First Industrial Realty Trust Inc (FR) 2007 Q2 法說會逐字稿

Good afternoon, my name is Judith and I'll be your conference operator today. At this time I would like to welcome everyone to the First Industrial Realty Trust second-quarter 2007 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. 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, everybody, to our second-quarter 2007 earnings conference call. And before we begin let me introduce the members of senior management who are here with me today -- Jojo Yap, our Chief Investment Officer, and Jojo will discuss our investment performance and our pipeline; David Draft, Executive Vice President of Operations will cover our portfolio results; Mike Havala, Chief Financial Officer, will discuss our joint ventures, balance sheet and guidance for 2007; and, as I mentioned, you have just heard from Sean O'Neill, our Senior Vice President of Investor Relations and Corporate Communications.

On our last earnings call I talked about the positive momentum within First Industrial in all areas of our organization. I'm pleased to report that our strong momentum continued in the second quarter as we took several major steps to expand our franchise and position us to serve customer needs that are being driven by international trade, by supply chain reconfiguration and by population growth.

To start we acquired two of the largest land sites in our history; the first was a 205 acre site in the Inland Empire where we plan to build 3.3 million square feet of distribution space. The second was a 500 plus acre park in West Palm Beach County, Florida with the ability to construct more than 6 million square feet of space. In total we purchased more than 1100 acres of land in the second quarter and 85% of these land investments were in high-growth markets such as Southern California, South Florida, Phoenix and Seattle where, as we mentioned on our last call, we opened an office last quarter.

To give you a sense of the importance of the land purchases we made in the second quarter, they represent a 35% increase in our land holdings of more than 3400 acres, but more importantly, they set the stage for a major ramp-up in our development business. As you may recall, we hired Jerry Pientka about a year and a half ago as Executive Vice President of Development and he has done a great job in expanding our team and our capabilities and putting our capital to work.

Last year, actually October of '06 at Investor Day, we set a goal of $750 million in land acquisitions and development starts for 2007 and I'm happy to say we are now increasing that target to $1.1 billion. Jojo will discuss our development outlook in a little more detail so you have a better picture of these significant growth opportunities.

We also opened two offices in Canada that will serve three markets. Dave Carreiro was hired as regional director in Toronto and Blair Sinclair was hired to spearhead our efforts in both Calgary and Edmonton. Toronto is the largest -- or excuse me, the fourth-largest industrial market in North America, obviously the largest in Canada, with nearly 800 million square feet and a key hub market. Calgary is the major Western distribution hub for Canada and Edmonton is a key distribution and service center for Canada's natural resource industries.

And yesterday, as you saw in a separate press release, we announced our expansion into the Netherlands and Belgium. And our mission and strategy in these markets is identical to our North American markets -- to provide industrial supply chain solutions to our corporate customers.

After evaluating our options in Europe for some time we believe there are significant opportunities to work with both new and existing customers. Case in point, as the volume of containerized freight rises there is excellent opportunities for development, especially near the ports of Antwerp and Rotterdam. As the EU continues to integrate, supply chain related development is increasing. And throughout both countries there are going to be opportunities to redevelop and acquire especially with the high percentage of industrial property that is owned by corporations.

And of course in every market that we invest in it is our requirement that it be run by a seasoned professional and a market expert. And I'm very pleased to announce that Jan Scheers, a senior executive from Macquarie Goodman Eurinpro, has joined us as managing director and he will lead our expansion into the Netherlands and Belgium. These new markets -- Toronto, Calgary, Edmonton, the Netherlands and Belgium -- are going to give us significant opportunities to serve corporate customers who, since our inception, have been the centerpiece of our focus and our strategy.

Last and certainly not least, turning to the results of the quarter. I am pleased to report that the second-quarter results exceeded the upper end of our guidance range. FFO was $1.17 per share and that beat the mid point of our guidance by $0.10 a share. And as we noted in our press release, we've raised our FFO guidance by $0.05 representing a 10% FFO growth at the mid point of our range. Also very important, this earnings was broad based -- net operating income was up 7% on both higher occupancy and rental rates; FFO from joint ventures was up 7%; and our growth in net economic gains was up 13% as we continued to deliver solutions to clients through our acquisitions, developments and redevelopments.

Our broad based capabilities, the ability to offer multiple facility types across an expanding platform has given us a lot of ways to serve our customers and that in turn has allowed the organization to build a strong pipeline of opportunities today with over $1.7 billion in investments that are either under contract or letter of intent. The great benefit of this platform to shareholders is our ability to build a profitable pipeline because we can create value in so many ways -- through corporate surplus acquisitions, through sale leasebacks, through opportunistic acquisitions as well as development.

Also very important, our growing capital base that accommodates the wide spectrum of investment risk that allows us to fill this wide variety of customer needs. The new $505 million core investment program with UBS is yet another example of that and a testament to the platform -- to our proven ability to source opportunities and to create value for both our partners and our shareholders. And with that I would like to turn it over to Jojo.

Thank you, Mike. We were very active in the second quarter on the investment side with nearly $0.5 billion of investments combined for joint ventures and balance sheet. Starting with our joint ventures -- we invested $294 million including $246 million of land and $25 million in buildings plus $23 million of development space and service. In addition to those significant land purchases that Mike just mentioned, I'd like to note that we had $139 million of development starts year-to-date in our ventures.

In the past we've described the importance of rising international trade as a major driver of customer demand for industrial space. Our strategy is focused on finding ways to fulfill this demand. And one example in the quarter was our acquisition of 205 acres in the Inland Empire in Paris, California. This site is located along the South I-215 corridor where we will build up to 3.3 million square feet of logistics distribution space on our new South Paris distribution center.

Southern California is a critical entry point for the nation's supply chain with the ports of Los Angeles and Long Beach handling 40% of the nation's import traffic. And we think the South Paris development is a great solution for customers that need state-of-the-art distribution centers in this strategic location. Our biggest investment in the quarter was a 537 acre site in South Florida that Mike mentioned, the largest land acquisition in our history.

As many of you know, industrial land is in limited supply in the dense population center of South Florida. The site we acquired is within a business park and is served by rail with efficient access to both air and sea ports, I-95 and the Florida Turnpike. With low industrial vacancies of limited land available for development, First Park South Florida will provide the much-needed distribution space to serve the growing global population.

As a final example, just a few weeks ago we announced the acquisition of 45 acres near the Ports of Tacoma and Olympia where we'll develop 780,000 square feet of distribution space. These ports are planning to expand to capture the growth from international trade from China and the rest of Asia. You might recall that we just opened our Seattle/Tacoma office earlier this year, so our team there is off to a fast start.

As noted last quarter, we expanded our JV disclosure to give you some added visibility to our development of landholding starting on page 38. As you'll see, the vast majority of our developable land is in Florida, Southern California and Phoenix -- markets benefiting from expanding global trade, supply chain reconfiguration activity and above-average population growth. For our joint ventures the total investments for development is in process at $190 million and we have an additional 2900 acres of land for development that can support 49 million square feet of additional space.

Let me now turn to our balance sheet. We acquired 20 properties of six parcels of land in 20 transactions for $134 million. We also placed four developments in service totaling $49 million, so total investments on balance sheet were $183 million. The weighted average cap rate for the investments was 8.4%.

Moving on to dispositions, we sold 51 properties in 28 separate transactions for $232 million. The weighted average cap rate for those sales was 7.3%. Cap rates are basically flat compared to a year ago despite an upward movement in interest rates and we think due to positive rent growth coupled with strong investor demand for industrial real estate, cap rates will generally stay flat.

Major balance sheet acquisitions in the quarter included two in Southern California. The first was the acquisition of a 596,000 square foot portfolio, five facilities from a corporate customer in the growing Inland Empire market. We provided the customer with a sale leaseback solution for his business critical facilities freeing up capital to redeploy in their business. Including this sale leaseback half our acquisitions and developments for our balance sheet during the quarter were with corporate customers.

The second acquisition I will highlight was a distribution facility in the South Bay submarket of L.A., just off the Alameda corridor. We identified this property as a great repositioning opportunity due to its access to the ports of L.A. and Long Beach and its ability to accommodate heavy distribution, rail users and large trailer parking, all of which are in high demand, and with limited availability in the infill L.A. submarkets.

As Mike noted, we have increased our 2007 target for combined JV balance sheet development starts and land acquisitions to $1.1 billion. We have $683 million already completed in the first half of the year. Dispositions in the ventures totaled $324 million and our average holding period was 1.7 years.

Let me now turn to net economic gain from our balance sheet. In the quarter our net economic gain was $36 million. The net economic gain margin for the quarter was 22% as a percentage of our cost basis. For the year we expect our margins to be in the mid to high teens. Of the gains produced in the second quarter about 54% were from merchant activity and the rest from existing properties. For the year we expect gains from merchant activity to be about 60% of total economic gain. On our property sold we achieved an IRR of 15% and that is on an unleveraged basis. Our average holding period for the balance sheet property sold was 2.9 years.

Now I'd like to turn to our pipeline. Our total investment pipeline for the balance sheet and joint ventures is approximately $1.7 billion. Breaking it down by investment type, developments currently and soon to be under construction total about $885 million and acquisitions closed in other agreements make up the rest. You can find this further breakdown of our pipeline in our press release.

Our overall land holdings for our balance sheet and joint ventures are now more than 3400 acres which if built out would be developable to about 59 million square feet for a potential investment of about $3 billion. So in closing, we had a good quarter in executing on our value creation strategy, we added sizable land holdings and our pipeline remained strong. And with that I would like to turn it over to David Draft.

Thanks, Jojo. First, as I usually do, I'd like to provide some commentary on the overall market and then I'll discuss our own portfolio results. The national markets continue to be solid as leasing activity in the second quarter remained positive. According to Torto Wheaton, supply and demand remained in balance. Net absorption was 34 million square feet and new deliveries were approximately 37 million square feet. Occupancy across the nation held steady in the second quarter at 90.7%. And I would also note, that's a level that's about 40 basis points higher than it was a year ago. The forecast for rental rates remains favorable across most of the major markets.

Turning then to First Industrial's on balance sheet results starting with NOI where we saw really very good growth, total NOI was up 7% as compared to the second quarter of last year. Looking at just the same-store component on a cash basis, that increased 6.3%. And then if you exclude lease termination fees, the same-store growth was 4.1%. These increases were driven by higher occupancy as well as rental rate increases and also contractual rent bumps built into existing leases.

I'd also like to mention that we added historical information on our same-store NOI in our supplemental -- and that's under footnote AM -- using the methodology that we adopted in the fourth quarter of 2006. As stated in the footnote, the population of our same-store pool includes all properties that have been in operation throughout the full quarter of both the current year and the prior year and which were in operation as of January 1, 2006. By the inclusion of all the properties, whether in service or out of service, the measure provides a more comprehensive view of performance and it's also comparable to the approach that's used by our peers.

Turning then to occupancy, in service occupancy at the quarter end was 94.6% and that's up 240 basis points from the year ago quarter so we've seen very good improvement there. Rental rate growth in the quarter came in at 3.5% and that's as compared to slightly negative for the year ago quarter. Tenant retention was also good again this quarter; we retained 72% of our expiring square footage and our outlook for the remainder of 2007 is favorable as well as we see strong demand across virtually all of our markets. Finally, the favorable market environment continues to keep leasing costs low. For the quarter these costs came in at $2.03 per square foot and that's well below our 2006 average which was $2.17 per square foot.

With respect to our regional portfolios, we have high occupancy levels across the majority of our markets and that includes Atlanta, Chicago, Baltimore/Washington, Central P.A., Philadelphia, Houston, Nashville, the list could go on. Specific industries in the quarter that were especially active included third party logistics firms, especially those handling consumer good products, as well as service sector customers.

So given the favorable market fundamentals and the positive outlook for our own portfolio over the remainder of the year, we are raising our outlook for full year average occupancy to approximately 93.5 to 94% and I would note that that's a 125 basis point increase from our original guidance. We expect rental rate changes to continue to be positive as well, as the leasing environment remains active.

So as a result of those positive factors we're also increasing our outlook for same-store NOI. We expect to see growth there for the full year 2007 to be in the range of 4 to 5% and that's on a cash basis excluding lease termination fees. I would also note again that's a 150 basis point increase from our original guidance which had a midpoint of 3%. So all of these things combined really gives us great satisfaction for what we've achieved in the first half, but probably more importantly these things give us good reason to look forward to a very good full year as the second half looks like it will be healthy. So with that I'd like to turn the call over to Mike Havala.

Thanks, David. I'm going to provide an update of our capital position, talk about some financial aspects of our expansion into new markets, and then I'll talk about our earnings and guidance. With respect to capital, as of June 30th our total capital base was $8.5 billion. This includes both our balance sheet and our joint ventures. For just our joint ventures we had invested approximately $1.8 billion of the $4.2 billion total JV capital base.

Now let me provide you some more details on our joint ventures. In our $1.6 billion development and repositioning joint venture with CalSTRS we have about $600 million 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. Since inception a little over two years ago we have recycled more than $450 million in this venture.

In our $950 million strategic land and development joint venture we've invested over $200 million as of quarter end, so we still have a significant amount of capacity here. And as a reminder, this equity capital commitment is revolving as well. In our $900 million UBS net lease joint venture we have deployed approximately $280 million. So we have over $600 million remaining in capacity here.

And then finally, we're pleased to announce a new $505 million program with UBS Wealth Management. This is now our second program with UBS. In this new program First Industrial will source core acquisitions on behalf of UBS and UBS will wholly own the assets and fund them with all equity. First Industrial will receive asset management and other fees as well as potential promotes. And I'd like to say that we got off to a very good start in this program closing $200 million already to date.

Regarding our balance sheet and our financial ratios, we're in a strong position. Our fixed charge coverage was 3.1 times, 100% of our permanent debt is fixed-rate with about an eight-year weighted average maturity, and 96% of our assets are unencumbered by mortgages. For the quarter our FFO payout ratio improved to 60.8% and our FAD payout ratio improved to 63.8%.

During the quarter we issued $150 million of 10-year notes at a 5.95 coupon and then we also redeemed our $50 million Series C preferred stock which carried a coupon of 8 5/8. As you may recall, we issued $50 million of preferred back in the end of 2006 with a 7.25 coupon and that effectively refinanced our Series C ahead of time. Also note that we took a $2 million non-cash charge or $0.04 per share in the second quarter as a result of this redemption of preferred stock.

Next let me briefly talk about some financial aspects of our investing outside the United States. Regarding capital, we will use both our balance sheet and joint venture capital for investing both in and outside the U.S. On balance sheet some of the proceeds from our active capital recycling will be invested into markets that we've discussed here outside the U.S. Regarding joint ventures, we're currently working on raising institutional capital for investing outside the U.S. and, while we're not ready to announce anything just yet, we've made some very good progress on this front.

Regarding other financial considerations of foreign investment such as foreign currency exchange and foreign taxes, I won't get into the detail on this call, but note that we've put together our plan which addresses hedging foreign currencies as well as addressing minimizing any foreign tax impacts. We've also included in our 2007 guidance $2.5 million in additional G&A for our Belgium and Netherlands expansion.

The opening of these markets has happened meaningfully earlier than anticipated, so with this included in our G&A we expect 2007 G&A to be about 15 to 20% higher than 2006 as compared to our previous expectations of 10 to 15%. Note that we expect our annual run rate for G&A in Belgium and the Netherlands to be about $4 million going into 2008.

Regarding the second quarter, we exceeded our previous guidance due primarily to several factors. First, net operating income was higher as a result of stronger occupancy and higher lease termination fees. Second, net economic gains were higher due to higher margins on capital recycling.

With regard to our FFO guidance, as we noted in our press release, we raised our FFO per-share guidance for the year by $0.05 to $4.45 to $4.65 and this is a result of higher expected JV income as well as stronger portfolio performance. And then for the third quarter we introduced our FFO guidance, a range of $1.07 to $1.17 per share.

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

Thanks, Mike. Let me quickly recap by saying that we had an outstanding first half in 2007. The portfolio is performing very well, the developments within our joint ventures is ramping up. We had solid net economic gains from our value creating investment and divestment process and we've opened up new markets in Seattle, Toronto, Calgary and Edmonton and now the Netherlands and Belgium.

By building the resources with both talent and capital and by concentrating on the needs of our corporate customers we've grown this franchise significantly in our capabilities over the last two years. So our success in the first half coupled with the favorable demand for the industrial space gives us a very positive outlook for the year. And so with that I would now like to ask the moderator if we could please open it up for any questions that you have. Thank you.

(OPERATOR INSTRUCTIONS). Lou Taylor, Deutsche Bank.

Good morning, guys. You mentioned that the G&A was ramping a little bit faster because you were going into Europe a little bit sooner. I guess what kind of triggered the move into Europe now as opposed to when you originally thought you might enter the market?

Lou, this is Mike Brennan. It was maybe two to four months ahead of time, so we found our person faster. We got our work done quicker and we just never could be sure that we would find the right person at the right time, so it was really just a matter of several months.

And then as you look forward in terms of the European platform -- I'm more focused right now on the G&A impact -- do you expect to build out the team pretty rapidly as you get into new markets or what should we expect for a G&A ramp in Europe?

I'll take this one and, Mike, if I get the numbers wrong, please jump in. We're going to spend $2 million to $3 million in 2007 and that's on getting the organization up to speed and all the different things that we need to put the team in place in the Netherlands and Belgium. So let's call it $0.05, $0.06 dilutive in 2007.

2008, I'm not in a position to forecast that yet, but we'll get back with you when we have a better picture of what the run rate will be in '08 and what the investment prospects look like in '08 for us. Lou, at this point the focus is just going to be purely on the Netherlands and Belgium. We're aware that there are opportunities elsewhere and we've taken a very disciplined approach to getting into this market.

So at this point there is no forecast for expanding into additional markets; we're going to work very hard in the Netherlands and Belgium because there's a lot to do there and then we'll get back with you if we decide to open new markets or whatever.

And then, Lou, let me just add onto that just a little bit. Going into 2008 we expect to start the year for our offices in Belgium and the Netherlands at about a $4 million run rate, that's an annual run rate, and look at that as a core group of people there in the offices, people that will start looking at transactions and getting us up and running in the markets and so forth.

Obviously as we do transactions and start acquiring properties and/or developing properties then we will also need to add people associated with those, for example property managers or leasing people, etc. But I think the key thing to start off the year in 2008 is where we expect our run rate for our core group that will start looking at transactions and that's about $4 million on an annual basis going into 2008.

Mike, just staying with you for a second. In terms of as you've grown your land inventory now, how is the accounting for that going to work in terms of capitalized versus expensing the carry cost, the infrastructure and the property taxes, etc.?

Basically, Lou, the accounting will work pursuant to GAAP and what that means is that the land inventory, if it's not being built on you don't capitalize a cost towards it, but once you start your development process then you start capitalizing on that as well. Note that some of this activity is going on in the joint ventures as well. But anyway, just based on our accounting for that will just be based on GAAP which is you start capitalizing once you have development activity on the land site itself.

Okay. And the last question is for Jojo. Jojo, you mentioned that you didn't see much or really any movement in cap rates. Are there any markets that you're in that you're seeing cap rates go up?

Okay. Lou, actually I've seen markets where cap rates have actually come down a bit and that's the coast starting from the year and I've seen cap rates come down a bit on large portfolio packages and there seem to be a significant amount of buyers bidding on large portfolios. Where I did see, Lou, some increase in cap rates are those long-term leases to less than stellar credit companies in secondary markets because the primary buyers for those who were leveraged buyers, highly leveraged buyers. So I saw cap rates increase there as the equity requirements in the debt markets were increased.

Great, thank you.

James Feldman, UBS.

Thank you. Can you talk a little bit about in terms of the new land this quarter and Canada and Europe even -- your plans in terms of how much of that will be in JVs and then how much of that will be stuff that you hold long-term versus build and sell?

Okay. James, let me ask Jojo to answer that and then -- the detailed specifics are all in the supplemental. It's a really good thorough description of the acquisitions that I would encourage everybody to take a look at it just because you can kind of see the strategy unfolding and a significant amount that we have in the high growth markets. Okay, Jojo.

James, as Mike alluded to, we have now provided additional disclosure starting from page -- I guess 38. And it breaks down all of our acquisitions and investments and joint ventures -- you will see those tracking. And we also put the acreage there by market.

To your question of where it's going to go, we primarily are conducting a bigger portion, a majority of our land acquisitions and speculative development in our joint ventures and that's primarily in our development and repositioning fund with California State Teachers' Retirement System and our strategic land and development fund. Expect us to continue to have a majority of our land acquisitions there.

Also expect us to continue the majority of our development starts in those joint ventures with California State Teachers' Retirement System. A higher proportion of build to suits will be on our balance sheet which is consistent with the past. James, does that answer your question?

I guess I was more focused on what you expect to hold long-term and what you expect to develop and sell. I guess can you just address that for Canada and then Europe?

In terms of overall, a lot of our buildings that we build either speculatively or in build to suit will go up to be sold and as we maximize value. A lot of times when we're finished stabilizing those assets we've achieved top of the market rents and we've maximized value. So, that is, you will see that continuing in our joint ventures. There are some developments that we would hold on balance sheet, but that would be less proportion of our development pipeline.

Vis-a-vis Canada -- and I cannot give you guidance yet in Europe as of today, but we will give you that, James, as we get more visibility of our pipeline there -- vis-a-vis Canada, Canada will not be different in terms of investment strategy and value creation for us as for the U.S.

Okay, thanks. And then can you just quickly address are there any markets where your view on supply has changed and you're getting a little bit more concerned?

Supply, overall -- it's Jojo again -- overall the supply, actually we've been pleased, has actually kept with demand and what's interesting is that the critical thing we focus on is that we tried to invest in high-growth markets where we feel that the supply will -- the demand will actually exceed supply. And those were the markets that are really benefiting from a significant (inaudible) throughput because of port activity and accelerating population growth.

So if you look at our major investments, our top markets for investments are Southern California because of all of the reasons we've stated before, I'm not going to repeat it -- Arizona, Florida, Chicago being a major depository of (inaudible) and containers. So right now at the end of the day demand is keeping up with supply. But we're always watching that.

All right, thank you.

(OPERATOR INSTRUCTIONS). Cedrik Lachance, Greenstreet Advisors.

Maybe to start with, I guess again on the same property NOI. David, you mentioned that it does include some out of service properties but that your same property portfolio is exclusively operating assets. I'm just trying to understand how an operating asset can be out of service?

Well, it's operating -- Cedrik, this is Dave -- it's operating to the extent that it is available for lease. In many cases there are tenants already in the space if it's a multi-tenant property. So while it may not be 100% stabilized or leased it's on the way to be and there's management taking place. The operations of the building are intact in terms of our asset management people, our leasing people, we're fully engaged on the property.

Okay. How many square feet from the out of service portfolio are actually in the same-store pool?

From the out of service in the same-store pool would be I think about 1.5 million. I'd have to double check that though, Cedrik, to get back to you on the specific number.

That would be nice. Looking -- turning to the profits that you generate from some of your JVs, if we look at the core 2005 JVs, the one in which you acquired the Duke portfolio you seem to have sold a fair amount of that JV, perhaps $200 million, perhaps more than that, yet you hardly report any net economic gain. Is it a statement about the flex market or was there anything about those properties?

No, the execution is right in line, Cedrik, with the strategy. As you may recall, it's a leverage venture and the going cash yield was definitely a positive in the low teens. So in order to achieve a levered return - or actually mid to high teens -- it doesn't - you don't really need to get a lot of profit under residual. And so that's the benefit of this venture. And we're proving out that some of the parts is worth more than the whole. That was the thesis of it at investment.

I just wanted to remind everybody, when we purchased it we said exactly what Jojo said, that this wasn't a home run, it was a solid double. So what we are producing today is slightly ahead of our expectations in terms of overall gain for the venture in First Industrial. So that's what was advertised and that's how it's playing out.

What happened in those properties in particular so that their value today is equal to their value two years ago?

I don't understand your question.

You reported a net economic gain of $117,000 and the core 2005 JV on page 38 sold over $200 million, that JV you bought in September '05. And then why is it that the properties that just got sold in the most recent quarter did not provide any additional value to you other than the income during that time period?

Let me give you a big picture answer then we can come and talk about it off line. But there's going to be pieces of that portfolio that are going to produce no gain, in fact they're going to produce losses, and then there is going to be parts of that portfolio that are going to produce lots of gain. So we purchased it in what it could do for the aggregate. So it shouldn't be surprising that you should see variations from quarter-to-quarter.

But if you'd like to go through that in more detail and walk through the pieces, I think we could probably do that for you. So maybe we could talk about that off line if you'd like to.

All right. Looking at the taxes or the cash taxes that you have to pay on some of the gains on the balance sheet, I'm trying to understand what percentage of your portfolio is in taxable subsidiary versus the percentage that's actually within the REIT itself. Could you give me some color on that?

Yes. In the taxable REIT subsidiary it would be in the 25% range. Now that excludes of course joint ventures. Joint ventures would be a lot more in addition to that. Most of those assets in the joint ventures are running through the taxable REIT subsidiary as well. But if you just looked at actually owned through the taxable REIT subsidiary you would be in that -- a quarter range of total portfolio.

Okay. Final question. You disclosed in your 10-Q that you had filed documents probably somewhat late with the IRS as you put your fee business or your management business into a taxable subsidiary. Can you explain to us what happened in there? Why is it that you might have run a little too late in terms of putting that business into a taxable subsidiary and what might be the consequences for the Company?

Yes, as far as consequences, we don't see any consequences to the Company with respect to that. That was just paperwork, if you will, and in transferring activity, if you will, from the operating partnership down to the taxable REIT subsidiary to make sure that we did things in the most tax efficient way. So again, from repercussions to the Company we expect exactly zero.

Okay, thank you.

Cedrik, it's Dave Draft; can I just ask you a follow-up question on your question? You were looking for the non-stabilized properties as a part of the same-store pool. Are you looking for square footage? What precisely are you looking for, those properties that are under development, redevelopment but not yet stabilized or all properties or what?

I'm just trying to understand what percentage of your same-store is qualified as out of service. And yes, I'd like to know which properties those are. They're properties that you've owned for a number of years and that were redeveloped or just trying to get some color basically on that. The reason I'm asking is because when you do the math on the square footage it's very clear that some of your same-store is in the out of service portfolio, but it's not so clear what's the history of those properties and why they might be in the out of service portfolio and at the same time in same-store.

Okay, got you. There's quite a bit of detail there, so we'll get back to you on that.

Cedrik, just so you -- you had some confusion on some of these matters last quarter. Just so you know, if you want to look at page 21 of our supplemental we give you a lot of detail. In addition, we added some supplemental disclosure on footnote M, and we also gave you more historical information on our same-store NOI going back several years. So hopefully that will help you with your analysis.

I appreciate all that, that's why I asked this particular question regarding the square footage from out of service. I think that would close the loop on my questions from last quarter.

If you look at footnote M that answers your question, so you have it now. There's no confusion.

All right, thanks.

John Stewart, Credit Suisse.

Mike Havala, just a couple of clarification questions on the guidance. First of all, I presume that the topic D42 charge was in your prior guidance, is that right?

Yes, it was.

So when you beat by $0.10 in the quarter that was contemplated. And do I understand that basically you beat by $0.10, you're raising by $0.05 and the offset is the increased G&A related to Europe?

Affectively, yes.

And when you -- you referenced the starts and the land acquisitions of $750 million going up to $1 billion. What's the breakdown? How much do you plan to start in development?

John, this is Jojo. If you look at our target of $1.1 billion, we have already $683 million of that done through the first half of the year and that is both land acquisitions and development starts. So we have about $400 million to go. For the $683 million, about one-third of that is development starts and about two-thirds of that is land acquisitions. We'll give you a better handle on how the $400 million plus target happens through the rest half of the year, but I project that the starts will be a higher proportion than the first half of the year which I gave to you as a third.

That would make sense. Let me ask it a slightly different way. How long a supply do you expect the 60 million square feet of buildable land represents? How many years worth of starts is that?

John, that's a good question. It's kind of hard -- it's more difficult to answer because it really depends on market by market. But let me just give you just some color. Some of -- a lot of the land that is in our 2005 development and repositioning venture, that would be consumed within an average of about two years. The land that we acquire in our strategic land and development joint venture, expect that to be more on the four- to five-year period. That kind of gives you color on how we acquire land in these entities. In terms of our balance sheet, expect that pipeline to be in about one to two years. Does that give you a sense on timing?

It does. I guess I'm just trying to get a sense for -- I guess Mike Brennan referenced a major ramp up in development in his comments. I'm trying to get a handle on what sort of a normalized start level and how much do you have to spend to get there and how much are you going to capitalize in G&A and what additional G&A beyond Europe that we're looking at?

John, this is Mike. Jojo I think gave a thoughtful answer, but if we try to bring too much science to it at this point I think it would be arbitrary. As a for instance, in Phoenix and in Southern California the absorption is occurring much faster, and also in Florida, than we anticipated. So working through the potential pipeline of 60 million may occur at a more rapid rate.

So I think the best answer to that is we'd have to contemplate that a little bit more, but I think most of the stuff, I'd say probably two-thirds of it is infill that goes in one to three years and the stuff in our lands in First Cal 3, as Jojo said, is four and five. You bring more science to it than that and I think it's not helpful, it's not accurate. So I don't think we can really give you a perfect answer on that.

John, just to add on to that, I mean we're not limiting our expansion plan on that 3400 acres. We expect to acquire more land going forward. So I would just not look at that 59 million square foot pipeline as a static pipeline.

Okay. Mike Brennan again, I understand that you are -- it sounds like you're working to raise capital for Europe and you don't want to tip your hand entirely, at least in terms of how you plan to fund that going forward. But can you give us a bit of a sense? You did make a couple of references to global trade and it sounds as if you're kind of -- I kind of get the sense maybe you're following tenants overseas. Can you give us some indication in terms of whether you've got build to suit lined up, are looking to buy a portfolio or are you going to build ground up? How are you going to build your presence?

Okay. Well, it's a great question. You asked two questions about capital and then customers, so I'll take the customers and Mike can join in. It's really interesting, the way we really got into Toronto was through Volkswagen and then Rockwell Automation and then of course we hired a local market expert there and then we found the opportunities to come by being on the ground.

In the Netherlands and Belgium, people on First Industrial listening in on this call will be quite familiar with our A+ accounts. In Belgium about 26% of (inaudible) on our A+ accounts are in Belgium and in the Netherlands it's about 30%. And in both of the markets together where we see both it's about 20% of our A+ accounts. I don't want to tell you -- so we have substantial customer relations from our domestic operations that are doing business in both Belgium and the Netherlands. So I would expect that we would bring over to the Netherlands, as we have in every other market, the benefits of our customer relations.

What happens and you just -- how much are we going to do, I think that remains to be seen. I'm not going to speak to that directly. So this is what we bring to every market -- we bring the benefits of our customer relations and then we bring the benefits of a local market expert so he can look and find things that are derived locally. Then we bring our capabilities of buying five facility types, developing, redeveloping and acquiring. We try to match that against the capital.

So the plan in the Netherlands and Belgium is not unlike what the plan will be in North America and our North American operations, but with a European adaptation. Okay, so hopefully that gives you some sense of the customer relationship side. On capital, Mike Havala?

Sure. On the capital, I appreciate your question on that. As you know, our style is more to announce things when they're done and completed, so I can't go too much into that right now. But you've seen what we've done here in the U.S. on building up our capital base and broadening that capital base substantially over the last couple years. And I think when you see us raise capital for Belgium and Netherlands I think you'll see it's consistent with that. So that's I think the only thing I can leave you with at this point in time and certainly when we're at the point where we've completed our capital raise we will announce it and talk about it and so forth then.

Okay. Just one more and I'll yield the floor. Looking at your dispositions to date it looks like you're about halfway to the low-end of the guidance but well ahead of the range for net economic gains. And I guess that kind of gets to Jojo's point that margins on sales in the second half may be midteens versus 27. And I guess my question is for Jojo, what is it specifically about asset sales in the second half that lead you to project lower margins?

Not anything in particular, we just have better visibility. We just have better visibility today of our pipeline and for us it's a little bit more accurate forecast. If you look at the midpoint of our on balance sheet target, we've got about $500 million to go. If you look at our midpoint of our economic guidance we have about $60 million to go. And if you just do the math, it's an after-tax margin of about 14%. So we're comfortable with our guidance, that's how we can meet that goal. But there's nothing really different from (inaudible), it's just the mix of property.

Not related to projecting any backup in cap rates?

No.

Okay. Thank you.

Paul Adornato, BMO Capital Markets.

Good afternoon. I was wondering if you could just talk about how stock buybacks figure into your capital allocation strategy?

Paul, this is Mike. As some of you know, we have a stock buyback authorization, $100 million, we've used $70 million of it, we have $30 million left. We will always consider that as an option for the Company and obviously that option is alive and well today for us. We don't comment on if we're in the market, when we'll be, how much or anything like that, but rest assured that is a capital allocation option that the Company has and has always looked at and I'm always asked by my Board to continue to look at that.

With respect to just -- I suppose I could just end it there on buybacks, but I would say that obviously where we have found tremendous returns is expenditure on growing the platform. I've been very pleased with the risk-reward trade-off and the rapidity and speed of returns that we can get from opening up an office when we have a great local market expert. So when I think about what we're able to do in Miami, we're able to do in San Francisco, what we're doing in Seattle and I don't want to -- and also the Inland Empire, I don't want to neglect mentioning any of our other fine officers that run the cities, but that's been a great payback for us. So that's how it figures in.

Okay. And if you happen to see a disconnect like we're seeing right now between asset pricing and the stock price, does that kind of encourage you to perhaps speed up asset sales or capital recycling activities?

Sure, that's certainly part of the calculus we do look at and we are looking at.

Okay, thank you.

Stephanie Krewson, Janney Montgomery Scott.

Good afternoon, gentlemen. Excellent quarter. Could you just refresh my memory? Many REITs have increased their dividend commitments recently, especially over the last year. Typically you announce dividend increases going into your fourth quarter, is that correct?

That is correct, Stephanie.

Thanks, gentlemen. All my other questions were answered.

Mitch Germain, Banc of America.

Good afternoon, everyone. Is there any specific fund which your incentive fees are more tied to than one of the others?

Are you asking are incentive fees higher in some ventures versus (multiple speakers)?

I guess what I'm really specifically asking, are they more tied to possibly the core JV fund in which you're shedding assets or that there's no correlation between the two?

We have a different set of incentive fees or promotes in every single venture and as we capital recycle we realize those so --. Does that answer your question?

It does. Again, I just wanted to see -- looking at the viability of those fees over the long-term. My second question -- in your guidance when you talk about your JV investments of $1.2 billion to $1.3 billion, it's unchanged versus the first quarter. And I know, Mike Havala, you referenced $200 million of investments for the new UBS fund, so can you I guess bridge the gap? Was that $1.2 billion to $1.3 billion, was the UBS fund considered last quarter or is there any change in the mix of what your investments are?

When we look at the $1.2 billion to $1.3 billion, that's inclusive of everything we do. So we're working on that sometime ago and so it is something that we contemplate when we consider our guidance.

Okay, thanks.

Ralph [Davies], JPMorgan.

Good afternoon. I had one question, just was looking at your same-store performance and it looked like you had pretty significant growth in occupancy in the Chicago area. And I just wanted -- kind of in light of that strong performance, I wanted to know if you could talk about growth prospects in that area and kind of maybe even on a submarket level?

Yes, Ralph, this is Dave Draft. We certainly have seen a substantial increase in our occupancy in Chicago. We've been talking about that coming for sometime as we looked at our pipeline actually over the last couple of quarters. Some of the leasing was finalized a little bit later than what we had expected so the occupancy came in obviously a little bit later than we had expected. But the marketplace, let me first of all just say in general, has been strengthening. We've seen really terrific activity over the last couple of quarters, again with a little bit of lag being at the time that the leases were actually executed and the tenants were actually in the building.

We're seeing a lot of activity in the airport area. You may know there's a very significant expansion of O'Hare airport taking place. That in combination with all of the import activity, airfreight and otherwise, coming into this very huge inland port area of Chicago is really starting to show its positive effects. So I would say from a submarket standpoint I would concentrate on the O'Hare airport submarket in particular and just tell you that things we expect will remain very active in the coming quarters as well; certainly over the balance of 2007. A good place to have a lot of square footage right now.

Thank you.

Just one follow-up on a question that we had earlier in the call. There was a question about how much of the out of service is in the same-store and it's about 1.3 million square feet. So just 2.3%, so that's resolved any potential confusion that was there. So with that --.

Thanks, everybody, for calling in. I believe, moderator, if I'm not mistaken that was our last question. I just wanted to thank everybody for their interest and, again, we're off to a great first half and I'd certainly like to acknowledge the great work that our team has done in building the platform. So thanks and we hope to catch up with you and talk with you soon.

Thank you. This concludes today's First Industrial Realty Trust second-quarter 2007 results conference call. You may now disconnect.