First Industrial Realty Trust Inc (FR) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to the First Industrial Realty Trust third-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to First Industrial.

Good afternoon, everyone. This is Sean O'Neill, Senior Vice President of Investor Relations and Corporate Communications. Before we discuss our results for the quarter, let me remind everyone that this call contains forward-looking statements about First Industrial. A number of factors could cause the Company's results to differ materially from those anticipated. These factors can be found in our earnings release that is available on our website at www.FirstIndustrial.com.

Now, let me turn the call over to Mike Brennan, President and CEO.

Welcome, everyone, to our third-quarter 2005 earnings conference call. Before we begin, let me introduce the members of senior management that are here today -- JoJo Yap, our Chief Investment Officer, will discuss our investment performance and our growing pipeline; David Draft, Executive Vice President of Operations, who will cover our portfolio results; and Mike Havala, our Chief Financial Officer, who will go through our capital markets activities, balance sheet and various financial specifics of our third-quarter results. And you have just heard from Sean O'Neill, our Senior Vice President of Investor Relations and Corporate Communications.

As we stated during our recent investor day that we held in New Jersey, First Industrial is focused on growing all aspects of our business, including our capital sources, our net operating income, our economic gains, our customer relationships and, most important, the quality of the personnel that makes all of this growth possible.

Getting into the third-quarter results, I am very pleased with our performance in the third quarter, not only with our bottom-line results but also with the successful execution of the strategic plans that we have outlined to you previously -- the creation of our core joint venture, the expansion of our national platform into new markets and the increased business activity that we are seeing with corporate America. We have been investing steadily in our franchise, and I'm very pleased to say that those investments are paying off in the form of accelerated growth.

Funds from operation were $0.95 per share in the third quarter, which is the high end of our guidance range. Net operating income was up, driven by another increase in occupancy. Joint venture income grew, as a result of our new co-investments with California State Teachers' Retirement System. And, again, net economic gains were strong, from both our expanding merchant activities and our capital recycling discipline, where we are selling properties where returns are maximized, and then reinvesting those proceeds into higher-returning opportunities.

On-balance-sheet investment activity that, as you know, includes both our acquisitions and our placed-in-service development, was 200 million in the third quarter. And this is the highest quarterly on-balance-sheet volume since the second quarter of '98, so I was very pleased with that. The investments that we have made in our people, our training, our new hires and the investments we have made in our platform, the new market entries, the enhanced customer and broker relationships, is evident in this robust investment activity.

Net economic gains in the quarter were strong at 25.6 million. Now, while a number of factors contribute to our success in producing these gains, one component of that success are the skills of our disposition group. I know I haven't spent much time in these calls describing our disposition team, but briefly let me say that this group of ten dedicated professionals are a core strength of our company. The greatest benefit is derived from their relationships with a deep pool of industrial real estate investors. And that knowledge and those relationships led to the development of our proprietary database that catalogs investors by their buying preferences and other characteristics, including the markets that they invest in, the industrial property types they invest in, financial wherewithal, the transaction size and so forth. So, this group plays a big part in giving the capital recycling component of our business a very high degree of probability.

Beyond that, though, the capabilities of our disposition group not only help us sell better, but they help us invest better, too. And this was clearly evident in the $1 billion acquisition we just completed with CalSTRS.

Just stepping back, over the past six years, we have completed more than 450 sales transactions, or about a sale every third business day. Over this six-year period, that sales volume totaled about $2.6 billion. This hands-on sales experience gives us the true pulse of the local and national markets. Because we've got hard information on what properties can be sold for, it gives me confidence and us overall confidence and accuracy in the investment underwriting process. And our joint venture partner recognized this market information advantage, and we both believe that it's going to help us unlock the value of our coinvestments.

In addition to the $1 billion acquisition by FirstCal 2, we're also making good progress on the investment side in FirstCal 1, which, as you may recall, is our development and redevelopment joint venture that we launched in March of this year. These additional capital resources that provide a cost-of-capital advantage in the marketplace have allowed us to leverage our platform and grow our investments at a quicker pace. Joint ventures are now a key element in our overall strategy and an important third engine of growth.

In addition to our new joint venture capital sources, our focus on building relationships with corporate America has also driven the growth of new investment opportunities. Of note, we are under contract with Rockwell Automation to purchase 24 buildings that encompasses multiple industrial facility types in 17 locations for a total price of about $150 million. This transaction is scheduled to close in the fourth quarter.

I think the transaction is significant in several respects. First, it reflects an increasing trend in corporate America to improve operating efficiencies through a thoughtful approach to supply chain and real estate planning. Second, it reflects the value and the competitive advantage of having a national platform that invests in multiple industrial facility types on a comprehensive scale. Finally and more broadly, it speaks to the vast amount of industrial real estate opportunities, where REITs still own less than 3% and where our information advantage and our investment skills can add value for both our customers and our shareholders.

Turning quickly to the performance of our on-balance-sheet portfolio, which David Draft will discuss in detail, fundamentals are, as you know, improving. And we continue to see further opportunities for NOI growth, both from increasing occupancy and from increasing rental rates. With respect to the performance of our recently acquired FirstCal 2 portfolio, the outlook for increased occupancy is also in line with our expectations. And I am very happy and we are all very happy with the transition process there. So overall, we are seeing increasing cash flows from net operating income, from joint venture income and from economic gains achieved through capital recycling.

And with that, I'd like to turn the discussion over to JoJo Yap.

As we have told you, we have been expanding our investment infrastructure in people, by adding new talent, increasing training of our entire team, and in (ph) new markets, all of which will drive our accelerating growth. Our new offices in North California, Miami and the Inland Empire are hitting their strides and are contributing to our investments and growing pipeline. We have expanded our presence in Baltimore, D.C. and Cincinnati, and we intend to expand our national platform in our target markets of Seattle and Las Vegas/Reno. These investments are driving the growth in investment activity in our future pipeline for our balance sheet and joint ventures.

Let me get into some of the details of our investment activity in the quarter, starting with our on-balance-sheet performance. As Mike Brennan said, we had a solid investment performance for the quarter. We were net investors by $21 million by investing $176 million in acquisitions and $24 million in placed-in-service developments. The yield spread of our investments exceeded yields on sales by 180 basis points. This spread compares favorably to our five-year average of 140 basis points.

During the quarter, we made 16 acquisitions. This volume of investments demonstrates the wide net we're able to cast to source investments that meet our criteria. One significant investment during the quarter was our $101 million transaction with Principal Real Estate Investors. This transaction was a great demonstration of our strength as an investor, a portfolio which we could say yes to because our capability to invest in multiple markets and multiple property types. On the development side, during the quarter we placed in service five developments, including our build-to-suit with Ridge Tools, a subsidiary of Emerson Electric, for a total of 482,000 square feet.

Through the third quarter, we've acquired 91 properties in 57 separate transactions for $413 million. And we have also placed $61 million of developments in service, for total investments of $474 million. Also, through the end of the third quarter, we have sold 72 properties in 54 separate transactions for a total of $473 million.

With respect to net economic gains, it was $25.6 million for the third quarter. I would like to point out that the last quarter was the 24th consecutive quarter of executing our capital recycling strategy that drove economic gains. Our sales were profitable as we achieved an unleveraged IRR of 17% and an after-tax profit margin of 14%. Our strategy for creating and harvesting value remains consistent. We aim to maximize the value of every asset from the bargaining table to asset management, all the way through the disposition process.

As Mike discussed, we sell assets to the most appropriate buyer where we can maximize the value of the asset. This is one of our major competitive advantages in the fragmented industrial market.

For the full year 2005, we project the percentage gains from merchant activity will be in the range of 60 to 70%, which of course includes land deals. Gains from existing buildings will be in the range of 30 to 40%. So, in total, we expect the composition of our gains to be relatively similar in 2006.

With respect to the overall investment pipeline, I just want to remind everyone that our on-balance-sheet and JV pipeline is approximately $1 billion. Again, when we say pipeline, we're referring to developments under construction and transactions under agreement.

Now, I would like to discuss our on-balance-sheet pipeline, which stands at $726 million. Of the $726 million, $427 million is in acquisitions and $299 million is developments. The $299 million of developments can be broken down to speculative and build-to-suit developments under construction at 253 million -- that's 86% leased -- and build-to-suits under agreements at $46 million.

For the full year 2005, we expect total investments, which includes acquisitions and developments to be placed in service, to be in the range of $750 million to $850 million. We expect sales to be in the $700 to $800 million range. Thus, we expect to be net investors in 2005, and our investments and should be accretive to NOI and produce future economic profits.

Now, I would like to discuss our joint venture activity and pipeline. You all know about our significant joint venture investment activity in the form of our $1 billion investment in FirstCal 2. In addition, we continue to grow the portfolio with FirstCal 1. As of September 30th, we have a total of $237 million of investment in FirstCal 1. This is up from 128 million from the last quarter. $201 million of that investment is in buildings, while the remaining $36 million is in land. Remember that this joint venture is a $950 million joint venture, which is of a revolving nature -- that is, if we sell assets from the portfolio, we can reinvest freed-up capital, up to the $950 million capacity.

We have generated and expect more fees, incentive payments and gains from FirstCal 1 in 2005, as we have several properties targeted for disposition. For example, during the third quarter, we sold an investment from the portfolio and generated disposition fees, incentive payments and gains. I would also like to point out that if the land in the venture was built out, it could be expanded to approximately $240 million.

Contributing to our investment activity in FirstCal 1 last quarter was an $86 million investment in a portfolio in Northern California. We were able to execute this transaction on behalf of the venture, because of our local market expertise and our knowledge of improving demand for industrial space in the region. We also invested $22 million in our net lease fund with Kuwait Finance House in the third quarter. We achieved this through acquiring a property leased to Elizabeth Arden which is being used as their sole critical distribution facility in North America.

With respect to our joint venture pipeline, it is at $288 million today. It's comprised of $172 million in acquisitions and $116 million (ph) in developments. Per our guidance, we expect to finish the year with 1.5 to $1.6 billion in joint venture investments, which already includes $1 billion in FirstCal 2, and the remaining 500 to $600 million in FirstCal 1 and our net lease venture, of which, in total we have already completed $390 million today.

In closing, our pipeline for both on-balance-sheet and joint ventures is growing, and it's a diverse pool of 59 transactions. We are growing the pipeline due to the investments we have made in our business.

And now, I will turn the presentation to David Draft, who will discuss our portfolio operations.

Okay. Well, thank you, JoJo. As stated earlier, a key ingredient in the Company's growth plans has been the expansion of our personnel resources, and especially in the key production areas handled by our transaction officers and leasing teams. We have also been adding to our expertise through comprehensive training programs. And the benefits of these investments in our people are evidenced by our increasing portfolio performance, and the importance of that is underscored by the fact that our asset base under ownership and management has been growing significantly, today standing at about 107 million square feet.

Now, before commenting on our on-balance-sheet portfolio and the $1 billion portfolio recently acquired in conjunction with our FirstCal 2 joint venture, I would just like to make a few comments about the state of the overall industrial market. Leasing activity nationwide continued to be strong in the third quarter, due to solid levels of overall business activity. Net absorption in the quarter was approximately 93 million square feet, which is an over 50% increase over the second quarter. And the outlook remains favorable as well, as absorption is expected to remain positive during the fourth quarter of 2005 and throughout 2006. New deliveries in the quarter totaled about 48 million square feet. And the difference, then, between that 48 million square feet and the 93 million square feet of net absorption drove a 40 basis point increase in national occupancy, which at quarter end reached 90%.

The outlook for market rental rates is positive, as well. Torto Wheaton is forecasting market rents for 2006 to increase 270 basis points over 2005. I would just also note here that, of the 51 markets included in that Torto forecast, it's expected that about 80% of those will show positive rental rate growth in 2006.

So, with that national perspective, I'd just like to turn now to conditions within First Industrial's portfolio. With respect to our regional portfolios, we're seeing some of the highest occupancy levels -- and by that I mean 96% to 99% -- in Baltimore/Washington. There, we are seeing government contractors continue to drive space needs. We are highly occupied in Central PA, Los Angeles and in Houston. And, specifically with respect to Houston, most of our properties there are in close proximity to the port, so they benefit from all of the activity taking place there.

Occupancy increases came from a broad range of industries, including businesses involved in the wholesaling of home furnishings and office supplies, commercial foodservice companies and businesses that package and store a wide range of consumer products.

Now, that activity has led to another solid increase in occupancy for First Industrial. Our in-service occupancy increased in the quarter by 50 basis points to 91.6%. And, as I mentioned at investor day, the outlook for occupancy is also favorable, as we expect our average occupancy rate in 2006 to be in the range of 92 to 93%.

With respect to net operating income, total NOI was up 8% on year over year. And if we look at just the same-store population, NOI was about even in the quarter, though that is an improvement over the decline of 2.3% in the second quarter.

I would also just like to note that, if we stripped out the effect of lease termination fees, same-store would be positive at 1.2%. For the full year 2005, same-store growth is expected to be even to slightly positive, and then, looking further ahead, we expect same-store NOI growth for 2006 to average 3 to 5%. Now, some of the drivers of that growth include our intense focus on leasing through our HOOP program, which I spoke about in some detail at investor day, as well as the improving spread between market rates and renewal rights that is built into our lease expiration schedule, and then also the favorable real estate environment that I spoke of earlier.

Regarding rental rates, in the third quarter, cash-on-cash rents declined by 3.9%. That compares to an average decline of 5.1% in the first half of 2005, so some improvement there. We think we'll see rental rates in our portfolio turn positive in 2006.

With respect to retention, we renewed 65.6% of our expiring square footage in the quarter. That level is, by the way, very consistent with our long-term historical average. And then, as we noted last quarter, I would just also note again that decision-makers continue to be more confident about the future prospects of their businesses. And because of that, they are willing to make renewal commitments earlier in the process; we are continuing to see that.

Tenant improvement and lease commission costs for the quarter came in at $2.45 per square foot. Through the first three quarters of this year, those costs averaged $2.24, and that's slightly below the 2004 average of $2.30, so some improvement over time taking place there, too. We think that leasing costs will moderate as occupancy continues to increase over time.

And now, I would just like to make a couple of comments about the asset management and leasing of the properties acquired as part of our second joint venture with CalSTRS.

First, I just want to mention that the advance work that the heads of our regional operations did in getting the organization prepared to lease and manage the portfolio -- well, that just really got us off to a running start. All required personnel to manage and lease the portfolio was onboard at closing, and these new people, of course working in conjunction with our existing team, are well underway in implementing our space improvement and tenant relations plans.

And then, second, leasing progress is very much on track. So far, we are exceeding underwritten rental rates, and tenant improvements are coming in lower than projected. Activity on the vacant spaces is also strong. Adding that all up, we expect that downtimes will, on average, be less than was assumed, as well. So all good news on that JV front. Taking all of the foregoing into account, we look forward to increasing performance across our on-balance-sheet and JV portfolios as we head into 2006.

So, I'll just wrap up for a half minute or so with a brief recap of some of the key reasons for that positive outlook for the remainder of this year and next, as well. First is just the macroeconomic environment remains strong, as I have discussed. Second, overall industry fundamentals are positive, with respect to the big measures -- net absorption, deliveries and rental rates. And, third, we expect to be a net investor on-balance-sheet in 2005. Fourth, our leasing and property management teams have been growing in size. But, more importantly, our tenants are increasingly impressed by the services these people are providing. The evidence of that satisfaction is found in the recently-released customer satisfaction report by Kingsley Associates, which shows First Industrial has extended its lead again over the Kingsley index. Now, that's a very significant accomplishment, as that index is comprised of over 300 million square feet owned by over 60 industrial landlords across the United States. And I will just tell everybody on the call here that we intend to keep that leadership position in the years ahead. Finally, we are continuing to see a strong level of showings in RFPs. So all of this will serve to drive occupancy, which, of course, will drive NOI higher as we finish 2005 and move into 2006.

So, with that, I'll turn the call over to Mike Havala.

In the third quarter, we were very active in growing our capital base. This is a critical element of our growth plan. In September, just six months after completing our $950 million development and repositioning joint venture with CalSTRS, we completed our second joint venture with CalSTRS. The second JV is a $1 billion core JV which more than fulfills the goal that we had previously established. Remember, earlier in the year, we had targeted creating a $200 million core joint venture in 2005. So we are very pleased with beating our target here.

The significance of these new joint ventures is that we have now have a cost-of-capital advantage, as well as a significantly increased investment capacity, which together make us even more competitive in the marketplace. This addition to our capital base gives us a bigger platform, including more markets, more customers and more talent inside our company. All in all, the new joint ventures are a new engine of growth for the Company. As we outlined in our recent investor day, our FFO from joint ventures is expected to grow substantially, more than doubling from a range of 12 to 16 million in 2005 to a range of 30 to 35 million in 2006.

In the third quarter, we already earned fees from our joint ventures, and importantly, we already earned incentive payments, as well. As shown in the more detailed disclosure that we now have provided in the supplemental, our total FFO from joint ventures was about 7 million in the third quarter, and this was up from over just 1 million in the second quarter. So obviously, a very significant increase.

It's important to understand that the fees and the incentive payments from our FirstCal 1 joint venture are still in the early growth phase, and these should ramp up as we continue to invest in more assets. And then the fees, incentive payments, et cetera, that we earn from our FirstCal 2 joint venture will be a significant stream of cash flow for a number of years out into the future. So, needless to say, private capital will continue to be an important element for our growth, and we will complete additional joint ventures in the future, where appropriate.

Next, let me talk about some specifics regarding our third quarter. First, our FFO per share grew to $0.95. This is up 10% sequentially from $0.86 in the second quarter. Note also that in the third quarter of 2004, we had a substantial contribution to our results from the $32 million profit that we had on the sale of our first venture with the Kuwait Finance House. This, of course, skews the comparison of the third-quarter 2004 number versus the third-quarter 2005 numbers.

During the quarter, we increased the size of our line of credit to $500 million. This will facilitate some of the larger transactions that we are now starting to see. We also have an accordion feature in our line which allows us to increase the line capacity by another 100 million, if appropriate. In redoing our line of credit, we also lowered the interest rate to LIBOR plus 62.5, and we extended the maturity out to September of 2008.

We continue to maintain a strong balance sheet, as 100% of our permanent debt is fixed rate, and our average maturity is 8.6 years. In addition, our fixed charge coverage has increased to 2.7 times.

Turning now to G&A expense for the quarter, as we have previously discussed, included in the G&A line item are both fixed and variable costs of running our business. In the supplemental, we have now provided some additional disclosure on the portion of our G&A that is directly tied to economic gains. Specifically, that's compensation of our transaction officers for producing those investment gains. For the third quarter, that amount was $3.3 million, as we show in the supplemental. Please note that the remaining unallocated amount of G&A is also, in part, something that supports the production of economic gains -- for example, the cost of functions such as underwriting support, due diligence, accounting, et cetera.

In the third quarter, you may have noticed that our total G&A increased, and this is due primarily to higher compensation costs related to higher gains, increased earnings and, of course, our new $1 billion joint venture.

Next, let me talk about guidance. In September, we initiated our guidance for 2006. And note that the midpoint of our 2006 FFO per share guidance, which is $4, represents 11% growth from the midpoint of our 2005 FFO per share guidance, which was 3.60. This 11% represents a significant acceleration in our growth rate. Also, I should note that we have further details in the guidance, in the press release, so I won't go into further detail here.

One last item that I want to point out is that the accelerated growth that we see for 2006 will significantly improve our dividend coverage. We expect to FFO payout ratio to be in the low 70's and the FAD payout ratio to be in the high 80's in 2006.

So, with that, let me just conclude by saying that we are very pleased with our results here in 2005, and we are even more excited about our outlook for 2006. So with that, let me turn it back over to Mike Brennan.

Today, we have outlined the progress we are making on growing our three cash flow streams -- our portfolio net operating income, our joint venture income and, of course, the gains from our capital recycling. And I am very pleased to say that we're hitting on all cylinders, and we expect double-digit FFO growth in 2006, as Mike just described.

With the major elements of our strategic plan in place, it's really now just a matter of continuing to execute on our active investment model, something that we dubbed the First Industrial Factory during investor day -- specifically, making sound acquisition and development underwriting at the front end; number two, through strong local management during our holding period and then, when that work is done, disposition to the optimal purchaser at the back end.

So, thank you very much for listening. And now, moderator, we would like to open it up for any questions.

(OPERATOR INSTRUCTIONS). Paul Adornato, Harris Nesbitt.

JoJo and Mike Havala, you spoke a little bit about the infrastructure, primarily the people that you are adding in order to execute your kind of rapid capital recycling program. I was wondering if you could just provide a little bit more color on that. Have you kind of added people before the activity, or has the activity increased, and then you add the professionals to handle it?

Typically, Paul, we have added professionals beforehand. As we have been implementing and planning our accelerated growth here, we have been implementing and adding people beforehand, by and large. So that has been the way we have done it. And again, as you have seen our infrastructure grow, we've added a lot of expertise to the Company, as well as adding horsepower and capabilities in order for us to grow the three revenue streams of the Company -- which are, of course, rental income, i.e., NOI; economic gain; and then our income from joint ventures.

And where do you stand now, in terms of the infrastructure? Are you happy with the levels that you are at, or will you still need to add a significant amount from here?

Yes. We are generally at a place where we are happy with it, if you will. Now, to the extent that we're building up some of the new markets, we will have some additional people added there, but by and large, for the most part, we are where we need to be.

And moving on, looking at your JV relationships, I was wondering if you could talk about additional JV conversations you have had. How is that process going, or do you find you're getting more calls these days? Or how do you go about sourcing potential new JV partners?

Well, we certainly have been getting more calls than a few years ago, given the success of our several joint ventures with the Kuwait Finance House and CalSTRS and so fourth. Remember, the joint ventures that we do fit within our overall business plan, our overall overarching strategy to serve our customers. So when we set up joint ventures, on the net lease side or on the value side, the development repositioning, those have to fit within our overall business plan. So we are not just going and creating ventures just for the sake of creating ventures; they need to serve a specific business purpose to us, which, again, is something that needs to be additive to what we already do on balance sheet. We don't want to compete with our balance sheet in the ventures, so it's additive. And that, again, just allows us to do more business with our corporate customers. And so that is the purpose or what's behind when we go out and form new joint ventures. Of course, this latest joint venture which we did, the $1 billion FirstCal 2 joint venture was one, because of the nature of the size, that it made sense for us to do in the joint venture form, where we could capitalize on the capital structure of the venture as well as the overall return we get on our equity, and it comes through the form of fees and incentive payments and so forth.

Should we expect a similar volume of activity to occur in joint ventures, or not necessarily?

Well, we provided our guidance with respect to 2006 for our activities in joint ventures. And basically, we see anywhere from 800 to $900 million of investment activity in our joint ventures in 2006 -- so a significant volume from years past. This year, of course, we had $1 billion in a large transaction. But '06 will be significant volume from what we have done in years past. And again, this comes back to the base, which is the infrastructure that we've built in order for us to be able to accomplish that.

Lou Taylor, Deutsche Bank.

David, you had mentioned your TI costs were 2.45 a foot this year. You mentioned an '04 number; can you just repeat that again?

Sure. The '04 number -- let me just give it to you exactly as I said it here. The '04 average was $2.30. If you take the first -- okay, that's 2004, on average. If you take the first three quarters of this year and weighted-averaged it, it's $2.24. So about a $0.06 difference there.

I noticed that you were getting some nice occupancy gains in a number of markets. But Atlanta is still relatively low. Can you just talk about what your plans are for that market to improve occupancy?

Sure. Well, first of all, you are going to see some real improvement there. There was a 500,000 square foot 3PL provider there, Lou, that lost their contract, moved out of the facility. We since have leased 216,000 square feet of that 500,000 square feet. So we will be coming back up there.

I would also just say, on a more macro view, that Atlanta has been one of our most robust value creation markets. We probably made more money in Atlanta from stabilizing properties, selling them, then going out and acquiring more, some of which are less than fully-occupied, which obviously is often the way we create value. So you are going to see, in some of those markets from time to time, a little more volatility in the occupancy levels, as we create this value and do our capital recycling. We think that Atlanta overall as a market has been getting more healthy, as have all the markets, really, over the last couple of years. But this year in particular, there is going to be very strong net absorption in Atlanta, and 2006 looks very strong, as well. So that's an improving market, and one that we will continue to do very well in.

And, JoJo, can you talk about your margins on sales? It looks like they have been bouncing around this year, 10%, 18%, 13%. And you look like you are guiding to 15% next year. Do you think those margins will be stable, or do you think you're going to have a similar level of volatility?

I would say that it's really hard to predict quarter by quarter. It's easier to have an outlook for the full year. I do think that the level would be similar to the level that we have achieved this year. When you look at the margins, development -- merchant development margins are in the 10 to 15% range, and redevelopments and speculative developments are higher. Build-to-suits are somewhat lower. But all in all, we are comfortable in that 15% range going forward.

And would you have in your --?

This will add, too -- the third quarter is -- we ended up at a 14% margin. And last quarter, it was an 18% margin.

And the first quarter was 10. So can you just remind us, in your merchant definition -- I know you have got your ground-up development -- just what other categories of activities do you have in that merchant definition?

Merchant is development transactions, build-to-suit transactions, speculative developments, redevelopments, and of course it includes land sales.

Just for reference, in the supplemental we do lay that all out in footnote L, so it's further described there, just for your reference.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citigroup.

This is Krupal Raval with Jon Litt and John Stewart. Speaking of the Rockwell acquisition or deal that you guys are going to be doing, the 17 markets, 17 states that you're entering -- are they new markets, or are they existing markets? And if they are new markets, do you plan on expanding your presence there?

Primarily in the existing markets. These acquisitions are primarily in existing markets. We have investment in infrastructure already. And there -- this is a sale leaseback, and these properties substantially is leased long-term to Rockwell, which is an A-rated company on an absolute net basis, meaning that overall, the tenant is responsible for all repair and maintenance and replacement of any structural items in the building.

And two questions about G&A. Do you expect G&A to increase based on the fact that you're going to be increasing your presence in these markets?

And, second of all, do you -- given the fact that there's an additional 3 million in G&A associated with the net economic gains, knowing that you are expecting to roughly double your net economic gains from the new ventures, would you say that that run rate is going to substantially increase?

On the first part of your question, we would not expect any increase in G&A with respect to the Rockwell transaction. Again, it's a net lease, long-term lease acquisition. So there should be almost zero impact in that lease as a result of that transaction, in particular.

On the second part of your question, I'll answer what I think you asked. And if I didn't answer your question, maybe you can ask it again. But when you look at our overall economic gains in 2005, for what we expect, and then 2006, what we expect, we see in the neighborhood of about a 10% increase in our overall economic gains. So any G&A that would be associated with that would go with that. So I think you are looking at it maybe from a different angle, if you will. What --?

Well, the reason I'm asking is because if you look at the total net economic gains quarter over quarter, they are both roughly around 25 million. And my understanding is that the balance of the 3 million that is incremental, in addition, in G&A, has to do with your new funds. So looking at the funds as the incremental source of gains that you have, I'm wondering what your G&A expectations are, given the fact that it's ramping up.

Understood. I would say that the run rate that you saw in the third quarter for our G&A -- again, because most of what we wanted to do with the infrastructure in building it up has been accomplished. The run rate that you saw for the third quarter should be similar for the fourth quarter, and I think probably in the same neighborhood, maybe a little bit of an increase, in 2006.

Very fair. So far as footnote AK in your supplemental, first, we appreciate the additional disclosure. So far as the net economic gains in that -- is that already included in footnote L? I just want to make sure we are not being redundant.

And, second of all, fee and incentive payments, is that line item incorporating the acquisition fees or whatever for FirstCal 2?

The first part of your question -- in footnote L, which details out our economic gains to the various categories, any economic gain that comes through the joint venture is included in footnote L. And, just so you know, the treatment that we have of any economic gain in the ventures is identical to the treatment that we have on the balance sheet. So anything that comes from the joint ventures, we will split up into the same categories that we do from an on-balance-sheet point of view, as well.

And then, where you see our added disclosure, as far as fees, et cetera, from joint ventures -- yes, that would include any fees that we earned during the third quarter, which would include an acquisition fee on our FirstCal 2 acquisition in that joint venture.

I think John Stewart has a couple of follow-up questions, as well.

JoJo, how much of the 60 to 70% of your gains that are expected to be merchant gains -- how much does land sales represent of that?

It's actually in the supplemental.

I'm sorry -- I meant for your '06 expectations.

'06 expectations? It would be a smaller part of the merchant gains that we expect, which we feel will be in the 60 to 70% range. So right now, year to date, for '05, the share of net economic gains that came from land sales is about 15%. So we don't think it's going to be significantly higher or significantly lower than that. If anything, it might be a bit lower. It would not represent a major portion of the merchant gains.

And then, I had a couple of follow-up questions on the Rockwell portfolio. First of all, can you identify for us which the new markets are?

Well, new markets -- we are substantially -- there are 7% or a very, very small portion of the assets are in Canada. And basically, they are in Ontario, and Ontario has, with the Toronto/Ontario market, has about 650 million square foot industrial base. And these assets would represent under 7% of the total portfolio is net leased on an absolute net-net basis for 15 years with contractual escalations, and it's paid -- 100% of the rent is paid in US dollars. It also represents the headquarters of Rockwell Canada, so it's a mission-critical facility. It's obviously -- you know the value of a triple net leased, absolute net leased property leased to an A-credit tenant. So we have a lot of options, in terms of looking at future value harvesting on that asset. We may choose to own, we may choose to sell, we may choose to JV, but we're excited about the whole transaction. But under 7% is outside the country.

How many of those assets do you expect will be non-core?

These are core properties -- meaning these are assets that are within the markets that we buy. These are great net lease assets; they were acquired all well below replacement costs, mission critical, very well-maintained assets.

What was the yield on the transaction?

I don't want to comment on -- our policy is not to comment on a deal-by-deal basis.

Do you have any sense for the average age of the portfolio?

What I can tell you is that -- just back on the yields, what I can just tell you is that in every investment that we do, we apply our strict adherence to our being spread investors. So that means when we invest in properties, we typically create value at the acquisition. So I will just leave it at that.

At this time, I would like to turn the floor back over to you for any further or final remarks.

Moderator, if there's no questions -- and I guess there isn't -- then we will conclude. Thank you very much for your questions, for calling in. And I guess we'll see a lot of you at NAREIT in the next week. Thank you.

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