First Industrial Realty Trust Inc (FR) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the First Industrial Realty Fourth Quarter Results Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn it 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 general accounting principals, policies and guidelines applicable to real estate investment trusts. For further information on these and other factors that could impact 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 Daily and welcome, everybody, to our fourth quarter and our year end ’02 conference call. With me here today is JoJo Yap, our Chief Investment Officer and Mike Havala, our Chief Financial Officer, and Mike Daly, our Director of Investor Relations.

Today I’m going to start the agenda with a discussion of our mission and strategy. JoJo will follow with a discussion of our portfolio and investment performance, and Mike Havala will finish up with a discussion of our balance sheet, our reporting and the details of our guidance for [2002] [phonetic].

Each year at this time, I’ve used my opening remarks to share with our investors our mission and strategy and I’d like to do the same this year, too, but to focus more on our overall mission, which has remained constant over the years, and that is to create value as measured by total return.

We have a few beliefs about how value is created. One of those beliefs is that it’s no longer created by inflation, and this has been true for many years and it looks, increasingly, to be the case as we go forward. It's also our belief that value is seldom created by brilliant macro calls from the top, like finding new cities or new countries to invest in. The market has become too efficient for that.

Instead, it’s our belief that value creation today, and in the future, is made through unique combinations of capital, human resources and organizational infrastructure. And by implication, a greater componentive value must more and more be created on the buy, or as we say, created at the closing table.

For First Industrial, the first step in the value creation process is to focus our organization’s priorities on the opportunities that we think offer the best chance for superior returns. The prioritization process begins with the study of owner characteristics and motivations. And we add to this a menu of transaction choices that are designed to appeal directly to owner motivations and structured to increase the difficulty of replicating those structures by our competitors.

And last, we capitalize on properties where we think the market perception of risk is far less than the actual list. And we formalize this into a selection methodology that is followed for every property that we purchase and every property that we sell.

As JoJo, today, describes our recent transactions, you will see a common theme emerge. Focus on owners where we provide unique solutions, where we’re undertaking transactional complexity that limits competing offers and where the procedure risk of the investment is greater than the actual risk, or where we could reduce that risk through our organizational infrastructure. And nearly every transaction that we do will have at least one of these three characteristics.

The second step in the value creation process for us is asset management and sale. Each property we purchase has a value creation plan. And the nature of industrial properties is that the gestation period for value creation will range from zero to five years. And for that reason First Industrial has and will sell approximately 15% of its assets each year.

In the sales phase, we reverse the acquisition process. We ensure that we’ve categorized our buyer’s motivations; we offer the properties under selling terms to create the largest pool of buyers. In other words, the selling process will reduce transactional complexity. And through the asset management process what we’re trying to do is remove the perceived risk and thus increase the reward premium to First Industrial.

The final step in the value creation process is to ensure that we have a reliable and a predictable platform from which we can find opportunities and nurture them through the value creation process. That platform is our INDL strategy. That ensures that we have a network to as many or more industrial opportunities than anyone in the market. And our INDL platform also serves to preserve value by setting our geographic, our product and our management standards for our investments.

Value creation opportunities for us, as you know, are focused on four principle activities. I’ll go through them briefly All involve industrial real estate and all within our 25 chosen markets. Our strategy and development is in-fill parcels in established parks and this way we avoid land development risk, business park development risk, but we can achieve full-scale development returns.

In re-development our strategy is deep discounts to replacement cost where we can cure functional obsolescence for minimal dollars.

In the corporate real estate side, our strategy is multi-requirement transaction, where speed is essential. And in the acquisitions, our strategy is to generate off-market transactions below replacement costs generated from our regional offices. We do not participate in bidding wars, where we think we will be the opportunity.

And our results validate this strategy. We have sold over $1.5 billion over the past four years, averaging about 14.1/2% of our portfolio in 279 separate transactions. We’ve achieved 17-1/2% total return on those investments and going forward, I feel, we’re well positioned to continue to deliver those returns, or at least returns that are well above the industry averages.

And we’ve also built a substantial pipeline of properties whose values, I think, we can and we will harvest on an ongoing basis. And the biggest contributor to that, as you know, has been the corporate real estate area and this is a big frontier. And by any standard of evaluation, we have been a leader in this field.

You will also note, from the press release, that we have changed our method of FFO reporting. We want our FFO reporting, going forward, to be consistent with our mission and our business model. We want our FFO reporting to be the closest method to GAAP. We want it to be simple in a comprehensive way to measure our effectiveness in the key areas of investments.

I do want to point out that I am also very aware that there is not a high degree of consensus on how to value cash flow from the investment activity of REITs in general and maybe [FR], in particular. But it’s my hope, at any rate, that our reporting will give you a means to measure us against our mission, which is to create value through total return.

Before turning it over to JoJo, I’d just like to make a few comments on the environment that we will be facing in ’03. And we have some good news. And we have some good news that we haven’t really been able to talk about the year. The ISM index, the Institute of Supply Chain Managers, is indicating about a 5% increase in manufacturing output. Along with that, there’s been a growth in the manufacturing employment. And capital spending increased by 3% and this is the first time that we’ve seen that since 2000.

Absorption was also positive and construction starts are down. So that’s a pretty good way to start the year. But I say it’s a good way to start. Clearly, however, in ’03, as in ’02, vacancy rates, obviously, remain high and companies, overall, are still fairly hesitant. Managers are still restricting their spending to some of the most pressing needs. So we still think that we’re going to operate in soft conditions, albeit marginally better than we had in 2002.

With that, I’d like to hand over the conversation to JoJo.

Thanks Mike. I’ll first discuss the portfolio, followed by investments and end with pipeline information.

Overall the markets are stabilized. Here are some occupancy statistics: our highest occupier, Atlanta, at 96%, Portland at 95%, Philadelphia at 94%, Los Angeles at 93% and Southern New Jersey at 93%. Lowest occupied markets are Harrisburg at 72%, Salt Lake City at 84%, Nashville and Tampa at 85%.

We had higher leasing costs due primarily to our decision to incur upfront tenant improvement to make our vacancies best of class. This will allow us to move quicker of re-leasing. This cost would have been $1.81 per square foot, as opposed to the $2.54 that appears in your supplemental. But for the advanced improvements we make, $1.81 per square foot is more in line with historical costs.

In terms of rental rate increases, we achieved a 4-1/2% increase in our renewals. Conversely, we experienced a decline of 3.4% on our new leasing.

Regarding our portfolio, also, we anticipate stable occupancy through the rest of the year. In most markets the volume and velocity of customers leaving industrial space continue at relatively low levels. We expect rent from new leasing to be about 5% lower than the expiring rents. Conversely, we continue to expect rental rate increases in our renewals in the range of 3 to 4%.

Assuming our historical retention rate of over 65% in the embedded annual rent increases in approximately half of our leases, we see same-store NOI to be sequentially flat through the rest of the year. Needless to say, we’re very focused on leasing our vacancies. One example of this is we require each of our regional heads to certify that every vacancy meets our high standards of aesthetics, marketing and price competitiveness.

With respect to investment activity, we continue to be very active on every front. Concerning development, we only develop in markets where we own property and have a significant portfolio management experience. We’ll make sure that the prototype that we build is appropriate for the sub market it serves. We only acquire in-fill sites. We only acquire land sites wherein we can immediately build for a tenant, or immediately satisfy existing demand as opposed to land banking.

We’ve exploited this offense in the land market by controlling land through options or marketing agreement in anticipation of build-to-suits for our customers. For example, we currently control a total of 253 acres of land in Atlanta, Chicago, New Jersey through this type of arrangement. The most compelling reason for landowners to enter into these agreements is to act as our national infrastructure and corporate relationships. This is a good example how INDL for a platform, benefits us.

Our development strategy allows us to deliver good results. Last year our speculative development and re-development projects will generate a total of $26-1/2 million of profit. Certainly we made the right choices between product type and sub market since we leased 64% of our development vacancies in 2002, despite negative overall absorption in the market.

Concerning re-development, we invest only in our existing markets where we can engage our local development, property management and investment teams. We usually develop assets only where there’s immediate demand, unless we can acquire the asset very inexpensively or obtain a leaseback from the owner.

We only consider assets that are functional or can be re-developed into functional assets. We invest at well below replacement costs so we can steal market share, as opposed to relying on market growth, especially given the environment. As a consequence, the returns in re-development are always higher than traditional investments. This happens this well because fewer investors can execute the management, leasing and re-development construction.

Finally, our re-development capability is key to our [I.S] efforts. This capability is often the differentiating factor in a multiple-transaction type requirement from a customer. Our competitive edge significantly expands when a customer needs multiple-market execution. This was certainly the case when we acquired four distribution assets from GM in Philadelphia, Chicago, Reno and Los Angeles. This was also the case when we interested Maytag in it’s re-configuration of its Eastern distribution network.

Finally, it was our re-development capabilities that allowed us to serve Caterpillar Logistics as well in the markets of Chicago and the Milwaukee area.

Concerning our corporate [leasing] services, our strategy is to simply supply [will-seek] solutions to corporate America. [Technical difficulty] solutions from one-up acquisitions to multiple-market reconfigurations of their supply chain. This need will continue as companies continue reconfiguring their supply chains to further achieve cost efficiencies and reductions.

In this tough economic environment, more and more companies are selling real estate to shore up their balance sheet, reinvest into their core business and buy back stock. In addition, some companies are trying on vying out of their synthetic leases through additional sale-leasebacks. There’s a sense of urgencies out there since all synthetic leases, most likely, need to be consolidated on balance sheet this year. Most of these companies are looking for an efficient provider of these integrated services. We’re in the best position to capitalize on this opportunity because of our ability and experience to buy, build and re-develop over a wide range of industrial product types nationwide.

This corporate strategy has served us well. This has led to record growth of new customers in 2002 that includes Ford, Maytag, Motorola, Caterpillar Logistics, Eagle Logistics and SuperValue. In addition, we just completed an agreement that made us a preferred provider of industrial space, nationwide, for Ryder Logistics, one of the nation’s largest logistics firms.

This is another great example on how a company is using First Industrials national infrastructure not only to source new business, but to serve the national leasing needs of corporate America.

Concerning acquisitions, we focus on those properties wherein we have local market expertise, derive significant lead from our portfolio management experience, and where we can acquire below-replacement costs. This experience allows us to choose the right product type for the sub market that will earn us a high return. We target, mainly, one-off transactions where we have less competition from well-capitalized buyers and where our size, financial wherewithal and our ability to close quickly makes a real difference.

We also buy portfolios that spin off properties individually because can create greater value by selling properties a la carte. We also look for opportunities where we can turn a single tenant building into a long-term net lease asset or use our building to achieve a much higher value.

Here’s an example of a garden-variety deal of a one-off acquisition coming from our regional office last quarter. Our regional office identified a corporate seller needing to get rid of a surplus property in Phoenix. This property was not marketed [widely], did not show well and did not attract many buyers. We struck a deal with the corporate seller requiring the sustainability for one year with the right to move them out in 30 days, at our request. During due diligence, we located a tenant, built the building on 10-year lease. We created value by buying the property at an empty-building price and acquiring it only after we had a 10-year lease in place. We project over a 15% un-leveraged [IRR] on this acquisition.

Concerning sales, we maximize value by selling the building to the right time buyer. If we’re selling leased assets, we market the building when it’s reached its maximum occupancy and stability. The more risk we remove, the greater the price to us. When we sell an empty single-tenant building, we market the building only to users, because the [indiscernible] asset from a replacement cost basis versus an investor who will penalize it with re-leasing costs and down time.

Last quarter, we sold $150 million at a 9.3 cap rate and a 20% un-leveraged return. We did this through 31 transactions across 17 markets. Users represented 21%, 1031-exchange investors 5%, private investors 57% and [issues-owned] investors 17%.

Some of the highlights included the sale of two buildings to our venture with Kuwait Finance House, the sale of a 102,000 square foot building to our customer, Pioneer Standard. Pioneer’s using the building as a call center. The sale of a 251,000 square foot building to another customer, Halliburton, Inc. Their energy services division is going to use the building for distribution.

Regarding our [pipeline] scheduled for sale over the next 18 months, it stands at $664 million today. Here’s the breakdown; $166 million of spec development, $48 million of re-development, $40 million of build-to-suit projects. The build-to-suit projects are as follows; an 80,000 square foot light industrial building for [atony’s] corporation, a German [gaming device] company with American headquarters in Phoenix. We helped them consolidate in our building from four other locations. We also provided them expansion capability by providing them some expansion land.

Two buildings totaling 500,000 square feet in North Carolina and Atlanta for Ford. For assisting Ford in their reconfiguration of their distribution network by building these high-velocity centers will effectively distribute parts to their dealers.

We’re also building a 130,000 square foot distribution facility in Chicago for [Vaney] Foods, a food processing company. Finally, we’re building a 318,000 square foot distribution building for a repeat customer, Tractor Supply Company, one of the largest retail suppliers of tractor parts and farm parts. This is our third transaction with this customer.

Our relationship with Tractor started as an existing customer back in 1998. Their business continued to grow and they asked us if we could assist them in an expansion. We responded by building them a 400,000 square foot building in 1999 to service this need.

In terms of existing buildings, we have over 80 properties that exceeds $400 million in value that we expect will be in the final stages of our access management plan and therefore value creation.

Land sites that are valued at $10 million constitute the balance of our pipeline. In summary, we are very pleased with our results for the quarter. We’ve stayed the course in our investment strategy and executed on our asset management plan, development, re-development and acquisitions and produced results. We focused on marketing our vast capabilities to corporate America and continue to grow our client base.

Finally, we completed the value creation cycle by maximizing the value of our assets by consistently applying out sales strategy. At this point I’d like to turn the presentation to Mike Havala.

Thanks JoJo. There are three areas I want to cover. First, I’ll talk about our balance sheet and capital markets activities, second I’ll talk about the reporting changes for 2003, including a comment on corporate governance. And then, third, I’ll talk about our guidance for 2003.

With respect to balance sheet and capital markets activities, let me just remind you about the strength of our balance sheet. Our debt to asset value is about 43%. Our interest covers us three times. And our fixed charge covers us 2.5 times. These are very good, especially in a tougher economic environment.

With respect to our debt, we have no maturity’s, really, until May of 2004. We have longer maturity's. In fact, our weighted average maturity at 12 years, is one of the longest in the entire REIT industry. And we also have 100% of our permanent debt at fixed rate debt, rather than floating. And, then, lastly, with respect to debt, we have very little secured debt. In fact now, 98% of our assets are unencumbered by mortgages.

With respect to capital markets activities, in October we paid off a $33 million secured loan and then in January, subsequent to year end, we paid off another $37 million in secured loans. So with this, we’ve now increased our unencumbered asset pool to the 98% that I mentioned before.

With respect to the fund that we have with the Kuwait Finance House, in the fourth quarter, the fund required an additional $25 million of properties, bringing the total in the fund up to just over $200 million. And, if you remember, this fund is anticipated to grow to close to $300 million.

Then, finally, in the fourth quarter, we re-purchased just under 1.1 million shares of our own stock, at an average price of about $27.02.

Next let me talk about same store. As you saw in the press release our same-store NOI for the quarter declined 1.2%. And that’s broken down in to same-store revenues declining 2.4% and same-store expenses declining 5.4%. One comment I would like to make about same-store is that regarding our statistic for same-store, we reported under a fairly conservative method. For example, we did not include the lease termination fee that we received from Amazon, about $4 million in the fourth quarter same-store statistic. If we had our same-store number reported would have been substantially higher, about 7% higher.

Next let me talk about some of our reporting changes for 2003. First, we’re expensing options beginning in 2003. This should have very little impact, less than a penny a share on an annual basis to us. Next, also as announced in our press release, and Mike Brennan mentioned as well, beginning in 2003 we’re going to simplify and clarify our computations of FFO. And, really, what this does, as far as the calculation, is we take GAAP net income, add back depreciation expense and subtract out accumulative depreciation on property sales. This really accomplishes having an FFO that’s closer to GAAP and something that’s consistent with our strategy and really provides transparency into 100% of our activities, both investment and operational.

With respect to disclosure, we still will disclose all the information we have in the past. So when you look at sales or the breakdown of sales you’ll be able to find that information in the supplemental and apply whatever analysis that you’d like to on that.

Next, let me talk about corporate governance. Institutional Shareholder Services, which, as many of you know, rates company’s corporate governance. They have rated First Industrial at higher than 90% of other real estate companies. And I think that we’ve always tried to and know that we’ve kept a high level of corporate governance, but we’re very appreciative to get this formal recognition.

I should also mention that we are making available corporate governance information on our web site this quarter as well.

The last thing I want to go over with you is our guidance for 2003. With respect to that guidance, we are keeping our guidance the same, the same as the guidance that we gave you for 2003 back on our last call in October of last year. Specifically, we’re comfortable at $2.00 to $2.20 a share in GAAP EPS, and then $3.55 to $3.75 in FFO per share.

The assumptions for this are in the press release, so I won’t reiterate those now. But there is one thing I want to mention about our guidance for 2003. Although we’re getting a sizeable dollar amount from Amazon as part of the lease buy-out in 2003, about $7-1/2 million, we are not changing our guidance as a result of this because of a couple of items.

First of all, in our original guidance that we gave you back in October, we did not anticipate that we’d have this lease termination, and so we’d already factored in $3 million into our guidance for 2003 from the rent that Amazon would have normally paid us.

In addition, in the first quarter, we’re going to write-off about $1.5 million of un-amortized loan fees. That’s a non-cash charge. Really that’s just a write-off of accumulated loan fees in connection with the pay off or our secured debt of $37 million, which I mentioned before.

And then, third, we are internalizing our due diligence function. Previously we had done this work through third parties, and while we are saving cash by internalizing it and it’s a benefit to the Company, from an accounting point of view, some of these costs will be expense versus capitalized, compared to how we did it before. So, again, that’s a net positive from a cash point of view, but from an accounting point of view that will increase our G&A a little bit. So I just wanted to go and clarify how we’re keeping our guidance for 2002.

With that, let me just conclude and say that 2002 was a challenging year for most everyone. For First Industrial, our financial position remains very strong. We have a great balance sheet, and we have strong and diverse sources of cash flow.

With that, let me turn it over to Mike Brennan.

Thank you, Mike. Just a few summary comments that I hope we could take away from this conference call.

Number one, I think it’s a good perspective to keep in mind that over the past two years, we’ve operated in one of the toughest environments for industrial properties we’ve seen in the last 20 years. Yet, despite that, our overall performance has been solid, and I attribute that to staying the course with our mission and strategy.

Second is, the benefits of our business model are highlighted when business conditions soften. While we can’t create demand, we can create value, and I think our best years are coming, especially as we gain a stronger foothold with corporate America.

So with that, I’d like to turn it over to questions and answers. Moderator?

Thank you. The floor is now open for questions. [Caller instructions.]

Our first question will be coming from Larry Raiman of Credit Suisse First Boston.

Hi. Nice job again on disclosure and in the call. I guess two quick questions.

First, in your Other Assets line -- I know, Mike and Mike, I’ve asked you this before; I just wanted to keep track. In Other Assets, embedded within the $178m total at the end of the year are mortgaged loans receivable of $85m, and I want to make sure, they relate to essentially seller finance on some of your asset sales?

Yes.

And could you describe that activity, if you will, the length of these loans, if you will, when you’re going to expect to collect them, the terms, and any default items and how you underwrite the risk associated with any default from the seller finance that you provide?

Sure. With respect to that, Larry, there were a couple question you had in there, but basically, the terms of those, we expect to collect those anywhere from a year or two from when those seller-financing loans were made. These are all mortgages, so they’re secured by the underlying real estate, and obviously, we underwrite that as an investment, and it has to pass our muster and our hurdles. And we charge a market rate of interest and so they’re very underwritten market transactions that we do.

Mike, they are first means or mezzanine?

No, they’re first mortgages.

Okay.

They’re all first mortgages. And there’s no other debt secured by the properties in these cases. So – and this was something, as you know, is common and customary in the real estate business, especially in the industrial real estate business. If you looked at most of our competitors, they would have these types of transactions as well, too.

Sure. Now—

And, Larry, we don’t see any default or –

Okay. And given the fact that over the next year or so, or on a going-forward basis, if you have kind of a stable capital pool, and it’s somewhat stable, as Mike articled earlier, about 15 percent of capital being recycled in each and every year, that would be a similar transaction volume. Would you expect at some point that -- this specific line item to stabilize as well as a proportion of your overall capital [base]?

Yeah, Larry, this is Mike. I’d just answer the question by saying I expect this will probably go down. We make the decision to invest in mortgages when, as an alternate investment, especially in periods where investments are sometimes hard to find, this gives us about a 400-basis-point increase over our line and about a 200-basis-point decrease on cash flow from normal investments. And, also, as we go forward into the year, we would expect that our alternate investments opportunities should increase. So this line item will probably decrease. And, also, too, if we want it to decrease faster, what we have done in the past is we’ve packaged and sold loans to get that when we needed it. So that’s what we – we would expect it to go down.

Okay.

If, you know – I mean at some point, price has got to reflect the fundamentals, so, you know, we would anticipate towards the end of the year that we maybe get a little pricing more in line with the fundamentals.

Okay. My second question – thanks for that – is related to your lease negotiations with your customer base on a nationwide basis. As you’re engaging in these negotiations and there’s the trade-off between rent concessions and all kinds of other items, what sort of – and you’re talking about lease concessions, capital expenditures, improvements in the properties – are you finding that the tenancy is asking more for free rents, asking more for improvements in the properties that they’re unwilling to fund off their balance sheets, or are they asking for just a lower base rent, all else remaining equal? And what sorts of give-and-take are you now experiencing with your customer base on the concession front?

Larry, this is JoJo. Your last question first, in terms of are they asking for more concessions? Yes. Are they asking for more free rent? The answer is yes. Overall, the tenants are not asking for significant tenant improvement packages. They would prefer lower full gross rent payable rather than, you know, finishing out this space because they know that the tenant improvement package, Larry, goes back in rent anyway. So that’s the main theme. Everybody is trying to lower their cost structure.

In terms of our balancing, if you may, I mean there’s a lot of things that go through lease negotiations. There are improvement, rent, rent escalations, length of term and all that. We’re focused on total return, so the most important thing for us is, number one, value creation, how that lease affects the value of our property, and, of course, in terms of total return, IRR really counts up front, and that means that we’re focused on cash flow. If we increase cash flow and we try to get, you know, the best rents we can get, then, you know, we can basically increase our IRR. So those are the drivers of the deal.

And are you finding that tenants are unwilling to sign triple-net leases and, therefore, bear the costs of insurance costs?

Oh, no, Larry, we do not find that at all. They are still signing triple-net leases, and I want to tell you a couple things. One is that as First Industrial being their landlord, they do benefit from some efficiencies. One is that we feel that we have one of the lowest insurance rates because of our leverage, you know, using our property base with negotiation of property insurers. And in terms of just landscaping costs, snow removal, HVAC maintenance, group maintenance, all of those, we have a bigger base we can negotiate with local contractors. So our cost per square foot is also more competitive than our lender. So overall, you know, we’re not seeing a shift away from triple-net, but on top of that, they get some benefits of dealing with First Industrial.

Okay, thanks. And –

Hey, Larry, just, you know, insurance – I think everybody knows this. JoJo did a – maybe a little too modest – did a great job in negotiating insurance this year. Our costs are, you know, anywhere from $0.03 to $0.04 a square foot, so it really isn’t that much, but this year because, you know, we thought we saw some predatory pricing in the insurance, we took our – we found three more brokers in addition to the one we had. JoJo went out and bid it to about 20-some-odd insurance companies, which kind of irritated our broker, but our insurance costs had a fairly minimal increase, which was fairly rare last year. So that’s – we did a good job in keeping those costs down. But at any rate, they’ve never really been that big for us to begin with.

Sure. Okay, thanks. I apologize for the last question, but Mike Havala, could you just, if you could, refresh me and maybe some others on the call, when you said the accounting change for reporting FFO, what difference – what specific line-item differences were embedded in the prior calculation versus current calculation for prospective [inaudible]?

The main difference, Larry, is that we are – before, we were reporting IIS as part of FFO, and so if we had a multi-tenant property sold to a pension fund, you know, that would’ve not been part of IIS. So now we’re just including 100 percent of all investment activities. It’s just simpler and cleaner. And obviously the bulk of what we did was IIS anyway.

Got it. Okay, thank you.

Thank you. Our next question is coming from [Arthur Winston][ph] of [Pilot Advisors][ph].

Good explanations. Given your guidance, I was curious where the debt and cash would wind up if you worked everything through your guidance on December 31?

You know, basically because we anticipate selling and reinvesting about the same amount of dollars, our balance sheet at the end of 2003 should look a lot like our balance sheet where it is right now.

And the mortgage receivables would be more or less the same as now?

Pretty close, yes.

Thank you.

Thank you. Our next question is coming from [John Stewart][ph] of Salomon Smith Barney.

Good morning. I have a couple of questions for JoJo and then a couple for Mike Havala.

JoJo, can you give the level of pre-leasing on the developments that were placed in service in the fourth quarter?

Leasing on the placed in service fourth quarter – it’s a 100 percent.

They’re 100-percent leased?

Yes, 100 percent.

Okay. And what about cap rates on the acquisitions of the fourth quarter?

Nine point nine percent (9.9%).

Okay. And then, Mike, I just want to be clear on the -- sort of the restoration fee with Amazon, the $3.6m, that is in addition to the lease termination fee?

Yes, that’s an addition, and basically what we did is Amazon – we worked out a deal where Amazon paid us $3.6m, and so we now have the obligation, if you will, to remove the equipment and so forth. We anticipate our costs will be meaningfully less than $3.6m, but, you know, that’s not complete yet, and so we’ll see. So don’t count the $3.6m as income because we’ll have some expenses against it, but certainly some of it will be.

Are you going to book that in the first quarter?

That will be booked when the project is completed. It may be towards the end of the first quarter or into the second quarter as well.

Okay. And then just with regard to your guidance, I want to be clear that what you’re calling the capital recycling in this press release, is that basically the equivalent of what you had been referring to as the IIS income, that specifically you’re now looking for $50-55m?

Yes, they’re similar; yes.

But are they not exactly in the same basket, or--?

Slightly different. As I mentioned before, the $50-55m includes gains on all sales, and fees, as well, when we do fee development and so forth.

I guess what I’m sort of getting at is that if your guidance on that piece of the puzzle is up, but everything else – or at least everything else at [apropos][ph] is constant, does that imply that your guidance on the rest of the business is down?

No, you know – this is Mike Brennan – it really doesn’t affect it very much at all.

[Indiscernible.]

It really doesn’t affect it very much at all. And we might choose not to sell one property that previously was in [INS][ph] for, you know, different reasons, maybe we didn’t get the lease renewed, and another one takes its place. It shouldn’t have any – really has no material effect.

Were you asking about if [debt][ph] is higher than the other items, such as NOI, interest – you know, if those items would be lower?

Right.

Is that what you were asking?

Exactly.

Yeah, I mean we raised our numbers slightly on that from 45 to 50 to 55 to [50][ph].

Right.

So that slightly went up. And then the other numbers, as I mentioned before, we have a couple things going on there with respect to the $1.5m of unamortized loan, which I mentioned before, and expensing options, and then by internalizing the due diligence function. And then, also, remember that we were net sellers of property in the fourth quarter for about $50m, too.

Right.

So that has a, you know, somewhat slightly negative impact going into 2003 as well. So, yeah, we just tweaked and refined those numbers a little bit.

Right. Okay. And then final question on the corporate governance. Is executive compensation linked to FFO growth?

We –

Well, this is Mike. Somewhat. There are many other factors that we look at.

Right.

You know, we look at subjective factors – our customer service, our human resource development. Those are big subjective factors. We look at internal net asset value growth, a big component for us. We look at occupancy. We look at the strength of our portfolio and how we’ve managed it. There are a number of objective standards against which compensation is beside it, and FFO is one.

What is the hurdle?

I’m sorry?

What is the hurdle for FFO, if you don’t mind me asking?

I’m sorry, when you say “hurdle”—

Well, the objective, I guess.

Well, our objective’s our internal business plan. That’s our objective.

Okay.

I mean there’s no formulaic number that’s applied to it. But, obviously, those decisions are not my decisions to make. Those are the decisions of the independent board members who [consist of][ph] of the Compensation Committee as well.

Gotcha. Okay, thank you.

[Indiscernible].

Thank you. Our next question is coming from [Terry O’Connor][ph] of [Cedar Creek Management][ph].

Terry O’Connor: Just to make things simple, could you tell us what the 2002 FFO would’ve been under the new definition, and also tell us what the 2003 FFO would’ve been under the old definition?

Yeah, I don’t know what the 2003 would necessarily be under the old definition because, again, we’re not sure exactly what we’re going to sell because that’s forecasting a projection. With respect to 2002, it shouldn’t be materially different. We don’t really measure it that way. And the change that we’re making is a prospective change, just like when we’re changing our expensing of options and so forth. That’s done on a prospective basis.

Terry O’Connor: But, for example, you had gains on sale of property in 2002 of $23.7m. That wouldn’t be added under your new definition of FFO?

No, I think the number that you’re looking at is a booked gain number, as well as some economic gain from some non-IIS transactions. So that would include the recovery of accumulated depreciation, which we are not including and have never included as part of our FFO.

Terry O’Connor: What portion of the 23.7 is accumulated depreciation?

I guess I’m not sure what that number is.

Terry O’Connor: Is it 20 million? Is it 2 million?

It’s a lot of it.

Terry O’Connor: All right. Can you tell us how same-store operating expenses fell 5.4 percent? That’s not consistent with most people’s trends.

Sure. Most of that decrease on the same-store operating expenses was the result of real estate taxes going down. You know, as we learned in the early ‘90s, protesting real estate taxes can be very lucrative, if you will, especially when you have higher vacancies. So in our policies, and what we do in the regions, any time that we have vacancy in our projects, that is a big signal for us to go and try and renegotiate real estate taxes. So that was the bigger – the biggest decrease in the operating expenses for same-store.

Terry O’Connor: Okay. Thank you very much.

Thank you.

Thank you. Our next question is coming from [Greg Isen][ph] of Safeco Asset Management.

Thanks. Good morning. In your press release regarding the new FFO calculation, you specifically say that you’ll start with net income and then add back depreciation. As I look at the supplement that you issued today, the line item Net Income occurs before Preferred Dividends. Did you mean to say net income for common stockholders?

Sure. It’ll be net income for common stockholders. Yeah, it’ll be after Preferred Dividends.

Okay. I just wanted to make sure of that.

Sure, no [inaudible].

And then regarding the $50-55m of gains, whether they be within the IIS structure or other economic gains, you were referring to economic gains there, excluding accumulated depreciation?

Correct. That’s right.

Gotcha. Okay, that’s it for me. Thanks.

Thank you. Our next question is coming from Bill [Inaudible] of [HVB Capital Management][ph].

My questions have been answered. Thank you.

[Caller instructions.]

Okay, well, Moderator -- Operator, I don’t know if there are any additional questions, but generally, we do have a few more than those. And just a little worried that in the last time we weren’t able to accommodate some people; they got cut off. So if you could double-check?

Certainly, sir. Actually, we do have a question now. It’s coming from [Tim Cowen][ph] of Morgan Stanley.

Okay, thank you.

Just a quick question on the mortgage loan receivables again. Where does the interest flow into your financial statements?

That is in Other Income. So if you look at the supplemental in Tenant Recoveries and Other Income, it’s in there.

Great. Thank you.

Yup.

Thank you. Our next question is coming from [John Woitescheck][ph] of [Reef][ph].

Hi, guys. Where is the Amazon lease term? I’m sorry if this is someplace in the notes. Is it in the top line, or is it in the IIS number?

It’s in Rental Income.

Great. Thanks.

Thanks, John.

Thank you. Our next question is coming from David Copp of RBC Capital Markets.

Hi. Good morning, guys. I had a couple of questions on the NAV you provide. You know, it looks like it has trended down in the last couple quarters here. Just wanted to get an idea of when you expected that to rebound? And then, also, I know a lot of this is fairly subjective, but you have made a 95-percent occupancy adjustment. Just wanted to kind of understand what your thoughts were there and why you think that’s the rational occupancy to be running this on given that occupancy hasn’t been there for, you know, several quarters and will likely not be there for several quarters?

Sure. With respect to the occupancy adjustments, again, the NAV that we provide is really a demonstration of an NAV calculation, and it’s there so that people can get the components. Almost everybody has their own nuances in how they compute NAV, and we realize that. So we want to try and provide you our various components. And some people do include an occupancy adjusted to try and stabilize occupancy because reality is, when people buy and sell properties, they underwrite to a certain level of occupancy, and if occupancies are 100 percent, they’re going to get [dinged][ph] on the sale because someone’s going to underwrite a lower occupancy, and vice versa. So that’s the logic for including that in there. But, again, main point is, this was here for demonstration purposes so that everybody has information that they need to do their own NAV calcs under their own methodologies.

I think the first part of your question was, you know, when we would see NAV increase. Of course, as the market gets better and rental rates increase, that’ll help, among other things. So I mean that’s – as the markets get healthier and our NOI goes up – same-store NOI goes up, as an example, then you’d expect to see our NAV go up, as well.

Does that answer your question, sir?

Yes, I guess.

Thank you. Our next question is coming from Lou Taylor of Deutsche Bank.

Actually, it’s [John Perry][ph]. On the – ’03 looks like it’s going to be a pretty busy year on the leasing front, about 24 percent of the leases that expire. Can you give us an update on the progress you’ve made so far and maybe a sense of the timing? Are they front-end loaded, back-end loaded?

Yes, the vacancies right now, you know, are fairly diversified. If you look at – you know, it’s fairly spread throughout the year. I mean if you look at the average size, you know, you’re looking at under 20,000 feet or so. We have a lot of tenants, and it’s spread over across a lot of cities. There’s no major city out there or no major lease that, you know, we’re looking at or major city that really over-weights the leasing. And it’s in the low-20’s range right now, and, you know, we’re on top of it. I mean, you know, we’re currently in conversations with all of these tenants trying to renew them as quickly as we can.

Okay, thanks.

Thank you. There appear to be no further questions or comments at this time.

Okay, well, thank you, Moderator, and thank everybody for calling in. Look forward to talking with you in April when we have our first quarter conference and maybe look forward to catching up with some of you individually if you have any questions. Thank you.

Thank you, ladies and gentlemen, for your participation. This does conclude this morning’s conference call. You may disconnect your lines at this time, and have a wonderful day.