First Industrial Realty Trust Inc (FR) 2007 Q3 法說會逐字稿

I'll be your conference operator today. At this time I would like to welcome everyone to the First Industrial Realty Trust third 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)

Thank you, it is now my pleasure to turn it 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, our President and CEO.

Okay. Well, thank you, Sean, and welcome everyone to our third quarter 2007 conference call and before I begin, let me introduce the other members of senior management that are here today. Jojo Yap our Chief Investment Officer who will discuss our investment performance and pipeline; Rick Czerwinski, National Director of Leasing and Asset Management will be taking David Draft's place on the conference call to cover our portfolio results. While new to our conference call, Rick is not new to us, he's headed up our national leasing and asset management group for several years and he's been with us for over 10 years. David, as you remember, from our last call, is now working out of our office in Brussels, Helping our Managing Director set up operations in Belgium and the Netherlands. And also here is Mike Havala, our Chief Financial Officer who will discuss our joint ventures, balance sheet and guidance for 2007 and 2008.

In the third quarter, we continued to see robust demand from our corporate customers as we work with them to solve growing and more complex supply chain needs in the face of rising international trade. From a broader macro economic perspective, business spending remains healthy. Companies continue to invest back in their business. As a result, the fundamentals in the sector are strong and the demands in our markets continue to outstrip new supply. As many of you know, we have been investing heavily in our franchise to capture the many opportunities that we see from rising customer demand and we've been realizing those benefits in these investments in our strong portfolio results, you'll see it in our joint venture earnings, and in net economic gains.

Third quarter FFO grew 13% year-over-year, and our year-to-date FFO per share is up 10%, so we are right on track for our full-year guidance of 10% using the midpoint of the range. The upward trend for our portfolio continued as year-over-year occupancy, again, rose. This, combined with the healthy increase in rental rates, drove our same-store NOI to 4.8%. Development is now, and will be in the future, an important element of our growth. And so with this in mind, I'd like to just take a moment to review the progress that we've made in expanding this area of the business and how significant it is to future growth.

First, our total land holdings of nearly 4,000 acres can support over 60 million square feet, and therefore, potentially billions of dollars of vertical development. Second, 85% of these land holdings are in the high growth markets of California, Florida, Phoenix, Seattle, Houston, where they're near sea ports or inland ports or intermodal operations that should see absorption levels significantly higher than the national averages. Third, we also control several thousand acres of land via option agreements. So you can see that development is going to be a significant part of our growth and that's just where we're at today.

So with that as a backdrop now let me turn to our development activity during the quarter. On balance sheet, we now have nearly 6 million square feet under development. During the quarter, we added four new projects, including a 600,000 square foot distribution center for Rust-Oleum in the Chicago market, as well as a build-to-suit for Kimberly Clark in Nashville which was our second development for Kimberly Clark this year. Balance sheet land acquisitions in the quarter totaled 133 acres, with our biggest land investment made in the L.A. market.

Regarding joint venture development, six new projects were started during the third quarter, and total in-process developments in joint ventures rose to 6.2 million square feet. Joint venture developments placed in service included a million square foot distribution center for another repeat customer, Sears, in Central Pennsylvania, which is located along the I-81 corridor, the preferred distribution location for retailers that use the ports of New York and New Jersey. Joint venture land acquisitions in the quarter totaled 884 acres, of which 73% is in the L.A. market as well.

Due in part to this growth in development, we're happy to say that joint venture FFO in the third quarter was up 20% year-over-year. Our multiple capital sources are what allow us to serve a wide range of needs, from infill development and redevelopment, but also to spec development on strategic land sites that are significant enough in size to accommodate both current and future customer needs.

For example, in the third quarter we started development on Phase I of our new 356-acre Dalport business park located in the Dallas market and adjacent to Union Pacific's new state-of-the-art intermodal operation which handles freight directly from the port of L.A. and Long Beach. Dalport has the capacity to support more than 6 million square feet of industrial space. In addition, during the quarter, we purchased 150-acre land site in the Salt Lake City airport submarket that's also less than one-eighth of a mile from Union Pacific Salt Lake intermodal facility. This facility is important because it's the first point of intersection in UP's rail system for freight traveling from the three largest West Coast ports, from L.A./Long Beach, Seattle/Tacoma, and Oakland. We believe investments like this that connect rail, airport, and highway networks will generate high margins because they provide value-added solutions to customers who are operating within congested transportation networks.

Turning to economic gains, third quarter profit margins for the quarter were solid at 21%, with overall economic gains coming in at $35 million. As a reminder, our net economic gains and the related margin are calculated on a cash basis, not depreciated book. So in summary, our financial results were quite strong in the third quarter.

Since the beginning of the year, as many of you know, we have entered several new markets, including Toronto, Calgary and Edmonton in Canada; Seattle in the United States; and the Netherlands in Belgium and Europe. In each case what we've done is we've hired market leaders, and I'm pleased to say that they are off to good starts building their pipelines.

In Seattle we're already underway with the development of First Park 45, a 780,000 square foot park development located near the ports of Tacoma and Olympia.

During the quarter we also enhanced our executive ranks. Bob Cutlip, who was our Managing Director in the east, has now become Executive Vice President of North America, and Bob will be responsible for leading our strategic business development across the United States and Canada. With an expanded platform, it will be Bob's responsibility to ensure that we are utilizing every capability of our franchise to open up new relationships and to broaden our service to our existing customers. Bob will be working very closely, not only with our Managing Directors, across North America, but also with David Draft, our Executive Vice President of Operations, who as I mentioned before, will now be based in Brussels. Together, Bob and David will endeavor to help long-standing customers with their industrial requirements in Belgium and the Netherlands, as we have done in North America.

We also hired Steve Stoner as our new Managing Director of the Central region. Steve is an ideal fit for us because he has been providing strategic counseling to corporate customers on their supply chains for many years. Most recently, Steve was President of Corporate Services group for Grubb & Ellis, and previously he was the Managing Partner of Arthur Anderson's overall U.S. Real Estate Advisory business.

In addition, we hired Bob Walter as our Senior Vice President of Capital Markets to expand our debt and equity capital sources for our joint venture programs. Bob has extensive real estate finance experience, having worked at both GE Capital, Nomura Securities, and most recently as Senior Vice President of U.S. Bank. So we welcome Bob to our team along with Steve.

So, as you can see, we continue to invest in our franchise, in people, and in new markets. These investments are designed to continue our strong FFO growth. In 2008, we expect to grow FFO by approximately 8%, using the midpoint of our guidance range. This growth projection also incorporates continuing investment in new offices and personnel that we believe are great investments for the future of our franchise. Our broad capabilities, and the ability to offer multiple facility types across an expanding platform, has given us lots of ways to serve our customers. And that, in turn, has allowed us to build a strong investment pipeline of $1.8 billion, but more importantly, it's allowed us to build a strong foundation for our future growth. And so with that, I'd like to turn the discussion over to Jojo, our Chief Investment Officer.

Thanks, Mike. During the third quarter we invested a total of $383 million combined for joint ventures and balance sheet. 71% was in our JV with the rest on balance sheet. Focusing a moment on our joint ventures, of the $273 million invested in the quarter, $118 million was for 884 acres of land for future development and $104 million was in our core asset program with UBS, including a 291,000 square foot sale leaseback for a large packaging company in Southern California. We also continued to build our land holdings in our joint ventures, as Mike mentioned. Bringing our joint venture total to approximately 3,450 acres developable to approximately 53 million square feet. We currently have 6.2 million square feet in process in our ventures, totaling more than $300 million of development.

During the quarter, dispositions in debentures totaled $163 million and our average holding period was just 1.7 years. The largest sale was a portfolio in Minneapolis from our 2005 core JV. Our second largest sale was a distribution center that we held just for 8 months, generating a 19% margin due to strong investor demand for properties in Orange County, as we expected in our underwriting and asset management plan.

Let me now turn to our balance sheet. We acquired 21 buildings and 7 parcels of land for $90 million. We also placed three developments in service, totaling $20 million, so total investments on balance sheet were $110 million. The weighted-average cap rate for investments was 8.6%.

Among our largest balance sheet acquisitions in the quarter were two transactions in Southern California. One was 131,000 square foot facility located in the San Fernando Valley with below market rents that we acquired for well below replacement costs in a market with limited supply. The second was 173,000 square foot distribution headquarters facility just off the Alameda corridor which the main artery for containerized cargo departing from the port.

Moving on to dispositions, we sold 39 properties for $207 million. The weighted-average cap rate for those sales was 7%. While there have been some dislocations in the debt markets recently, we haven't seen much of an impact on our business. One of the key reasons is that a significant portion of the institutional investors who typically buy from us are either all equity or low leverage buyers. Plus, we benefit from having a dedicated team of 12 professionals who focus solely on dispositions for our portfolio.

Let me now turn to net economic gain from our balance sheet. In the quarter, our net economic gain was $35 million producing a margin of 21.4% as a percentage of our cost basis. For the year, we expect our margins to be in the 18% range. 53% of the gains in the quarter were from merchant activity and land sales and the rest from existing properties. Year to date, 62% of our gains have been from merchant activity and land sales. For the year, we expect gains from merchant activity and land sales to be about 60% of total economic gain. On the property sold, we achieved an IRR of 13% and that is on an unleveraged basis. Our average holding period for the balance sheet properties sold was four years.

I would like to turn to our pipeline. Our total investment pipeline for the balance sheet and joint ventures is $1.8 billion. A major portion of our pipeline is comprised of developments that are either currently or soon to be in process as we have detailed in our press release. Our total land holdings for our balance sheet and joint ventures are now nearly 4,000 acres, which are developable to about 61 million square feet, and can accommodate billions of dollars of future development.

Now, let me share with you our investment outlook for 2008, which is reflected in our guidance in our press release. For our balance sheet, we see total investment in the range of $850 million to $950 million, with dispositions in the range of $950 million to $1.050 billion. We expect to produce net economic gains in the range of $143 million to $153 million with margins on cost of about 17%. For our joint ventures, we see investment in the range of $950 million to $1.050 billion. And dispositions in the range of $1.1 billion to $1.2 billion, and it will contribute to JV FFO growth, to a range of $67 million to $77 million in 2008. As a reminder, our investment volume guidance includes only completed acquisitions and developments placed in service. For our joint ventures, we expect new development starts to be approximately $650 million for 2008. So with that, let me turn it over to Rick Czerwinski, National Director of Leasing and Asset Management.

Thanks, Jojo. First I'd like to make a few comments on the national market and then discuss our portfolio results. Demand for industrial space in the U.S. remains healthy with net absorption of 28 million square feet and new deliveries of approximately 29 million square feet. National occupancy is holding relatively steady at 90.8%. 30 basis points higher than the year-ago quarter and the forecast for rental rates was favorable across most of the major markets.

Turning to the portfolio, I'm pleased to report that First Industrial's balance sheet portfolio continues to deliver strong performance. Let's run through the metrics. Occupancy at the end of the quarter was 94.8%, up 170 basis points from the year-ago quarter and the highest level in more than six quarters. These results were broad based with occupancy levels of 94% or greater in 22 of our cities. Demand is strong across nearly all of our markets with good activity from logistics firms to consumer goods industry, and local or regional firms. Active industries include technology, energy, pharmaceuticals, and aerospace. Same store NOI was 4.8% on a cash basis and 3.2% excluding lease termination fees.

NOI performance like our occupancy results was broad-based across most of our markets. Rental rate growth in the quarter was 3.6%, up from 1.5% for the year-ago quarter, and as a reminder, we report this metric on a cash basis. Rental rate growth was also broad-based. With the overwhelming majority of our regions reporting positive increases. We're achieving strong rental rate increases on both new and renewal transactions and we're having excellent success in building in annual contractual increases. Tenant retention was up this quarter coming in at 79%. And lastly, leasing costs were only $1.72 per square foot which is 21% lower than our 2006 average of $2.17 per square foot. This was caused in large part by the tightening supply and strong demand in most of our markets.

So given the healthy market fundamentals we're seeing, and the positive outlook for our portfolio for the fourth quarter, we're raising outlook for full-year 2007 occupancy to approximately 94%. We expect same store NOI growth for 2007 to be in the range of 4 to 5% on a cash basis excluding lease termination fees. And we expect rental rate changes to continue to be positive and leasing costs to continue to be significantly below the 2006 average.

We are very pleased with our 2007 portfolio performance, and anticipate good results next year. Specifically, for 2008, we expect average occupancy to be approximately 94%. We see same-store NOI between 3 and 5% and positive rental rate growth. So with that, I'll turn the call over to Michael Havala.

Well, thanks, Rick. I'm going to provide an update of our capital position, including our joint ventures, and then our guidance for 2007 and 2008. As of September 30, our total capital base was $8.7 billion, and this includes both our balance sheet and our joint ventures. For just our joint ventures, we had invested approximately $2 billion of the $4.4 -- $4.5 billion total joint venture capital base. And remember much of our joint venture equity capital is revolving as well.

Regarding our balance sheet and financial ratios, we're in a strong position. Our fixed charge coverage was 2.8 times. 100% of our permanent debt is fixed rate with nearly an eight-year weighted-average maturity. And then 96% of our assets are unencumbered by mortgages. For the quarter, our FFO payout ratio improved to 63%, and our FAD payout ratio improved to 71.8%.

During the quarter, we renewed our $500 million senior unsecured credit facility, and we were very pleased that despite the challenging credit markets we were able to decrease our credit spread by 15 basis points down to LIBOR plus 47.5. In addition, we increased the maturity of our credit facility by executing a five-year facility rather than the typical three-year facility. And then finally we added the ability to borrow in multi-currencies in order to facilitate our international investments.

Also during the quarter, we repurchased over 743,000 shares of our common stock, at a weighted-average price of $39.55, for a total of approximately $29 million. And as we have done in the past when repurchasing our own stock we also reduced our debt proportionately in order to keep the stock we purchased a leverage neutral program. We have authorized another $100 million of stock repurchase capacity, but you should note that further repurchases have not been factored into our guidance numbers for the remaining part of '07 as well as 2008. Regarding the quarter, we exceeded the midpoint of our guidance by $0.01 and we're still on track for our previously increased 2007 guidance which is $4.50 to $4.60 per share for the year. And at the midpoint of our guidance range, our FFO for share growth is just above 10%.

For 2008, we are initiating our FFO guidance at a range of $4.80 to $5 per share. Our key assumptions have been laid out in the press release and Jojo and Rick discussed some of these as well, so I won't reiterate these here, but the key elements of our 2008 guidance include growth in all three of our revenue streams, those are net operating income, joint venture income, and net economic gain.

We will continue to expand our Company by adding resources in the development area, and in our international markets. We expect our total G&A to increase between 20 and 30% in 2008. Now, it's important to note that the majority of our G&A increase is related to our increase in development resources, and our international expansion, and under the accounting rules, when you develop inside a joint venture, you do not capitalize the development G&A. Thus, our G&A line will show a higher number which is more than made up in development fee income and development profits, but there is a gross-up of revenues and expenses under the accounting rules when you do development inside a joint venture.

And then the last point I wanted to make about our guidance is that we expect our 2008 FFO to trend upward from quarter to quarter throughout the year, and that's just due to the timing of the transactions in our pipeline. So with that, let me just conclude by saying that we see solid earnings growth for 2007, and 2008, we have billions of dollars of capital available to help us achieve it,and we will continue to expand and grow the Company. With that, let me turn it back over to Mike Brennan.

Okay, Mike. Thanks a lot. Before we open up for questions I'd like to just briefly summarize some of our thoughts at the quarter. Our year-to-date results are right on track with our guidance of 10% growth for the year based on a very sound plan that we put together. The portfolio's performing very well. The economic gains from our value-added investments that we harvested in the quarter continue to show very healthy margins. As we ramp up our development business we expect to see continued growth in joint venture income as we did this particular quarter.

Our investments in people, the investments in new markets, and the multiple capital sources that we have, set the stage for future growth by meeting the supply chain needs of our corporate customers. So I'm very pleased with the development and performance of the franchise and platform. So with that, let me turn it over to the moderator who will open it up for questions.

And just as a reminder, we'd like to make sure that everyone on the call has an opportunity to ask a question, so please ask one question per caller. Moderator?

Thank you. (OPERATOR INSTRUCTIONS) Your first question is coming from Jamie Feldman of UBS.

Jamie? This is Mike Brennan, are you there? Okay, moderator, let's go on to the next question.

Thank you. Your next question is coming from Cedrik Lachance of Green Street Advisors.

Thank you. Looking at the difference between your expected growth economic gains and your expected net economic gains in '07 and '08, you seem to be able to realize better net gains next year. What is going to drive this improvement in net versus gross?

Jojo would you like to start?

Absolutely. Cedrik, hello. This is Jojo. In terms of what will drive our net economic gains, one of the things that we have guided to is about a 17, approximately 17% margin on cost. So it's not significantly higher, number one, compared to where we're going to end up in 2007. In terms of the absolute amount, we have a big pipeline. And more buildings that we own are nearing completion under asset management plans. In addition to that, a lot of our developments are -- we have a greater pipeline of developments and more of them are expected to be leased. So that pipeline alone gives us the ability to increase our net economic gains in the future.

The other thing I want to highlight, Cedrik, is that we now have more people and we are also in more markets. And every year for the last 10 years we have had intra-year type transactions. What I mean by that is that we are able to either buy, redevelop, invest, and sell within the same year, because of our wide infrastructure and access to deal flow. So we would expect that business also to grow.

Cedrik, this is Mike Brennan. One of the things, too, remember that in the pipeline on 2008, you have many more developments being harvested than say was the case in '07 or '06. So in '07 you have a more heterogeneous population. Some of our, say, quick re-sales of stabilized assets may carry a margin of 10% to 12% but it carries far less risk. When you go into '08 you have a greater population of the developments that I had mentioned here in my prepared remarks that generally carry slightly higher margins than, say, the example that I'd given you before.

Let me ask a follow-up on this. When you look at book gains versus net economic gains this year, you're forecasting about $205 in book gains, and $132 million in net gains. And then next year you forecast about $210 million in book gains and about $148 in net gains. I understand the difference between book and net as being the G&A costs associated with generating the gains, and taxes. Is there a fundamental difference in your tax assumptions or in your G&A assumptions next year?

No, Cedrik, there really is not a fundamental differential in the assumptions. The difference between the book gains and the net gains, of course, you've got depreciation that is in your book gains but of course is not in our net economic gains, but it's a recap or so. So I mean, you look at book gains this year, next year, not too much different. You do see some growth obviously in our net economic gain from 2007 into 2008.

Thank you. Your next question is coming from Jamie Feldman of UBS.

Hi, thank you very much. Can you please talk about the buyers for your assets? I guess I was a little surprised that the '08 guidance was so strong given just an expectation for slower real estate activity and what's happening in the credit markets. I know you addressed a little bit in the call the institutional buyer, but can you break out where you think development sales and merchant development sales and economic gains will go in '08. Like what percentage will be categorized by each kind of buyer?

Jamie, let me start and then Jojo can provide some specific buyer composition. But basically, I think if you are a day-to-day practitioner of our craft as we are, you know that there's a very large population of institutional buyers who are buyers that were once entrepreneurs that are now financed by institutions or an assortment of groups out there that have the capacity and wherewithal to purchase industrial real estate. It also is one of the most highly allocated and least filled investment property types in all of the pension fund or institutional universe. So there's a substantial amount of liquidity looking to go into institutional, really industrial real estate by institutions. So there really is, I guess, the good news and bad news is that there really is no shortage of liquidity for the sector.

The last thing I would point out is that one of the great benefits of the model that we've created is that, yes, we all know that there are many buyers out there, we all have a staff of 12 dedicated professionals. Their job is not only to source the institutional buyers, but to understand in every market with every product type with every risk profile the type of buyer that we can match with one of the properties that we're purchasing. So, yes, we, all of us understand the liquidity, but I think what we have, one unique benefit of the platform is that we developed that capability to be able to precisely, fairly precisely place an investment with an end buyer when we purchased it. So I think your concerns are good ones in terms of what the liquidity concerns can do, but in our particular sector, with our particular model, we've navigated it pretty well. Jojo you want to talk about some of the specifics on, as far as composition?

Thanks, Mike. Jamie, the composition in the third quarter was approximately 67%, was approximately sold to institutional buyers, and users which are types of buyers that are typically either all equity or low leverage. In addition to that, I just want to highlight is that the remaining private buyers, a portion of that are 1031 exchange buyers who are driven by a different motivation, as you know, tax. And, therefore, a lot of times they are also low leverage buyers with an additional motivation of buying property for tax deferrals.

I think your follow-up question was how does the composition look going forward. When you look back historically in the past 10 years, basically our buyer profile for the institutional buyers and users has been in the 60% range. I don't see that changing. One of the things that the other sellers can't do is really actively sell to users because they don't have a dedicated group. We can sell one building at a time. So when we have a building that's not leased, obviously we can sell it to the highest-priced buyer, which is the user buyer.

And I guess a related follow-up would just be, it seems like since you do have this institutional interest, why not expand the long-term hold funds model more aggressively going forward and then you have kind of a captive buyer?

I'm not sure that I understand your question.

Well, if you have institutional interest in the assets, why not ramp up the amount of property funds that you manage? You can have the same capital available for your development pipeline without the risk of actually having to sell to the open market without knowing who's going to buy it?

Sure. No, it's a very good question. I'm glad you asked it, that is something that we have analyzed and looked at and it's something that we may potentially consider going out into the future. Note that we do have, that we did establish a new core venture, if you will, this year with our partner UBS, about a $505 million program to invest in core assets. So that is similar to what you're talking about. Those assets are purchased in the marketplace but that is a similar thing to what you're talking about, but it is something that we do look at and analyze and consider. Jamie, that's a good question.

Does the '08 guidance assume any additional funds?

No, the '08 guidance does not. However, our plan, as we've mentioned previous occasions, is that we will -- we intend on continuing to look for opportunities to expand the use of private capital. So we will be actively involved in that and, as I mentioned, Mr. Walter is, along with Mike Havala, it's one of his chief responsibilities.

Thank you.

Thank you. Your next question is coming from Lou Taylor of Deutsche Banc.

Hi, good morning, guys. Not to belabor the point but Mike Brennan, you've done a good job this year in terms of getting some pretty good cap rates on your dispositions with that 7% average. You've given the same range for the '08 dispositions. Do you think you'll be able to average a 7 next year or do you think you'll be within the range but just at the higher end of the range?

I'm not sure. Lou, I think that when we look at the composition -- I think the answer is yes, I think we'll be about in the range, I think we actually increased it about 25 basis points. But stepping back, when we look at where some of the sales will occur, they will be developments coming out of some pretty strong markets where actually cap rates have held firm and in some cases gone down due to the expectation of rising net operating incomes.

If the fundamentals stay pretty much like they are at, I don't think that you're going to see a significant increase in the rise in cap rates because -- and if you do, what you lose on cap rates you may gain on NOI. So I think we've gone through a fairly significant baptismal fire in the markets over the last 90 days and shook out a lot of the marginal players, but still there's, as I said before, enormous amounts of liquidity that want to enter industrial real estate. So, and we feel pretty confident in the range.

Now, I'll say this, that if a liquidity crisis were to develop again or were to become more severe than the one we saw, remember that with $4 billion in buying capacity we stand in a pretty good position to be a fairly formidable competitor if liquidity were to drop in the market. So, again, I think we look, we're fairly confident in those projections that we've given you.

Okay. Thank you.

Thank you. Your next question is coming from Paul Adornato of BMO Capital Markets.

Hi. Just a couple of questions on international expansion. What type of tenant synergies would you expect as you go overseas, or I guess another way to ask the question, where do your tenants want you to go overseas?

Paul, this is Mike Brennan. Just to remember, that today we're in the Netherlands and we're in Belgium. One of the things we mentioned on a prior call was that we had a group of what we called A accounts and we kind of looked where they were at in Belgium and the Netherlands, there was a considerable amount of overlap. So we do have many opportunities to take customers in the United States and provide those particular -- and new opportunities in Belgium and the Netherlands.

One of the things that was very intriguing about Netherlands and Belgium was that nobody had a model similar to -- nobody had a model like First Industrial's where we could do both development and the purchase of surplus assets in combination with one another. So we have a number of multinational corporations that we work with in the United States that have operations in Europe, and so I would think that we'd be able to do a lot of same things over there that we've done in the United States. So.

Okay.

Now, remember, just take, Sean passed me a note, just a reminder, when we got into Toronto it was all customers. It was -- the first one was Volkswagen, then Rockwell International, and then another private equity group that we worked with in the past, those were the four first acquisitions that we made, those happened to be net lease properties.

Right. Okay. Great. Thank you.

Thank you. Your next question is coming from [Keeban Kim] of Credit Suisse.

First, a real quick follow-up on net economic gains. Could you just talk a little bit more about the asset mix you're expecting in '08, particularly the -- how old the assets are and how long you can hold them before you sell?

Jojo?

Yes. In terms of the mixture, we expect in '08 that the percentage of sales coming from merchant activity and land sales will be in the 60% range. So that is somewhat in the range historically of where we've been. In terms of age, I mean, it's across the board. And that is something that we do not plan -- we do not plan with a building age in mind. What we do is we look at each and every asset, and have an asset management plan for value creation. Whenever we make an investment and we try our best to execute that plan as soon as we can. So that would be -- that really is a ground-up value creation philosophy and discipline that we've maintained throughout our career really as a public Company.

Does that answer your question?

Yes. And just a different question now. For stock repurchases, it seems like you got in a pretty good price, around $40. What range would be ideal for your ongoing stock repurchases?

That's a very good question. I will not answer that, I will not tell you exactly where we will or will not buy, but I would just say that every year and every quarter we look at our investment alternatives that we have and we have many great investments in real estate but from time to time we will take a look at repurchasing assets that were already purchased, which is really the stock repurchase plan. So now we also increased our authorization, reissued an authorization up to $100 million. So that we have the opportunity to make that investment -- to make that a viable investment alternative together with our investments in real estate.

Okay, thank you.

Thank you. Your next question is coming from Michael Bilerman of Citigroup.

Hi guys, Jon Litt's on the phone with me as well. Going onto the gains, I think you mentioned just before that you would expect that 60% would stay within the merchant development and land sales of 40% from the existing buildings. And I guess in the case now that your net economic are greater sort of to Cedrik's point as a percentage of book, would that then imply that given the fact that the total percentage is the same, 40% of existing sales, that those are newer buildings that you're selling relative to the year prior because you have a lower book gain?

I don't know that I would draw that conclusion necessarily. I think that the difference between '07 and what we expect for '08 is pretty small, pretty immaterial, and of course obviously as the year goes and the pipeline develops more and changes those will move around a little bit. So I wouldn't draw any big conclusions from that.

But you're getting a bigger follow through from book to net or from your gross, that would imply that, I mean, if you haven't changed your depreciation or G&A or tax assumptions that the -- and the percentage of your existing assets that you're selling is the same of the total, i.e. 40%, that has to be shorter life assets?

It's not a material differential.

What would be the margins on the different categories that you're expecting in '08?

The -- this is Jojo. The margin has been fairly even across merchant activities, sales, and existing buildings. Where it differs a bit is under development, the build-to-suits overall are lower in margin within the 200 to 300 basis points range. So if you're at 18%, for example, 18% margin on speculative development, you would expect that margins for build-to-suits would be about 14%, 14-15%.

Now, also when you look at build-to-suits, I just want to be clear, there are build-to-suits that you pursue without owning the land and there are build-to-suits that you do on the piece of dirt that you already own. That adds a big difference. Build-to-suits that you pursue without owning the land is highly competitive, and that's a very low-margin business. That we don't do a lot. When you have a build-to-suit on your own land, typically what happens is that the customer has made the choice for your unique piece and the margins there are not that significant, vis-a-vis speculative development. So I hope that gives you a sense of margins.

Thank you. Your next question is coming from Brian Legg of Millennium Partners.

Thank you. Can you guys just talk about clearly going through the credit crisis, did you see any reluctance for buyers to close or any re-trading activity?

Brian, this is Mike. Broadly speaking, as Jojo mentioned, the customers that we did sell buildings to, no, we did not. Again, high allocations to real estate, good quality real estate, good prospects in the market. They wanted to close. Yes, we did see some -- several transactions attempt to be re-traded, and sometimes we said yes, and sometimes we said no. But it was a fairly small amount. We, too, anticipating or perhaps opportunistically or whatever, and had some opportunities in the quarter to take advantage of a temporary disruption in pricing, so on the buy side we benefited a lot more than those isolated instances in which we -- buyers walked away or gave us a lower price. So yes, we did a little on the margin, sure.

And just in general, did you see any real back-up in cap rates or I'm just trying to get a sense, did you see the amount of transactions out in the marketplace retrench, in other words, sellers were pulling back assets from the marketplace?

Well, pulling back assets from the marketplace, sometimes they did. Having grown accustomed to one price, they didn't want to accept another one. So, yes, there was a little bit of pulling back. When we think about where did we see a little bit more pullback than others, would probably be in the -- that area of the business which is largely the domain of the local entrepreneur, so in the redevelopment areas, okay. That wasn't a drawback in cap rates because in some cases they are not even leased, but is really a drawback in the amount of money that a lender would advance towards a risky redevelopment.

And so what we -- our particular tactic in that market was to increase significantly the amount of offers or re-offers that we made in certain prime areas of redevelopment, such as in South Bay market in L.A. So there, where advance rates for fairly risky properties had gotten rather high, allowing entrepreneurial buyers to participate in that type of a market, there we saw a little bit more pullback. And that was great for First Industrial. That's the moment that we had been waiting for, those are on, again, on the redevelopment-type projects.

But so in general, the cap rate environment, are you seeing cap rates, do they feel stable or do they feel like they might be backing up?

No, they feel stable. Look, we went and we've increased by about 25 basis points our range on buying and selling, so we think that there's a possibility of that, and as we go further on in the year. But no, I think that the results of the quarter if you're ever going to see it, I think you'd see it in this quarter where there was a reaction, perhaps an overreaction. But we navigated through it quite well. I think, again, we navigated through it quite well not just because we have a great group of people that can identify buyers and sellers, but we navigated through it because there's excellent, very high allocations to real estate, very strong fundamentals, also what type of product we bought and where, also lends great assistance to our disposition plans.

But I think you will see it. I think you'll see it throughout the industry that while you may get, I think on the redevelopment side, you'll get that. And I think that's beautiful news for people that do redevelopment, is that we're going to get the entrepreneurs that were ably assisted by 85 and 90% LTV's on that project if we can get those guys out of our business that will be good for people that have ample amounts of cash like we do.

Great, thank you.

Thank you. Your next question is coming from Mitchell Germain of Banc of America.

Good afternoon, guys. I got on late so I apologize if I'm asking something that's already been addressed. Jojo, I know you've mentioned in the past you guys have always been pretty conservative in the manner in which you underwrite transactions. Have you made any changes to become a little more conservative given what's going on?

Yes, Mitch, definitely one of the things that we have done in our underwriting, and we have not -- we may not have closed deals because of the more conservative underwriting. But basically we've done this on two specific changes. One is that we increased the exit cap rates. So a lot of times we use a, both a unleveraged and a leveraged IRR analysis. And what we've done is that we bumped up our exit cap rates. And you know the effect of that is to reduce the price. The other thing is that on both redevelopment and under-lease properties and redevelopment that requires leasing, we've extended all our lease-up times in our underwriting. So and the last thing that we did is that we tempered rental rate growth. So once you do that, one of the things we're seeing is actually the run rate growth is already outpacing our assumptions in some of the cases that we've changed our underwriting last 60 days.

Can you quantify some of those changes, Jojo?

The range, exit caps, up 25 basis points. That's the reason why we will also reflected that increased exit cap guidance vis-a-vis our guidance. In terms of downtime, if we assume that we would lease a space nine months, we would make it 12 months. And at the end of the day in terms of rental rate growth, anywhere from 50 to 100 basis points a year.

Okay. Great.

Mitchell, I would say -- this is Mike Brennan. That's exactly what we did, we also thought we saw a good opportunity right after the 4th of July when the credit crisis hit, to have more of it our way. But I would say that what we did on underwriting was generally pervasive throughout our whole approach to 2008, which was not -- which was by no means a pessimistic outlook, it was on optimistic outlook, it was just moderated somewhat from '07 for cautionary reasons. We, like many others, weren't quite sure what the credit crunch, crisis, whatever, dilemma might pose for the economic health. But it's still a very vibrant marketplace. Rick's comments, we saw almost every single market in which we operate have very strong fundamentals. The high levels of plant utilization, record levels of liquidity, good business spending, we like what we see. Then on the other hand, we read the same newspapers as everyone else, and made sure that that moderation was felt throughout our portfolio projections as well as our underwriting assumptions.

Great. And you -- your prior comments, Mike, the caller before -- the question before mine, on the 90-plus LTV buyers, I know we haven't seen as much of a prevalence of those buyers in the industrial space, have they really been major players, number one? And number two, have you seen any really change in the composition of buyers?

Yes. Have they been real players? Yes, they have. I mean, I -- maybe my example is somewhat exaggerated but they've been players on core properties, but that's okay because we're not players on core properties. So whatever happens to them there, we're not necessarily concerned. Where we're happy that that's gone away is on the redevelopment properties. Yes, they were, now thankfully many lenders have said hey, that's a risky property, that's construction risk and leasing risk and so we don't think that advanced rate is appropriate anymore. Okay. So that's an area that's incrementally beneficial to us.

What portion of the -- look, the biggest buyer of industrial real estate is going to be institutions. It just made way for the institutions that were sitting, again, I'm repeating myself, but on large allocations that want to go into industrial real estate to be able to get more of their allocations met. So that void, if you will, I can't give you statistics on how much of those buyers constituted the market but they were there. And -- but again, they're, at this point in time, there's no lack of interest in this sector because of the large opportunities that are out there, the supply chain reconfiguration, the port activity, just leading to strong fundamentals which is leading to strong interest in the sector.

Appreciate the color. Thanks, Mike.

Thank you. Your next question is coming from David Taylor of David Taylor & Company.

Thank you. And first, I'd like to say it was a great quarter. I appreciate seeing it.

Sure.

I'd like to revisit the question on repurchase of shares. I'd like to sort of get into the mental framework of, not the price, okay, but the -- what do you look at as an acceptable place to repurchase shares? Is it a discount to book or a substantial increment to what you perceive as your cost of capital? What is it that you look at?

Well, I could talk -- we could write a book about this subject, but we won't at this point. But let me say that the most pervasive argument, for me, is lining that investment up together with investments in real estate. And if we can make the case to ourselves that we're purchasing that stock at a discount to intrinsic value, then we're interested. Now, other things are nice to get as well. FFO accretion, and so forth. But the deep discount to it -- to intrinsic value is appealing to us, the bigger the discount, the better. So we line up our opportunities, whether they're development, redevelopment, acquisitions, and so forth, stock repurchases goes right along there with it, and from time to time one alternative will be more attractive than another.

Okay. So you view this as in competition with real estate purchases?

Yes, I do. Yes.

Okay. Great. Thank you.

Thank you. There appears to be no further questions. At this time, I'd like to turn the floor back over to First Industrial Realty Trust for any closing remarks.

Okay. Well, thank you very much today for your questions and your interest in our Company. And we look forward to seeing some of you at NAREIT in November. Talk to you later. Thank you.

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