First Industrial Realty Trust Inc (FR) 2003 Q3 法說會逐字稿

Good morning and welcome to the First Industrial Realty Trust third quarter results conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions following the presentation. It is now my pleasure to turn the floor over to First Industrial.

Good morning everyone and thank you for joining us today. Before we review the quarter, let me remind you that this conference 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 in the real estate markets 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 principles, 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 and good morning to everybody and welcome to our third quarter earnings conference call. I'd like to start by introducing the members of management that are here: Jo Jo Yap, our Chief Investment Officer, Mike Havala, our Chief Financial Officer and you just heard from Mike Daly, our Director of Investor Relations.

I'd like to start the call today with an overview of our strategy followed by a discussion of our third quarter results and then discuss a little bit about our view of '04 and consequently the result of our guidance and how we formulated it. Jo Jo will then follow with a discussion of our portfolio and our investment performance and Mike will discuss our balance sheet, capital markets activity and give you the details of our guidance for '04, which we are initiating with this call.

Our strategy is designed to capitalize on three key characteristics of our industry that we outlined at our recent investor day and spoke about in our last call, those being the size of the 26b sq. ft domestic market, second is the unique ownership characteristics of the business specifically where corporations own 65% of that 26b sq. ft., where the private investor owns 30%, so a full 95% of the ownership is in the hands of private investors and corporate America, and last is maturity and what I mean by that is something which manifests itself in historical rent flows at or in most cases below the rate of inflation.

Our strategy is designed to deal with both the opportunities and the reality of those characteristics in four particular ways.

Number one is the creation and the maintenance of a national network to serve the dual purpose of opening up broad avenues for investment and providing a national platform to serve customers. Second is investment in five facility types that are most commonly found in supply chain networks again for the dual purpose of broadening avenues for investment and providing a more complete product availability set for our customers. Third is to operate our properties on location with company employed managers for the dual purpose of competing effectively against the private investor and for the purpose of creating and rounding out that full service capability for our customers and to deal with the issue of maturity, it is our strategy to recycle capital to achieve optimal returns and then to fully disclose those returns so that our investors can get a full view of all the economic activity that First Industrial undertakes.

With respect to our third quarter performance, I'm pleased. We certainly have more work to do but in the third quarter, every aspect of our business improved. With respect to our portfolio performance, our occupancy was up for the second consecutive quarter, retention rose to nearly 80% up from 74% in the last quarter, we saw improvements in both same store and rental rates, and tenant improvements and leasing cost declined both on an absolute basis but more importantly on a square foot leased basis, so we're pleased with that performance in light of where we are at in the economic cycle.

With respect to our investment performance, our track record of recycling capital at returns significantly above our cost of capital continues. In the quarter, we achieved 18% and for the year we have achieved a 16% internal rate of return and those returns produced economic gains of $16m. On the reinvestment side, we continue to find value added opportunities and we continue to spread invest by a margin of nearly 200 basis points. It is of course a difficult acquisition environment, but as Jojo will detail in a second we are finding some good opportunities and we hope that we're going to have a good fourth quarter in that regard.

In as much as we have initiated guidance with this call and in our press release that we sent out last night, I wanted to share with you, our views of the formulation of that and certain things that we believe we're likely to see in 2004.

With respect to the economic outlook, clearly we have more reasons for optimism than we did at the beginning of 2003. By mid-year, corporate profits had risen by 9.9 percent and the results that are coming in the third quarter indicate perhaps an even stronger performance in the third quarter. By mid-year, capital spending also rose by 7.3 percent and many of the people that have been on this call before realize that I regard that as a very important indicator in terms of how absorption will play out in our industry.

The ISM Index rose to 53.7 percent and very interestingly the inventory to sales ratio is now at an all time low. So that indicates that if the economic activity continues, with the holiday season around the corner, that maybe we can expect inventory levels to build up and at the same time perhaps we can see absorption rise. And clearly that positive economic activity over the last six months is beginning to work its way into our portfolio results and perhaps also explains in part the exceptional build-to-suit activity that we've had over that same period.

So in short, in 2004 the stage, at least from where we sit today, certainly appears to be set for a better economic environment. With respect to the industrial real estate sector of course, we need to temper our optimism that we brought on by the good economic news with the other reality and that being that we have an 11.7 percent vacancy. In our view what's likely to occur in 2004, assuming the economy is healthy, is increased space absorption, leading to higher occupancy, but with pricing power still favoring the tenant. And you have already seen this begin to play out in our results.

With respect to investment activity, investor demand should remain strong in 2004. First, fundamentals are improving. Second, interest rates are still low and they're still providing significant positive leverage. And last, lender delinquency rates are extremely low at slightly over 1.0 percent contrast that with the 7.0 percent that we saw in 1991 and 1993. And I think again the stage is set there for investor demand to remain pretty strong.

With respect to new business opportunities in corporate America, despite its earnings improvements, still has major issues. Most of the companies that we work with have supply chain work that is left unfinished and that they are at work on and we're working with a number of companies to do that. Many companies that we work with still have significant pension fund liability issues. And all of our customers have some other issues, whether it's trying to find optimal capital deployment, whether it's reducing leverage or something else. And so, industrial real estate will certainly play a role in all of these areas. And we've worked very hard over the past three years to brand our service with corporate America and so it's within that sector that we expect to find our most lucrative opportunities in 2004, as we have in the past.

Finally, before I hand it off to Jojo, I'd like to comment on our dividend pay out so that everyone is clear on our views in this regard. At the low end of our guidance for the full year, which has been raised a nickel to $3.40 our FAD pay out ratio is less than 100 percent and therefore fully covers our dividend. Again in 2004 at the low end of our 2004 FFO range we will again fully cover our dividend.

And last, perhaps most importantly, the company still has two significant growth drivers that are more important as the economy improves. The first is what Mike Havala and I have referred to in the past as our low income producing assets. At the end of the second quarter, we held approximately $300m in land, development in process, cash and other assets, yielding in the aggregate less than 2.0 percent. Our plan is to reduce that to no more than $150m and invest the difference in income producing assets. Mike Havala will discuss the implications of this initiative for the balance of 2003 and beyond that.

The second driver of course, of growth, is increasing occupancy. For every 1.0 percent rise in our occupancy we have an $0.08 cents per share pickup. And for seven years, between 1994 and 2001 our occupancy ranged between 95.0 percent and 98.0 percent and I have no doubt that we'll increase our occupancy as market conditions improve. Thus, further improving dividend coverage and overall valuation.

With that I'd like to pass this to Jojo.

Thanks Mike. Overall, the markets in which we operate continued to firm. And during the third quarter our regional teams were able to drive sequential improvement in portfolio occupancy and tenant retention. And though we still saw pressure on rents, same property NOI and cash-on-cash rental rates also improved sequentially. As Mike has mentioned our occupancy today is 87.7 percent, up from last quarter.

Our retention ratio of 79.8% is very strong, and is primarily a result of our strong customer relationships. And while there remains pricing pressure on rents from both prospective and renewing tenants, we're seeing signs of improvement in tenant improvements.

Tenant improvements and leasing commissions dropped to $1.77 per square from $2.50 per square foot from the second quarter. Building improvement costs were $1.2 million less than the prior quarter at about $2.5 million. You may remember in our second quarter call, we indicated that they would be lower as a result of front end loading of roofing costs. For the balance of the year, we currently anticipate that occupancy will remain stable or slightly increase. Rental rates and renewals will be plus or minus 5% lower and rental rates and new leases will be plus or minus 10% lower.

In the fourth quarter we expect capital expenditures including leasing costs to be similar to the last quarter.

Let me now give you some color on 6 major US markets consisting 40% of our overall investments. Overall our occupancy in 5 out of our 6 major markets is higher than the market occupancy. These markets include Chicago, Atlanta, Dallas Forth Worth, Denver, New Jersey and Los Angeles. The Chicago market's occupancy is at 88.1% versus our occupancy of 88.3%. Development activity is focused on the South West I-55 Corridor, West Suburban and South Chicago sub markets.

Leasing has picked in most sub-markets with most deals getting done in the south and west of the city. Almost 50% of our Chicago portfolio is located in the corresponding sub-market. The Atlanta market's occupancy is at 84% versus our occupancy of 90%. The north-east and South Atlanta sub-markets continue to absorb the majority of the leasing activity. 40% of our Atlanta portfolio is located in these two sub-markets. Meanwhile the worst performing sub-market is the I-20 West Fulton District where our exposure is limited to 3 1/2 % of our Atlanta portfolio.

The Dallas Fort Worth market occupancy is 86% versus our occupancy of 94.1%. The North Fort Worth and South Simmons are the best performing markets all with occupancies above 90%. In terms of leasing activity, we expect South Fort Worth and Great South West Arlington to be the best performing sub-markets. Approximately 32% of our Dallas portfolio is located in these 2 sub-markets. The Denver market occupancy is 87% versus our occupancy at 90%. Year to date the northwest sub-market has seen the most activity 40% of our Denver portfolio is located here. Sub-markets with the lowest occupancies are the Southeast, Weld County and North. Approximately 11% of our Denver portfolio is located in these sub-markets.

In New Jersey, our occupancy is 88% versus the market occupancy of 91%. The Middlesex Summerset sub-market continues to see the majority of leasing activity in 2003. 30% of our Northern New Jersey portfolio is in this sub-market. Morris, being our largest sub-market with 40% of our northern New Jersey portfolio, in terms of leasing activity it has picked up in the sub-market and we expect its occupancy to grow.

Our last major market, Los Angeles is at 95.2% beating the market by 140 basis points. LA County is clearly the best market in the country despite its occupancy rate already beating the nation by 550 basis points, its occupancy continues to rise even more. International trade in the port of Los Angeles continues to drive demand, which is able to out pace the very strong new deliveries.

With respect to investment performance just like Mike mentioned we saw sold a total of $143.3 million of assets in the third quarter, achieving an un-leveraged IRR of 18% reflecting the continued strength of the sales market. Private investors, users and institutions all remain active keeping cap rates at record lows in an 8% cap rate range.

During the quarter we closed the sale of the majority of our Portland portfolio. Our portfolio performed well during our ownership but today Portland has one of the highest unemployment rates in the country at 8.5% versus the nation's 6.1%. We expect that this will cause Portland to under perform our other markets and may well elongate Portland's recovery. Given this dynamic, we expect weak industrial real estate demand in the intermediate term and decided to take advantage of the high prices being achieved in the market place.

Also during the quarter we sold a 309,000 sq. ft. property in Chicago that had achieved its maximum value. We purchased a property with a short-term lease in place implementing an asset management plan that called for executing a long-term lease upon renewal and selling the facility. We sold the facility for $12.6 million achieving a 20% un-leveraged IRR. We also sold a 207,000 square foot property in Nashville to a tenant with a significant investment in the building. We sold the facility for $8 million, which was higher than what a typical investor would pay due to the customer's investment in the facility.

And we achieved a 24% un-levered gross profit margin on the sale of a property that we bought from American Spectrum that I'll talk about in a minute.

We acquired this property at the below market price given the uncertainty of a roll over, representing a third of the property. Upon closing, we immediately negotiated with a tenant, stabilized this roll over and sold the building to a local investor at a profit. In summary, our $16 million of investment profits continue to demonstrate our value creation capabilities driven by our sound property specific asset management plans, our extensive merchant development and re-development capabilities and our disciplined reinvestment strategies that leads us to profitable opportunities.

With respect to reinvestment activity, the overall market is highly competitive and during the quarter we acquired approximately $30m of property. While our value harvesting activities led us net sellers at the end of the quarter, we presently have $130m in acquisitions under letter of intent or contract. These prospective acquisitions total over four million square feet and that's across 14 separate transactions and will represent future value creation opportunities for us.

Our largest acquisition of the third quarter was one that I mentioned that we had on under contract at the time of our second quarter call. We acquired six properties from American Spectrum totaling over 800,000 square feet. This is another great example of how our I-N-D-L operating platform and disciplined reinvestment strategy result in profitable opportunities.

America Spectrum announced a geographic repositioning that calls for exiting several markets including Chicago, St. Louis, Indianapolis and Cincinnati. They also initiated a stock repurchase program. This fact has created an urgency to dispose of assets and generate capital to fund their initiatives.

This transaction was a perfect fit for us as it included properties and different markets and also included different facility types. The complexity of this transaction limited the field of possible investors and enabled us to acquire solid portfolios at a below market price thereby creating value at the closing table versus depending upon inflation to create value.

The value to America Spectrum was that they were able to exit four markets quickly, efficiently and with certainty. We expect to achieve a stabilized yield in excess of 11.5% and an IRR in excess of 13% on this $27.2m investment. In terms of built-to-suit completions, I'm pleased to report that during the third quarter we completed the fee developments for A-Tronics Corporation and Vanee Foods and also completed the 318,000 square foot facility for Tractor Supply that I mentioned in the second quarter.

I will now give you detail on our $65m built-to-suit pipeline. We are under development on five projects totaling 859,000 square feet for Ford Motor Company, Mary Kay Cosmetics, Caterpillar Corp, Asset Acceptance Corporation and Daiwa, a Japanese conglomerate.

Since the end of the third quarter, we signed a lease on a 144,000 square foot light industrial facility for DBL Distributing in Phoenix. In addition, we have a fully negotiated lease out for signature for a 315,000 square foot distribution building for a large US publicly traded retailer of consumer electronics.

In terms of occupancy of all our developments in process including signed leases it stands at 67% today. I will conclude by saying that in addition to the $130m of acquisitions under agreement, we are seeing more opportunities now than compared to the past few quarters. These opportunities are spread over value added investments, sale leasebacks, redevelopment and built-to-suits.

We are looking forward to quite a significant amount of reinvestment activity in the last quarter of this year, hence we expect to be net investors in the last quarter. With that, I'll turn the call over to Mike Havala.

Well thanks Jojo. First I'll start with a couple of quick comments on our balance sheet. Regarding the strength of our balance sheet, our debt-to-asset value was 41% at quarter-end, our interest coverage was 2.9 times, and our fixed-charge coverage was 2.4 times. These are very solid ratios especially in this part of the business cycle. And I should also mention that our coverage ratios have increased meaningfully from the second quarter of this year.

With respect to the qualitative features of our debt, we have one of the longest debt maturities in the entire REIT industry at eleven years, 100% of our permanent debt is fixed rate and then we have very little secured debt, as 97% of our assets are unencumbered by mortgages. We look at this as the best of both worlds from a capital point of view. This allows us financial stability and at the same time, operational flexibility.

With respect to capital markets activities, let me talk about some things with respect to the Kuwait Finance House funds or KFH funds. In the third quarter, the first fund that we have with KFH acquired an additional $37m of properties, bringing the total in the fund to just over $267m - - and remember this fund is anticipated to grow to close to $300m. And then as we previously announced, we have a second fund with KFH, which is a net lease fund and the purpose of this fund is to help serve our corporate customers better.

We believe that good service is full service and this allows us to do more business in the way of sale leasebacks and multi-part transactions with our corporate customers. Let me clarify about what will go into this fund. Assets off our balance sheet will not go into this fund. This fund will acquire properties out there in the marketplace that we see, as well as there will be newly created sale leasebacks with our corporate customers. Regarding the economics of the fund, it is designed to go up to $425m in assets and we anticipate about 70% debt and then of the equity, First Industrial is 15% and KFH is 85%.

Next, let me talk about guidance. For 2003, the guidance for GAAP EPS is $2.30 to $2.40 and you'll notice this increased a little bit since last time due to higher than expected book gains. The guidance for FFO per share is $3.40 and $3.50 and again, this range narrowed, as we got closer to year-end.

For 2004, we are introducing the initial guidance. The guidance for GAAP EPS is $2.10 to $2.30 and the guidance for FFO per share is $3.35 to $3.55. Now the key assumptions have been outlined in the press release so I won't reiterate those here, but let me add some color to one or two of those assumptions.

First of all, with respect to NOI, as we indicated in the press release, we anticipate that our same store NOI will be slightly negative for 2004. We do however, expect our total NOI to be flat to positive in 2004, compared to 2003, and let me explain why this is. Basically, it rests on the fact that we anticipate monetizing anywhere from $100m to $150m of our low income producing assets. A lot of this will come from just simply using our 1031 cash balances, and so when we monetize these low income-producing assets and invest in new acquisitions for example, that produces NOI but it does not go into the calculation of same store NOI because they are new projects.

In addition, let me mention something else about NOI for next year. We anticipate an average occupancy of about 89% for 2004 and this, by the way, we expect will be a little bit lower at the beginning of the year and a little bit higher towards the end of the year. And the last thing I want to talk about with respect to guidance for 2004 is economic gains. Similar to what we've seen in prior years, we anticipate in 2004 that our economic gains will be back-end weighted, as we saw in 2003 and other years and we expect that to happen as well in 2004.

The last thing I want to talk about are two significant opportunities that we have. When taken together, these two opportunities can result in as much as $57m in additional potential NOI and let me go through these with you. The first opportunity rests in assets that are on our balance sheet, which are earning a below normalized return, as Mike said we refer to these as our low income producing assets. Specifically, these are cash, which includes 1031 accounts, land, construction in progress and mortgage notes receivable. As of September 30th, our balance for all these items was $313m.

We earned an annualized return of about 2% on the $313m since the third quarter, so if you assume we can earn a normalized return of about 10% on this capital, the net 8% incremental return on $313m is about $25m. Now obviously we don't anticipate these balances going down to zero but certainly, as far as our plan for 2004, we're targeting this to go down by 100 to $150m.

Now the second opportunity that we have lies in occupancy. As you know, we're 87.7% occupied as of quarter end. For seven years running and that was just very recently in the past, our occupancy was anywhere from 95% to 98%. So if you compute the difference between say 95% and 87.7%, that results in about $32m of additional NOI. So that $32m potential, as well as what I talked about before (in the $25m potential in low income producing assets) is $57m potential for these two opportunities combined.

So I just wanted to share this with you as it's something that's clearly significant to our future potential and something that's out there within our existing capacity that we have today. So with that let me just conclude and say that the economic environment, while showing signs that are positive, still presents its challenges.

Fortunately for First Industrial, our financial position remains strong as we have a solid balance sheet and then we have strong and diverse sources of cash flow. So with that let me turn it back over to Mike.

Thank you Mike. I'd like to make a few summary comments and then the moderator will open it up for questions. The first big take away for us is that clearly the economy seems to be improving and its effects have already been evident in our results and we should take that good news with more sobering news and that is that the rental rate growth, because of the vacancy, is obviously going to lag in recovery. So the extent of the vacancy declines is going to depend upon absorption, which will depend upon the magnitude of the economic recovery. But net-net this is clearly a positive for our sector and it's clearly a very solid step forward for the recovery of our sector---the strength of our sector.

Last and to emphasize what Mike had said in his closing remarks the closer we are to a recovery or the deeper into recovery we are the more meaningful and more realistic it becomes that we can achieve some of the upside potential that Mike had mentioned, the low income producing assets, and the up-side in occupancy that produces a greater earnings potential.

But the last thing I want to mention is there's something else as well and that's our value creation Capabilities that get a major boost by our focus on corporate real estate. And the potential of that business and the value of having an infrastructure that can mine it, are not in my view fully appreciated by many observers of our company and our industry, so in '04 we'll do our best without giving away all of our secrets to keep everybody updated on our progress on that front both now and throughout 2004. And with that moderator can we please open it up for questions.

Thank you. The floor is now open for questions. If you do have a question 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. Questions will be taken in the order that they are received. And we do ask that while posing your question you please pick up your handset to ensure proper sound qualities. Once again, if you do have a question at this time, please press the numbers one followed by the four on your touch tone telephone. Please hold the line while we poll for questions. Your first question is coming from Lee Schalop of Banc of America Securities. Please pose your question.

Thank you and Christie McElroy is here too. Could you to talk about the way you calculate FFO today and whether you expect there'll be any changes to the calculation of FFO going forward?

Sure. We don't anticipate that Lee - we don't anticipate that.

Okay. And Christie has a couple of follow up questions.

What drove these sequential declines in repair and maintenance and G&A expenses in the quarter?

With the respect to the repair and maintenance for the quarter possibly just timing on some certain expenses.

Yeah we---this is Jojo again, you know, like we said there are some ---we have an initiative to package a number of our contracts and we do that earlier in the first half of the year to try to get more of what the volume pricing discounts after we did with roofing and with other expenses like landscaping, snow removal and the other expenses.

Okay and secondly what are your expectations for the mix of net economic gains going forward with regard to your existing property, merchant development and land sales?

Yes this is Jojo again overall going forward we expect that the existing property gains would be in the 60% level and the rest will be coming from merchant development, re-development, fees from our joint venture and other flips.

Great thanks.

Thank you.

The next question is coming David Copp of RBC Capital please pose your question.

Hi good morning. Here with Jay Leupp as well. Nice quarter guys. You mentioned about your expectations for occupancy in '04, can you give us an idea of your level of comfort with regard to your roll over next year and where you are in terms of talks with your tenants and where this might go?

Hello this is Jojo. In the terms of our roll over, our roll over next year is 24% in 2004 and this is spread evenly. A couple of things, for instance almost spread evenly across the quarters and also in addition that it would spread evenly across most of our markets. So what you have is a diversified roll over and not focusing and not exposed, the roll over is not exposed on either large transactions or limited to a few number of cities that could create more risk. So we're very comfortable with that, in addition to that we would like to say although it's been-it maybe difficult to sustain we're very, very pleased with our 79% retention ratio today and that is evidence by our strong customer relationships.

Where do you think rents are-you know market rents verses as well as expiring rents are in general, generally speaking?

Generally speaking, as Mike had mentioned, because of the market vacancy the industry does not have pricing power. And so what's happening is that on renewals you do have less decline on renewals and more declines in new leasing. In renewals we expect it to be in the range plus or minus 5% lower and on new leasing, new deals we expect it to be plus or minus 10% lower. And then you can do the math given our historical retention ratios.

Okay and then on the assets you sold this quarter what was the occupancy of those assets?

The occupancy on those assets was in the lower 90% range.

So roughly in line with this portfolio and you have the lease term their by any chance?

I do not have the weighted average lease terms.

Okay fair enough thanks guys.

The next question is coming from Louis Taylor of Deutsche Bank please pose your question.

Hi thanks it's a follow up to Lee's question earlier for Michael Havala, given Reg G what are your accountants or legal accountants are saying about your FFO definition and its non-conformance with the NAREIT definition and how you're allowed to report it.

Reg G, as you know, requires you to provide reconciliations of non-GAAP measures to GAAP and we provide all that. We've provided in the press releases, we provide that in the supplemental and so forth. We're in full compliance with Reg G with respect to that.

Yes but doesn't Reg G require a strict adherence to the NAREIT definition of FFO -- that certainly has been my impression from the other companies?

Not necessarily, no. It also depends on how you file you 10-Ks and 10-Qs and so forth.

Okay, of the low income generating assets you expect to sell over the course of the next 15 months or so, what's your best guess of the mix between land mortgages and cash and CIP?

Lou, you mean the manner in which we...

No I mean if you sell a 150, is it going to be $50m of land and a 100m of CIP or vice versa. Just what's the rough percentage of the mix of these low income-producing assets that's you're going sell?

Lou, it probably will be about half the reduction via 1031 cash balances. As Jojo mentioned, we anticipate being net investors in the fourth quarter and that would allow us to utilize hopefully a significant portion of our 1031 cash.

In addition we're seeking to reduce our land balances and then also some of the mortgage notes receivable as well.

Okay.

With respect to construction in process, it does not depend upon us selling that, it's just putting it in into the income producing category, either by a whole lease-up or a sale and subsequent re-investment, and therefore it would be income producing. So it's not dependent upon a sale of the development properties.

Okay now given the potential kind of reduction in this category if you will and-what do you expect for reported gains under your definition and will that inflate the '04 gain number and that the'05 number that would be less just simply because you have less of this category?

It will not affect the gain significantly because most of the reduction will come in the form of lowering our 1031 cash balances, as well as some of the other things. So it really will not have a significant impact on the gain one way or the other in 2004.

Okay thank you.

Your next question is coming from Dan Sullivan of Wachovia Securities please pose your question sir.

Good morning guys I have two quick questions the first one is can you give a little bit more color on the nature of the assets you bought from American Spectrum Realty? In terms of their physical characteristics, age things like that?

Yes absolutely this is Jojo, well a couple of things they were diverse facility types and they were in our core markets of Chicago, Cincinnati, St. Louis and these are all within close to work and we manage our portfolio. So it was a very good fit for us. It ranged from light industrial product to regional warehouse and we had multi-tenant products there. And the average age is in 12-15 year range and in terms of the just the in place rents and the quality of management from the prior owner, I want to comment the customer relationships has not been really fortified by the old owner, there's a lot to be done in increasing customer service in those facilities and their also below market rents in the portfolio. So we really feel really good and really excited in pushing the rents up and providing better customer service to the tenants there.

But Dan also though I would add that even if we're not successful in making the tenants love us any more than the prior land lord, there was a double digit current return in place on the assets. And there was some additional - there was vacancy as well which provided up side that can take those returns even beyond the double digit number that we bought when we - that we got when bought it. So you know we need not win friends and influence people on the tenant side in order to make that a great investment. But we'll always try to do that and we can make a good investment a better one.

Second question thanks very much. Second question on your, there might have been numbers reported that I didn't see, but do you have any thing relative to the sequential quarter 2 to quarter 3 things towards same store revenues or same store NOI on the portfolio - the over all portfolio?

Yes, we don't have that available at this time.

Thanks very much.

The next question is coming from Jonathan Litt of Smith Barney, please pose your question sir.

Good morning it's Gary Boston here with John. On the sales during the quarter in terms that were included in the corporate real estate gains line item $9m out of the $9.6m or so, could you just give us some color on the average age of those assets? You know maybe where they were primarily located?

Okay I don't have the whole portfolio broken - I have the whole portfolio age broken down and the average age is 17 years, I don't have the break down. What I can tell you is that the - under the $9m number you're referring to existing property gains that is older than 17 years just because you have newer properties in the merchant development gains. Does that answer your question?

Oh I see, so the total - the average age for the total corporate real estate number is 17?

The total for the whole sales of $143m.

Of all sales, okay. But is this chunk of it would have been older than average product?

That's right because the merchant development -- by nature of the new development that got sold, it's newer, and that was just built recently.

And that age is from the day the project was build not necessarily from when we owned the products.

Do you also have some sense of that on these assets that were sold. So how long they were in your portfolio?

Yes the average - the weighted average term is 43.3 months. That is basically 3.6 years.

So most of this is relatively recently bought and then resold.

On average.

Okay. Got it thanks.

If there will be any further questions at this time please press number 1 followed by 4 on your touch tone telephone. Once again if you do have a question at this time please press the numbers 1 followed by 4 on your touch tone telephone. Please hold the line while we queue for question. And our next question is coming from Gary Freeman of Gem Investors. Please pose your questions.

Thanks hi guys.

Hi Gary.

Can you give us a better sense on both the renewal and on new leases for what the deals look like both in terms of term and rent structure?

Gary hi this is Jojo let me start with the easy one with the term. The term has not been different from the prior or historically - the terms have been in the 5 years range. And that's the reason there are term - weighted average lease terms have not changed. In terms of just qualitatively -- number one it's spread across our whole market. But qualitatively we saw the larger rental rate decline on the large spaces.

I guess I was thinking more in terms of you know, your offering free rent sort of at the beginning of some leases and then step up in rents, you know, a year or two some thing to that effect? Or is it more sort of a flat line?

Okay our rental rate changes are computed using the prior year space rate and basically the in place space rate. Okay so that's - so in addition to that there are some concessions being offered. In some markets - and there is no concession being offered like in LA. To some markets we're in we offer up to three months of free rent.

How would you characterize that in sense of you know percentage of the lease deals where you're offering concessions. Do you have a ball-park number?

I don't have the weighted average you know percentage of you know, lease deals for where we offer that. I can look into that.

Okay thank you.

The next question is from Al Eisenberg of Merrill Lynch. Please pose your question sir.

Good morning with preferred yields selling at all time lows and your preferred series E&D callable for at least 6 months. My guess is you could refinance and save at least 50 basis points. Is there a reason there hasn't been called yet?

That's certainly some thing that's on our radar screen as well and when we think it's the appropriate time and economics to do so, we will. But we don't have any specific plans on that at this point.

Thank you.

The next question is coming from Terry O'Connor of Cedar Creek Management. Please pose your question sir.

Hi guys I want to just clarify some thing to in Gary Boston's question he asked how long the assets in the portfolio - had been in your port folio when they were sold. You said 3.6 years on average. Does that include your merchant development properties? And then would the right amount be something like 6 or 6.5 years for the properties that are not a part of merchant development?

Again this is Jojo I don't have those broken down. You're correct in that it includes merchant development.

Thank you.

Remember that merchant development was a small portion of the total sales. The portion of merchant development that was in total sales was approximately 15% or less or less in this particular batch. So --.

Got it thank you.

Gentlemen do you have any closing comments at this time?

Well if there are no questions I think the call has concluded. Well thank you very much we look forward to talking with you in February.

Thank you for your participation that does conclude this morning teleconference. You may disconnect your line at this time and have a great day. Thank you.

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