First Industrial Realty Trust Inc (FR) 2004 Q2 法說會逐字稿

Good Morning Ladies and Gentlemen and welcome to the First Industrial Realty Trust second quarter results conference call. At this time all participants have been placed on a listen only mode and the floors will be open for your questions following today’s presentation.

It is now my pleasure to turn the focus to First Industrial. Please begin the conference.

Good morning everyone and thank you for joining us today. Before we discuss our results for 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 realt 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 developmental 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 affect 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 very much Mike and welcome everybody to our second quarter earnings conference call. Before we begin, I would like to introduce the members of management that are here today. Jojo Yap our Chief Investment Officer, who will detail our investment performance. David Draft, Executive Vice President of Operations, who will go through our portfolio performance in the second quarter, Mike Havala our Chief Financial Officer, who will discuss our balance sheet, capital markets activity that we had in the second quarter, and guidance for the balance of ’04, and also here with us is Mike Daly, our Director of Investor Relations.

Before we get into our second quarter results, I just want to take a moment to tell everybody that the second quarter of ‘04 was special to us because it marked our 10 year anniversary as a public company. And as we look back to those early years , and where we’re at today there is a lot that we are proud of. The first, we really strengthened our platform. We are a national organization today that began as largely a Midwest organization. We have a totally full-service organization, we were one again that stared largely known for our acquisition prowess, but now that has developed into a completely full-service organization that develops, redevelops and acquires and also allowed us to begin a significant corporate real estate business. And last we have a significantly deep bench with management strength that really bares no resemblance to what we began with 10 years ago.

We also delivered value to shareholders over those 10 years generating an average annual return of 13.7% over that 10-year period, and also of interesting note (By June 30th of this year we had sent back to shareholders $23.48 per share in dividends representing virtually 100% of the original IPO price of $23.50. So, I just wanted to say thanks to the analysts that covered us, our shareholders, our Board of Directors and especially to our employees who really made this all possible for us.

Before getting into our second quarter results, for our new investors, First Industrial is a nationwide acquirer and developer of the five facility types most commonly found in supply chain networks; that’s what we do. But this allows us more importantly to capitalize on what we regard as the three key characteristics of our industry. It allows us to capitalize on characteristic number one, size of the market that contains 26 Billion square feet. It allows us to capitalize on the corporate real estate market, the second key characteristic where corporations own 65% of that 26 billion square feet, and the third characteristic is that our strategic design allows us to maker money in a commodity product where superior returns are possible for low cost acquirers and also for those capable of solving the more complex needs of sellers and tenants.

I am pleased to report that in the second quarter we are clearly on track to meet our full year objectives, the second quarter FFO was 67 cents a share and that was 4 cents above the mid-range of our guidance. The portfolio contributed to this significantly, by registering its fifth consecutive quarterly increase in occupancy. Economic gains also made a significant contribution this quarter by delivering net profits of $20 m and producing an outstanding internal rate of return of over 25%. And again, the decision to focus on the corporate real estate market continues to deliver benefits for us, on the acquisition side alone 40% of the acquisitions that we made in the second quarter came from corporate sellers and that puts us at about 50% of the acquisitions that we made in the first 6 months of ‘04 came from corporate sellers.

Looking beyond the second quarter, we think the stage is set for us to harvest on the opportunities for growth that we have outlined in the past. Clearly the economic winds continue to be at our back the ISM index has remained at over 60 for 8 months and that the longest span over 60 since 1983, and similarly the corporate profit margin outlook in the second half was also at levels not seen since 1983 and following that profitability of business, investment spending remains robust. In fact, many people project that it will be higher than any single year in the 1990’s, and you know of course that in the late 1990’s there was certainly a very high level of capital expenditures. All that is important because as business spending increases so does industrial absorption and in the second quarter of ‘04 we saw positive absorption of nearly 43 million square feet, the fourth consecutive quarter of positive absorption, and as a consequence this pushed this the national occupancy up for the first time in three and a half years.

In addition of however, to the obvious benefits that a strengthening economy brings to our company. (Technical difficulties).

Okay thank you operator, and sorry very much for the technical difficulties that we had, we were just disconnected, we don’t really know what happened.

Where I had last left us, before we got disconnected, was I was just kind of trying to outline some of the positive benefits going forward for the Company and cover the economic outlook. And now I would like to talk to you about the joint ventures we had announced in May.

As many of you may know, we announced in May our plan to create three new funds. First, a corporate repositioning fund, second a development fund, and third a core fund, and these funds will all share three characteristics. Number one, all are mission consistent. The investments that we make in these funds will be within our current and target markets and among our five industrial facility types, and will facilitate further penetration into the corporate real estate market. All of these funds will be additive, these funds will invest in properties that, because of our risk profile and our capital structure, the Company either did not invest in, or did invest but in a limited volume. And number three, all will allow us to expand our successful investment record. Of note, the skills that generated the high double digit IRR’s are certainly transportable to the private market and again of note the current return that we think we are on track to achieve will produce leverage returns for our partners of approximately 20% very well positioned to launch those funds. With that I would like to turn the discussion to Jo -Jo.

Thanks Mike. In terms of economic gain performance, we had a great quarter posting $20m in net profits. That represents a record and significant increase over both the prior quarter and the second quarter of 2003. We achieved this performance through harvesting value from $111m of property and land in 21 separate transactions, while achieving an unleveraged IRR of 25.4%. With respect to economic profit, we expect it to continue at a strong rate due the strength of our harvestable opportunities. With approximately $493m of properties we could harvest in the next 12 months. Specifically it includes $281m of merchant development and redevelopment properties, $108m of build-to-suits, $99m of existing buildings and $6m of land. I want to note that $87m of our $108m build-to-suit pipeline is already built or is under construction. Build-to-suit customers in that pipeline include Maytag, Mohawk carpets, Electronic Boutique and Tucker Rocky.

As the economy continues to strengthen, we are better positioned to capture more build-to-suits going forward, given that we control 1,500 acres of land that would allow for us to construct over 23m square feet. I also want to point out 2/3rd’s of this land is controlled primarily through options and no cost marketing agreements. Finally In addition to the harvestable opportunities that I just mentioned, we placed under agreement the properties in our first venture with the Kuwait Finance House.

Regarding the investment performance, we invested $121m through 9 separate property acquisitions and 5 developments that we stabilized last quarter. We continue to spread invest to achieving a weighted average yield on these investments of 9%. This exceeds our sales cap rate of 8.3% by 70 basis points. This deep investment made us net investors last quarter, as total reinvestment exceeded our sales by $9m. Additionally we expect to remain net investors during the second half of the year by a margin of about $100m.

The last critical factor in our ability to source re-investment opportunity is the growth in our corporate real estate business. We are pleased with our performance in this segment of our business plus one half of our investment last quarter which were transacted directly with corporate America. These transactions were comprised of four completed build-to-suits, two sale leasebacks and one surplus property redevelopment. The build-to-suits include Mary Kay Cosmetics, Ford Motor and Caterpillar Logistics. We are excited about the fact that we are on track to achieve a record number of corporate transactions in the Company’s history by the end of the year.

In terms of our re-investment pipeline, it is encouraging. We anticipate that we will invest and stabilize approximately $175-$200m in acquisition and developments in the third quarter. Of that $180m is already under agreement.

In summary, we are pleased with our investment performance and out harvestable opportunities remain strong and deep. We also expect to be able to re-invest our sales proceeds into higher returning investments as we continue to lever our platform and really take advantage of our increasing corporate business.

I now turn the call to David.

Ok well thanks a lot Jojo. I will begin with the key second quarter portfolio statistics beginning with occupancy, which came in, in the quarter at 88.6%. Now that is a 10 basis point increase over the last quarter and notably is the 5th consecutive quarterly increase. While the increase is somewhat moderate, I would note also that occupancy did increase in two thirds of our regional portfolios quarter over quarter. Some of the larger markets with highest occupancy included Los Angeles, Dallas and Philadelphia. I would also note that these were the same markets that were highly occupied in the first quarter. Markets with the lower occupancy levels included central P.A, Minneapolis and Tampa. In terms of facility types, demand was generally weakest in the higher finished spaces and were strongest in regional warehouse and light industrial type product.

Same store NOI improved substantially in the quarter. -1.7% in Q2 compared to- 2.9 % in the first quarter. Cash-on-cash rental rates also improved materially by one hundred basis points. They were -2.7% in the second quarter and that compares to -3.7% in the first quarter. Rental rates were strongest in our regional warehouse product at 7.9% and weakest in our bulk warehouse facilities at -7.2%.

Duration of lease terms remained very steady in quarter, we averaged 5.0 years and that is right at our long term running average. Cost for TI’S and leasing commissions came in at $2.32 per square foot that is up a little bit over Q1, but we looked at those cost of course on an annual basis and we expect that that level will be closer to $2.00 per square foot as we look back over the entire year 2004.

Retention held up very well, in fact the 240 basis point increase over the first quarter, it came in at 66.6% of rolling square footage it was even somewhat higher than that, based on number of leases.

Our renewal progress also remains very much on track that is based on, both, signed leases as well as discussions and process. So just to summarize the quarter overall, we obviously saw a very meaningful improvement in almost every performance measure and we believe that points to a very good second half.

Taking a look at some of these key stats then as we look forward over the second half first of all, occupancy we look for the pace to pick up some speed especially in the 4th quarter as the positive movement on the national economic scene translates into more gains and absorption. Rental rates will likely decline a bit further through the end of the year but the extent of those decreases will show marked improvement from the past. Improvements in same store NOI of course will surely follow, we look for the decline to be modest in the third quarter and approaching flat by year end. And I would just say too that the extent of all of these improvements I just mentioned, really reflects the expectation of continued progress on the national economic front. And further that that expectation is reinforced by reports being received from our field operators and I think this is especially important. Having just completed a round of discussions with each of our regional offices just a few business days ago I can confirm that both actual and prospective activity is surely broad-based, as activity is increasing in every one of our markets. That includes notably our largest market - - or one of our largest markets, Chicago where we have either signed or have under negotiation approximately 500,000 square feet of new deals, not just renewals but new deals in the last 6 weeks, and that activity has increased occupancy in Chicago by over 5%. That’s comparing the second quarter with the first quarter, 5% increase.

So that - - on that very positive note, I’ll conclude my presentation and turn the call over to Mike Havala.

Thanks David I first would like to start with a few comments on the strength of our balance sheet.

Our debt to asset value as of the end of the quarter was 40%. Our interest coverage was 2.9 times and our fixed charge coverage was 2.4 times. These are very solid ratios, which by the way, have improved over the quarter and in fact should continue to improve as fundamentals and our transactional income increases.

With respect to the qualitative features of our debt, we have one of the longest debt maturities in the entire REIT industry at 10 years. 100% of our permanent debt is fixed-rate-debt, and we have very little secured debt, as 97% of our assets are unencumbered by mortgages.

Next, let me talk about capital markets and the second quarter was a very active quarter for us. We refinanced $300m and this was composed of $100m of debt that was maturing, and then $200m of preferred stock which we called. And then we issued $325m of new capital to replace the prior capital which we refinanced and the new capital was composed of $125m of ten-year notes, $125m of five-year notes and then $75m of preferred stock.

In addition, we extended the maturity of our $300m credit facility by two years out to September of 2007. And we just felt like this was very good time in the market to add even more security to our balance sheet.

With respect to the earnings impact of our capital markets activities, because we are able to reduce the cost of the capital that we refinanced, the result is that it will increase our earnings by about 9 cents a share on an annual basis. Because this happened partway through the year in 2004, it will be about 5 cents in 2004.

The next thing I want to talk about with respect to capital markets is joint ventures. As we’ve talked to you about before, we have three areas for new joint ventures. The first area is development and we anticipate about $300m of activity here. In the development fund we will invest in land and develop properties. One thing I think that’s important to know, is that because this fund will be composed of mostly pre-specified land sites in non-competing submarkets, this will not compete with the development that we do on balance sheet.

The second area in the joint venture front is corporate repositioning and we anticipate doing about $400m of activity here. We’re going to invest in turn-around properties, redevelopment properties, possibly vacant buildings. Things that we see in addition to other things from our corporate customers. And since we see so many of these opportunities, and we pass on many of them due to our limited balance sheet capacity, these investments will be additive to what we’re already doing today.

And then the third area for joint ventures is stabilized assets - - or core assets, and we anticipate doing about $800m of activity here. For this we are going to invest in stabilized assets, likely with little near term roll-over, and the focus will be on generating a solid income return rather than on short term value creation. Again this will not compete with our balance sheet investments because these are assets we typically don’t buy. and in fact sometimes we sell, that is after we’ve created the value by stabilizing the assets we often sell into the market.

So, those are the three areas that we’re focused on with respect to new joint ventures.

With respect to all the ventures, the investment period we anticipate will be about two years. So, the volume numbers I gave you before, think of those as happening over a two year period.

The structure of the ventures should be similar to what you’ve seen from us in the past and how we’ve done venture. The timing, our plan is to have these ready to accept assets by the end of 2004, and because we think it will happen towards the end of 2004, we have not included any income from the ventures in our 2004 earnings guidance.

Let me talk about earnings and our guidance. For the second quarter, as you saw, we are very much on track with our plan, coming in at 67 cents a share on FFO, we are at the high end of our range, which was 58 to 68 cents.

Also as a reminder, we had a16 cent per share non-cash charge in the second quarter pursuant to EITF D-42 related to the redemption of preferred stock, that is our series D and E which we redeemed during the quarter.

Excluding this charge, our second quarter FFO was 82 cents which would have been about an 11% growth from last year.

The last thing I want to mention with respect to the second quarter is,you may have noticed that our G&A increased. What we’ve done is we’ve added infrastructure related to our corporate real estate program and also for adding new investments for our joint ventures.

In addition, we saw some additional Sarbanes Oxley costs, typical of what you’re seeing with most companies. We had an increase in restricted stock amortization, note that this is a non-cash expense, and then we expect a normalized mix of cash versus equity incentive compensation during the year.

Next let me talk about our guidance. For the whole year 2004, we’ve reaffirmed our previous guidance for both GAAP, EPS and FFO per share. The key assumptions and the details are listed in the press release so I won’t reiterate those here.

And then we’ve also established our initial guidance for the third quarter, again for both GAAP, EPS and FFO per share and this has been laid out in the press release as well.

With that, let me just conclude and say our financial position remains strong and is infact improving. Now, we’re very excited about our new opportunities regarding the joint venture investments and these should substantially help us grow the company in 2005 and beyond.

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

Thank you very much Mike and I’d like to make three summary points and then moderator, I’d like to open it up for any questions.

Number one, the economic recovery that’s underway for over a year now continues to dole out its benefits to the US industrial sector in general and First Industrial in particular. Witness the fourt quarters of positive absorptions that we’ve had in the marketplace.

Secondly, the value added business model is paying off. There is record gains. As Jojo mentioned, also a growing pipeline and as Mike just got done talking about, we will have alternate capital sources from these newly formed joint ventures that will be able to expand our deployment opportunities.

And last, as we look forward into the next ten years, we will remain ready to respond flexibly as business opportunities warrant as we have done over the last ten years. But although our tactics need to be flexible our mission is not, we will remain as we have over these ten years, committed to our mission to create industrial real estate solutions, through our speed, our service and our responses.

So with that, moderator, can we open it up for questions.

Thank you. The floor is now open for questions. If you do have a question please press star 1 on your telephone keypad at this time. If at any point your question is answered you may remove yourself from the queue by pressing the pound key. Please we ask that while you pose your question, that you utilize your hand set to provide optimum sound quality. Once again press star 1 on your telephone for any questions at this time. One moment while we hold for questions.

Our first question is coming from Jim Cowan of Morgan Stanley, please go ahead with your question.

Hi, could you just explain to me the Series H preferred issue and how that is supposed to be considered?

Sure, the series H preferred has been redeemed and paid off, that was done in early July.

So is the total capitalization of preferred at quarter end? You guys say that you guys raised 75m during the quarter but that doesn’t include series H?

That’s correct we did raise the series H in June and then that was paid off in early July. So it straddled the quarter as far as the pay off.

Okay, but its still outstanding as of the end of the quarter.

Yes, it was still outstanding as of June 30.

And what are the proceeds for?

Series H preferred was approximately $125m

And you are going to pay that from where?

We did a bond offering - a 5 year bond offering of $125m in June and essentially those proceeds went to later pay off the series H for the beginning of July.

Okay, so you had $125m for series H and you have - the other, Okay, thank you.

Thank you. Our next question is coming from Ross Nussbaum of Bank of America Securities, please go ahead.

Hi, this is Christina McElroy here for Ross. You maintained your FFO guidance but you increased your net economic gain expectation by about $10m or 20cents per share. Why didn’t you increase your FFO guidance or is there something offsetting the gain.

Sure, good question. With respect to our guidance, that’s right we did keep our guidance the same and because of what happened in the second quarter of gains being higher than normal, and the fact that as well as in the second half of the year we expect an increase in gains as well. We increased our estimate and our guidance changed, now we did have higher G&A, so that’s offsetting that somewhat, and then the other offsetting factor is – you remember earlier in the year we anticipated monetizing some of what we call low income producing assets, about $100m, and so forth, and we are not going to do that for the year, so –

So that’s more like next year?

I’m sorry?

That will happen next year?

Well, there’s a couple of elements to that, with respect to those, and one of the items in the low income producing basket is land – and what we have decided to do with the land that we’re holding is either develop on it, because as we see fundamentals change in the market place it makes sense to hold. Some of those parcels of land also may be used to seed our development venture as well, so that’s why a change of plans with respect to the land holdings that we have.

Okay and what is your expected breakout in the gains, what’s your expected break out between land sales and merchant sales and existing asset sales ?

Hi, this is Jojo. Currently, its running at about 50% - 50% existing, 50% merchant development and land. We see the merchant development and redevelopment going higher in the remaining half of the year.

I’m sorry, is the merchant growing higher?

Yes, merchant development and redevelopment going higher, being high – as a higher proportion of the composition of gain.

Okay. And you’re second half FFO as if you see the mid-point of the guidance, excluding the preferred redemption charges, it’s roughly 11% higher than the first half. What are the primary drivers, is that’s pretty much all gain?

A lot of it is traditional gains we anticipate in the second half of the year.

Any as a result of increase in occupancy?

Yes, there is some factored in for increase in occupancy, if you remember, we anticipated that we’d be about 89% occupied on average during the course of the year. At the beginning of the year, we were in the mid 88s, so we’re expecting to be in the mid 89s for the second half of the year.

Okay, and I’m not sure if you covered this or not, tenant recoveries dipped in the second quarter, what happened there?

Expenses went down also, and so we recover less when the expenses are lower.

Okay, and what about the – this settlement gain that is in there. This interest rate –

Yes, what we did is back in March, that we were going to go into the capital markets within the next couple of months and interest rates had just downed substantially, we locked into the then current rates in March. Obviously that was before the start of the increase in rates, starting with the April 2nd jobs report and so forth. So, our hedges were substantially in the money, from an accounting point of view, we hedged about $150m, and our offering – our five year offering was only $125m, so the difference - the extra hedge if you will, was settled and we received a check of about $1.45m or just beyond that, that’s what that number is.

And one last question on your rollover this year and next year, I know its 25% above average for you guys, but are you feeling pretty comfortable with that ’04/’05 rollover.

We are Christy, I mean we are right on track, really on a historical basis and you know, the one advantage that we have today is really the operating environment, so that just really underpins and provides I think even more safety to the fact that we will get where we need to be in the right time frame.

If you also just look at our progress year to date , I had the statistic earlier, but over half of our 2004 rollover has already been renewed and usually, renewals are more active in the second half of the year. So all in all we are on track plus.

Thank you. Once again this is a reminder for any questions, you may press (*) one (1) on your telephone keypad at this time. Once again, press (*) one (1) on your telephone keypad. Our next question is coming from David Taylor of David P. Taylor. Please go ahead.

Thank you. What metrics does management look at before it would recommend a dividend increase to the board?

This is Mike Brennan, David. What we would look at is, how comfortable we felt with the ’05 operating environment in general, and our business plans and the ability to execute those in particular. And so, as we get closer to the third quarter and fourth quarter, which is generally the time that we give estimates for ’05. We are starting to develop some solid opinions, so let’s put it that way, about where the business is going. So it is really quite simple that the confidence that we have in the business plan and what that confidence means in terms of increased earnings.

Is there a proportion of FFO or earnings or whatever that you try to target?

Well that is a kind of a longer discussion maybe than we have time for here but, it’s more about the confidence that we have in the different income streams that we are looking at. Whether it is generated from leasing, capital recycling or now whether it is generated from a joint venture activity. So, it is not just the level it is the degree of confidence we have in the ability to make the hit on all three income streams and generate that so. But that is the general way in which we look at the dividend increase and what we might recommend to the board.

Do you think it is possible that dividends might be increased during the course of this year.

Well, I won’t comment on that, I will just keep my comments to the business. It is not only possible to see increasing business activities, but we are seeing it, and we are seeing that on every front. You know David’s report was almost straight A’s in terms of the type of port folio we would like to see of course, I always push David to get more occupancy, but occupancy is up in the same store--excuse me—while it declines, declines significantly less. Rental rates although they declined a little bit, declines significantly less and in Jojo’s report in terms of the sales activity we are having the pipeline we are seeing is good so, all I can say is that you know we certainly liked what we saw at the quarter and we certainly like what we see going forward and if we can keep doing a decent job at that, that is when good thing happen.

Thank you. Our next question is coming from Gary Freeman of Gem Investors. Please go ahead.

Thanks. Mike, first question just following on from the previous caller, just conceptually, how comfortable are you in terms of looking at a dividend increase when the current dividend is not being covered by operational cash flow.

Well I didn’t say to the last caller, Mr. Taylor, that we would increase it.

No, I am just talking conceptually.

Yeah, well as to the premise, I wasn’t suggesting a dividend increase and I wasn’t ruling it out. As to the second part of your question about the dividend not being covered, the dividend is covered. We will have periods from quarter to quarter where it may not be such as the case in this quarter. So, Gary as I said to you before, if we –to the extent that we didn’t think we had the business prospects, being able to pay out a dividend, obviously we wouldn’t consider that. But we certainly think that the trend is significantly up and, you know, I think that is probably all that I can say about it.

Let me add and say that if you look at our guidance for FFO for the full year 2004 and you compute your version of FAD or CAD or AFFO, depending on which definition you use. You will see that our pay out ratio for the year should be less than 100 percent. For 2004 we fully expect that our FAD payout ratio will be less than 100 percent.

Right. I understand that point, I was just talking more from the standpoint of operations. You know operational cash flow from property operations as opposed to including the gains activity. But your comment is fair enough. The other question I just wanted to ask was, in terms of economic gains as a percentage of FFO it has been trending above 50% for the last couple quarters and my expectation was that that was going to be coming down as percentage of FFO, you know, looking out for the remainder of the year, it sounds like that is unlikely to be the case given you current guidance. Could you just elaborate a little further on that?

First of all, the way that we do it here is we look at our economic gains relative to our revenues. It is really revenue even though from an accounting point of view it shows up as a separate line item and there is a tendency for people to want to extract it out of bottom line FFO. It is a top line number and so when you look at our revenues for the quarter, including economic gain, economic gains are about 19% of our total revenues. The reason we say that it is a revenue and not a bottom line number, is remember, in order to generate those gains we have infrastructure, we have people, we have offices, we have IT systems, all that supports the whole of our business. In addition to that, we have capital costs and that, unfortunately, is not captured in what is required from a GAAP boarding point of view. And the capital costs of course would be layering on our overall cost of capital, to producing that. So, we strongly believe that it is really most appropriate to look at our economic gains as a revenue, like rent, rather than a bottom line number, because that is really what it is. Again that number for the quarter was 19%.

Okay fair enough my final question you know Mike you’ve talked about the last several quarters and the potential upside of getting the portfolio back into the 95% range in terms of occupancy? You know how satisfied are you with the current state of occupancy gains, because over the last 6 months or so I would say that gains there have been pretty flat. Could you comment a little more on this?

Yes I will and David and I will do color commentary on this but we’re certainly – you know the signs are there that we are going to improve that significantly and I think we’ll definitely see over the course of the next year that happening. The second thing that you should remember as well, is that in the period where certain investors are fearful of the leasing risk, it gives us a great opportunity to buy some of those properties. So in some of the more recent acquisitions we’re taking on, of properties that have maybe more vacancy or maybe more potential for it. And that’s of course -- that as well is reflected in the occupancy.

And we felt that’s a great time to load up on some of these corporate bargains that maybe others were worried about. So I think the general answer to you question I feel absolutely confident we’re getting there in terms of leasing. And you just have to remember too that it’s not – our eye is not 100 purely percent on the occupancy line, although that’s important, our eye is on the value of creation line. I mean that’s what we’re looking for. So if we take out – and we have the ability to buy 100% lease properties and jack the occupancy up quickly. But what we’re interested in doing is buying properties where we can make a lot of money. So that’s – I think you need to understand both of that in terms of what we do.

I won’t add much to that, really Gary either, this is Dave; it’s just that you know I don’t think anybody’s occupancy has just shot ahead. I think we’re in the beginning phase of seeing the translation of the broader economic fundamentals being translated into the industrial space business. So as I mentioned in my formal remarks, we are indeed expecting an acceleration of the increase in occupancy. But understand that it’s really – we’re at the corner now we’ve been approaching it for some time. And we’re just gradually starting to turn around it. I mean that’s really the way it looks to us.

Oh good thanks for your time.

Thank you.

Thank you once again I would to remind the audience to ask any questions star (*) one (1) on your telephone key pad at this time. Once again that is star (*) one (1) for any further questions. Our next question is coming from Jonathan Litt of Smith Barney. Please go ahead.

Hi this is John Stewart with John Litt as well. The first question is for Mike Havala. Mike I guess I was bit surprised to see a same store NOI decline given that you had a hundered basis points pick up in occupancy in the same store year over year. What drove that was it rent roll down or can you walk us through that?

It was just a combination of the when the occupancy hit as well. Because the occupancy we reported at the end of the quarter. So the average occupancy is an important number as well, I don’t have that statistic, but that can be a nuance, if you will. And then of course rents are minus and so that is a factor in here as well, the same store pool.

You mentioned that for the balance of the year you expect the rent roll down to moderate. Can you kind of quantify for us what you expect the mark to market in your portfolio is?

Sure and John this is David. The mark to market, I’m going to give you a range of 4% spread a low of -2 to probably a high of -6. You know we came in on the second quarter at really less of a reduction than we would have guessed what number of months ago by over the rest of the year, I put it in that -2 to -4 area or -6 area.

And then Mike Havala again, what drove the higher G&A in the quarter?

Yes there was kind of a couple of things as I mentioned it was related to you know, adding infrastructure to or corporate real estate program and what we’re doing on the joint venture front. Sarbanes Oxley cost which every body is incurring that increase in restrict stock, amortization, which and of course the non-cash expense items and then the, you know, we see as they normalize mix of the cash versus equity percent of compensation for 2004. So those are the main elements to increase in G&A.

Now if you’re looking at what the run rate on a going forward basis, it probably would be more similar to the second quarter than it would be to the first quarter number. In the second quarter we did have some unique cost related to the quarter of course, your annual report costs, share holder meetings, our investor day those type of things. And those will obviously decrease during the rest of the year but we will also have an offsetting increase if you will, with some additional investment that we have in infrastructure with respect to the new joint ventures.

Again, its an expenxe but obviously we look at that as a investment to produce income as soon as we get the ventures up and running.

Okay and then Jojo did I understand you correctly to say that the -- am I right in thinking the amount going in Cap rate on the $73m of acquisition in the quarter was 9% in the stabilized yield the 9.5 that you put in the press release was a stabilized yield, was that the difference there?

The 9% was the combination of both acquisitions and developments. The acquisition cap rate on that Cap rate is higher than the weighted average.

Okay good.

Did that answer your question?

I guess I was trying to get at what the going in Cap rate was rather than forward looking stabilized feel.

Sure for the acquisitions?

Yes that’s right.

For the acquisitions they are a bit low. The acquisition stabilized yield in that group is 9.7 and 9.7 Cap rate. And the going in yield is slightly lower than the 9.7% stabilized yield.

Okay thank you.

Thank you there appears to be no further questions. I would like to turn the floor back over to First Industrial for any further remarks.

Okay well thank you moderator it looks like no one else is in the queue. I want to thank every body for calling in and thank you for staying there while we had our technical difficulties, and we will talk to you again on our third quarter results. Thank you.

Thank you this does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.