First Industrial Realty Trust Inc (FR) 2007 Q1 法說會逐字稿

Good afternoon. My name is Takia and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial Realty Trust first-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to First Industrial Realty Trust.

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.

Okay. Thank you very much, Sean and welcome everybody to our first-quarter 2007 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 pipeline; David Draft, Executive Vice President of Operations who will cover our portfolio results; Mike Havala, Chief Financial Officer who will discuss our joint ventures, balance sheet and guidance for 2007 and you have just heard from Sean O'Neill, our Senior Vice President of Investor Relations and Corporate Communications.

On our last earnings call, we described our accomplishments in 2006, particularly our strong FFO growth, but also our momentum in building an organization that has developed into a very powerful franchise. I am pleased to report that that positive momentum has continued into 2007 displaying both our strategy and our strong execution. Particularly in the first quarter, FFO grew by 15% and those results were driven by strong same-store NOI results by a nearly doubling of our joint venture income and solid net economic gains.

On the joint venture side, we are seeing the benefits of our decision to rapidly grow our private capital sources and that expansion in capital led to an expansion in both the range and the volume of industrial real estate solutions we can offer, including development and redevelopment, purchasing surplus assets, net lease transaction, as well as selling or building properties for users who want to own their own facilities.

March of 2007 also marked the two-year anniversary of our first joint venture with CalSTRS. Since then, we have added two new ventures with them and we have expanded our first venture, increasing our aggregate relationship to over $3 billion. These ventures coupled with the UBS net lease venture and our own balance sheet provide a major competitive advantage in our quest to be the premier provider of corporate real estate solutions.

Looking ahead, we are on track to meet our investment goals for the full year. In the first quarter, many of our investments including our land purchases were made in high-growth markets, including Southern California, Phoenix and Florida as Jojo will cover in greater detail. Several of these investments were made through our newest joint venture; that being the Strategic Land and Development JV. It is this fund that gives us a distinct competitive advantage given its mandate to control large sites in the path of growth.

During the quarter, we also entered the Seattle market. Seattle, as you know, benefits from growing international trade facilitated through its two active ports of Tacoma, as well as the port of Seattle. It also benefits from favorable demographic trends.

We are also pleased to have a record pipeline of $1.9 billion of potential investments and this pipeline is a direct reflection of the strength of the franchise. It reflects the growth and the proficiency of our investment professionals throughout the country. It reflects the strength of our customer and broker relationships and it reflects the benefits of having multiple sources of capital to fund those investments.

Turning now to the macroeconomic environment. While the outlook for GDP has been tempered somewhat over the past few months, our outlook for a strong industrial real estate environment, particularly in the high-growth markets, remains unchanged and there are several reasons for our favorable outlook. Number one, business spending on structures is projected to be a healthy 11% in 2007.

Containerized cargo is positioned to grow by a multiple of GDP growth, creating strong demand for larger and more sophisticated distribution centers and third, supply chain reconfiguration projects are in high demand by our customers. Whether it is to support shifting patterns of global production or to accommodate demographic trends, the net effect is demand for new developments throughout a variety of facility types in light industrial, in regional warehouses, as well as the national distribution centers.

Supply chain reconfigurations also provide opportunities to increase our redevelopment activity through the acquisition of deeply discounted assets. So the net effect is that since a unique feature of our franchise is that we invest in multiple facility types across our wide national platform, we are uniquely positioned to capitalize on these trends and so with that, I would now like to turn the discussion over to Jojo.

Thank you, Mike. As Mike said, we are off to a good start in the first quarter, so let me get right into our investment results. Starting with the balance sheet, we acquired 60 properties in 17 transactions for a total of $178 million. We also placed two developments in service at $9 million. The weighted average cap rate for investments was 8.9%.

Moving onto dispositions, we sold 36 properties in 19 separate transactions for a total of $223 million. The weighted average cap rate for that sale is 7.1%.

One investment of note during the quarter was the acquisition of our remaining interest in the 1998 Core JV. Years ago, we negotiated the ability to purchase the properties from the venture at a fixed price, which we did in the first quarter.

Another notable acquisition in the quarter was a corporate customer transaction with a transportation company that arose from our relationship with a private equity firm, Sun Capital. This was a more complicated, multi-market and property sale leaseback transaction and one for which First Industrial has a unique advantage given our platform and expertise.

We purchased a three building, 390,000 square foot portfolio in the New Jersey and Chicago markets and provided the customer long-term leases. We were able to help the customer monetize assets to reinvest in its businesses while also maintaining the use of its critical facilities. As we discussed before, by developing relationships with private equity firms, we are building a solid pipeline of opportunities like this one.

Now let me turn into joint ventures. In our JVs, we invested $133 million during the quarter, including $40 million of developments placed in service. We had $131 million of development starts in our ventures this quarter. In our supplemental, please note that we have added some new disclosure on our JV properties and landholdings starting on page 32.

I would like to point out for you that more than two-thirds of our developable land in our development and repositioning joint venture is in Southern California, Phoenix and Florida, all high-growth markets. And 79% of our acquisitions in the first quarter were in those markets. So we are executing on our strategy to increase our investment in these markets as we have laid out for you previously.

The total investment for developments in process is $215 million and we have an additional 2100 acres of land in our JVs that will support 37 million square feet of additional space. So as you can see, we have built a substantial land portfolio to ramp up our development.

I would like to highlight that we are well on our way toward our 2007 goal of $750 million of combined development starts and land acquisitions as these totaled $289 million in the quarter for our joint ventures and balance sheet. Note that dispositions in the ventures totaled $173 million and our average holding period was 1.5 years for our joint venture dispositions as we have been rapidly executing our asset management plans for a number of JV properties.

Let me now turn to net economic gain from our balance sheet. In the quarter, net economic gain was $35 million. Note that gains for the quarter included approximately $3 million of assignment fees and breakup fees. A key competitive advantage for our platform and active investment approach is that we have many ways to create value. We earn assignment fees by negotiating the right to purchase a property and then selling that right to a passive owner or user that we have identified.

Our net economic gain margin for the quarter was 20%, including assignment and breakup fees and 19% without. Of the gains produced in the first quarter, about 80% were for merchant activity, including land sales, and the rest from existing properties.

On our properties sold, we achieved in IRR of 13% and that is on an unlevered basis. Our average holding period for the balance sheet properties sold was 3.7 years. For the full year, we expect the composition of our gains to be approximately 60% to 70% for merchant activity and land on our balance sheet.

Now I would like to turn to our pipeline. Our overall investment pipeline for our balance sheet and joint ventures is approximately $1.9 billion. Breaking it down by investment type, developments currently and soon to be under construction total about $795 million or 40% of the pipeline. Acquisitions closed and under agreement make up the rest. You can find a further breakdown of our pipeline in our press release.

As part of our development pipeline, we signed two large built-to-suit agreements with major corporate customers. We signed an agreement with Sears to develop a million square foot distribution center in the Harrisburg, Central Pennsylvania market. We are also building a 1.3 million square foot distribution center for Circuit City in this market. As many of you are aware, Central Pennsylvania has been the location of choice for customers reconfiguring their supply chains to serve the East Coast due to its great highway infrastructure, access to I-81 and a good workforce.

We continued to expand our landholdings this quarter, adding 958 total acres, mostly in our Strategic Land and Development JV. Total developable landholdings are now 2800 acres, which if built out would be developable to about 49 million square feet or a potential investment of about $2 billion.

So in closing, our investments in our pipeline reflect our focus on markets benefiting from increasing global trade, population growth and supply chain reconfiguration. With that, I will turn it over to David Draft.

All right. Well, thank you, Jojo. First, from a national perspective, leasing activity in the first quarter remained positive. According to Torto Wheaton, demand continued to outpace supply for the fourth consecutive quarter.

In the first quarter of 2007, deliveries were 25 million square feet and net absorption was approximately 33 million square feet. As a result, occupancy levels moved up 10 basis points to 90.7% during the quarter. For the last 12 months, national occupancy has increased by 50 basis points. Rental rates are expected to be positive across most markets throughout the year. So the environment is a good one for industrial real estate.

Turning now to First Industrial's on-balance sheet results and I would like to start with NOI. Same-store NOI on a cash basis increased 7.3% year-to-year, so we had very good performance there and I also think it is important to note that that increase was predominantly driven by higher occupancy and rental rate increases from both renewing leases, as well as contractual rent bumps built in to existing leases.

Now if you look at it without lease termination fees, same-store growth was 6.1%. In terms of total NOI, that was up 12.9% versus the first quarter of last year, also driven primarily by increases in occupancy and rental rate increases. We were also able to negotiate some lease termination fees that we expect will prove to be profitable decisions.

In-service occupancy at quarter-end was 94% and that is a real solid improvement from the year-ago quarter, which was 90.7%. Rental rate growth in the quarter came in at 4% and that is up from 3% growth reported in the fourth quarter of 2006 and that is up significantly from our 2006 full-year average of 0.3%.

Tenant retention was also good. In the quarter, we retained 67% of our expiring square footage and we are also on track with respect to our remaining 2007 rollover as we are seeing strong demand across our markets and across our broad customer base as well.

Finally, a greater demand for space has helped us keep good control of leasing costs. For the quarter, these costs came in at $2.14 per square foot and that is a little better than our 2006 average of $2.17 per square foot.

And then just with respect to our regional portfolios, we are seeing some of the highest occupancy levels in Atlanta, Baltimore/Washington, DC area, northern New Jersey, Nashville and St. Louis. We saw occupancy improvements in several markets, particularly Atlanta. We spoke about that before in terms of it being an inland port market that serves the lower East Coast and also in Houston, we saw a nice increase and their port activity just continues to grow. Denver too is achieving occupancy levels not seen in some time as demand has outpaced supply in most of the submarkets there.

Specific industries in the quarter that were especially active include third-party logistics firms and of course they play an important role in the nation's supply chain, as well as a good level of activity from consumers' goods companies and beverage distributors too.

Given the favorable market fundamentals and the positive outlook for our own portfolio, we continue to expect good portfolio results for the full year. We think occupancy will average about 93% for the year and that we will continue to report increasing rents in a healthy leasing environment.

So in view of this positive outlook, we are increasing our guidance for full-year same-store NOI by 50 basis points, which means that we expect same-store growth to be in the range of 2.5% to 3.5% for all of 2007.

So then just to wrap up, fundamentals are obviously good. Our portfolio has been performing well and we expect continued strong demand for space from our customers going forward. So at this point, I would like to turn the call over to Mike Havala.

Thanks, David. I am going to provide an update of our capital position, as well as talk about our guidance. Regarding capital, as of March 31, our total capital base was $8.8 billion and this includes of course our balance sheet and our joint ventures.

For just our joint ventures, we had invested approximately $1.7 billion of the $4.3 billion total capital base, so let me provide you some more detail here on our joint ventures. First, in our $1.6 billion development and repositioning joint venture with CalSTRS, we have $0.5 billion invested and remember, as we recycle capital, we can redeploy that capital so our capacity here is theoretically unlimited as long as we don't exceed the $1.6 billion invested at any one point in time. And then since inception two years ago with respect to this venture, we've recycled more than $367 million.

Next, regarding our $950 million Strategic Land and Development joint venture, we have invested $58 million as of quarter-end. So we have a significant amount of capacity here. We do have a number of -- a number of attractive parcels in our current pipeline for this venture. And so as a reminder, the equity capital commitment here is revolving as well.

And then finally in our $900 million net lease joint venture with UBS, we have deployed $277 million, so we have over $600 million remaining in capacity here.

And then I would like to point out that we have added more disclosure in our supplemental regarding our joint ventures and this is important because our joint ventures have a growing importance as a major engine of growth for the Company. So first of all, in our supplemental and footnote [AK], we have now separately disclosed fees and incentive payments, as well as our pro rata share of operations and net economic gains.

And then secondly, we have added a new joint venture section to our supplemental, which provides detailed financial and property information regarding our ventures. As Jojo highlighted, what you will see in the supplemental, the information there will reflect the significant progress that we have made in growing our development business, which, as you know, is a major goal for the Company. So we hope that you find this additional disclosure helpful.

Regarding our balance sheet and financial ratios, we are in a strong position. We have 41% leverage. Our fixed charge coverage for the quarter was 2.8 times. 100% of our debt -- permanent debt is fixed rate with an eight-year weighted average maturity and 96% of our assets are unencumbered by mortgages. For the quarter, our FFO payout ratio improved to 63.4% and our FAD payout ratio improved to 66.7%.

Regarding the first quarter, we exceeded our previous guidance due primarily to several factors. First, NOI was higher as a result of stronger occupancy and one additional lease termination fee that came in late in the quarter. Second, our JV FFO was higher and third, we had higher margins on capital recycling.

Next, let me talk about guidance. As noted in our press release, we are reaffirming our FFO per share guidance for the year of $4.40 to $4.60 and then for the second quarter, we are introducing our FFO guidance in the range of $1.02 to $1.12 per share.

So with that, let me just conclude by saying that we see strong earnings growth again in 2007 and we have a substantial amount of capacity from the capital point of view in place to help us achieve that. So with that, let me turn it back over to Mike Brennan.

Okay. Thank you, Mike. Before we open up for questions, let me just quickly recap by saying that we are off to a very good start indeed for the year. The portfolio, as Dave mentioned, is performing very well. Joint ventures are gaining further momentum, especially as we ramp up our Strategic Land and Development venture and again, we had solid net economic gains from our value-creating investment and disposition process.

By building the resources both in terms of new talent and private capital and then by concentrating on the evolving needs of our corporate customers, we have grown our franchise and our capabilities substantially over the last two to three years and I am very proud of all the people in our organization that made that possible.

Our actions coupled with favorable demand for industrial space gives us a very positive outlook for the year and as Mike just mentioned, we are reiterating our full-year FFO guidance. So with that, let me turn it over to the moderator and then we'll open it up for any questions that you have. Thank you.

(OPERATOR INSTRUCTIONS). Michael Gorman, Credit Suisse.

Good afternoon, guys. I wanted to thank you for the increased JV disclosure. That is helpful. My first question is, David, what would the same-store NOI number have looked like under the old calculation?

Yes, we don't -- Michael, we don't track that particular methodology anymore. I would just say to you that there isn't anything definitionally between the two methods that would cause one to be higher or lower really than the other. I can tell you that it would have been solid either way.

And then just if I can just very quickly as a little bit of a reminder, I think the current methodology is really the right reflection of the portfolio in terms of the operating properties that we have and it is really comparative to the peer group. So does that take care of that for you, Michael?

I guess so. But then I guess sticking with that for a second, what was the variance? I understand that the strong same-store was driven by occupancy and rental rates, but what was the variance to when you last gave guidance when you thought it was going to be closer to 2% to 3% for the year? What was the positive change there?

Well, really, the 2% to 3%, which is now 2.5% to 3.5% with the increased guidance, is of course the four-quarter number. We are going to see some fluctuation from quarter to quarter as we always do. In the first quarter, we had a couple of lease termination fees. We are comparing it of course to a quarter of a year ago, which increased our percentage a little bit as well here in the first quarter.

And two, I just want to mention that the occupancy levels that we have today are allowing us really to be more aggressive on rental rates. So there may be some times where we do a little trade-off of a rental rate for a month or two of occupancy and in the long run, that is a very good thing for the valuation of the property. But I would attribute most of it just to day in and day out, quarter in and quarter out fluctuations depending on the deals done in that particular quarter.

And Mike, a question on G&A. If I am doing my math right, it looks like it was up about 18% or 19% year-over-year. I think on the last call, you had mentioned that it was going to be up closer to 10% for the year. What drove it higher in the first quarter and do you still see it going back down to a 10% increase in the latter half of the year?

Sure, good question. With respect to our G&A for the year 2007, we would expect it to be up about 10%, maybe up to 15% higher than it was in 2006. With respect to the first quarter, it is really a function a little bit of your comparative quarter, what happened in the first quarter of '06 versus '07. But again for the year, we see it being in the 10% to 15% range.

Remember, just let me step back a little bit. The reason our G&A is increasing because essentially that is a cost of production or a large part of G&A is the cost of production and as Mike mentioned, a lot of the growth opportunities that we have seen for example on the development side, we wanted to make sure that we had the appropriate resources to take advantage of all those growth opportunities. So that is generally why G&A has gone up and hopefully that answers your question specifically with respect to what we see in 2007.

Sure. And if I could just follow up with a question on the FFO guidance. First-quarter same-store came in above expectations I guess and it looks like you are looking for that to trail off in the coming quarters. The gains were at a run rate that would equal about $140 million, which was a little bit above your guidance. FFO from JVs were strong, but the run rate still points to maybe just below the midpoint of your guidance. I'm just wondering what has to happen for you guys to get to $4.60 on the year?

Basically I'll just say that we are comfortable in the range of $4.40 to $4.60. That is our guidance that we expect to come in at and it's just based on the visibility that we have of all parts of our revenue drivers; NOI, net economic gains and of course JV FFO. So obviously many things can happen for that number to change up and down, but right now we are comfortable in our guidance range of $4.40 to $4.60.

Okay and just finally, I apologize if I missed something, but you mentioned that you are opening a new market in Seattle/Tacoma, but I didn't see anything in the portfolio or in the development pipeline. Can you just clarify that for me and maybe quantify the timing or the opportunity, the magnitude of the opportunity that you are looking at there?

Michael, this is Jojo. Yes, basically it is -- in our JV disclosure, we have what a JV owns, what we have in terms of development in process, but what we don't have is the details. So you right. You didn't see it in the JV because we don't have it in detail in terms of development soon to be under construction. So we don't have that, but in terms of -- I will not comment -- general policy is not to comment on the financial characteristics of our investments, but let me just give you a general framework.

The predominant investment is development close in to the Port of Seattle and Port of Tacoma and what we have done -- because like I mentioned to you -- these are one of the ports -- part of our markets that we are going to target. This is a seaport that is very active. In the past, we have already hired a person heading that office and with the heading up that office with a new investment professional, we are going to embark on the development.

The development will be primarily distribution-driven and again it will be benefiting from the containerized cargo throughput through Port of Tacoma and Port of Seattle. I hope that gives you some color.

Sure. You haven't purchased the land for that project yet, right?

It is now -- correct. It is under a non-contingent contract.

Just so all the listeners know, Gary Danklefsen, who has been hired, I believe we sent out a national press release regarding that. I think it was about two months ago. A great experienced person, worked at both CB and Trammell Crow. Also too, some of you may remember that we got some very good experience up there when one of our customers asked us to build in the Port of Tacoma about a 450,000 square foot distribution facility. It was for Pier 1 Imports. So we know the market pretty well and with a great local market expert, we hope that good things will happen there.

Thanks, guys.

Ross Nussbaum, Banc of America.

Hey, guys. It's [Mitch Germain] here with Ross. We're trying to get a better handle on your sales margins. We are coming up with about 13% for the quarter. Can you guys walk us through that calculation please?

Yes, Our calculations if you took the net economic gains, with the assignment fees -- I will give you total calculations. With the assignments fees over our basis were at 20%. If you took the assignment fees of approximately $3 million out of our net economic gains and divided that by our basis, we quote margins -- margins over our basis, not on the sales, what you would get is 19%.

Basically it is 19% to 20% depending upon whether you have assignment fees as your numerator and the denominator is our economic basis. So the margin is an after-tax margin on costs.

Okay. You have got a couple merchant sales. Can you give me an idea as to what you classify as a merchant sale with regards to the holding period?

Sure. Holding period is less than one year.

Okay. And you said that is about 60%?

Yes, this quarter was higher. Merchant activity and land is 80%, but for the full year, we look at, Mitch, at about 60% to 70%, merchant sales and land.

How can we decipher from your assets that have been sold during the quarter what is part of your existing portfolio and what is part of your merchant?

I don't think you necessarily can. We disclose all of our sales, but we don't provide that much minutia on each sale on an individual asset by asset transaction basis. So --.

Okay. Thank you.

Kristin Brown, Deutsche Bank.

Good afternoon. I just wanted to ask a little bit more about footnote AK. I definitely appreciate the extra disclosure, but in terms of your guidance for $55 million to $60 million in JV income, it looks like about $8.3 million of it is recurring with the incentive and gains during the quarter. How do you see that number shaking out in terms of mix over the year? Like how do you get from the run rate this quarter to $55 million to $60 million?

Sure. Well, let me step back for a minute and just point out something or clarify. All of it is recurring because remember what is in that is the pro rata share of the operations, the fees, the incentive payments, promotes and then of course pro rata share of net economic gain. And the nature of the ventures remember with our developments, repositioning venture and Strategic Land is to recycle capital and also our 2005 Core was to buy and to sell. So the nature of our joint ventures is in fact merchant and is in fact recurring.

So if you go back, you have seen that we have received incentive payments each and every quarter for the last number of years. So just wanted to clarify that, that the entire amount of our JV FFO is recurring. Now in any one quarter, that number is going to be higher or lower just depending on what happens in that quarter, but I just wanted to clarify that for you.

Okay. But the incentive fee number kind of bounces around a little bit depending on --?

Sure. Absolutely. That is going to vary from quarter to quarter, but certainly when you look over the course of a longer period of time, say a year, you are going to see substantial numbers in there each and every year.

Okay. In terms of development margin, if it came in at 20% this quarter, what is your outlook for the rest of the year?

Kristin. Hi, this is Jojo. In terms of a couple things. One is that if you look at our development in process today, we are forecasting in the high eight cap rates. So overall, we are projecting anywhere from 15 -- overall, about 15% after-tax margin of cost. Now how do we get there? Well, that is based on our pro forma underwriting.

The other thing -- if you look at development in process, if you look at the projected yields of about the high eights, if you assume we can sell that for about 6.75, 6.5 to 7 cap rate, that will give you about 150 to 175 basis point spread. That basically computes to about a 15% after-tax margin.

Okay. Thank you.

Thank you.

Cedrik Lachance, Green Street Advisors.

Thank you. I just want to start with a new line item that you have on page 4, which is the contractor revenues and contractor expenses. Can you tell me what is the difference between that and build to suit for sale revenues?

Yes, Cedrik, let me answer that for you. Basically what happens is when you have a build to suit where the tenant has a contractual obligation to purchase that property from you as we have periodically, then that is what you see in the build to suit for sale revenues item and under GAAP accounting, you need to -- instead of just recording the net profit on that, you need to gross up the revenues and the costs so to speak and that is what you see here.

In the other line item, which is called contractor revenues and then you see down below contractor expenses, that is where we are in the role of a general contractor, which we are not most of the time, but occasionally we are depending on different regions where we have that capability. So in that circumstance, we are building buildings and are in the general contractor role on behalf of our joint venture. So again there, the GAAP accounting requires you to gross up the revenues and the expenses rather than just to show it as a net profit number. Does that answer your question, Cedrik?

So the difference is a commitment for purchasing the assets on the part of the buyer?

That is part of the difference, yes. The other part is if you are doing it on behalf of somebody else. For example --.

So it's fee development?

Yes. You can look at it all essentially as fee development and that is the nature of that business.

Okay. Just sticking with accounting, when you show the G&A that is related to your net economic gains, what percentage of G&A constitutes restricted shares that are granted to your people in the field?

Yes, I don't have that exact detail number offhand, but note that -- you bring up an important point is that the people in the field, the development and acquisition officers, their pay is mostly based on what they do, which is producing profits for the Company and a lot of that pay that they get is not in the form of cash; it is in the form of stock in the Company and that is restricted stock and of course there are many benefits of restricted stock rather than pay in cash because it helps with retention, helps them with aligned interest with our shareholders and so forth. We can go on about that, but I am glad you brought that up. That is a good relevant point.

Okay. And so this is generally a three-year vesting period on those shares?

Yes, generally three-year vesting.

Okay. So how does the accounting work in terms of what is being expensed every year?

Yes, it is just simply one-third in each year. So depending on what vests each year, it is just one-third, one-third, one-third of the amount of restricted stock that was granted.

So you started that program last year, is that correct?

No, this is something that we have been doing for a long, long time. It is just a matter of order of magnitude. What we did about a year or so ago is we shifted away from cash and more into restricted stock. So in other words, people are getting restricted stock in lieu of cash.

Okay. So over the next three years or in three years from now, your G&A as a percent of gains is going to increase, correct?

No, not necessarily because remember this is something that we have been doing and it is just a matter of degree. It was something we were doing before, but we just upped it if you will. So that really should have a minimum effect on a going-forward basis.

Despite the fact that the accounting distributes and the cost of the gains over three years?

That is correct just because again remember we have restricted from prior years vesting in the current period as well too.

Turning to the acquisition from the Carlyle JV, if you look at the 4Q supplemental, your gross book value at the time on the real estate was $49.6 million and you bought the assets for $43 million. Why aren't you showing a net economic loss for this quarter on that portfolio?

I'll answer that. First of all, we own a percentage interest of that property, so we don't show the whole value, the whole book value based on our percentage. We only show it based on percentage interest and Mike Havala can probably answer the income or loss question.

Even without the 10% interest you already had in the property, you would still be showing a loss from the gross book value. I am just trying to understand why is that not showing as part of your net economic gain/losses for this quarter?

Yes, basically we bought the 90% interest, so it is an acquisition and maybe we will have to get back to you a little bit on that detail. Why don't we get back to you with respect to that detail?

Okay. But conceptually, your net economic gains are calculated on the gross book value of your properties, correct?

It is on our costs. Yes, it is not -- don't get confused with book value meaning GAAP. It is based on our cost basis in it. So all costs that go into the projects and so forth.

It should be fairly consistent with either gross book or total assets in that particular JV. So turning to the gains on sales that you realized on the other properties in JVs, so that is the same thing, so it is calculated on gross book value, so the amount you realized of about $12 million at the property level is versus the gross book value of what you sold or it's versus -- what number should we use as the denominator? The $173 million of total sales in JVs during the quarter?

It's basically -- the net economic gain is calculated based on what we sold it for, meaning what we received, versus our cost basis in it, which is what we had into it and then subtracting out any tax effect.

And staying with the Carlyle acquisition, when we look at the NOI from last quarter, it seems that you bought the property with a 12% cap rate. Can you give us some color on that?

Cedrik, are you asking about the first-quarter acquisitions in terms of cap rate?

No, just Carlyle.

Carlyle.

If you look at Carlyle 4Q '06, net operating income was $1.3 million or $1.4 million. Divided by your cost on it, it is, call it, 12% cap rate. I don't understand why that is.

Our general policy is not to talk about the specific financial returns of any transaction, but I will tell you that the pricing was based on a fixed price call option that was negotiated years ago and what I can tell you is the yield is above average.

Okay. I also had a question on the same property NOI. Your same property pool includes your not-in-service portfolio, is that correct?

Our same-store is our in-service -- our in-service properties, Cedrik. According to the definition that we discussed last quarter in terms of all operating properties, all operating properties, of course what is out of there would be redevelopments, properties currently under either redevelopment or development. (See Editor's note at end of transcript)

Okay.

So all operating properties. Operating is the --.

Operating word.

Yes, key word there.

Okay. In that case, can you explain to me how the -- you have a 92% occupancy in your same-store pool and a 94% occupancy in your total portfolio. If you look at the difference of square footage there in terms of the occupied square feet that you need to go from same-store portfolio to the total portfolio, there is 7.4 million square feet of occupied space. Yet there is only 6.5 million square feet difference between your total portfolio and your same-store portfolio. That it implies the 112% occupancy rate for those assets. Can you help me understand what happens there?

I don't know that I can right off the cuff. I am not sure that I entirely understand the question. Maybe you could go through that one more time, Cedrik, and we will do our best.

Your same-store pool is 60.7 million square feet and it is 92% occupied. That means that your total occupancy -- total occupied square feet is 55.9 million square feet. Your total portfolio is 67.3 million square feet, which is 94% occupied and as page 14 shows, your total occupied square feet is 63.2 million square feet. So the difference in square footage that is occupied is greater than the number of square feet remaining between the same-store pool and your total portfolio. i.e. something seems to be off in the math.

Why don't we get back to you and go through a detailed reconciliation with you. But just as a point of reference, the out-of-service properties, which tend to range anywhere from 5% to 10% of our portfolio and that is just normal when we have properties for redevelopment and so forth, that occupancy clearly is lower because you have got properties that we are redeveloping and so forth than our normal portfolio. So we need to follow your math a little bit and I would suggest that we spend some time on it after the call so we have -- so other callers can ask questions.

Yes, sure. But just to be clear, the out-of-service is not in your same-store, so -- but we can off-line that. All right. I will yield the floor. Thanks.

We will walk through it with you.

Thanks.

You are welcome.

James Feldman, UBS.

Thank you very much. Good afternoon. Can you please walk through what you're seeing in terms of cap rates compressing or flattening both in your kind of in the premier markets, the coastal markets, leverage to global trade and then also in kind of some of the secondary markets where you are picking up -- where you are working through some of these portfolios you are getting in your corporate transactions?

Okay. James, hi. It's Jojo.

Hi, Jojo.

A couple of things. There are a couple of variables that really effect your cap rates; (inaudible). I am going to address all of these. Capital flows, interest rates and then buyer's expectation of rental rate growth. So number one -- and then I will go through geographical. Number one, in terms of capital flows, that has not changed, meaning that the robustness of capital --one, is to go the industrial real estate. It's pretty much the same level compared to last year. So it has not had an affect on cap rates.

Second of all, in terms of interest rates, interest rates have not moved significantly and we did not expect that it would move significantly upwards. Although in terms of our pro forma underwriting, we always assumed that in a one-year period that cap rates would go up 50 basis points. But we don't see significant moving interest rates.

What has moved is in terms of rental rate assumptions by our buyers. Because of the increasing occupancy in the markets, what buyers now and underwriting is a little bit more of the rental rate increases and James, as you know, when you underwrite higher rental rate increase, your IRR goes up and your cap rate goes down. Everything else being the same.

So overall nationally, from start of '06 to the start of '07, cap rates have come down about maybe 25 basis points globally I would say. Overall, the West Coast and the East Coast -- if I were to rank cap rates in terms of levels, the lowest cap rates are in the West Coast followed by the East Coast followed by the Midwest. So that is a general rule of thumb.

In terms of cap rates, vis-a-vis port markets, cap rates have come down a bit because of the -- because of the belief that there is going to be more absorption there and more rental rate increases.

James, I think the last point or the last subject that you wanted me to address was cap rates from our corporate transactions. Well, just to step back, corporations own real estate for their use. They are not professional investors, buyers, developers or sellers. So typically the margins -- whenever you work with corporations -- are typically higher because the solutions you have provided them are a little bit more complicated where it's built to suit, sale leaseback, redevelopment. But at the same time though, that allows you to get better margins and that is where we primarily focus on. Okay?

The last thing I want to mention to you, James, is that cap rates is something we really track because that is very, very important in our business and that is why we have -- that is why we have a very strong disposition capability. Being a capital recycler really helps us pin down cap rates and that allows to price our goods and services to corporate America in a very, very accurate way.

Whenever we price a build-to-suit to corporate America or surplus redevelopment or an acquisition of property, we typically know where the spread is because we are active sellers too. So that's one thing that we really focus on. So I am glad you brought it up, James, but I want to make sure that I answered all your questions.

Right. So as you look out 12 months, are you guys underwriting to cap rates compressing or staying flat or going up?

In all our underwriting, we always underwrite on an IRR basis, cap rates increasing.

So you do expect them to increase?

Always in our IRR calculations, about 50 basis points one year.

Okay. And you had mentioned rents rising. What is your mark-to-market for your '07 rollover and then maybe your '08 rollover?

I'm sorry. One more time, Cedrik.

I think I lost you. The mark-to-market on your rents for the rest of '07 and then for '08, if you were to just reprice them?

Yes. James, that is about 3% to 3.5% would be the range I would give you.

And for '07?

For '07.

And then what about '08, the rents continue to go up or is that about --?

Yes, that is looking ahead a bit, but yes, absolutely continue to increase most likely in about the same range would be our best estimate at this point.

Okay. And this is on a cash basis.

That's correct.

Okay. And then finally some of the industrial companies have mentioned an expectation for maybe supply increasing, maybe absorption coming down back half of this year. Where are you most concerned about that happening and how do you think it impacts your development pipeline?

Let me answer how it affects our development pipeline. Well, what's interesting, James, is that overall one test that we have is -- that's the good thing about having a large portfolio because that is really the empirical evidence. The empirical evidence right now is that we continue to increase our portfolio occupancy and that is driven by overall greater absorption than supply. So that being the case, you are correct that there are certain pockets in the US wherein supply is catching up with demand and actually supply is actually maybe exceeding demand.

Now we -- those are the markets that we would not develop in. What I will tell you is that 75% of all our developments are focused on markets that benefit from three things. One is port activity, increased containerized cargo throughput. So you will see us develop for example in the Inland Empire, in the markets that will benefit from Port of Seattle, Port of Tacoma. In markets like the I-81 Harrisburg corridor because that benefits from the East Coast port markets.

You will also see us develop more on the markets that will benefit from the increased population growth. What are those? Southern California, Arizona, Florida. Now, that doesn't mean that there are not some markets in the U.S. that will not benefit from above average population growth, but these three markets are key in terms of population growth. So you will see 75% of our development there.

The remaining 25%, James, we will focus on opportunistic development. In part of our business where we work with corporate America, what we find is there is always opportunities to do infill development. That we will continue, whether it is being driven by port activity -- whether it is not being driven by port activity or population growth.

Great. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). Bill Crow, Raymond James.

Good morning, guys. Just following up on that last question, I mean we are hearing some indications across the market from some of your peers about some weakening conditions, or at least not strengthening at the pace it was last year. Jojo, can you actually name some of those markets where supply and demand are getting a little lopsided in the wrong direction? And is there any property type within industrial specifically that you are seeing more weakness in than others?

Okay. Let me -- Bill, let me address first of all a product type. We are primarily -- our development is focused on regional or national distribution, as we sit today. And when we develop light industrial or flex, it is primarily infill. So, you know, we are not looking to develop product where we see softness.

Now let me just visually through my mind kind of go through a little bit through this through the U.S. In the Inland Empire, for example, last year there is 20 million square feet of net absorption. Now, we do know if you track the market, that is going to be about 30 million square feet of supply. So one might say, well, you know, then supply is actually going to be more than 1.5 years' demand. But what investors have to realize is that, number one, land is actually pretty constrained in that market going forward because a couple of things -- residential zoning and, for example, topography issues that you have to deal when you go to the high desert or further east along I-10.

So there is a number of -- so, we apply those kind of criteria, if we may, in every market that we go to. Atlanta, overall Atlanta, you might hear and studies show that overall, it doesn't have single-digit vacancy rates. But when you focus on Atlanta -- for example, First Industrial is focusing in the most active corridor. And where is the most active distribution corridor? Our bet is, for example, the I-75 South Atlanta market. Because that really is a corridor that will service Georgia and Atlanta and Florida.

So again, I think you have got to pick submarkets when you develop, Bill. I know you know that. And I will be happy to go through -- you know, we can go through city by city, but it will probably take the rest of the hour to go through that (multiple speakers).

This is Mike Brennan. I mean, I think that I laid and David laid out the case, and Jojo has too, that while maybe '06 may not be as good as '07, you know, I think -- remember the business spending has a lot to do with absorption. I think -- remember that in '07 -- and those numbers are strong -- in '07, you have less plant utilization capacity than you have had before. And Jojo mentioned the empirical evidence on the ground is that, in fact, a healthy, robust level of leasing has occurred. And Jojo said that that is accentuated in those strong markets.

So we are not going to suggest that there couldn't be a falloff in some ways, but I also wouldn't say that it is our opinion, as I have said it is not, that this year isn't shaping up to be a decent year, and it is. So the evidence on the ground actually is positive.

All right. Any change in construction costs, land acquisition costs because of the decline in single family or because of the slowdown in overall construction? Anything you are seeing out there that would change the trends?

Bill, Jojo again. Definitely there has been a change. Land -- about a year to two years ago, actually about two to three years ago, we were heavily competing. Most industrial developers were heavily competing with residential developers. Of course, that has gone away. Meaning that we are not tripping over each other acquiring land sites. So from a residential development, residential developer competition, that has gone away. That has helped us overallowing First Industrial or probably similar developers in acquiring land.

In terms of costs, for '07, we predict a lower rate of increase in construction costs and that is really because the levels of supply for both steel and cement has stabilized across the world versus for example two to three years ago when you are seeing 10% to 15% to even as much as 20% increases, this year, we are looking maybe to flat to 5% increase across the country.

In terms of -- so all in all, what does that -- how does that impact land prices? Overall, competition actually should come down overall because of the residential side and construction costs have come down. But one thing that offsetted that is the capital inflows. There has been quite a bit of competition in the market for especially for port-related, inland port-related land acquisitions.

But that is the benefit of again us and First Industrial, that is the benefit of being in as much as 30 markets, having a significant number of investment professionals scouring the market for investment opportunities. For example, in this quarter, we acquired 14 separate transactions in terms of acquisitions and numerous developments that we have started. That is because we are trying to apply everything that we have, our capital, all across the markets we are in.

Okay. Thank you.

Thank you.

There appear to be no further questions. I'll now turn the call back over to First Industrial for any closing remarks.

Thank you, everybody and again, I am very pleased with the progress that we have had this quarter and our outlook for the year is also very positive. I want to thank you for your interest and your questions and we look forward to seeing many of you at NAREIT in June. Thank you.

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

The following note was provided by First Industrial Realty Trust following the conference call; On the First Quarter 2007 Earnings Conference Call, a question was asked regarding the methodology used for calculating Same Store Net Operating Income (Same Store NOI). Management incorrectly stated that "out of service" properties are excluded from the first quarter 2007 population of Same Store Properties used to calculate Same Store NOI. While "out of service" properties had previously been excluded from the definition of Same Store Properties through the third quarter 2006, the Company amended its definition of Same Store Properties beginning in the fourth quarter of 2006, as noted in Footnote (am) of the Fourth Quarter 2006 Supplemental Information Report.

Consistent with the Fourth Quarter 2006 Supplemental Information Report, Footnote (am) of the First Quarter 2007 Supplemental Information Report accurately defines Same Store Properties as follows;

"Same store properties, for the period beginning January 1, 2007, include all properties owned January 1, 2006 and held as an operating property through the end of the current reporting period and developments that were placed in service or were substantially completed for 12 months prior to January 1, 2006 (the "Same Store Pool")."

Consequently, the terms "in service" and "out of service" no longer apply to the definition of same store properties used to calculate Same Store NOI.