First Industrial Realty Trust Inc (FR) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Nelson and I will be your conference facilitator today. At this time, I would like to welcome everyone to the first quarter results conference call. [OPERATOR INSTRUCTIONS ] it is now my pleasure to turn the floor over to First Industrial. You may begin your conference.

Good morning, everyone. This is Sean O'Neill, Senior Vice President of Investor Relations and Corporate Communication. 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 may cause the company's actual results to differ materially from those anticipated. These factors can be found in our earnings releases that is available on our website at www.firstindustrial.com. Now, let me turn the call over to Mike Brennan, President and CEO.

Thank you very much, Sean. And welcome everybody to our first quarter 2006 earnings conference call. Before we begin, let me introduce the members of senior management who are here today. JoJo Yap, Chief Investment Officer, and JoJo will discuss our investment performance and our pipeline. David Draft, Executive Vice President of Operations, who will cover our portfolio results. Mike Havala, Chief Financial Officer, and Mike will go go through our capital markets activity, balance sheet, and guidance from 2006. And you have just heard from Sean O'Neill, our Senior Vice President of Investor Relations and Corporate Communications.

As you will recall on our last earnings call, we described our accomplishments in 2005: Building our capital sources, growing our talent base and entering new cities, and that it would be those enhancements that would drive FFO growth in 2006. Well I'm pleased to report that our first quarter financial performance reflects the benefits of an enhanced platform with results at the high end of our guidance range and well above our performance of one year ago. Specifically, FFO was $0.97 per share in the quarter, a 21% increase from last year, net income per share grew 18% and FAD was $0.80 a share, up 36%. So we're very pleased with the overall results.

This year-to-year acceleration that we have experienced in the first quarter was driven by our three engines of growth and all three were up. Now, those engines of growth, as I've mentioned in the past, are our net operating income, our joint venture income, and our net economic gains. Regarding our first engine of growth on the portfolio side, we indicated in our fourth quarter conference call that occupancy would be down in the first quarter, and David will cover this in more detail. Let me quickly say, however, that we expect occupancy will rise for the rest of the year.

Turning to our second engine of growth, joint ventures, growth in this income stream was driven with the -- by the addition of two ventures. Last year with California State Teachers Retirement system, totaling nearly $2 billion. As you may recall, we earn a variety of these for managing joint venture portfolios as well as performance-based incentives. We have an excellent track record of delivering high returns to our co-investors, and I'd like to say we are off to an equally good start with these funds. We added to this second engine of growth in the first quarter with another co-investment program with UBS Wealth Management that will give us the capacity to invest up to $900 million in long-term, single-tenant net lease properties, and as many of you know, we announced this new co-investment program on March 15th, and we have already closed four transactions, totaling nearly $100 million in the second quarter. So those transactions closed post-first quarter.

Regarding our final engine growth, net economic gain, this was also very strong in the quarter at $35 million. We continue to achieve favorable returns from our value creation model, where we buy land and buildings, and then we add value through development, redevelopment and leasing, and we harvest that value when we have created it. The net economic gains that we've achieved in the quarter continue a strong upward trend. I'd like to note that the average holding period for these investments, which consist of our acquisitions, our redevelopments and new developments, was just 19 months. As I've mentioned on previous calls, the big driver of all this growth is our business with corporate America.

Now, these customers have complicated real estate needs ranging from the expedited sales of single assets to customized build-to-suits, to large strategically driven dispositions. We like complexity because it requires the skills and attributes of a large platform. In other words, we like complexity because it allows us to utilize distinct competitive advantages. When JoJo discusses our investment activity for the quarter, he'll also provide everyone with some examples of how we create, and then we harvest that value, so that we can give you an even better appreciation for the entire process. And importantly, how we're rewarded for solving customers' complicated real estate needs.

Investments for our balance sheet and co-investment programs are progressing well. And as we close on those investments, we're equally pleased that we are replenishing our pipeline with new opportunities. And, given our growing challenge in capital base, development will become an even big part of our business going forward. As we noted in our last call, we are forecasting 11% growth in FFO per share for the full year 2006, based upon the midpoint of our guidance, and we are off to a very good start. The actions we took last year to increase our capabilities and our capital and our infrastructure made us the largest investor in industrial properties in 2005, and those actions are, in turn, what are driving the acceleration of FFO growth in 2006.

Before concluding, let me make a few remarks on the macro perspective. The outlook for our business sector remains favorable. We're seeing-- we have seen an overall rise in plant utilization. We've seen continued increased spending by business. We've seen an expansion of global trade. And based on those three, we're seeing increased activity from corporations, ranging from new expansions to new supply chain activity, and also an increasing level of real estate dispositions. And each of these trends has a positive impact on our business. So with that, I'd like to turn the discussion over to JoJo, our Chief Investment Officer.

Thank you, Mike. Let me get right into our investments results for the quarter. I'll separate my comments by balance sheet and joint venture activities. Starting with investments on balance sheet, we acquired 28 properties and 21 transactions for a total of $159 million. On the development side, we placed in service developments totaling $65 million, including projects for our corporate customers, Mary Kay Cosmetics, Pier 1 imports, and Staples. So in total, balance sheet volume during the quarter was $224 million. And we're on pace relative to our guidance for our total on balance sheet investments of 600 to $700 million for the year. I want to point out that 83% of our total investments during the quarter were with corporate America, our primary customer segment. For the quarter, our investment yield exceeded the yield in dispositions by 135 basis points. As in the past, we expect this yield spread to produce strong investment gains as we complete our asset management plans on each investment.

Turning now to a discussion of our sales for the quarter, we sold 27 properties in 15 separate transactions for a total of $297 million, at a weighted average cap rate of 6.8%. For the property sold this quarter, our average hold period was just 19 months, as Mike said. This is an indicator of our ability to efficiently identify investment opportunities, provide solutions to our customers, harvest the value, and maximize profits. Our active investment model is very different from the passive investor who doesn't have our skills to create value or who typically holds properties for long periods of time. To this point, we harvested the majority of the 3.8 million square foot portfolio we acquired from Rockwell Automation that closed in November of last year.

The acquisition showcased First Industrial's expertise in handling transactional complexity, investing in multiple markets and property types, as well as providing operational flexibility to corporate customers through lease terms ranging from 5 to 15 years. Also during the quarter, we harvested our Le Nature's 500,000 square foot build-to-suit development for $89 million, I'd like to spend a little time discussing this project, since it's a great example of our capabilities as a developer.

Le Nature's produces and markets all natural beverages. More than a year ago, when they decided they needed a state-of-the-art headquarters and bottling plant to meet their growing customer demands, they chose First Industrial. We acquired a 30-acre land site this is strategically located next to the Phoenix International Airport, providing secure access to both the airport and major highways. In addition, this site offers fantastic visibility in terms of advertising to both air travelers and more than 175,000 vehicles that pass the site every day. The facility and infrastructure design had to accommodate highly customized beverage packaging, processing, and warehouse technology. It also featured advancements in water treatment, ammonia refrigeration, compressed air, steam generation, and electrical and cooling systems. This development won several industry awards, including the National Association of Industrial and Office Properties. So needless to say, we're very proud of this project on a number of levels.

So as part of our growth strategy we are pursuing more development opportunities. With that, I'll move onto our joint venture investments. As Mike discussed, joint ventures are an expanding part of our growth strategy. In our JV's, we invested $64 million during the quarter. In terms of sales, we sold $59 million. Again, speaking to our ability to quickly create and harvest value, the average hold period for these investments was five months, and the returns were well above the hurdles for our joint ventures. Corporate America transactions for both on-balance sheet and JV's, which included acquisitions and awarded build-to-suits, were $193 million in the quarter. So, we continue to make good strides with this important target market.

Let me now turn to net economic gain. In the quarter, net economic gain was $35 million. On our sales, we achieved an unleveraged IRR of 17% and an after-tax profit margin of 12%. We're very proud of our record in producing economic gains for 26 consecutive quarters. Of the gains produced in the first quarter, about three-quarters was for -- was from merchant activity, including land sales and the remaining from existing properties. For the full year, we expect the composition of our gains to be approximately 60 to 70% for merchant activity on our balance sheet.

Now I'd like to turn to our pipeline. Our overall investment pipeline for balance sheet and joint ventures is approximately $887 million. Breaking it down by investment type, developments currently and soon to be under construction total $367 million, or approximately 40% of the pipeline. Acquisitions currently under agreement are $347 million, and we already have closed $173 million in the second quarter, for a total acquisition pipeline of $520 million.

Now I'd like to break it down by entity. Out of the $367 million of development, $180 million is for our balance sheet and the rest for our joint ventures. More importantly, the developments on our balance sheet are already 82% leased. Out of the $520 million of acquisition pipeline, $166 is for our balance sheet and the rest is for our joint ventures. Also note that in addition to our $367 million development pipeline I just mentioned, our total land holdings of 1,060 acres on balance sheet and in our JVs can accommodate more than 19 million square feet or approximately [$860] million of additional development. Of course, we also continue to add to this land inventory as we acquire more for development in our first [CAL1] venture. So, in closing, our investment pipeline for on-balance sheet and co-investment programs remains strong, as our investment officers' focus of serving the expanding industrial real estate needs of corporate America. With that, I would now like to turn it over to David Draft.

Okay. Well, thanks, JoJo. I'd like to start with some brief comments on the national fundamentals, and then I'll turn to our own portfolio results. Our nationwide leasing activity in the first quarter was flat versus the fourth quarter of last year. As occupancy levels remained steady at 90.2%. Macroeconomic fundamentals for our business are favorable. Overall business activity is still strong, and we anticipate companies to ramp up their capital investment and put their record cash positions to work. Inventories remain tight, and industrial orders continue to show strength. Net absorption in the quarter was approximately 27 million square feet, which is at a somewhat lower pace, generally, than last year, but that's expected to ramp up during the rest of this year. So with that national backdrop, I'd like to just now turn to First Industrial's on-balance sheet portfolio results.

First total NOI. Total NOI was up 6%, largely due to our growing portfolio. In-service occupancy was 90.7%. That's down 1.7% from the fourth quarter and about even with all of last year. As Mike indicated, we noted during our last earnings call that occupancy would be down from the fourth quarter. Due in large part to high rollover, that always occurs at the end of the calendar year. Most of the change in occupancy versus fourth quarter of 2005 was due to four large tenants that did not renew, which also lowered retention and same-store NOI as noted in our press release. While some of the decline in same-store NOI was due to lower occupancy, other factors, such as straight-line rent and lease termination fees influenced the comparisons. Same-store NOI is now expected to be about even for the full year, which means we expect it to be positive for the balance of the year. We saw less of a decline in rental rates this quarter, negative 2.3% versus negative 4.4% for the full year 2005. And tenant improvement costs also improved to $2.22 per square foot from an average of $2.36 per square foot in 2005. So these are moving in the right direction, which you would expect as market fundamentals improve.

I'd like to just drill down on the occupancy for the quarter. The two largest tenants that did not renew were three PL providers that lost contracts with their customers. And in one case, we saw below-market pricing by a competing landlord that just wanted to fill a space. We decided to maintain our pricing discipline, because we are confident that we can lease up our property at a higher rent, and do so fairly soon. We expect overall leasing activity to be strong during the balance of the year. In the first quarter, total leasing activity was up 17% from the first quarter, due, in part, to owning a larger portfolio, but also due to a strong amount of new leasing activity. In the second, third and fourth quarter, we have significantly less rollover, which is part of the reason that we expect occupancy will average about 92% for the full year. In addition, our analysis of larger tenants renewing throughout the rest of the year shows that a high percentage are expected to renew with us. We also have significant activity in terms of showings and RFPs for our vacant space.

With respect to our regional portfolios, we're seeing some of the highest occupancy levels in Houston, where companies are attracted to the -- this key Gulf port for their supply chain needs, and our East Coast hubs, especially central Pennsylvania, southern New Jersey and Philadelphia, which continue to drive strong results. In terms of market activity and velocity, we are seeing strong levels in Phoenix, Los Angeles, as well as San Diego. And as general market data indicates, the business environments in Columbus, Detroit, and Cleveland are less robust. The demand for space was spread across many industries in the quarter, including global logistics firms, regional and local distributors, home products manufacturers, construction, and medical equipment suppliers. So then just to wrap up my comments for this morning, we will continue to maximize the value of our portfolio through our leasing and marketing efforts and by providing industry-leading customer service. So with that, I'd like to now turn the call over to Mike Havala.

Well, thanks David. The first topic that I'm going to cover is capital markets. As part of our growth plan we've been very active over the past 12 months, increasing our capital base while at the same time lowering our cost of capital. Last year, as most of you know, we added two new joint ventures with CalSTRS totaling about $2 billion. In the first quarter of 2006, we again increased our capital base with a new co-investment program with UBS Wealth Management for approximately $900 million. Thus all together we've added nearly $3 billion in new co-investment capital in the past 12 months. We're very pleased to add UBS to our private capital base, as they are a very well-respected institution with an enormous capital capacity.

So let me give you some specifics of our program with UBS. The new program gives us a capacity t to invest up to $900 million in long-term single-tenant net lease properties as the investment horizon is longer term in the seven- to ten-year range, and it also provides us a longer term income stream as well. UBS has allocated up to $255 million in equity, and First Industrial has committed up to $45 million in equity, therefore, representing an 85% and 15% equity interest respectively. The leverage in our program is expected to be in the 60 to 70% range. And then as Mike mentioned, we're off to a very good start as we've already invested nearly $100 million in this program in the second quarter so far.

One thing that I wanted to point out is that our new capital sources are a significant competitive advantage for us for several reasons. First, it gives us a lower cost of capital. Second, it allows to us invest in larger portfolios with capital availability at the ready. And then third, we can invest more quickly and with more certainty, thus improving our pricing. So all in all, the new private capital that we've arranged is a major engine of our growth. Please note that we provide a lot of disclosure on our joint ventures in our supplemental. We show the financial results for the joint venture entities themselves on page 8, and then we break out the income from joint ventures on page 37 of our supplemental, specifically under footnote AK. And as you can see there, it totaled $6.7 million in the first quarter '06, compared to $1.9 million with the first quarter '05. So a pretty substantial increase there.

With respect to the balance sheet, we continue to maintain our financial strength. We have a weighted average debt maturity of 8.7 years. 100% of our permanent debt is fixed rate, and we have a strong fixed charge coverage ratio of 2.7 times. With market interest rates generally rising, we're very pleased to have both a high level of fixed rate debt as well as longer maturities. It's a very strong combination.

Next let me talk about our guidance. With respect to FFO guidance for 2006, as Mike said, we expect 11% growth, and that's based on the midpoint of our guidance, which is $4 per share. This represents a significant acceleration in our growth rate. We're seeing all three revenue sources increase or expected to increase in 2006. First, NOI is expected to grow as occupancy and fundamentals improve. And second, our net economic gain is expected to increase as our expanded infrastructure produces more investment profits. And then third, our JV FFO is expected to increase up to 35 to $40 million in 2006, which is more than double where it was in 2005 at $16 million. So it's important to note is that we're already starting to see the increase in our growth rate. FFO per share in the first quarter was up 21%, and this follows an 18% increase in the fourth quarter of last year. So we're well on our way of achieving the growth that we've set up through adding substantially in our infrastructure and our capital base. So with that, let me turn it back over to Mike Brennan.

Thanks, Mike. Let me close where I began. The investments that we made in our business in 2005 are paying off in the form of accelerated growth in 2006, and as Mike just got done saying, our guidance is for 11% FFO growth for the full year. We're performing very well on capital raising, on our investments, and on the harvesting side of our business, and we do expect improving results from our portfolio as the year progresses. So, we're off to a good start for the year. The investments we've made in our platform and our people give us a great position in the marketplace, and it's that position in the marketplace that will be a distinct advantage, especially in a corporate arena, as the pace of dispositions and supply chain requirements accelerate, so with that, thank you very much. And moderator, we would now like to open it up for the questions. Thank you .

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Ross Nussbaum of Banc of America.

Thank you, it's John Kim with Ross. First question in regards to your core operations. If you look at your NOI plus the NOI you get from joint ventures, it actually declined about $2 million this quarter. So how do you expect to make up for this $2 million in loss from your core operations?

Part of that, John, a big part of that was because we were net sellers in the first quarter compared to being net investors in 2005. So I think that's where you see the biggest part of that change. With respect to the rest of the year, we do not expect to be net sellers, we expect to be about even on balance sheet with investments versus sales. I should note that in the joint ventures, we expect to be pretty substantial net investors in 2006, as you see in our guidance.

This question may be for Mike Havala, can you remind us what your policy is as far as classifying real estate held for sale?

Yes, basically it's when projects are under contract, then they're classified as held for sale. So you saw at the end of the quarter as of March 31st, we had quite a bit under contract. And that's what's listed and held for sale.

Okay. So going, as we go on through this year, we should expect about $700 million of these assets to be classified at some point in held for sale; is that correct?

Well, not necessarily. Because oftentimes because of the timing of when something goes under letter of intent versus under contract versus actual sale closing, that all might happen intra-quarter. So you won't typically see a very high balance of properties held for sale that is under contract, at the quarter end.

Okay, this is a follow-up question for David. How confident are you to have flat same-store NOI results for the rest of the year? I guess including this quarter, given you have a lot of leases welling over still in '06 and the leases expiring at a pretty high level at $4.28?

Yes, John, Ross. Actually, very confident. Let me give you the three primary reasons why. First of all, it's just the level of new leasing activity. Even in the first quarter, at 3.1 million square feet, the level of new leasing activity was -- it was actually one of the strongest quarters in new leasing in many quarters. So that's holding up very well. It's very strong actually. And going forward, based on discussions we have in process right now, on the new leasing front, everything looks in very good shape. And you know, with respect to rollover, we actually have less rollover to deal with at this point in the year than what we've had for the last three years. In fact, about 3% less. Supplemental states about 15.4% of our rents still rolling over the remainder of the year, and if you look at the average of the last three years at this point in time, it's closer to 18.5%. So we have less rollover. Number three is we just expect a higher level of retention. In fact, I think going over the next several quarters here, the rest of this year certainly, we'll return back to historical levels, I think. So when you combine new leasing, higher retention, and less rollover, you've got three very key primary reasons to think we're going to get it back up again, and I'm sure we will.

As far as your projections for '06, it's been trending down over the last couple of meetings, and the last conference call you said 2 to 4%, so I'm just questioning what happened in the last three months.

Right. Well, really I mean it's a result of the retention level at 58% is a good 10 percentage points or more below what our historic average is. So that was really the big reason there, John. And as I just explained, I don't think you're going to see that again, for all the reasons that I gave.

I made add to that as well, remember in the first quarter as we mentioned in our press release, the same-store number, the majority of that change was a result of things like straight line rent, FAS 141 adjustment, lease termination fees, and so forth. Those things we do not expect to occur going forward. So those were, in some cases, just accounting anomalies with respect to the comparison one quarter versus another quarter. Remember, the same-store number is a 90-day versus a 90-day period in the prior quarter. So you can have some volatility there with respect to things like operating expenses or recoveries or, again, accounting things that are not economic like straight line rents or FAS 141, which is where a lot of the change happened in this particular quarter.

Okay. Thank you very much.

Thank you. Our next question comes from Kristin Brown of Deutsche Bank.

Hi guys. My question, I was just wondering if you could talk a little bit about your outlook for cap rates. Do you see a lot of private capital in the market keeping them lower or do you think they're going to move with interest rates?

Kristin, hi, this is JoJo. Basically, what we've had some reactions or some requests from some of our buyers, and the reasoning -- in terms of price reduction, because of increasing in interest rates, but what's happening is that it's really being only used for negotiations, and we have not seen any changes in cap rates. There is significant -- continues to be significant supply of capital in the market. There's actually less product that's stabilized and ready to be sold to market than demand. So, that has been keeping the cap rates low despite the 65 to 70 basis points increase in the 10-years treasuries from first quarter of '05 to first quarter of '06. My forecast is that if the capital, the amount of capital subsides, you might see some cap rate increase. But remember also that when cap rate -- when interest rates increase, it's usually a sign of a stronger economy. And the stronger economy, what that will do is that that tends to push rental rate growth higher, and in so doing, what happens that investors are able to apply a little bit higher growth rate, and a little bit of a higher residual value that results in a higher valuation. Because most investors in the market are total return investors anyway. So I hope, Kristin, that answers your question.

Okay, thank you.

Thank you. Our next question comes from John Litt of Citigroup.

Hi, guys. It's Jon Stewart here with John Litt.

Hi guys.

Mike, what would same-store NOI growth have been if you strip out straight line rents and lease termination fees from both quarters?

Let me give you a number here that I think is appropriate. If you take out straight line rent and the FAS 141, which is in there as well, and your lease termination fees, that would bring same-store down -- same-store would have decreased by 2.7% during the quarter.

Okay. That's helpful, having a clean number. Thank you. My next question is I know you talked about the big expirations at the end of the year and that you expected occupancy to dip in the first quarter. My question is: How did the dip to 90.7% compare with your expectations? Did there wind up being another couple large move-outs that you hadn't expected, or was that even better than expected?

No, it was actually slightly worse than we expected, but that was due to one tenant, 245,000 square feet in our Baltimore portfolio that was a little bit on the fence as to whether they would be able to renew their customer or not. And in the final analysis, they were not able to. So that brought it down slightly. But I would say everything else was pretty much along lines of expectation. I would also just note that particular building that I just referenced, that's under contract to sell at a handsome profit at this point, too. So it looks like it's all going to work out for the best. But that was one anomaly that we had there.

Okay. I think JoJo mentioned in his comments that the transactions that you sold in the JVs during the quarter were well above the hurdle rate, so my question is: Is the increased guidance for JV FFO contribution, is that due to volume or basically fees? Being in the money on these transactions?

John, it's both. We expect that fees coming from increased volume. We would expect increased fees coming in from increased volume. We also are -- we have incentive payments, as you know, and those are being well into the money. So that's why we have forecasted an increasing JV income. In summary, it's fees -- the increase in fees instead of payments.

Okay. And my last question for Mike Havala is: What's -- what's the offset to the rest of guidance, given that you're upping your JV FFO contribution by $5 million, but you're -- nothing else ch-- at least the FFO per share guidance isn't changing, so what's the -- is it the occupancy drop coming in a little bit worse than expected that's the offset?

It is the fact that in the first quarter we were net sellers by about $73 million, and then also when you look at the timing of the buys and sells, that contributed to -- that was the biggest piece of it, if you will. And then just catching up for occupancy a little bit as well.

Okay. Thank you.

Yep.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Paul Adomato of Harris Nesbitt.

Thanks. Could you remind us of your definition of net economic gain?

Yes, basically net economic gain is what you sold a property for less the cost of selling, versus your cost basis, including all improvements, et cetera, that are into the property. So it's a cash -- how much money did you make on a cash basis on that asset, if you will.

Okay. I'm sorry. And so looking at the joint venture FFO contribution of 35 to $40 million this year, how much of that is attributable to net economic gains?

We don't break it down line by line, but the majority of that comes from incentive payments and fees. So the minority of that comes from net economic gains.

Okay. And given that your balance sheet is increasing and just the level of turnover is increasing, you're becoming a larger buyer and a larger seller, I was wondering if you could just comment on the pool of potential acquisitions and, if you feel like you'll be able to meet your acquisition targets for the next 18 months?

Sure. Paul, this is JoJo Yap. In terms I will discuss both balance sheet volume and joint venture volume. In terms of the joint venture volume, as we've discussed, we have about $541 million of development and soon to be constructed development, plus acquisitions already under agreement. So if you look at our guidance in joint ventures, we've given you an 800 to $900 million range so roughly, if you add what we've closed already today, and the pipeline, -- when I say close already, in the first quarter and the pipeline, that brings us to about 70% of our goal. In terms of our on-balance sheet, we've given you guidance in the 650 range, and just today we're -- I mean, in terms of first quarter, we're already about $225 million of development placed in service and acquisitions. And we have a -- approximately a same amount of pipeline that kind of gets us to about 60 or 70% of our target range. And so, if you look at both, and we still have -- we still have basically about eight months to go in the year to look for more opportunity. So overall, Paul, we feel confident that we will achieve our -- our guidance volume in terms of balance sheet and joint ventures.

Okay. And on the flip side, who is the typical buyer of the properties that you sell?

It's a wide range. That is one of the things that we have a core capability in. We sell to the highest-priced buyer. And there are four pools, Paul. Number one is the institutional buyers that represents all of the institutional capital out in the market. The second pool, I would say, is the private leveraged buyer. That is a very, very big pool of buyer, too, because only a certain percentage of the market really is owned by institutional capital. The third bucket is what we call the tax incentivize or tax-deferred buyer, where in all of the monies that are in 1031 exchanges need to find a home because there's a lot of tax-motivated buyers to defer tax into reinvesting in real estate. And the last pool is the user buyer, wherein they typically buy the building for their own use and not for investment. And we target that market because they typically buy well over the -- well below the cap rate and above replacement cost. So that's very, very important for us because we buy below replacement cost, we want to sell above replacement cost. For the first quarter of '06, the largest percentage of buyers was the institutional capital but it fluctuates really quarter by quarter. So I wanted to give you that color in the first quarter of '06.

Okay. Thank you.

Okay. You're welcome, Paul.

Thank you. Our next question comes from Stephanie Krewson of BB&T.

Hi guys.

Hi, Stephanie.

I get a lot of calls from investors who are concerned that your economic gains of the past can be attributed largely to cap rate compression. Well, I think anyone who's been selling assets in the last couple of years has benefited from that. Could you please comment on that? And, I guess to put it another way, give people -- explain to people and investors how you intend to make money on your capital recycling business in a higher cap rate environment?

Steph, this is Mike Brennan, and JoJo took -- gave a little bit of an explanation for it. I think it's very important for people to understand that our history as a spread investor, we move with the market. We gave an investor presentation on many occasions, and we showed difference between the cap rates that we buy and sell at. So -- historically. So I would hope that people would find comfort in the fact that we have been able to be historically a spread investor in good markets and bad. The reasons that we're able to do that are probably more important than the statistics. One reason has to do with the fact that we develop, redevelop, and acquire. So that gives us a lot of opportunities to look at. The other reason that we're able to do it is because we invest in five facility types. So you've got increasing deal flow coming from the fact that we're a five-facility type investor. The third reason has to do with the fact that we have a corporate real estate business, in which we can undertake complicated things that are more difficult for others. And then we accentuate those abilities by having buckets of capital, so that we can say yes to as many corporate customers as we possibly can. So, hopefully that would give people reassurance that it's not cap rate compression that's driving us, it's really the infrastructure. I think also it's important, too, Steph, one of the things that I mentioned was the pool of properties that we sold in this particular quarter, while we had them for 19 months, and cap rate compression has been going on for longer than 19 months, right?. So it's not properties that we harvested from 10 years ago. So it's properties that -- take a look at Rockwell and Le Nature's, right? The biggest sales we had this year were things that we commenced six -- three to nine months ago.

So it sounds like you're making your money at the table by not -- by basically getting in well below replacement cost?

Well, that's right. And really it's delivering a service that has value. I mean, there's no -- it's no secret to our customers that there's a price for the service of decomplexitizing things, and being able to take things in bulk and doing complicated things that help their strategic initiatives. The reason we get what we get is not because anybody's ill-advised. It's because we provide a major transactional event that helps them in their strategic alternatives. And that was the case with Rockwell. I mean, there's 27 buildings in 17 locations, different facility types in different locations, and we were able to underwrite it quickly in 30 days and close it. That has value for people.

And how many of these assets do you still -- of the Rockwell assets, for example, do you still own? Or have you -- because you mention that you've already sold some of those, and that transaction was, I think, late third quarter last year.

JoJo, the specifics on Rockwell in terms of how much we still own on that?

We have -- Stephanie, are you asking similar to Rockwell, or are you just asking --

Just looking at that deal as an example, as a sort of a case study for how you generate your economic gains.

Yes. Just -- just like what Mike said [inaudible-background noise] there was no cap rate compression from a year before, from first quarter '05 to '06. So the point being that if someone makes a profit within a year, that means it was not made -- it was not made due to cap rate compression. And this is the business that we're in. An active investor such like First Industrial has significant acquisition and redevelopment and reselling expertise. And this is the pipeline we're talking about. Out of the $541 million of joint venture pipeline that I just mentioned to you, Stephanie, $541 million of that is basically that kind of pipeline. Because if you look back at what we're trying to do in our redevelopment joint venture, this is the value-added joint venture. So significant portion of what we put in our JV, redevelopment-development portion, has a asset management plan within a 12 to 24-month period and does not rely at all on cap rate compression.

Right. But JoJo, can you just give us some-- what sort of detail can you give us as to -- okay you purchased 27 assets, how many have you sold and what has been your aggregate cash gain in that time frame? On those Rockwell assets?

Stephanie, I would not break down the cash gain, but approximately 65% of the value of the transaction has been sold. The Rockwell transaction. But we wouldn't -- our policies would not break down the net economic gain by transaction.

Okay. Thanks, guys, solid quarter.

All right, thanks, Stephanie.

Thank you. Our next question comes from Annette Masterson of St. Paul Traveler's.

I just have a really basic question. I apologize if you've already answered this, but can you just talk a little bit about what's going on on your G&A line?

Sure, absolutely. With respect to our G&A, we have invested substantially in our infrastructure over the last 18 months or so, and that's the cost that is increasing as we produce more revenues. So just a couple of numbers for you in the quarter, compared to last quarter, first quarter of last year, our revenues went up about $27 million, our FFO went up about $10 million, and our G&A went up between 5 and $6 million. So by investing in our infrastructure and having those costs, it's really an investment in revenue-producing people, if you will. So our revenues have gone up a multiple of what our investment has been.

So you're just saying that this is a salary-type expense?

Yeah, well, remember also the size of our company has grown substantially as well. In 2005, our capital base grew about 60% and our portfolio grew by about 42%. So again, the company has just become a lot larger, has a lot more capabilities than it had. We have more people. So it's, again, just the growth of the company that line item like others have grown.

Thank you.

You're welcome.

Thank you. Our next question is a follow-up from Ross Nussbaum of Bank of America.

Thank you, it's John Kim again. I had a couple questions on the UBS joint venture. Can you contribute existing assets that you own on your balance sheet to the joint venture? And how do you determine which acquisitions are contributed to this venture versus your other net lease venture with KFH?

Sure, hi, John, this is Mike. With respect to the UBS Wealth Management co-investment program, we are not prohibited from contributing assets on our balance sheet to the venture. We have not yet done that, and that's something that could be done, but it's not something that we necessarily expect to do for the bulk of that venture. With respect to the other net lease venture that we had with KFH, the Kuwait Finance House, that venture basically, the investment period ended at the end of 2005, and so for us to continue in that business, we want to add a lot more capacity and competitive capital, and that's what we did with respect to UBS Wealth Management. John, is that helpful?

Yes, it is. And then I also had a question once again on the net economic gains you had this quarter. Is there any way you can break out the $35 million, maybe on a percentage basis, on which assets you redeveloped versus assets that you repositioned releasing versus assets that you had sold with minimal capital improvements?

Well, we do break down in the supplemental in the footnote that line item into three categories, that would be land sales, merchant sales, and then what we call existing sales. And if you look in that footnote, there's a description of sort of what goes in each category. So I'm not sure if you're looking for something more than that?

Yeah, it could be either on this call or off-line, just something more as far as how much value you're adding to a lot of these properties. I think it's a question that's been recurring on this conference call.

John, on the merchant sale side, as Mike said, we can take anybody who is interested and show which ones were ground up and which ones were redevelopment, that would be pretty easy to do.

I think the other maybe important statistic is what the margins are and then what the IRRs are. And so we've talked to you about those numbers in the past and our margins in IRRs in the mid-teens have been very, very good numbers. So --

Okay, thank you.

Thanks, John.

Thank you. I would now like to turn the floor back over to management for closing remarks.

Okay. Well, thanks everybody for calling in, we appreciate your questions and your interest in FR,. As I mentioned we're off to a good start for the year, and we look forward to catching up with you at the [NAREIT] convention in the early part of June. Thank you very much.

Thank you. This does conclude today's first quarter results conference call. You may now disconnect and have a wonderful day.