First Industrial Realty Trust Inc (FR) 2006 Q4 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial Realty Trust fourth quarter and full year 2006 results conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, First Industrial Realty Trust. Sir, you may begin your conference.

Good morning, 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 may cause the Company's actual 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.

Thank you very much, Sean and welcome, everyone, to our fourth quarter and our year-end 2006 earnings conference call.

Before we begin, let me introduce the members of senior management who are here today, Jojo Yap, our 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 through our Capital Markets activity, balance sheet, and our guidance for 2006; and you have just heard from Sean O'Neill, our Senior Vice President of Investor Relations and Corporate Communications.

2006 was a great year for First Industrial. Our funds from operations were up 14.4%, funds available for distribution rose 23% and our dividend payout strengthened to 68% of FFO and 82% of FAD. Our success is directly attributable to our focus on corporate customers, starting with understanding their needs and then building the franchise to serve those needs.

As we said on our last earnings call and we said at investor day, customer demand is coming from several key areas. First, it's coming from the increasing volume of containerized cargo driven by the rising international trade. We see it coming from the need to reconfigure supply chains to accommodate the shipping, manufacturing and distribution patterns.

It is coming from the demographic shifts that are affecting states like California, Arizona, Texas, Florida and Georgia, which creates demands for various industrial facility types. And of course, it's been coming from the needs of corporations to dispose either of surplus properties or to sell and lease back critical facilities.

And to meet that demand, we have been building our resources in two big areas. The first is our capital sources. Most of you know that in 2006, we added a $900 million net lease venture to help our customers monetize their real estate through sale leasebacks. We also added a $950 million strategic land and development venture to take advantage of the long term development opportunities in major coastal and in inland port markets. We also increased the size of our first JV with CalSTRS to $1.6 billion and we extended the term to 2011 to accommodate a rising volume of infill development and redevelopment projects.

So when you combine the balance sheets with our JVs, our capital base is now approximately $9 billion. And these additions to our capital base make us uniquely capable of addressing, assisting customers with almost virtually any need in their supply chain.

The second area that we have been building our resources is our platform. In building the platform, we have operated under one doctrine -- give the organization every tool necessary to serve our customers and create value. So we have added acquisition and development personnel. And we have added it in both new and existing markets. And we have also increased our leasing and our asset management and our headquarters support.

As a result of having grown our resources, we have expanded our customer and our broker relations. For the sixth year in a row, I'm proud to say that we received top customer scores based on independent surveys. And we also completed a record of 57 corporate transactions which represent about 50% of our total volume.

Also as a result of increasing our resources, our total transaction volume in 2006 exceeded $3 billion. And this was comprised of 250 separate transactions, which is more than one transaction per business day. And I think this is a clear indicator of the capabilities of the platform.

And last, as a result of growing our resources, for the second year in a row, we were the largest investor of industrial real estate in the United States. That excludes industrial M&A -- i.e., the CenterPoint transaction. And while we were the largest investor in the United States, we still own less than 1% of the market, giving us tremendous opportunities to grow. And to that point, we entered 2007 with the largest pipeline in our history, now $1.9 billion.

Turning to the quarter, funds from operations grew to $1.03 per share. And that was a penny above the midpoint of our guidance range. And I am happy to say that these results were driven by increases in all three engines of growth in our net operating income, in our joint venture income, and in our net economic gain.

As we look back on 2007, I would like to highlight for you several key accomplishments. First, we raised significant new joint venture capital, as I mentioned. And we invested that capital in high growth markets. Additionally, a very large portion of this investment has been in land, setting the stage for a significant volume of new development.

Second, we saw improved occupancy and rental rates each and every quarter, which contributed to a full year NOI increase of 8.8%.

Third, net economic gains were at an all time high at $124 million, reflecting the combined efforts of our investment and our portfolio management and our disposition teams, each of whom had value, as we systematically buy and develop and then sell value added properties. Now, we had these same teams also propel our joint venture earnings to a record $53 million for the year, providing strong returns on capital.

But finally and perhaps most importantly, it was gratifying for all of us to see how well our investments in our people and our infrastructure are paying off. You know, and just to recap what I said as I started, we identified the key drivers of customer demand. We grew our resources accordingly. And by doing that we've created a new franchise that has set the stage for future growth.

And with that, I would like to turn the discussion over to Jojo.

Thank you, Mike. We had a very strong year in total investment, deploying nearly $1.6 billion of capital on balance sheet and in joint ventures. As Mike said, this makes us the number one real estate investor in the U.S. from third parties, and builds upon our number one position in 2005. The outlook is strong due to our record pipeline, both for acquisitions and our expanding development capabilities, supported by our significant capital capacity for JVs and our capital recycling strategy.

So, with that introduction, let me move on to the details of the quarter and the year. First, I will discuss our on balance sheet activities. Then, I will provide you with an update on our joint venture activities. Then I will close by reviewing our investment pipeline.

For our balance sheet during the quarter, we acquired 18 properties in 15 separate transactions for a total of $148 million. For the full year of 2006, we acquired 104 properties in 62 transactions for a total of $612 million.

On the development side, we placed in service two developments in the quarter totaling $17 million. For the year, we placed in service 16 developments totaling $214 million. As we have noted, that total includes build-to-suits for household names like Pier 1, Mary Kay, Staples, Walgreens and Solo Cup, as well as logistics firms Ozburn-Hessey and Jacobson, who are [reported] repeat customers. In total, balance sheet investment was $164 million for the quarter and $826 million for the year.

In terms of corporate transactions on our balance sheet, it accounted for about half of our total investment activity. Our focus on this key segment is producing more opportunities as other customers' supply chains involved in response to increasing international trade and demographic changes.

During the fourth quarter, our investment yields of 8.1% exceeded the yields on dispositions of 7.2% by 90 basis points. For the year, our investment yield of 8.4% exceeded the yield on dispositions of 7.1% by 130 basis points.

With regards to balance sheet sales during the quarter, we sold 32 properties in 20 transactions for a total of $187 million. For the full year, we sold 134 properties in 83 separate transactions for a total of $946 million.

Now, I would like to move on to our joint venture activities. In our JVs, we invested $116 million during the quarter and $737 million for the full year. The majority of our investments during the quarter were in our development and repositioning venture.

During the quarter, we also sold $206 million from our JVs, the majority of which came from our development and repositioning venture as we were able to create value quickly. For the year, we sold $591 million in our ventures with slightly more than half from our core venture and the rest from our development and repositioning joint venture. As in prior quarters, we exceeded the leverage returns we projected at time of acquisition.

Turning now to net economic gain, in the quarter, net economic gain was $22 million. For the full year, net economic gains were in line with our guidance of $124 million. 62% of our gains on balance sheet for the year were from merchant activity. On our balance sheet sales, we achieved an unlevered IRR of 13% in the fourth quarter and 15% for the full year. Our average holding period for all properties sold during the year was 2.9 years.

On to our margins -- our net economic gain margin was 14.2% in the quarter and 16.3% for the full year. It is important to remember that these margins are from sales of a wide range of investments, including [focuses], specs, single asset sales, portfolios and net [fees] properties, all of which have varying risk/return characteristics that impact margins. I also want to note that we have also taken advantage of the active investment climate, disposing of property that we believe will not achieve our future return objectives, and decided to redeploy this capital into higher-returning investments. Our outlook for after-tax margins on cost is in the 13 to 15% range for 2007.

Now, I would like to highlight some few examples of our investment strategy in action. First, let me discuss the first investment made for our strategic land and development joint venture. In this transaction we acquired a 356-acre land parcel that has direct access to the Union Pacific intermodal terminal located in South Dallas. We will immediately build a 475,000 square foot distribution center, as we are already seeing significant interest from customers who want to take advantage of this inland port. Our park has capacity for an another 5.7 million square feet. This is an example of an investment that is a perfect fit for our strategy to allocate more capital to inland port markets.

Moving on to our seaport investment. Last week, we announced the acquisition of an 88-acre land site, strategically located in the Port of Houston. This site is in a great location right in between the established Barbour's Cut Container Terminal, which is now at full capacity, and the new Bayport Container Terminal that is opening this month.

These ports in Houston are experiencing double-digit growth in containerized cargo volume. We plan to build two distribution centers totaling 1.3 million square feet with a projected total investment of $55 million. In addition, our park will offer direct intermodal access to the Union Pacific rail line, which will help benefit our customers.

We have also been investing in Southern California, which is positioned for strong demand for industrial space driven by growing international trade. In 2006, we acquired 1.5 million square feet or nearly 200 million in Southern California, particularly L.A. and Inland Empire.

We also continued to acquire more land last year in this market, and increased our total holdings to about 180 acres, giving us about 3.5 million square feet of additional capacity there.

Finally, I would like to [point out] sale leaseback transaction of Volkswagen. This is a good example of a corporate customer transaction in multiple markets.

We acquired [millions for upward] portfolio at three distribution centers in Dallas and the Chicago/Milwaukee market and the Toronto market. As we told you at investor day, we like the Toronto market, and we're looking to add our presence there.

Now to our investment pipeline. We define our pipeline as all acquisitions and developments under agreement and letters of intent, as well acquisitions already closed as of the end of the last quarter as well as developments to be placed in service. Our overall pipeline for balance sheet and JVs is approximately $1.9 billion, an all time high. About $1.1 billion is building and land acquisitions, and the remainder is developments. Of this total pipeline, we have closed $148 million of new investments since December 31st. You can find the summary of our pipeline in our press release.

Now, additionally, if you look at our land holdings, which will be an important feature for future development pipelines, they total nearly 2,200 acres, 1,600 of which have been acquired to our JVs since 2005. And again, we are focusing these investments at key infill markets and those that will benefit from expanding international trade and population shifts like southern California, Florida, Phoenix, and key regional infill markets. These land holdings can accommodate approximately 42 million square feet, or nearly $1.7 billion of additional development.

As we look at 2007, we expect that FFO from joint ventures as a percentage of JV sales will be lower than in 2006, as our sales will be weighted more towards core JV investment, which has lower margins than merchant investments.

Given the build up of our development and repositioning investments of our two other joint ventures with CalSTRS, we would expect FFO for JVs as a percentage of JV sales volume to trend back up next year and beyond.

As you've noticed, we have been directing more and more of our investments to markets benefiting from international trade, supply chain reconfiguration, and demographic change. As further evidence of our focus, more than 80% of our total pipeline I mentioned is in these target markets, such as L.A., the Inland Empire, Chicago, South Florida, Phoenix, and central Pennsylvania.

So in closing, we are busy putting our capital from our joint ventures and [recycling] efforts into higher returning investments so we can continue to create value. With that, I would like to turn it over to David Draft.

Okay. Well, thank you, very much, Jojo. I would like to start as I usually do with some brief comments on the favorable market fundamentals for the industrial real estate sector overall. And then after that, I will turn to First Industrial's portfolio results both for the quarter and for full year 2006.

Nationwide occupancy for the quarter was 90.6%. And that is up 10 basis points from the third quarter. For the year, occupancy increased 50 basis points. Industrial capacity utilization figures came in strong again at 81% in January. So overall, demand for industrial space is good and the supply/demand balance is favorable, as evidenced by positive net absorption in the fourth quarter of approximately 52 million square feet. And that was a slight improvement by the way from the third quarter.

New deliveries were approximately 44 million square feet. And that is up about 10 million square feet from the previous quarter. Other favorable indicators for the industrial sector include estimates for business spending growth to be a multiple of GDP growth in 2007 and investments and structures is expected to grow at double-digits.

So that's a positive backdrop. And with that, I would like to turn now to First Industrials on balance sheet portfolio results. And I would like to start with occupancy.

Occupancy in our portfolio increased to 94.2% and that's up from 93.1% in the third quarter. So that's a very strong climb of 110 basis points. We were able to deliver these results due to a solid level of new leasing and good retention. And we believe that both of those things reflect our execution on our objective of providing exceptional customer service.

In total, we leased 5.6 million square feet during the quarter, and we retained 65% of our expiring square footage in the fourth quarter and a solid 73% for the year.

I would note the majority of our markets have performed well in terms of occupancy. Our performance was very strong on the coast in regions such as southern New Jersey and Los Angeles. In both those regions of course supply is tight and driven by international trade. We had very good activity in Tampa as well. There, there is really favorable demographics as we know, and a limited supply of industrial properties and industrial zoned land for future development.

The Baltimore/D.C. market and Indianapolis markets continue to perform well. And we also saw occupancy improvements in several of our hub markets like Chicago, Dallas and Atlanta.

So demand for space was broad based. The consumer products and retail segment, including companies like P&G, Target and Best Buy were active during the quarter, as were construction suppliers and the petroleum industry too.

With all of that, we are now projecting our average occupancy for the full year 2007 to be approximately 93%. Again, that's an average and that's up from our 2006 average of 92.5%.

So at this point, I would like to turn to NOI. First of all, total NOI for the year 2006 was $261 million. That's up 8.8% from the $239 million for the full year 2005. This increase in NOI was largely driven by higher occupancy and rental rates turning positive.

Our same-store NOI on a cash basis for the quarter was 2.5%. And for the year, the cash change was 2.2%. We would also just like to note that we have refined our same-store calculation to be a better reflection of our business and more comparable to our industry peers. The population in same-store includes properties that have been in operation throughout the full quarter of both the current year and the prior year and that were in operation as of January 1, 2005. I would say also that that includes all operating properties, as well as developments that were completed by January 1, 2004. Developments and redevelopments which were in process in the prior period are not included in the population.

Please note that we describe our methodology in footnote (am) of our supplemental. And I would also note that under the previous methodology, which was a rolling quarterly measure for our stabilized properties, the fourth quarter figure on a cash basis was a positive 1.3%. As we look ahead to 2007, we see same-store averaging 2 to 3% positive. And that's on a cash basis.

So I would just like to at this point, to turn to rental rate changes. Those changes were positive 3.0%, which builds upon our positive 1.5% in the prior quarter, the third quarter.

For the full year, rental rates were up 30 basis points, and that is as compared to negative 4.4% for the full year 2005. So that's an increase of 470 basis points in rental rates year-over-year. We expect rental rates to remain positive throughout 2007 as we renew leases in originated in 2002, 2003, and 2004 -- and of course a much improved environment now. Rental rate changes were positive as well throughout most of our regions. I think it was about 80% or so.

Turning now to lease cost, lease cost in the quarter were $2.31 per square foot and we averaged $2.17 for the year. In 2007, we expect leasing costs will be roughly similar to 2006.

So I would just conclude by saying that there was a very good overall business environment and very good, strong demand for industrial space. Combining with the solid levels of activity and opportunities we see in virtually all of our markets, we really believe that our portfolio is poised for even better things in 2007.

So I will conclude there and turn the call now over to Mike Havala.

Well, thanks, David. 2006 was a significant year for us in raising capital and expanding our platform. So let me recap 2006 for you from a capital markets activities perspective.

Most significant were our private capital raises. During the year, we had three large additions to our private capital capacity. First in March, we entered into a $900 million coinvestment program with UBS Wealth Management.

Second, in August, we announced a new joint venture with CalSTRS, which is a $950 million joint venture which targets land positions in development, focusing in markets that are benefiting from the growth of international trade and positive demographics.

Third, in December, due to the success of our development and repositioning joint venture, which was our first joint venture with CalSTRS, we expanded its capacity from $950 million to $1.6 billion.

We also raised public capital in 2006, about $600 million total in preferred stock, debt and convertible debt. These capital raises helped us lower our cost of capital through the repayment of higher cost securities. Most of the benefit of this will be in 2007 and beyond, just simply due to completing these transactions during the year in 2006 and thus getting only a partial benefit in 2006.

Next, let me walk through our capital position as of year end. As of December 31, our total capital base was $9 billion. This includes both our balance sheet and our joint venture capacity. As of December 31, we had deployed approximately $6.4 billion of the $9 billion total capital base.

So let me provide you some more detail on this. In our $900 million UBS net lease joint venture, we have deployed $277 million. So we have over $600 million remaining in capacity. In our $1.6 billion development and repositioning joint venture with CalSTRS, we have $478 million invested or under development. But remember, the equity commitment is revolving. So as we recycle capital, we can redeploy that capital. So our capacity here is theoretically unlimited as long as we don't exceed $1.6 billion invested at any one point in time.

And then in our $950 million strategic land and development joint venture, we have invested $19 million as of year-end, so we obviously have a significant amount of capacity here. And note also that this equity capital commitment is revolving as well. So that rounds out our capital capacity in our joint ventures.

Regarding our balance sheet and financial ratios, we are in a strong position. We have 40% leverage, and that is measured on a debt to market cap basis. For the year 2006, our fixed charge coverage was 2.8 times. 100% of our permanent debt is fixed rate, with over an eight-year weighted average maturity. And 96% of our assets are unencumbered by mortgages. In addition, for 2006 our FFO payout ratio improved to 68% and our FAD payout ratio improved to 81.8%.

Next, let me talk about our fourth quarter and full year numbers. Our FFO per share came in at $1.03 and $4.13 respectively. Note that we had raised our guidance for FFO per share twice in 2006, once from a midpoint of $4.00 to a midpoint of $4.10, and then from a midpoint of $4.10 to a midpoint of $4.12. So we are very pleased with the year as we saw 14% FFO per share growth -- by the way, beating all but one in our sector.

Our FFO from joint ventures or private capital income was our biggest pleasant surprise during the year, as we came in at $53 million, exceeding our original expectations, and up from about $16 million in 2005. The significant increase here was a function of having more capital in place. More people and of course doing a number of very profitable transactions.

The last thing that I wanted to mention with respect to the quarter is that our joint venture income and our net economic gain exceeded our previous expectations, but this was offset by higher interest expense in the quarter and G&A expense, due in part to writing off approximately $1 million in pursuit costs.

Regarding our disclosure, we added some further disclosure in our supplemental this quarter. One thing that we did is we have bifurcated income taxes into those associated with net economic gains and those associated with our joint venture income. Previously, virtually all taxes were related to net economic gain. But as our joint venture activity increased substantially in 2006, taxes are now related to this as well. You can take a look at footnote (ak) for some further information on this.

And then the last area I wanted to discuss is our guidance. In October, we initiated our guidance for 2007. The details and components have been updated and are provided for you in the press release, but note that we are reaffirming our FFO per share guidance for 2007 of $4.40 to $4.60. And note that we have increased our expectation for joint venture income and net economic gain, and this was offset by a higher projection for G&A expense, in part as a cost of producing higher revenues as well as an expected further expansion of our platform in 2007.

So with that, we are very pleased with what we accomplished in 2006, and we look forward to another strong year in 2007. With that, I will turn it over to Mike Brennan. Mike?

Very briefly before we open it up for questions, I just want to re-emphasize that 2006 was a great year for us. And as you noted from our comments, we obviously look forward to another strong year in 2007.

Everybody noted that there is significant capacity within our organization, whether it is in terms of financial capacity or the productivity of our work force. So we expect FFO will be up 9% in 2007 when you use the midpoint of our range.

David pointed out that the fundamentals are also positive. The macroeconomic outlook is favorable with increased business spending and growing levels of international trade. And so we think we are in a great position to take advantage of these favorable trends.

And so with that, moderator, we would like to open it up for questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Ross Nussbaum from Banc of America Securities. Go ahead.

Thank you and good afternoon, everyone. A couple of questions. First, it looks like in the fourth quarter, you had just under $22 million of fees and incentive payments. Can you break that out between what was recurring management fees and what may have been one time acquisition, disposition, financing kind of fees?

Yes, hi, Ross. Basically, if you look at -- let me give you 2006 as the whole year. More than half our joint venture income came in the form of fees and our related -- our pro rata share of the economics of the joint venture. So between 50 and 60% of our 2006 joint venture FFO came from fees and the pro rata share of the economics in the joint ventures. Ross, does that answer your question?

No, no. What I am asking is, I am looking at the footnote in your press release (ak), where it says that your fees and incentive payments in the fourth quarter were $21.9 million.

Yes.

So, I am trying to get a read on how much is recurring and how much of that number were one time acquisition, financing, disposition type fees.

Sure, I understand. We don't have that breakdown right here, Ross. But again, I think, if you look at the entire year for 2006, more than half of our joint venture FFO came in the form of fees and our pro rata share of the joint ventures.

It looks like more than that. If I am reading this footnote correctly, it's showing you get $52.7 million of FFO from joint ventures, with $49.5 million of that coming from fees and incentive payments.

Yes, that is correct, $49 million. But remember, that is fees and promotes are included in that $49 million. So when I said more than half came from fees, I was excluding that part that comes from promotes. So again, more than half came from fees and our prorata share of the operations from the joint ventures.

It is just kind of hard to see that, because you are lumping the promotes and the fees together, I guess.

I understand what you are saying.

Okay. And the other question I have is with respect to the breakdown. And this is also in the footnotes. This is footnote -- I think I lost my place -- well, I will just try to remember it then -- I think it is footnote (L), where it basically shows that about 63% of your economic gain in 2006 came from merchant sales, which is fairly consistent with what you had in 2005, if you look at land sales and merchant sales together. So as we look forward to 2007 and even 2008, do you think that that's what the break out is probably going to look like?

Yes, merchant sales we estimated would represent 60 to 65%.

So that's a pretty good run rate going forward here?

Yes, Ross.

Thank you.

Your next question comes from Michael Gorman from Credit Suisse.

David, I just had a question for you. I apologize if I missed it. What is the rental rate increase that you are looking for in 2007 across the portfolio?

Yes, Michael, we are looking for average of about 3%.

Okay. Great. And then, Mike, going back to the net economic gains and I guess the JVs, what are you looking for in terms of the G&A for both categories in 2007?

Yes, let me give you the G&A overall with respect to 2007, what we expect. For 2007, for the whole year, we expect our G&A to be about 10% higher than where it is in 2006. And again, that is a function of you know, as Mike mentioned, adding to our resources to take advantage of all the opportunities that we are seeing in our industry and in the markets as well. So about 10% higher in 2007 versus 2006.

And that 10% would apply to the JV G&A and also the net economic gain G&A?

In total. I was giving it to you in total. Where it breaks down line by line really is a function of the specific activity for those during the year. But for the whole year again, we expect our G&A to be about 10% higher in '07 versus '06.

Great. And then, Mike, just one last one, I guess. In all your dealings with the corporate customers. You talked about international trade a bit. Have you received any requests to go overseas and do a build-to-suit outside of North America?

Yes, I'll give it to Jojo.

Yes, we have been requested to provide the same service that we provided our customers here in the U.S.

I mean, what kind of time frame is that? Is that something you would do in a JV or is that an '07 event?

We haven't announced any plans to service our clients outside of the U.S. But we have been requested.

Okay. Thanks.

Your next question comes from Michael Bilerman from Citigroup.

Hello, this is [Irwin Grossman] with Michael Bilerman and John Litt. What are your development start expectations for 2007?

Yes, Hi. It is Jojo. In terms of development activity, we expect that the total of basically our starts and our land acquisitions would be in the $750 million range for 2007.

And how much of that is in JVs versus on balance sheet?

About 70 -- I would say about 60 to 70% of that will be in JVs. So, more than a majority portion. I just also want to highlight, Irwin, that if you put together all of our construction in progress and all of our developments that are soon to be started and under construction, they are approximately $809 million today.

Okay. And of those development starts, how many are you targeting to sell versus to hold?

Well, most substantially, most of the developments in the joint ventures are going to be targeted to be sold at the appropriate time, when they are stabilized. And on the balance sheet, it really depends. You know, we have to make a decision at that time when we apply basically our capital allocation.

Irwin, this is Mike Brennan. Most of those that we start, that Jojo is talking about, will not be monotized in '07, of that batch that Jojo described. But some would be.

And one more question. It looks like your disposition guidance, your gross proceeds went up in proportion much more so than the economic gains. Can you comment on that? Is that an issue of margin compression?

Let me comment on that. Based on our pipeline, and based on our analysis of our pipeline, we are going to be at about a 13 to 15% after-tax margin. And basically, that really -- that's where our sales volume guidance comes from, basically on balance sheet.

In terms of JVs, as I pointed out before, a majority of the sales is coming from our core venture, wherein the margins are lower than merchant activities. So you will see that the JV FFO as a percentage of JV sales volume trending up. But you know, we are comfortable with a 13 to 15% after tax margin on cost for on balance sheet sales.

I guess the question is I guess it looks like your cap rates that you are looking at to buy and sell at have compressed quite a bit from your original guidance for '07. Maybe you could comment what changed in that relatively short period of time?

Sure. It hasn't changed. It hasn't changed a lot. We have always been guiding in the 150 basis points range. In fact, if you look at since 2000, for the last six years, our spread, we have been very successful in investing in a yield [higher in] dispositions.

The spread has ranged from about 99 basis points to about 187 basis points. So the average for the last six years has been in the 143 basis points range. Irwin, you will see that go up and down, because that's just the nature of the business. But our focus is to make sure that whatever we produce by development or whatever we acquire in terms of redevelopment, we got to have a spread over what we can sell things for to continue to create value.

Right, that is clear. But the investment cap rates from your old guidance is 8 to 9. And now it is 7.5 to 8. And you disposition cap rates have fallen to 6.5, 7.5 from 7 to 8. I am just wondering -- while your spreads appear to be the same -- at the low end, obviously it is about 100 basis points -- what changed that caused you to drop your numbers by 50 basis points at the low end on both of those?

Good question. You know, what has happened in the industrial marketplace really -- let me address the sales side first -- is that overall, actually average cap rates in the U.S. has been hovering in the 7% range. And when you go to the coast, it actually goes as low as 6 and sometimes sub-6. And when you go to the Midwest, it goes a bit higher. So we felt it was a more proper reflection of ongoing cap rates. (multiple speakers)

(multiple speakers) indicated a little bit of a change in the strategy, where you are going into markets which are maybe a bit competitive, a bit more richly priced, and therefore, cap rates are down? Or is it that your core strategy -- you have just seen cap rate compression in your core strategy?

Hi, this is Mike. The change there -- which was small, about 50 basis points was really just a matter of fine tuning based on what we have been seeing. If you look at for example our sales in 2006 at about 7.1, we just wanted the range to reflect a little bit more of where we are coming in closer to the mid point. So it was a matter of fine tuning rather than a major change in how we view the market place and so forth. Just a little more updating and reflecting of what our experience has been and what we see going out into 2007.

It is Michael Bilerman speaking. Maybe you can just talk about it -- even though you increased the cap rate on the acquisitions and lowered them -- you declined them both on the acquisitions and dispositions, the net volume still remained the same or it went up by $100 million. And so if you are having an 100 million of proceeds on the same spread, that would cause accretion. And it looks like your economic gains also went up by $5 million or $0.10. So, what are the offsets to guidance range staying the same when you have had the upside from the net investment activity and from the gains?

Yes, good question. It's something I did try to address in my prepared remarks. But let me just reiterate that, is that, yes, we did up our guidance for economic gain by about $5 million in 2007. And the offset there really is our expected investment in our infrastructure, in other words, G&A. So again as we expand the Company, grow the Company, see the opportunities that Mike and Jojo were talking about, we are just investing -- continuing to invest more into our infrastructure. So that was the offset.

For both the gains and the net investment activity?

Yes. Yes, it offsets the gains.

Now the G&A -- is it more people, or you're paying the existing people more? Is there any sort of comp plans coming into play? Or it is really just enlarging the company?

Mike, this is Mike Brennan. I described in my remarks that it is a combination of things. It is an increase in acquisition and development people for new and existing markets. We would anticipate opening up a Toronto office. We have opened up a Seattle office.

We are also increasing our headquarters support, our marketing, some of the back room accounting, research, due diligence support, asset management, leasing people, et cetera.

So, as Mike also mentioned we have got close to $2.6 billion in additional capacity. Our goal is to be number one, two, or three every year in acquisitions and number one, two, or three every year in developments. So, we are adding correspondingly to our G&A in order to do that.

To a broader question, which I think is quite appropriate to ask, was it -- been a wise decision to do these things, xecause we are fully aware of the risks that we take when we undertake hiring, opening up new offices. As we look at the large growth opportunities out there and we look at what the organization has done, we know that we increased G&A by $21 million in '06, but we increased revenues by $83 million. So, right now the decisions we have made regarding the business are pretty good.

So, you know, I think net net, that is sort of our viewpoint on that. So we are going to be careful to make sure that as we make these investments in infrastructure and people. We want to be quite careful that we are able to make them pay off. And as we said, we like what we see so far. The progress that we have made so far is pretty good

I apologize. I had missed your opening comments. I was on another call.

That's quite all right. Thanks.

Your next question comes from Jamie Feldman from UBS. Go ahead.

Just a quick follow up to the International discussion before. Do you have interest from tenants or potential tenants for build-to-suits or for corporate sales?

Both.

Okay.

It's the international -- I mean, there is a little bit more corporate ownership outside the United States in international markets than there is in the U.S. So naturally it would be both.

Can you just walk us through briefly the fee stream on the development JVs in terms of how much you collect when you just own the land versus how much you collect once these buildings are built?

Yes, generally, when you do development and joint venture, you don't, as much as we would like to, but you don't collect fees when you just own the land. It is usually when you start doing the vertical that you get fees. And those are development fees. And then of course, when you lease it up, there would be leasing fees involved as well. It is really when you start to do the vertical that the development fees kick in.

Okay, so you don't get anything on assets under management just for buying land?

Well, it is different on different ventures. But we do have an asset management fee in some of our ventures as well. But again, the majority -- the bigger impact item is certainly when we start doing vertical, the development fee associated with that.

Okay. And then, David, can you just briefly describe if you have seen any slowing of domestic demand based on a slowdown in housing or housing-related tenants?

You know, not anything appreciable. And it is -- I think what is happening, what we are seeing particularly in the regions where we lease to -- more heavily to the construction and supplier industry, what we are seeing is that, you know, business spending in the commercial, industrial and retail side of construction has been very strong. And so as housing has definitely tapered off some, I think these other sectors of construction have continued to remain very solid.

So, our portfolio, you know, is really very diverse, geographically, from a facility type standpoint, from a tenant size standpoint. So we feel like we have got a lot of safety in our diversity. And because of those other factors I mentioned as well, we have really been holding up very well in that regard. Pleased so far.

All right. Thank you.

Okay.

Your next question comes from Sri Nagarajan from RBC Capital Management.

Thanks, couple of quick questions. First, Mike, I think you outlined your available capacity in your joint ventures. (multiple speakers) you had outlined [latest] capacity that are available in joint ventures, and obviously, there is room left for expansion. What do you think your prospects of increasing the capacity are in '07? And how are your investors feeling in terms of increasing U.S. industrial exposure?

Yes, with respect to our capacity, you know, as we mentioned, we d have a substantial amount of capacity. And again, that ties into and is matched with the opportunities that we see.

But with respect to what capital sources -- how they are viewing the industrial sector -- very positively. What you see is typically, institutions have a difficult time fulfilling their allocations, not only to real estate but also fulfilling their allocations to industrial. When you look at the large industrial platforms out there that are national in nature, there really are not many. So our platform is something that is demand.

But again, it is difficult for many institutions to fulfill their allocation to industrial, partly because of the small size per building -- it is difficult to get a lot of capital out all at one time, like you can in some other sectors like office and so forth.

So, again, that is something that -- really the way we look at that is it really increases the value, the platform that we have. And I think given all the capital that we have raised over the last few years, I think hopefully you view that as acceptance of that.

I think the other thing they like is where we are allocating the capital. When you go and you look at the investments we have made in markets where we can benefit from international trade, the absorption is a multiple of the national average. As we seek out intermodal inland port areas such as Jojo described, we anticipate that the absorption should be a higher portion of the national.

When we look at the great success we have had in Florida and in Arizona, you know, if you came down to Phoenix and you saw Kevin Czerwinski present, you realized that we have done a brisk trade in building and developing multiple facility types where there is strength in demographics.

And then our opportunistic business that we have in the regional markets and in our surplus acquisitions of corporate, they like that too. So, you know, so I guess I would say that not only are they desirous of the industrial product type, but I think it is important to realize where we are putting that money to work at.

Just a quick couple follow ups on the guidance. Number one, on the JV FFO guidance of 55 to $60 million, I think there was a previous question on what happened in '06 versus in terms of the fees and pro rata gains you had expressed [about] more than 50%. Now looking forward in '07, I think you also described that the sales are going to be minimal. Give us a flavor of how this could break down as core operating gains and incentive fees?

Sure. For 2007, I think the mix is going to look similar to 2006, maybe even a little bit more weighted toward the fees. But I think 2007 will look very similar to 2006 where, you know, between 50 and 60% of our income from joint ventures is coming from the fees and from our pro rata share of the economics and the operations of the joint ventures.

One thing I should mention with respect to the incentives and promotes and so forth. The way we structure our ventures is that we get those promotes currently as we recycle and sell and monetize assets. And so that is something that is very recurring for us. It is something that since we started these ventures, we have been getting every quarter. And we would expect that to continue.

So it is different than when you have other types of private capital, when you have funds that might reprice every three years and your promotes only happen once every three years. In our situatiotn, it is very different from that. And I am glad you asked the question or maybe even [raised] the question so we could emphasize that, because this important thing to understand is the recurring nature of all the economics from the joint ventures, even including the promotes.

One last question again to tease something out from a previous question earlier. Obviously, your guidance brought down cap rates. And you expressed that it's a function of the shift to the coastal markets. Now Jojo, maybe you can just qualitatively talk about -- in terms of the risk/return profile where you are vis-a-vis due to the shift compared to a Midwest market focus in terms of both liquidity, returns and risk?

Okay. Risk/return, Sri -- Basically, what you have -- the difference really lies in just the rental rate growth and yields. What you typically -- global, this is now 30,000 foot level. Basically, in the Midwest, you have higher yields; basically, slower rental rate growth rates. And then in the coast, you have lower yields and higher rental rate growth rates.

But as a total return investor, you have to focus -- we focus on total returns on an unleveraged basis for our balance sheet. And so the way you get there for markets where maybe you have lower rental rate growth -- you have to have to achieve a higher yield. And for those markets that you might have a higher rental rate growth rate, then you can accept somewhat lower yield. So that's why you have a range of cap rates.

Vis-a-vis our joint ventures, our investment strategies there are strictly within our joint venture. For example, the development repositioning joint venture is immediate development or immediate repositioning properties and then stabilize and then harvest the value.

In terms of our strategic land venture, it is longer term, Sri. It is really identifying large land sites in the path of growth, where it is benefiting from supply chain reconfiguration, international trade, and demographics. Those are basically the investment strategies.

In terms of returns, it is wide, meaning that you know, across all our platforms, you can basically say we are looking anywhere from a levered 10 to a levered 20%, because that is between all our buckets. I hope that provides you sort of the range.

Okay, great. Thanks.

Your next question comes from Stephanie Krewson from BBT.

Hey, guys. Gosh, so many great questions already. I am left with just a couple mundane ones. This might be a question for David Draft. Could you walk me through, just refine really quickly what average cap rates would be appropriate to use for your different facility types -- bulk, light industrial, R&D, regional warehouse and manufacturing?

This is Dave. I am going to redirect that over to Jojo over here.

Stephanie, hi. The range would be about 75 basis points range. And it would range anywhere from 6, I would say 6.25 to 7.25 -- you know, again -- and basically, I would say the bulk would be at the lower end. And basically, the [flex] would be the higher end.

But across the U.S., if you look at statistics based on our research, the widest spread between bulk and flex, 75 basis points. The narrowest spread is about 50 basis points.

That is helpful. Second question, you guided for average occupancy for the year this year of 93%. That implies obviously a decrease from where you ended this year. I am guessing that rather than anticipating big vacancies coming on that perhaps you are anticipating just the delivery of some developments that aren't stabilized or acquiring some vacancy opportunistically. Would that be an accurate assumption?

Stephanie, this is Dave. Let me just say a couple of things there. First of all, I think the more meaningful measure on occupancy would be the annual averages. So if you look at 2006, the average there was 92.5%. Yes, we ended the year at 94.2, but average was 92.5.

So as we go into 2007 and we project our average there, we are at 93% on average. So we got a 50 basis point really increase year-over-year on the meaningful stat.

I would also just say this, Stephanie, that we are also pushing rents as occupancy is increasing. So, when you are pushing rents, you are probably not going to eke out the absolute highest occupancy percentage that would be possible. But it is a good play because you are getting more rent on the other side. So we are not -- it is not all about just getting the highest possible occupancy number. We want NOI. And we get that through rents increasing as well.

I hope that answers it. Anything else on that one?

No, that's it. Great year, gentlemen.

Thank you.

Your next question comes from Cedrik Lachance from Green Street Advisors.

Can you walk me through your old same-store definition and the main components that have changed into your new same-store definition?

I sure can, Cedrik. Let me -- I will try to say it a little bit differently with the same meaning as what I did in my prepared remarks.

Under the former method, Cedrik, the same-store population changed each quarter on a rolling basis, whereas under the revised method, there is the additional requirement that the properties must also have been owned as of the first day of the preceding calendar year, which in this case would be 1-1-05. When we're talking about the 2006 same-store pool, it would have been owned as of 1-1-05.

And this also now includes all of our operating properties, whether stabilized or not, as well as our development properties that were completed at least 12 months prior to that first day of the preceding year -- so in this case, 1-1-04. It is probably easiest to think about it in terms of 2006. So development properties had to have been completed by 1-1-04. Then they go right into the pool. And other properties needed to be owned by 1-1-05. And then they go into the pool.

And if I could just take a moment also just to reflect upon something here,that both methods really reflect substantially the same population of properties. The revised method is more inclusive and, we think, a more complete picture of the comparative performance of all of the operating properties. And it is also, you know, similar to the methodology that is used by our peers. So there too I think relative performance can more readily be discerned. Does that answer your question, Cedrik?

Yes, very well. Just one extra question there. So you include as well the out of service portfolio that is about 5 million square feet this quarter?

What we do is if it was owned by 1-1-05, it goes into the pool. (multiple speakers) So the answer (multiple speakers) is yes.

So whether you have it in the other (multiple speakers) or not -- okay, great.

And a question for Jojo. When I look on page 4, your build-to-suit for sale revenues and costs, there seems to be only a 2.2% margin on what's been reported for the quarter. And I don't know if it is one [asset] or multiple assets. Can you help me understand what compelled you to make this investment?

Okay, I'm looking at page four.

On page four, you have got build-to-suit for sale revenues, build-to-suit for sale cost. The margin there is about 2%. So I am trying to understand why you made that investment?

Yes, that is the first kick off investment we had in the Terminus Park in Atlanta. It was the first build-to-suit for Staples. And basically, that allowed to put infrastructure on the ground, road infrastructure. It was a great corporate client that we could put in there. And there was basically a fixed price agreement.

So it was a build-to-suit sale. Basically, we built it for the tenant, and the tenant wanted to buy it. So there was no -- first of all, number one, no risk for us -- good credit tenant buying other building at completion. Second, it was a good way to kick off our [park].

What would you expect in the future at this park in terms of margins?

We are almost done actually in that park. We have basically built out the rest. We built a spec building. And then we leased to Viking Office Products, Cedrik. And we have one last spec building going on in that park.

And so you are expecting margins there that would recoup that would be sizably greater than the 2% you had in your kickoff tenant? Is that it?

Yes.

Okay.

That's the plan.

Okay. One last question -- just on underwriting. Le Nature's for which you built a building in Phoenix went bankrupt or is in the process of going into Chapter 11. That is obviously a building that you sold shortly before they did go into bankruptcy proceedings. Is there any danger that you have any fallout from this, one? And two, can you walk me through a little bit the credit underwriting that you take, that -- your approach to credit underwriting on build-to-suit?

Sure, okay. We don't expect fallout, first, to answer your question. We did not retain any equity interest in that transaction that we sold. So it is 100% sold. We don't have any equity risk going forward.

In terms of credit, our credit underwriting in all of our developments or redevelopments and build-to-suits is real estate based, meaning that, first of all, the building that we develop has to underwrite based on the real estate, meaning that we limit our investment to the real estate value of the property. So, in essence when you do that, what happens is that the worst that you should be able -- you should suffer is the down time, the leasing commissions, and the tenant improvements that you have to incur and some interest in capital cost carry to the extent a tenant leaves. So that is really our standard underwriting.

Now, when we build for good credit tenants, meaning that those are A rated, creditworthy rated tenants, then if we are asked to amortize [of] above average improvements, we will do that. In this case, we did not.

Now I want to point out that the land value alone on this site today is in the $20 a square foot range. It is one of the highest traffic valuable location in Phoenix. And that has contributed to the high price per square foot. But it is market in Phoenix. One might say that it is high priced. But it is market in Phoenix.

Thank you.

Thank you. Your next question comes from David Taylor from David P. Taylor and Company.

Thank you. I know that numbers in any one quarter can be out of line. But the spread between the yield on asset purchases and dispositions in the fourth quarter declined to about 90 basis points which to my memory is about the lowest I have seen it. Was there something peculiar in the fourth quarter? Do you expect this to run back well over 100 basis points going forward?

No, it is -- again, spreads within quarter to quarter vary. I would like to point out that still going forward we do expect to be in the historical spread in the mid 100s and the reason for that is that we have more visibility in the pipeline. But quarter to quarter, it does change.

So, also, I want to point out that this is available in the supplemental. If you look at 2006, we were very successful in placing in service a significant amount of newly built state of the art distribution centers on a build-to-suit basis. These properties in the market today would trade anywhere in the low six cap rate range. So although we always track our comparative performance in our pro forma, our yields and placed in service development vis-a-vis our current sales -- I just want to point out that in development, a significant amount of the placed in service is coming from state of the art, build-to-suit developments that are leased long term to good tenants. So, I hope that answers your question, David.

Okay. Thank you.

I think we have time for one more question.

Your final question is a follow up question from Michael Gorman from Credit Suisse. Sir, go ahead.

Just a quick follow up for Jojo. Could you give us a little bit more color? You mentioned in your prepared remarks that you sold a couple of buildings during the quarter that weren't going to meet your return expectations. Was this just a function of getting out of some markets that you didn't want to be in? Or were these recent acquisitions where the underwriting didn't turn out to be what you thought it would?

Three reasons. One, most of them, if you look at 2006, most of the sales came from the Detroit market and the Texas market. And if you further look into the detail, we sold -- the properties were in the sub markets were generally weaker than the overall market, meaning the absorption that we saw in a particular submarket within where we sold our properties were particularly weaker. So our forecast was that these properties are going to perform below average in terms of cash flow growth vis-a-vis our portfolio. So basically, we sold these assets. And basically at the end of the day we sold the assets with a slight loss.

Thank you.

Okay. Well, I would just like to thank everyone for their participation and your questions. And I just want to mention that for those that are going to be in the New York City area next Thursday, March 1st, First Industrial and myself and Mike Havala will be at the New York Society of Security Analysts REIT Conference. So we'll be there. And if you are there, we look forward to seeing all of you. So until then, thank you, and we will talk soon.

This concludes today's First Industrial Realty Trust conference call. You may now disconnect.