each in cash. So that's about $1.2 million per quarter which doesn't then leave much for, you know it leaves about $1.5-$1.6 million for IR, legal accounting, corporate office expenses. Are those expenses embedded somewhere else?

No, everything is accounted for either in G & A or if its related to development it's part of development and if its related to IIS it's part of IIS.

What is the G & A component of related development then?

You know I don't have that exact number but just to give you a reference, it's typically anywhere from about 3-6% on any one given development. It depends on the complexity of the development, the size and so forth and it is in that range overall. So if you looked at our total development activity for a year, and let's say you picked up a percentage in the middle of that range, the 3-6% range, say you pick 5%, that would be about your number of development overhead.

Okay and I think Lee has just one follow-up question. Thank you.

It's really not a question, just a suggestion. In future if you could get the supplemental to us before the call it would be helpful in terms of asking questions on the call, thanks.

Lee and Alexis, just one question that I think other people on the call may appreciate as well.

That was the question regarding the composition of the IIS pipeline going forward. In my remarks, I obviously said that there was going to be a significant move, and there already is to more asset sales, for all of the reasons that we articulated. So, there is obviously a significant possibility that we hope this happens, that the IIS pipeline is going shift not so much to building new buildings but buying new buildings, General Motors style, similar to the transactions I referred to in that instance to the transaction that we completed in Q2 where we are buying groups of assets so we would expect to see more of that. Now we will see we just don't know what 2003 holds. If our inquiries in pipeline are any indication, we should do more of that type of business.

Our next question is coming from Bryan Legg of Merrill Lynch, your line is live.

Jo-Jo can you just go back to the numbers that you gave for 3Q-02 and the Capex. The $1.84, was that TI and leasing commissions for all of the leases that rolled over in the quarter?

Yes Brian, you are correct.

When you say that maybe not a good run rate would something between $1.51-1.84 and assuming 65% renewals would that be a pretty decent assumption?

Brian yes, I think that is fair.

Mike, I just wanted to ask you guys given that if you take your low end of your FFO guidance for '03 and at the high end of your IIS, so that means that your IIS will be a third of your FFO and that's before you even take out your Capex. To put this in context does that mean that you dividend, currently, is appropriately priced?

Yes, I would say as far as a dividend then I think it would be appropriately priced. Also I said that if we came in at the high end of our IIS number we would come in at the high end of our FFO number too. If you look at our coverage ratios for FFO, FAD, are very healthily ratios where we are right now.

Even considering that most of the IIS are gains, you are still comfortable with your current dividend.

Sure. IIS is a recurring business; it's integrated interwoven with the rest of our business so you can't really separate the two. IIS really is a core business, just like everything else.

OK, Can you guys talk about how many of your base rents will be expiring in the second half of 2002? It was 11.3%, how much of that is left and also the 22.5% of leases expiring in 03, can you talk about how much you have committed?

Okay, we have 7% leftover expiring in 2002; half of the 7% is committed. 32.5% for 03. We are in active negotiations with all our tenants, I can't give you a number now for signed leases. If you look back since 1994 when we went public, we started off with a higher renewal rate but right now and for the past couple of years we have been in the high 60s renewals.

Can you expect that to continue in 03

Yes.

Are you seeing Tenants in general, are they contracting in space needs? So you might have the same renewal rate but they need less space.

Well, we didn't see that this quarter and although this quarter has been a really tough quarter and a difficult environment. It's across the board, you are seeing contractions, you are seeing some expansions, and depending on what industry you are in. So and there is the tenants that are moving around, so we didn't real see that in our occupancy as we have shown.

Okay. I have a few more questions. What were the total lease termination fees in the quarter?

Those were $672,000

Okay and is that sort of a normal number?

Yes, year to date we are at about $2 million so that's about average.

And were there any up-ticks in your bad debt?

No.

Expensing options, is that included in your '03 guidance?

No it is not. The jury is still out on what will happen with that. Just so you know, it would have a very small impact on us. Anywhere between probably $0.01-0.02 for the year of 2003, if they are expensed.

Okay and last question, can you give me a sense of what the best and worst markets were in terms of NOI growth in Q3?

yes I can give you that. In terms of same store NOI for Q3. Top Northern NJ 12.6% topped it followed it by Southern NJ 9.9%, Portland 7.8%, bottom three markets were Nashville -18%, Louisville -16%, Harrisburg -12%.

Is there something going on in these particular markets? Are they just sort of property specific and that you don't have a huge amount of square footage in these ad markets that are causing these negative double digits?

First of all, in terms of bottoms, our holdings there are substantially smaller when compared to for example Northern NJ. Secondly, it was property specific. We had a couple of large buildings.

Okay so it's not really reflective of the markets.

No.

Okay, thank you.

our next question is coming from Paul Peryer of Raymond James, your line is live.

Thanks, good morning guys. Jo-Jo, earlier you were responding to a question and you were giving some of the TI and commission costs for some past years, do you happen to have the average lease terms for those years and could you comment on the average lease term now and how it has changed and has it changed over the past several quarters?

Well, if you track our lease terms for the last 4 to 5 years I would say it has been about 5.4 - 5.5, that's the range.

Okay, so you've really not seen any change?

It's actually ticked up a little bit.

Ticked up a little bit, well let's see, one more question, just for clarification, Mike Havala, on the press release on the front page it talks about the sales and it mentions that you were a net seller, those sales are not included in the IIS numbers is that correct? Are those core portfolio sales?

The sales that we have in the press release are everything. So, we sold $128 million during the quarter.

Some of those were the IIS sales?

Yes, In fact I think if you look on the second page, we've said that there are about $103.5 million of those were IIS sales.

Ok, very good. Thanks.

Our next question is coming from Gary Boston of Solomon Smith Barney, your line is live.

Good morning, or good afternoon. Mike, I just wanted to apologize if I missed it in the previous G&A discussion. Do you know what the capitalized G&A was for the quarter and where that's headed as your development pipeline slows down?

Sure, I don't have the exact number for that. But, again, relative to the development volume that we have, it's anywhere in the 3-6% range. So I don't have the exact number for you.

So if we took the current pipeline of 3-6% and then looking at the future pipeline we could figure out how much of that will have to come back into expenses? Assuming you have the same number of people working for you.

Sure, all of that has been factored into our guidance for 2003. But yes, if our development activity for 2003 was significantly less than it was in 2002, there would be more expensed.

In terms of the Asset sales. Do you expect, in the existing sales piece of your IIS and is all of that going to be core portfolio or is that going to include build pursuits and things like that.

In terms of the existing piece, do you mean all of the property we own on the balance sheet?

I am talking about the $175 million out of the $210 million that you referenced, in terms of the proposition of the IIS pipeline.

Yes, that's all those properties we own today.

So those would be all of the NOI contributing assets?

Correct.

Okay, I guess that is it; I thought there was something else, thanks a lot.

Operator I do believe we have one gentleman who is trying to ask a question.

We do have a question, it is coming from Greg Isen of Safeco, your line is live.

Thanks, good morning. Going back to the IIS, he said in the explanation of the components that it included sale that you recognized a gain on seven buildings of about 1.71 million square feet that were sold into the Kuwait Finance House partnership. Is that correct?

Yes.

Okay, those buildings, was that part of your development pipeline that you finished developing and then sold into Kuwait Finance House after it was leased up.

Yes, those were buildings that we developed and exactly when we leased up and then sold to Kuwait Finance House. That's correct

Okay, did those buildings ever actually enter into what would constitute your same store sales NOI computation that you have entered into the past?

No, those would never be in same store.

Okay so those were never there. They were built, they were leased and they were sold into the Kuwait Finance House partnership after they released the stabilized level that the partnership requires.

The way that that fund generally works is that it was identified as our speculative pipeline to go into the fund and that it would be completed with the development and then get leased, then they go right into the fund.

Okay. Now you recognized a gain on the sale there, you are a part owner of the partnership and at some point down the road, you have a put option, correct me if I am wrong. Do they have a put option to put the assets back to you down the road at specific price terms?

No that's not correct there is no put option to us. By the way, First Industrial owns 15 % of that venture. So under the accounting rules we only recognize 85% of that gain, the other 15% of the gain gets deferred until it is sold out of the venture to say, some third party who wants to buy it.

Okay so you only recognized 85% of the gain. I don't have a better word than 'self dealing' but that is the only word that I can think of to describe and understanding this transaction so that it really is an acceptable transaction. Do you understand what I am driving at? Other people may be looking at the same thing and jumping to conclusions that might be erroneous. From a quality of earnings point of view, so I am trying to make sure that it is above board. If you don't have a put-option to put it back to you it truly is earnings to you.

Yes, absolutely. It's final sale to the venture with no if, and or buts.

That's what I wanted to make sure, thank you very much.

There are no more questions at this time.

Okay. Well thank you everyone for calling-in, we certainly appreciate it and we hope to see some of you at NAREAC shortly in the next week or so.

This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

13