First Industrial Realty Trust Inc (FR) 2003 Q4 法說會逐字稿

Good morning and welcome to the First Industrial Realty Trust fourth quarter and year-end 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. I would now like to turn the floor over to First Industrial Realty Trust.

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 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 Daly, and welcome everybody to our year-end 2003 earnings conference call. Before I begin, I'd like to introduce the members of management that are here today. Jojo Yap, our Chief Investment Officer, David Draft our Executive Vice President of Operations, Mike Havala, 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, then briefly discuss our full-year results, and then end with a view of our current and future operating environment outlook. Jojo will follow with a discussion of investment performance, David will follow Jojo with discussion of our portfolio performance and will give an update on our markets, and Mike will end with a brief discussion of our balance sheet, capital markets activities and our guidance for 2004.

For those that are new to First Industrial and new to our conference call here, let me just briefly outline our strategy. First, our strategy is designed to capitalize on three key characteristics of our industry. First is size, 26b square feet; we regard that as an unequivocal opportunity. Number two is ownership. One of the unique characteristics of the industrial business is that corporations own 65% of that 26b square feet and the private investor owns 30%. The third key characteristic is the commodity nature of our business that rewards low cost producers and active capital recyclers.

Our strategy is designed to exploit these three characteristics in these particular ways. Number one, we try to exploit the size characteristics through the creation of a national network that opens up broad avenues for investment and provides a national platform to be able to serve the corporate real estate customer. Also we do this by investing in five industrial facility types that are most commonly found in supply chain networks, that serves the dual purpose of again broadening up those avenues for investment, and providing a complete product availability for our customers. Third, through investing in the nations top 25 markets, again we hope to take advantage of the size benefit. And with company-employed regional managers for the purpose of competing effectively against private investors, that group that owns 30% of that 26b square feet; and creating full service capabilities for our corporate customers. We refer to that as our delivery system. And finally, we mitigate the commodity nature of industrial properties by actively recycling capital to achieve optimal returns.

Going to our year-end performance, we are pleased with our full-year results. As you can see from the press release, our 2003 FFO was $3.47 per share, coming in at the high end of the range. It was driven by the performance of our portfolio that again we are happy to say registered its third consecutive quarterly increase in occupancy. Secondly it came from our economic gains that resulted in record net gains of $56.2m and produced an internal rate of return that I am very pleased with at 15.5%. Finally, these results were driven by our focus on corporate real estate transactions, which accounted for nearly one-third of our 2003 investment activity. Jojo will give you a little bit more color on that as we go along.

As we look out into to 2004 and beyond, while I believe, and we at First Industrial believe, that it's going to take all of 2004 before rental rate growth turns positive, we are optimistic for the future for five principal reasons.

Number one, clearly we have the economy, the wind is at our back, where are in the last couple of years we were facing a fairly strong headwind. The ISM index now stands at 63.6 versus about 53 one year ago, and that's the highest level that we've seen since December of 1983. Corporate profits are expected to rise by about 14.3% versus 2002 levels, and following that profitability our fourth quarter business investment grew at 6.9%. That as you know is what we regard as one of the most important things for absorption. And so as that spending increased industrial space absorption did follow in the fourth quarter; and in that the fourth quarter space absorption reached 15.1m square feet. That's the best performance that we've seen since the third quarter of 2002, and the second best performance that we've seen over the last three years.

The second reason for our optimism is that obviously an improving economy should clearly help our occupancy. Each 1% rise in occupancy adds approximately $0.08 per share in FFO to our bottom line, and it's worth noting that for seven consecutive years our occupancy ranged from a low of 95% to a high of 98%.

Our third reason that we are optimistic is that in addition to the earnings potential from occupancy gains, the company has currently $300m in low income-producing assets, specifically land, developments, cash and mortgages that in the aggregate generate return significantly below stabilized properties. And our plan in 2004 is to reduce the level of those low income-producing assets by a minimum of $100m, and invest those in stabilized income-producing assets.

The fourth reason for our optimism is our economic gain potential. Our key competitive advantage is our ability to accommodate the diverse disposition and development and leasing needs of corporate America. In 2003 we nearly doubled the number of corporate customers with whom we completed investment transactions. And in 2004 I predict we can again double the number of corporate investment transactions by building on our reputation for flexibility and service. I call that a little pressure for Jojo.

The final reason for our optimism is our balance sheet. We entered 2004 with a very solid balance sheet. And very importantly, as our investment opportunities grow, our access to capital, both private and public gives me the confidence, and our company the confidence that we will have access to capital as we need it that's commensurate with our strategy, and that's within the parameters of our investment criteria.

So with that I'd like to turn the discussion of to Jojo.

Thanks, Mike. That was a little bit of pressure there. In terms of economic gain performance, we had a record year in 2003. We have seen $56m of economic gain, which represented 18.6% increase in economic gain over 2002. These results reflect the success of our versatile disposition tactics, with our one-off sales capability in particular being on display in 2003 to take advantage of the robust market for private leveraged transactions.

In 2003, we sold $394m of property and land in 93 separate transactions across 23 different markets. The average cycle of such transactions was $4m, and on these sales we achieved a weighted average unleveraged IRR of 15.5%. Our sales pipeline remained strong, with approximately $650m of properties we would expect to harvest in the next 18 months. Specifically, it includes $264m of existing buildings, $287m of merchant development and redevelopment properties, $93m of build-to-suits and $6m of land. With respect to the development properties within our sales pipeline the occupancy is at 70% today.

Build-to-suits and fee developments and profits include a total eight projects totaling 2.2m square feet. Customers include Mary Kay Cosmetics, Ford Motor, Caterpillar, Diawa and Matag . Further, we're better positioned to capture more build-to-suits going forward, given that we control, primarily through options and no-cost marketing agreements, a total of 1700 acres or approximately 22.5m square feet of buildable area. We secured these minimal cost option agreements in late 2002 and early 2003 at the low end of the development cycle, and they should serve us well as the market improves.

With respect to our ability to harvest gains, I would note that the sales environment continues to be strong due to low interest rates and low delinquency rates that provides ample capital for stabilized investments.

Regarding our reinvestment performance, we continue to identify and execute our opportunities to spread invest. In '03, we acquired $229m of property and placed in service approximately $65m of new developments. Projected yields of these investments averaged 10.3% or 170 bps over what properties would sell for today.

I think it's important to understand how we find these reinvestment opportunities. First our I-N-D-L infrastructure allows us to cast a wide net, and at the same time allows us to be very selective in investments we choose to make. We can choose from a wide geographic area among five facility types, and can acquire, develop or redevelop as circumstances dictate. Second, just as we do with sales, our local and regional teams give us the option of implementing a one-off reinvestment tactic. This tactic reduces the dependence on large portfolio transactions. Specifically in '03 we completed 29 separate acquisitions transactions across 13 markets, with an average transaction size of $8m.

Another critical factor in our ability to source reinvestment opportunities is the growth of our corporate real estate business. Our corporate business, which includes acquisitions and developments directly with corporate America totaled $350m for the past four years. The type of transaction that has shown the highest growth is the sale-leasebacks and medium-term lease-backs with terms of three to seven years. In total our volume of corporate transactions has increased 17.7% from '02 to '03. In addition, as Mike mentioned, our corporate transactions represented 32% of last year's total investments.

Multiple factors drive corporate real estate transactions. These include the need for supply chain efficiencies, pension liability issues, mergers, and increasingly the need for expansion space as business improves. Corporate real estates transactions come in the form of multiple property transactions or a series of transactions over the course of our relationship. But the common ingredient in all of these transactions is certainty of execution.

Finally, as we continue to market our corporate services program, corporate real estate directors, along with the brokers that serve them, have become much more familiar with First Industrial's unique capabilities in this area.

Finally, in terms of our reinvestment pipeline, it is encouraging. We have closed $32m of acquisitions year-to-date. Acquisitions and build-to-suits currently under agreement, excluding what's already under construction totaled $83m. We are one of a few final bidders or short-listed on $169m of acquisitions and build-to-suits. In total, closed year to-date the total transactions under agreement and under serious consideration totals $284m.

In summary, we are pleased with our investment performance and our sales pipeline remains strong indeed. We expect to be able to reinvest our sales proceeds into higher returning investments as we continue to lever our platform and take advantage of our increasing corporate business.

I will now turn the call to David Draft.

Okay. Well thanks, Jojo. I will start with an overview of key statistics for the fourth quarter and full year 2003, and then I will turn to the portfolio outlook for 2004. We did see the business climate begin to improve in 2003 especially in the last half. With respect to occupancy, we ended the year at 88.4%, which is a 70 bp increase over the third quarter. I would say that we are pleased with both the margin of the increase, and also as Mike stated a few minutes ago, it's the third quarter in a row that we can report a meaningful improvement in occupancy.

We are also pleased that the increase was broadly based, and that is that approximately two-thirds of our regional portfolios advanced in the fourth quarter compared to about a third in the prior quarters of 2003. Where we achieved the highest occupancy was generally in the west, northeast and in a couple of our Texas markets, specifically Los Angeles, Northern New Jersey, and Dallas/Forth Worth. Lowest occupancy at the end of the year was most prevalent in our mid-west and some parts of the southeast, again specifically regionally being Tampa, Indianapolis, and because of a couple of downsizing at year end, Chicago as well.

The highest occupied product type was light industrial and regional warehouse. We attribute that to a couple of things. First of all there just is less supply in those product types currently, and also the fact that tenants in those types of facilities have sometimes paid for improvements that they are hesitant to leave behind.

So let's look at same-store. Negative 7.6% in the quarter, and for the year negative 2.0%. But I would like to remind everyone of one factor that significantly impacted the quarterly number, and that is the approximate $4m lease termination fee you may recall that we collected from Amazon in the fourth quarter of '02. Now if we take that fee out of the equation then the fourth quarter is essentially flat at minus 0.4%. Now we didn't otherwise publish that normalized result of minus 0.4%, but it is certainly important for the quarter and I wanted to emphasize it.

The decrease in same-store of course is a result of the industry-wide drop in occupancy as well as declining rents. So looking more closely at rental rates, the change in the fourth quarter was very similar to the third - negative 6.5%. If we look at rental rates a little more closely and divide it between new rates and renewal, we find that the new rates are down about 10.5%, and renewal rates much less, minus 2.4%. For the year on average 5.5% negative.

The largest increases in rental rates came from Southern New Jersey at 11%, and Los Angeles at 9.5%; continued strength on the coast there. The largest decreases for the year came from Atlanta, minus 16.7%, and Dallas at minus 13.7%.

Retention - for the quarter we retained 63.1% of expiring square footage, and for the year 71.9% of expiring square footage. We think that our strong customer service practices are reflected in those numbers, and I just wanted to mention that in 2003, Kingsley & Associates, which is a leading research firm which rates tenant satisfaction nationally, determined that our rating was one of the highest in the country, and we are proud of that.

I'd just like to finish up 2003 with the stats on leasing cost. Tenant improvements and leasing commissions came in for the quarter at $2.33 per square foot. I would note that that's higher than last quarter, but then we had quite a bit more leasing in the fourth quarter as well. As I'm sure you know both tenant improvement and leasing commissions are more expensive for new leasing than they are for renewal, and that's what affected that number. On an annual basis the average was $2.06 per square foot, which is really right within the range of the $2 or so run rate that we have talked about on past calls.

Two general observations to finish up 2003. The first is just the challenge that we faced and that landlords everywhere faced. Tenants held a strong hand in 2003, there's no question about it, and they played it. They played in negotiating lower rent and higher tenant improvement packages. The second observation a positive one, is that our customer practices are helping us retain tenants, and leasing activity is picking up as well. That's evidenced not only by our own occupancy increases, but the positive absorption taking place nationally.

So with that I would like to just turn for a minute or two to the outlook for the portfolio in 2004. Assuming that the economic expansion continues, the stage will definitely be set for the portfolio to begin turning more broadly positive. But before pricing power really makes a shift from the tenant to the landlord, we believe that the national availability rate will need to drop, and probably drop by 100 bp maybe more, from its current level of over 11%. So our 2004 portfolio forecast should be seen as being tempered with that backdrop.

Let's just look at occupancy. We think this will likely improve by year end. We think also that most markets will likely participate in that improvement, particularly the east and west coast as well as the Texas markets. We think they will probably lead the way again in 2004 as they did in 2003. We also believe that space requirements will begin to broaden across more industries. That would add to the demand that has existed for some time now, and we've spoke about it in the past, with companies related to home building products, medical and pharmaceutical sectors, and there are others as well. But that would certainly be a positive development.

With respect to rollover, I'd like to make a couple or three brief observations. First the amount that we are looking at over the next two years is very similar volume to what we were looking at a year ago, it's similar volume to what we looking at even two years ago. So there's nothing unusual there in terms of the amount of rollover. Second is that the general leasing environment is getting better, which as Mike stated is quite the opposite of what we've been facing for most of the last two years - that will be a big assist.

Finally, renewal leasing is on track. Discussions with expiring tenants are positive. So, just to summarize retention, it held up in the tough times for First Industrial, when occupancy was declining. We think it's entirely logical that it will hold again as the environment becomes more friendly.

Okay, same-store NOI and rental rates. We expect same-store NOI to be slightly negative as compared to 2003, and that would be mostly related to continuing pressure on rental rates. We think rents will probably decline again by 5% to 10% or so in the first half, and then gradually reduce as we move along throughout the year. An important factor that will certainly help same-store, and rental rates as well, is related to new building deliveries. They have been slowing substantially over the last several years. We had a high in that area, of new deliveries of 237m square feet in 2001. It dropped to 84m square feet in 2003. Now that's a reduction of 65% in new building deliveries, a very significant factor and a positive one. Finally, leasing cost. Here we expect to see levels very similar to the last 18 months or so; that is a run rate of about $2 square foot on an annual basis.

So that's how we see things in the portfolio for 2004. At this point I'd like to turn the call over to Mike Havala.

Thanks, David. There are couple of areas that I want to cover here today. First I will talk about our balance sheet. With respect to the strength of our balance sheet our debt to asset value as at 12/31 was 39.8%. Our interest coverage was 3.0 times, and our fixed-charge coverage was 2.5 times. Very solid ratios; and I should mention these have improved meaningfully from earlier in 2003.

With respect to the qualitative features of our debt, as you know we have one of the longest debt maturities in the entire industry in excess of 10 years. And then we also have very little secured debt as 97% of our assets are unencumbered by mortgages. And this of course is a good thing financially, but it's a great thing operationally as it gives us the flexibility to execute our overall strategy.

Next let me talk about some capital markets activities. In the fourth quarter our first fund with the Kuwait Finance House acquired an additional $25m of properties, bringing the total properties in the fund to about $287m. And then as we previously announced, we have a second fund with KFH which primarily invests in properties with mid to longer term leases. And this just simply allows us to do more business in the way of sale lease-backs and multi-part transactions with our corporate customers. We anticipate this fund to reach up to $425m.

Next let me talk about our guidance for 2004. As shown in press release we are reaffirming our guidance. We anticipate that GAAP EPS will be $2.10 to $2.30 and then we anticipate that FFO per share will be between $3.35 to $3.55. In the press release we've detailed out the key assumptions, but let me just add a little more color to this. With respect to occupancy, we anticipate that the average occupancy for 2004 will be about 89%. We anticipate that this will be a little bit lower in the beginning of the year and a little bit higher at the end of the year. We also anticipate in 2004 monetizing at least $100m of our low income-producing assets. A lot of this will come from utilizing out 1031 cash balances that we had on our balance sheet as of December 31.

With respect to economic gains, we anticipate that these will be somewhat back-end weighted, and this really is based on some known transactions that we are currently working on. Then the last thing I want to mention about guidance, is that our EPS and FFO numbers do not assume any impact from either refinancing existing debt or the potential redemption of a callable preferred series.

The next thing I want to talk about is an accounting item. As disclosed in our press release table there was a change in the methodology regarding how shares of restricted stock are included in the number of shares outstanding. Our prior method included all shares of restricted stock, whereas the new method includes restricted shares only upon vesting. And while our prior method was more conservative, the new method is what's required under a strict interpretation of GAAP, and that's the reason for the change. The impact of this change for 2003, is to increase our per share numbers by about one penny per quarter.

The next thing I want to talk about are two significant opportunities that we have. And these two opportunities, when taken together, can result in as much as $57m of additional potential NOI. The first opportunity rests in assets on our balance sheet which are earning a below normalized return. We refer to these as low income-producing assets. Specifically these are cash, land, construction in progress and mortgage notes receivable. As of December 31, we had about $307m in these assets. And if you do the math and you assume we can earn a normalized return on these assets say of about 10%, and you compare that to what we really earned, the incremental return would be an annual increase of about $27m. Now we don't expect to monetize all these items down to zero of course, but certainly our plan is to aggressively reduce these balances.

The second opportunity lies in occupancy. As you know our occupancy as of year end was 88.4%, and as Mike mentioned for seven years running between 1994 and 2000 our occupancy was anywhere between 95% and 98%. So if you just do the math, the difference between 95% and 88.4% would result in additional NOI of about $30m. So I want to share these two opportunities with you because we think this is something significant to our future potential. And this is something we can do within our existing capacity.

With that, let me just conclude and say that our financial position remains strong, and is in fact improving. We have a solid balance sheet and strong and diverse sources of cash flow. With that let me turn it over back to Mike Brennan

Okay. Well thank you, Mike. Just a few summary points I'd like to make and then we'd be happy to open it up for any questions you have. First is that the improving economy has led to increased business spending and has clearly helped absorption. You can see it in the industry numbers and in our numbers as well. Probably the flip side to that is that as tenants are returning, obviously they've returned to a market that still has considerable vacancy and is going to affect pricing power. And as David mentioned, we think that it needs to go down by 100 bps before pricing power returns to the landlord. But the net effect of both still has been very beneficial to our company.

A second point I'd like to make, just kinds of builds on something I've said and what Mike reiterated. Obviously a stronger economy is going to help us on three fronts, and those benefits really have significant bottom-line benefits for First Industrial over the next couple of years. The first thing obviously it affect is occupancy, big driver; obviously a very big driver of our profitability. Second thing a stronger economy will do is help us more quickly monetize the low-income producing assets. And the third thing a stronger economy is going to do is help us fill out our corporate real estate business even better where we pick up some of that work related to expansion needs, in addition to the supply chain work and the acquisition of properties that we have already done a good and brisk business with, with corporate America. So I think the future looks pretty good.

So with that, I would like to open it up for any questions. Moderator?

Thank you. (Caller Instructions) The first question is coming from William Acheson of Prudential Equity. Please pose your question.

Thank you. Good morning gentlemen.

Good morning.

Doing good. The cap rate on the property sales in the fourth quarter listed at 9%, it was higher than the average for the year at 8.6% and it was also up from the third quarter, 8.3%. And it's kind of a high difference to be accounted for just by a change in mix of assets being sold. I was wondering is it getting more competitive out there, and what does this say for the dispositions you are going to make in 2004?

William, hi, this is Jojo Yap. But for two properties, one of them was a problematic property in New Hampshire and is in a market that we're not investing in going forward. And but for one exercise of a tenant purchase option, the cap rate would have been 8.54% for the fourth quarter. So those two properties are basically, I would consider as anomalies.

Okay. In terms of guidance, I know you mentioned each of these elements in parts before, but if you could just separate them out for us one more time, guidance in 2004, between acquisitions, developments and dispositions. I mean the dispositions look like you're at a run rate of about $450m in a 12-month period, how about for acquisitions and developments? And if you could give us some guidance on cap rates there?

Okay. You are right on in terms of our run rate and dispositions, so I don't need to add to that, so you are right at the mid-point of our guidance of our range. If you took the run rate over acquisitions and our developments, over what we invested, currently right now it would be somewhat below the range. But at the same time we are seeing increased corporate business, just like I mentioned and just like Mike mentioned. And also one thing to focus on is the returns that we are getting on our value-added acquisitions. They are clearly higher then what the market, clearly what all our competitors are getting, meaning that we get more bang for our buck. But at the same time, just in terms of disposition cap rates, right now properties are trading in the 8% to 9% cap rate range except for investment-grade leases wherein the cap rates are anywhere from 6.75% to about 7.25% cap rate. These are dispositions now.

In terms of acquisitions, it really depends on what the strategy and what your capability is. Using our platform, we are able to acquire stabilized projected cap rates of 10 and above. And because that's where we employ our one-off strategy, we lever our organization, and we work with corporate America, which typically yields are higher than the market cap rate. Does that answer your question?

Yes, we're getting there. I had been looking at dollar magnitude acquisitions of around $200m in 2004 and development completions of $180m. But it sounds like you are running ahead of that?

Given our pipeline right now of what we have under letter of intent, and what we've closed, and what we're bidding on, yes. But at the same time there's no guarantee that we will get the business that we are getting on those that we're short listed on or are the final few bidders. We just want to stay within our guidance there.

A couple of bookkeeping questions here. There was like a $4m jump in depreciation third quarter to fourth quarter, it's something that gets backed out, but I was wondering what caused that and what should the run rate be going forward.

I'm not sure what the answer is there, we can get back to you on that.

Okay. And in your supplemental statements, footnote L, it looks like you made some minor to moderate adjustments for the first three quarters in the mix between gains for merchant development and existing properties. Some of them were small adjustments, some of them were larger adjustments, was there some reclassification going on there and why?

Yes, the totals are the same, there's no change there, but we just clarified our definitions in there. If you notice in footnote L in the big paragraph that starts off toward the end, we have a clearer definition of what land sales are in merchant sales and redevelopments are and so forth. So that just relates to that clarification. There's no change in our overall definitions.

Okay. And how should the trend of the magnitude of IIS income look like in 2004 versus 2003?

Well as you know we gave our guidance between $60m and $70m for our net economic gains in 2004, so since we did $56m in 2003 that would be an increase versus 2003 assuming we hit in that range.

Yes, when you mentioned that number there was a little static on the line, I do appreciate it. Thank you.

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

Hi, thanks. For Mike Havala or Mike Brennan or Jojo, how far along are you on the sale of these low cash yielding assets? Do you have much under contract, and when do you expect it to fall within the year?

Sure, Lou, this is Mike Havala. With respect to those low-income producing assets there is a number of things that we are working on with respect to those. Certainly a big piece of that is developments that are in process that we need to lease up and get monetized. When exactly that happens we can't be sure, but probably if you're looking for an assumption ratably during the year I think is probably pretty reasonable. And you know that our development projects that we are working on in total right now average about 70% occupied. Then with respect to land, which is not a big number, but we are looking to monetize some of those parcels. And again, because it's not a big number, where that falls in the year really will not be a big impact. And then we do anticipate a reduction in our balance of our notes receivable. Again I can't really tell you that that will happen in one place of the year or the other, but probably more towards the front end of the year.

And then I guess another item in there is our 1031 cash balance, which was about $82m as of the end of the year, and we anticipate that going down meaningfully in the first quarter.

Okay. Now when you had mentioned that $27m of incremental NOI from these assets, and with the development piece being a big piece, are you just counting the revenue impact or are you netting out the costs that are currently being capitalized, like interest?

That's the net P&L impact. Remember right now we have very little capitalized interest. In the quarter is was between $200,000 and $300,000, so it was a very, very small number. So that $27m number basically is the NOI, again the capitalized interest is a tiny number.

Okay. And then just to stay with you for a last question. In your guidance you kept your guidance, the amount of gains went up. With the change in the share count there's a little bit there as well. Are we to read into that that you expect the core to do worse or are you just being conservative?

Well, I think Lou, there are a couple of factors that play into that. First of all it is still early in the year and it's a long year. Secondly, we were net sellers in the fourth quarter and that does have an impact in our '04 numbers, versus if you remember our third quarter call we thought we had a chance to be net investors in our fourth quarter of '03. So that impacts it as well.

Lou, this is Mike Brennan. I think the simple answer after Mike explained the numerics is that we need to link together, and the industry does, a series of successful quarters on positive absorption. And then we can celebrate; then we can be a lit bit maybe more expansive in our projections. But we have this quarter of positive absorption, a third quarter of positive -- we just need more linkage, and it's too early in the year for us to make any bolder conclusions on what we're going to do on occupancy.

Alright, great. Thanks.

The next question is coming from Christine McElroy of Banc of America Securities. Please pose your question.

Hi, guys. I was wondering if you could go into a little bit more detail on what you are expecting for the net economic gains? You said that you expect them to be back weighted. And you also mentioned that your expectations are based on some known transactions. Can you go into a little bit more detail on that on a quarter-to-quarter basis?

With respect to that, let me just give you '03 as an example. If you look at '03, our first half of the year was lighter than our second half of the year. I think our second half of the year was close to $9m or $10m more than the first half of the year with respect to economic gains. And that's pretty typical with respect to the way corporate America operates as an example when they have their budget set for the beginning of the year. It just takes time for transactions to happen.

With respect to the second part of your question, with respect to some transactions that we're working, there's nothing that we have to announce here today, but then we're always working on transactions. But some of the things that are working on we anticipate are probably more likely to happen after June 30 rather than before June 30.

And going back to the previous question, you increased the dollar amount of your expected net economic gains. Was that a result of increasing your expected margins on properties, or a change in the mix of properties you plan to sell? What was the rationale behind that?

I think it's just more visibility. Our last conference call was in October and that was four months ago. We have better visibility obviously now than we did four months ago on the numbers. So I think it was more that than anything else.

Okay. And I was also wondering if you could go through some of your individual core markets in a little bit more detail, some of the trends and observations you are seeing?

Sure, Christine, this is David. If we look at the top performers at the end of 2003, as I mentioned in my presentation we'd first of all be -- on both the east coast and the west coast we continue to see those markets strong and being driven by the export/import business. Interestingly on the east coast there was quite an expansion to the harbor channels up there, especially in the ports of Elizabeth and Newark. And that's generating a lot of activity in the northeast particularly from an export business. So we like the coast for the port reasons primarily.

We also have been doing very well in our Texas markets, Dallas Forth Worth have been strong. We're in great sub markets there; our product fits to a tee and all things considered we think 2004 will be very strong there as well. In terms of where we still have more challenges, it would be most prevalent in some of the mid west markets; Indianapolis again is still facing some over supply. There are still municipal incentives being offered in the suburban areas, and that is still depressing rates and depressing occupancy as well. Also, in Tampa which was hit rather hard over the last couple of years on the tenant failure side, we're recovering from that, but I think it's going to take another year or so before we build occupancies back in Tampa to the level that we would like to see.

And then just finally in central PA, in that area we are still looking for more large space users. There's been some contraction there. Some of the 3PLs have much less business over the last couple of years. We think that will continue to be challenging too throughout 2004. So that gives it to you on sort of a general basis, does that answer your question?

Yes, that's great. Thanks, guys.

(Caller Instructions). Our next question today is coming from Gary Boston of Smith Barney. Please pose your question, sir.

Good morning. Mike, you've given us some detail in terms of the timing of the IIS activity. I was wondering if you could give us any color on how you guys see the breakout between the various pieces of that bucket over the course of the year?

Hi, it's Jojo. Of course it's not as easy to predict what the composition is, but what I can tell is that the best information I have is, if you look historically in '03 the composition goes like this. Roughly merchant activity composed of a total of about 49%, which is broken down 44.2% merchant activity and about 5% land sales and the rest existing buildings. And what I can tell you is that we are seeing a different trend going. Meaning that the merchant activity is increasing as a component of the economic gains. And that's the guidance I can give you right now.

If as you say there is a shift trend, is there anything you can point to that's sort driving that?

More expansionary business, so your build-to-suit components. Your development or build-to-suit components primarily are going to be higher. They've been down over the last couple of years. Potential redevelopment opportunities, you know just taking existing building - you know what redevelopment is. And so those might be brought to a point where we would harvest some of those gains this year. But really the net effect is that, as David pointed out, you had from 260m square feet of new developments to 84m square feet, so when the expansion begins it's going to begin on than build-to-suit side probably.

A final question just in terms of the corporate environment overall. Is there any concern that as the economy starts to ramp back up, that some of the forces that have been driving these corporation to offload some of their real estate are going to abate so that they don't need to raise the cash and may not have pension liabilities issues? Do you see that as a trend or is it expected to continue going forward?

Gary, I think in the aggregate some of that activity will abate a little bit. But with respect to our own initiatives, while we are happy with what we've done, we have a very low part of that market share. So I don't think it's going to affect us, First Industrial's business mix from a micro standpoint because there are still plenty of things out there. The supply chain efficiency work is sometimes undertaken when they can afford to do so. Some buildings that are disposed of are sometimes done when they can afford to do so. So there's just so much out there. Owning 65% of 26b square feet, there's just too much there. What I think is more likely to happen in '04 and '05 is we will just see more of every type of business, and largely because of expansions which will fill up build-to-suit business, and just business penetration as we build repeat business from a customer base that continues to grow.

Great, I appreciate the comments. Thanks.

The next question is coming from Gary Freeman of Gem Investments. Please pose your question.

Hi, thanks. A couple of questions, the first one for Mike Havala please. Mike, can you maybe better quantify what you mean by slightly negative same-store NOI for '04?

Yes, slightly negative to us means in the 1% to 2% negative.

Sorry, could you say that again I think I missed that?

Slightly negative to us means in the negative 1% to negative 2% range.

Thank you. Next question, just on your '04 roll, which I think is roughly 26%. Can you give us some color in terms of what the mark to market is on the '04 roll?

On the mark to market, Gary, I would -- I'm going to kind of take it in two halves of the year again, not that it will break out precisely that way, but we think for the next quarter, maybe two, we will probably be in the 5% to 10% negative range on the mark to market. And as I mentioned a little earlier, we see that declining as the year goes along. And hopefully at some point in 2005, it may a quarter or two there, but to get into the positive range we think that's going to happen.

Okay, great. That's helpful. As you are situated in '04, is there any -- you know in February of '04, is there any sort of tangible evidence you can speak to in terms of progress made on '04 roll?

Well we don't really report mid-quarter what our renewal leasing level is. I can say to you, Gary, that it's very consistent with past quarters, past recent quarters. We look to come in, in 2004 in a very similar range as 2003, which is pretty solid. And also again, I would just reiterate the fact that we did that in a tough economy. Really for the last two years when you can maintain a well into the 60s approaching 70% on retention in a declining occupancy environment, you certainly ought to be able to do that in an improving environment. And we think we definitely will. All things are pointing in the right direction.

Right, good. In terms of leasing economics, can you give us a sense for the concessions that you are currently having to offer in terms of free rent and TIs and how you see that trending through '04?

Sure. We think, Gary, that '04 will probably be representative of '03 in terms of concession packages. And that would go for both the free rent and also tenant improvements. Free rent varies market by market. I would say the pressure is on the positive side, the bias is in both free rent and TI in that I think we've hit -- it looks like we've hit the peak and we're probably going to start coming off from that as the year goes along. But I am not going to suggest any great positive movement in 2004. I think we're a year away from that yet.

Any movement in terms of -- any difference from past in terms of lease term?

Our lease term has remained very constant in the approximate five-year area. We like that; we think that is a norm for the industry, at least the product and tenants that we typically work with day in and day out. We have about two-thirds or so of our tenants have increases in their leases, either annually or every couple of years or so. And still pretty healthy increases actually. So we like the five years, we are going to try to hold it and I think we will.

Okay. And then my last question just relates to, I think it was the previous caller in terms of net economic gains. I think you were talking about a trend of existing gains as a percentage of the total net economic gains trending down. If I look at '02 versus '03, you've seen that number jump from about 25% to 50% of the whole. Are you saying that we should see that trend reversing a little bit, and to what extent?

Yes, Gary, that is what we're saying. We are seeing the trends reverse a little bit, and that is because of the increasing corporate business that we're getting, and the value-added acquisitions that we've been engaging on for the last year in quite a big way. So yes, it's hard to give any more guidance than what we ended up in '03 on what our future mix is, but it's trending down.

Okay. Thank you, that's helpful. Thanks for the time.

The last question today is a follow-up from William Acheson of Prudential Equity Group. Please pose your questions.

Thank you. On the restricted share classification, have you published restated numbers for the first three quarters?

No we have not, those will be as we report each comparative quarter going into each '04.

Okay.

It impacted our numbers about a penny a share per quarter.

Okay, and that's fairly even?

Yes.

Okay. Thank you.

I'd like to turn the floor back over to Mr. Michael Brennan for any closing comments.

Okay. Well thank you everybody for calling in and asking the questions, we appreciate it. We hope to catch up with you on either some industry function or our next call. Thank you.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.