First Industrial Realty Trust Inc (FR) 2008 Q2 法說會逐字稿

Good afternoon. My name is Donald, and I will be your conference operator today. At this time I would like to welcome everyone to the First Industrial Realty Trust Second Quarter results conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to First Industrial Realty Trust.

Good morning, everyone. 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 press release that is available on our website at firstindustrial.com. Now, let me turn the call over to Mike Brennan, our President and CEO.

Thank you very much, Sean and welcome everyone to our second quarter 2008 earnings call. Before we begin, let me introduce the other members of senior management who are here with me today. Mike Havala, our Chief Financial Officer, Jojo Yap, our Chief Investment Officer and Rick Czerwinski, our National Director of Leasing and Asset Management. For our call today, I'm going to start by providing an overview of our results for the quarter as well as my outlook for the balance of the year. Mike Havala will then cover our operating results and capital position and he'll update all of us in the guidance for 2008.

While market conditions continue to be more challenging than last year, our FFO of $1.16 per share for the second quarter was at the higher end of our guidance range. Portfolio results were solid with occupancy at 93.5%, retention of 81%, 5.8 million square feet of leasing and that's a level that exceeded all four quarters of 2007, and same store revenues were up 2.3%.

As you may recall from our first quarter conference call, we made reference to a dip that we anticipated in our same store NOI in the second quarter from strong growth in the first quarter. This decline in second -- second quarter same store NOI was projected and was due primarily to an increase in two expense items that we do not anticipate in the second half of the year. For the balance of the year, we continue to anticipate same store NOI growth will be positive and for the full year to be between 0% and 2% positive. Moreover, let me mention that we expect total NOI to be up in the third and fourth quarter due to positive net investment on balance sheet in the second half, as well as contributions from an increase in same store NOI together with improving occupancy from our out-of-service portfolio.

Now turning to net economic gains, our profits from capital recycling continue to be very strong in the second quarter at $38 million, up from $36 million a year ago. Margins and IRRs continue to be healthy as well.

Joint venture FFO was $9.4 million for the quarter, which was down from last year. In the second half of 2008; however, we expect to monetize a significantly larger number of transactions with a result in increase in second half JV income.

G&A expenses were essentially even with last year and, given our expansion into Europe and Canada, I believe that we have managed our G&A costs prudently. By reallocating our resources from lower growth markets to ones with greater growth potential, we have contained our G&A costs without hindering the expansion of our platform.

Also as you saw in our recent press releases, we opened new offices and hired new country directors for both France and Germany, adding to our offices in the Netherlands and Belgium. Our current investment pipeline in Europe is approximately $150 million which we expect to finance primarily through our $475 million European JV.

So overall, we had a good second quarter and as we look out for the full year, we are maintaining our FFO per share guidance range of $4.70 to $5 per share. In terms of the breakdown of FFO by quarter, you'll note that we anticipate an acceleration in the fourth quarter. The forecasted increase is primarily related to two areas and those are higher JV FFO from greater incentive payments and higher NOI from on balance sheet investment activity.

On the investment side we have adjusted our full-year balance sheet and joint venture investment target down slightly to $1.75 billion and our development starts down to $400 million for 2008 due to the postponement of some spec buildings. Our investment activity is forecasted to be significantly greater in the second half and there are several reasons for this. The first reason is the pipeline. The majority of our $1.4 billion investment pipeline is expected to close by the end of the year and that includes more than $200 million of development expected to be placed in service.

The second reason for the forecast of greater investment activity in the second half is the expectation that corporate real estate acquisition opportunities will increase. Specifically over the past months, our accepted acquisition offers from corporate sellers have increased compared to earlier in 2008. Several of these acquisitions were accepted under terms that earlier in 2008 had not been acceptable to the sellers. Further, we know of other corporate transactions being remarketed at new, lower prices. Several motivations may explain this. For some, it is operational. For others, it is financial or for many, it may simply reflect their views of the real estate market. The net effect in our view is more corporate sales volume.

The third reason that our investment activity is forecasted to be significantly greater in the second half is purely FR organizational strengths. Specifically compared to one year ago, we now operate in seven new international markets, three cities in Canada and now four markets in Europe with the additions of France and Germany in the second quarter. In the second quarter, happy to say that Europe got on the board, so to speak, contributing approximately $150 million to our pipeline. Equally important, these new markets, like our US operations, all have dedicated capital to move opportunistically, providing a material competitive advantage. Also as an overall reminder, we have made sizable investments in our franchise over the past few years, including raising approximately $6 billion in new private capital, opening up new markets throughout Europe and North America and also recruiting top professionals to better serve our customers. And let me also emphasize that the long-term drivers of demand for industrial space are still solidly in place. Demand relating to rising international trade. Demand relating to changes demographics and also demand from supply chain activity, especially given rising energy costs. As in the past, our mission is to anticipate customers' evolving supply chain needs and to be fully prepared with the right spaces and the right markets to deliver timely solutions. So we think the current environment will provide ample opportunities to continue that mission. With that, let me turn the discussion over to Mike Havala.

Thanks, Mike. And let me get right to our investments during the quarter. In total, for both our balance sheet and our joint ventures, we completed 19 investments totaling $244 million. On the disposition side, we completed 27 dispositions, totaling $371 million. So although there's been lower transaction volume overall in the real estate market, we continue to execute our capital recycling.

Moving specifically to joint venture investments in the second quarter, total investment activity was $119 million, that's comprised of $101 million in acquisitions and the remainder coming from developments placed in service. Our largest investment in the second quarter for our JVs was a 286-acre land parcel at the Port of Houston and we acquired this from a corporate customer. The site is located at the center of the Houston energy corridor along a ship channel. And as you might be aware our Interport project in this land constraint market has been very successful due in part to the Houston economy that is benefiting from a strong energy sector. So, we're glad to add this large land parcel to our holdings. For this parcel we are targeting build-to-suits and spec development for the site as well as land sales to customers. Other investments in our joint ventures during the quarter included a sale leaseback and a surplus acquisition with corporate customers in the Atlanta and the LA market. And these are both examples of value-add opportunities.

During the quarter, we also placed in service a 308,000 square foot project in the Chicago market with a total investment of about $17 million and this was for our Development and Repositioning joint venture. This is a very good example of an infill redevelopment project whereby we acquired an obsolete manufacturing facility, we demolished it and then we constructed a multi-tenant distribution facility which was then leased to three tenants and then subsequently monetized. JV dispositions during the quarter totaled $100 million with all of these sales from our Development Repositioning joint venture. Our average holding period for the assets sold from joint ventures was about three years. And then to update you on our JV development activity, we have about 4.5 million square feet of development in process and that's projected to total about $229 million of investment upon completion.

Moving now to our balance sheet investments. We invested $125 million during the quarter and that's comprised of $86 million in acquisitions and $39 million of development placed in service. Among our balance sheet acquisitions, we added approximately half a million square feet in Southern California, primarily in the South Bay market and this included a 184,000 square foot building leased to a leading biotech company, as well as a 208,000 square foot facility that is in a short-term sale leaseback with a corporate customer and we will later reposition this in order to serve another customer's needs.

Regarding dispositions on the balance sheet, we sold 53 properties in 21 transactions, totaling $272 million and these were sold at an average cap rate of 7.6%. The net economic gains from the balance sheet were $38 million and we had a margin on cost of 17% and on the properties that were sold, we achieved an internal rate of return of 12% and note that that's on an unleveraged basis. And then the average holding period for assets sold from the balance sheet in the quarter was 5.9 years.

Turning now to our results from our balance sheet portfolio. Occupancy was 93.5% at quarter end. Then as we stated in our last earnings call our second quarter same store NOI would dip and as expected, it did and it came in at minus 0.9% excluding lease termination fees and on a cash basis. The reason for the dip in the second quarter was due to charge-offs for two tenants as well as a true-up for real estate taxes in the second quarter in Indianapolis. Our rental rate growth on a cash basis for the quarter was 3%. The average lease term is 6.1 years and then on average less than 15% of our leases expire annually through the next five years. Tenant retention was strong in the quarter at 81% and our leasing costs were about average at $2.14 per square foot.

Next, let me give an update on our capital position. Our current capital base is nearly $10 billion and that includes both our balance sheet and our joint ventures. For just our joint ventures, we had about $4 billion of available capital capacity and then remember much of our joint venture equity capital is revolving so we have substantial capital for investment opportunities here. Regarding our balance sheet debt, as I've noted on our last few calls our weighted average debt maturity is long at 7.7 years. And we have no debt maturing in 2008 and less than $135 million maturing in total through the end of 2010. All of our long-term debt is fixed-rate and our financial ratios are strong. In the quarter we had a fixed charge coverage of 2.7 times. And then our FFO and FAD payout ratios were 62% and 69% respectively for the quarter.

Moving on to our 2008 guidance, as Mike noted, we have reaffirmed our FFO guidance range of $4.70 to $5 per share. We have updated some of the components of our guidance as follows: our on balance sheet investments are expected to be $800 to $900 million and then dispositions are expected to be in the range of $1 billion to $1.1 billion. Noting of course that there may be volatility in transaction volume given the state of the capital markets. We now expect development starts for 2008 to be about $400 million and this includes our fee development activity. And then as I previously noted, our average occupancy for the year is expected to be about 93% and our same property NOI is estimated to be flat to 2% positive for the year.

We also now expect a lower G&A expense than previously forecasted as we now estimate the percentage increase in 2008 to be about even to slightly up from 2007. Our guidance for the third quarter FFO per share is $1.08 to $1.18 and we expect the second half JV FFO to be largely weighted to the fourth quarter and that's due to the timing of anticipated JV property sales and the associated fees and incentive payments. These dispositions will be primarily from properties which we have either already completed or are shortly going to complete or expect to complete our asset management plans. Note that these are spread out over a number of transactions in a number of different markets. So with that, let me turn it back over to Mike Brennan. Mike.

Thank you, Mike. Before we open it up for questions, let me reiterate that while market conditions have become more challenging, the fundamental long-term drivers of growth are very much intact. Also, as we noted before, there is still considerable investor demand for industrial properties and the liquidity for industrial real estate, above and beyond the institutional investor, is further enhanced by its other natural buyers, the user buyer, the passive buyer and the local buyer.

On the new investment front, we have the distinct competitive advantage of a deep capital base and of course the on the ground expertise to identify and create value. Strategically, we are well positioned, I think, to serve the supply chain needs of our corporate customers which are going to require increasing industrial real estate solutions, whether their businesses are expanding , whether they are contracting, we believe we are well positioned to capitalize on these opportunities. And so now, operator, can we please open it up for questions. Thank

Our first question is coming from Lou Taylor with Deutsche Bank. Please go ahead.

Hi, thanks. Good morning, guys. Mike or Mike, can you give just a sense of the buyer or seller profiles of your 2Q acquisitions and of your pipeline in terms of who's buying properties from you in terms of, where you see the best opportunities to buy?

Yes. Lou, this is Mike. I'll ask Jojo to give the detail on that.

Lou, hi, Jojo here.

Hey.

Less than 5% of the buyers for our 2Q properties were private investors. Over 90% came from almost an equal split between institutional capital, which is primarily through advisers, and the rest came from users. And then there was a -- also a small market for 1031, particularly for 2Q. Going forward, the most active part of the market is going to be really three out of the four, meaning institutional capital, primarily to advisers, which includes pension funds and insurance companies, part of that three would be the users who continue to be active and 1031 exchange investors. And some of the 1031 exchange investors, you may already know, are represented by TICs, we call them in the industry, which is tenant in common investors or group of limited partnerships and finally the least active of all are the private one-off leverage investors.

Now, in terms of sellers, Jojo. I think that was Lou's other question.

Oh, in terms of sellers, just like Mike alluded to, there has been continued increase in terms of corporate sellers, so going forward if you look at our pipeline and the source of that, the majority is coming from corporate sellers and the rest is really kind of equally split between institutional and private investors.

Okay. And then in terms of the corporate sellers, are they selling single assets or are they more selling in portfolios?

Yes. Let me just start, maybe, Jojo can give some specifics. It's both. Where it's operational, they tend to be the one-off assets. Where it's financial, they tend to be the larger packages and sometimes we get a combination. We get a combination where, CFO and COO work together to help both the financial and operational side. Now, sort of the ones that I was alluding to are going to be larger packages. We always get the -- sort of the one-off transactions, Mike mentioned a few that we -- that we both bought and sold in the quarter, but sort of the ones that we're sort of thinking about are going to be large packages, multi-property, multi-location. I think, Jojo, any color on that?

Exactly. The only thing I would add as the company grows, the larger -- the larger the company is in terms of asset size, the more we find the multiple type transactions. And the only thing I would like to add there is that there are some requirements that are both operational and financial, and those are the mid-term leasebacks where a company has a plan for the next two to three years, but then operationally need to reconfigure their supply chain. That's sort of in the middle of the pool of transactions that Mike just mentioned.

Okay. Last question. It looks like some of your dispositions in the quarter were a little skewed toward the Philadelphia/Southern Jersey area. Was that just the mix of deals that quarter or is that a market you're looking to just reduce exposure in?

Lou, it's really the completion of the asset management plans. When we look at each asset, we have approved asset management plans, and usually they include repositioning and redevelopment and leasing. And in this case we've completed those and we've maximized -- we believe we've maximized the value already. We've leased it to a maximum market occupancy, so we decided to harvest that value and continue to reinvest in high returning investments.

Yes, Lou, no, we're not getting out of the Philly market, and the Southern Jersey. Specifically, there was one -- I don't think-- it was called Cherry Hill that we've been redeveloping over the past several years, that was the biggest one, but we'll certainly entertain investments, yes. As Jojo mentioned, we're done with our plan, but if we see some other things in the area, there's nothing wrong with the market.

Great. Thank you.

Next question is coming from Stephanie Krewson with Janney Montgomery. Please go ahead.

Guys, a few quick questions. The first resolves around the debt that you bought back in the quarter, it represented $0.03 of your FFO. Couple of questions there, number one, that's nonrecurring, but that is part of FFO?

Yes. Yes. Certainly it is.

Okay. But I mean it's -- obviously it's a nonrecurring thing. Secondly, why did you choose to buy back debt rather than stock? And I know the answer is because that was a better return, but can you shed a little light on how you calculated that?

Let me address the first part with respect to why we bought back some debt. If you remember towards the end of last year, we bought back some stock and typically when we do a stock buyback, we do it in a leverage neutral way, which means that we'll reduce both stock and then debt as well. And so when we're reducing our debt, we, of course, want to reduce the most expensive debt that we have which is what we bought back in the marketplace, for the most part. Obviously you've got to consider what is available as well, too. So, that's what we did with respect to buying back the debt with respect to here in the second quarter.

Now, I just want to mention with respect to -- let's suppose that debt was purchased as a stand alone investment. Remember that while it is correct to say it's non-recurring, on the other hand, that money could have been deployed into an investment, a piece of real estate. So, in that sense, it isn't really. So it's just a redeployment into debt, this time for the specific purpose of balancing the stock repurchase to make it leverage neutral. But you've got to remember that if we were to do that in the future, it's an alternate investment.

Right. How much of your stock buyback is still outstanding? How much can you buy back and when does that expire?

$60 million is outstanding and, good question with respect to the expiration. I guess I don't know that or if there is one. Is it open-ended authorization, is that -- yes, we believe that's the case.

And then second and final question is related to your occupancy. You addressed this somewhat in your opening comments. Your occupancy is declining, but it's in line with your guidance. Is it safe to say that this is because you're selling stabilized properties more quickly than you're leasing things that you've bought opportunistically or your developments and specifically looking at footnote M, like Mary, should we be concerned about the leasing levels?

This is Rick Czerwinski. I'll answer that. The first part of your question regarding what we've sold, what we sell quarter to quarter can either help us or hurt us. It really has not had a large impact on our overall occupancy. In looking forward from a leasing perspective, what we see is really what we've seen in the first half of the year. We think that leasing activity, new leasing activity will continue to be at its current pace. Renewals, we have a very good vision for the remainder of the year. We know who's going to renew, who is not. So we feel very comfortable with our guidance as a result of that.

Right. But the developments and the acquisitions that are not in your active portfolio in footnote M, like Mary.

Yes.

Could you please address those?

Sure.

Because the number -- the occupancy levels increased from the first quarter, but not by as much as I had hoped.

Yes. Well, you have to keep in mind that those properties are -- were -- we're completing the asset management plans of some, those will be sold, we're adding to it, so it's a dynamic number. It's not a static number. But from a leasing standpoint, what we see for the remainder of the year, we see that occupancy level increasing. Approximately-- a substantial amount.

Yes, I think, on that part that's in redevelopment or development, Steph, just realize that, let's say quite simply empty buildings come in and they get leased and then full ones get sold and so it's never going to -- I mean by definition it's not a stabilized pool, so they're always in active redevelopment, leasing or development. So that's the nature of that grouping and it will be plus or minus kind of always that way.

The reason why I was hesitant to give a number was because if new developments enter that population or we buy a value-add property, you might not see an increase in that percentage at quarter end, but inter-quarter, we are leasing those properties and we're creating the value and continuing the cycle.

Okay. And I apologize. I just thought of one other follow-up that's somewhat related. You mentioned that you've decreased your development pipeline somewhat to strip out some of the speculative developments. Could you just add a little color on where you are still starting speculative developments or are you like many REITs stripping the majority of that out of your development pipeline?

Yes, Stephanie, hi, it's Jojo. In terms of going forward, where we see immediate starts, we're looking at really, quite a bit of markets in the U.S. It's spread, it's diversified, it's not any particular market, but a couple of top markets we're looking at, Houston is one market, LA in terms of infill development and Seattle and then we have a number of multi-tenant developments as well in the Florida area. But, those are what I would say are top markets.

Okay. Thanks, guys.

Thank you.

Thank you.

Thank you. Our next question is coming from Mitch Germain of Banc of America. Please go ahead.

Good afternoon everyone. Mike Havala, you said $400 million in developments for the year for starts?

Yes, we expect about $400 million development starts for 2008.

And where are you year to date on that number?

Okay. Year to date starts -- Mitch, hi, it's Jojo.

Hey, Jojo.

$150 million.

Okay. I appreciate it. Mike Brennan, I'd really just like to flesh out your comments regarding the transaction markets and if you can just elaborate a little further. It kind of appears that, you're talking about somewhat of a recovery relative to where we were, call it 90 days ago.

Yes, okay. It's a great question. In a way we -- yes, just trying to give you some sense. I think you're referring to my comment on the -- our expectation of corporate real estate activity.

Yes.

-- is going to increase, yes. Well, let's just start with the empirical evidence. Our pipeline is significantly increased due primarily -- well, due to, among other things, but importantly the corporate real estate transactions and, again, these were -- what's interesting about it, and I'll come to the punch line in a bit was that I mentioned at one point we may offer X and that was not accepted, but three months -- three, four months on, it was. And then I mentioned that, we've seen some other packages that were once marketed at a higher number that are now being remarketed at a lower number and then I said, we can sort of speculate as to the reasons for this. Some may feel that it's, financially, some will need these real estate transactions to be completed, not unlike in prior years, some it may be a reflection of just, normal block and tackling on the operational side, some may think that this is the right time now to sell real estate. Now, I think, though, that maybe-- maybe the reason that we're seeing it, if it's not -- but I think our evidence is pretty good, I don't think it's -- we see a trend in it, is that maybe corporate real estate people, it not being their core business, are not going to necessarily take a property for operational reasons and not sell it simply because the real estate market isn't to where it needs to be. So maybe they brought the properties out into the market hoping that the picture would get better, but the credit picture did not get better and at the same time there's a specter of a slowdown in the United States economy. So maybe for some they've said we've waited long enough and now we need to go. We don't know exactly what the causes are, but we are just -- again, that's just speculation on our part. But that's -- , that's -- those are the reasons that we perhaps have seen the comeback in

I appreciate those comments. And can you -- Jojo, specifically, how much of your acquisitions year-to-date have been value-add as a percentage to stable?

Okay. A couple of things. Definitely the acquisitions for the second quarter was primarily value-add.

Okay.

And in the markets where -- one of the strongest markets in the U.S. which is LA County. And let me just -- let me just look back at the list of acquisitions for the first quarter here. I just want to peruse that.

Mitch, while Jojo is looking through for that, I just wanted to bring up something, don't know if we'll have a chance to bring it up in Q&A is as you saw the cap rate disposition number was 7.6%.

Yes.

You saw the acquisition cap rate was about 7.6% as well, but about 82% of our total acquisitions were in the Southern California markets in Riverside and in the South Bay market. That's just -- so that's just a world of difference. So it might not look like there's spread investing there, but obviously properties in the South Bay market are selling in the 6% cap rate range, so --

I appreciate the commentary.

I wanted to point that out for everyone.

Okay. So I just looked at -- in terms of all of the building acquisitions in the second quarter, I stay with that comment, over 80% were value-added. When I look at the first quarter, I would say approximately half of that was value-added. But the rest was -- I would determine in the three core-plus type.

Just last question, Jojo, while I have you. Have you seen an increase of portfolios for sale or are larger portfolios still kind of on the side lines at this point?

No. That was where -- no, I don't see that, Mitch. Actually, that has -- has experienced the biggest decrease, packages over $50 million in industrial real estate in the US has experienced the biggest decrease of all, when you compare it year over year. And the one-off transaction as a component has decreased as well, but not as much.

Great. Thanks a lot, guys. I appreciate it.

Okay. Thank you.

Thank you, Mitch.

Thank you. Our next question is coming from Michael Bilerman with Citi Please go ahead.

Hey, guys, a few questions. How much debt was actually repurchased to generate the gain this quarter?

Approximately $20 million.

And does your guidance -- I see that wasn't in guidance in terms of the gain and does your guidance have any more of this income?

We're not going to, I guess, provide information on any kind of buyback with respect to, either debt or stock on a going forward basis. I think you understand why we wouldn't want to comment on that one way or another, but, we wouldn't want to comment on that.

I'm just -- I'm trying to understand, I guess you bought back almost $70 million of stock last year, the capital environments have certainly become more constrained, your line balance at 350 over 500, why use any capacity when you have such a big development pipeline, to buy back $20 million of debt where, your reissue probably would be at the same sort of rate if not higher today?

Well, remember, when we bought it back, we bought it back at a significant discount to the face, if you will. In addition, we have ongoing savings as well because that debt is more expensive than line of credit debt. In today's market, debt that's 5, 6, 7, 8 years, there's a significant spread on that debt in today's market, 400 basis points plus or minus. and that tends to be pretty volatile in the market.

But that's to your line of credit costs. I think about it more so if you have to go out and raise unsecured or --

Sure.

-- secured financing, it's probably going to be around the yield which you bought back the debt, so why chew up capacity to generate a $3 million gain?

Sure. Well, we have capacity on our line of credit, we have an accordion feature on our line of credit, so we have -- we're solid with respect to all the liquidity that we need for our business. We have a lot of capital capacity, remember on our joint ventures. We have about $4 billion of capital capacity on our joint ventures, adding up equity and any debt components on there as well. So we have plenty of capacity for future investment.

This is Mike, just to add on to that. Remember that a substantial portion of the investment activity that is taking place is taking place in the ventures and there we're providing 10% of the equity and our partners 90% and so forth. So, that large number doesn't maybe need quite as much equity as it might be -- as one might think maybe just looking at the numbers.

When you said you wanted to do things on a leverage neutral basis, buying back stock increases the leverage and just swapping the debt for debt really doesn't do much and I -- it is just puzzling, you bought back stock at 39 bucks, you have a $60 million authorization, your stock has been in the mid-to high 20s, why not just continue to buy back stock?

Yes, again, this is Mike and, well, that's obviously an option that we certainly have and every single day, actually, we look at the different investment options that we have, so that's not one that we are forgetting any time soon.

All right. Can you just reconcile, I guess, at the end of the first quarter you had a pipeline of acquisitions under contract or letter of intent of about $716 million. You closed on about $120 in the core, $50 million in JV and the pipeline's up.

Sorry, his line seems to have disconnected. Our next question is coming from Paul Adornato from BMO Capital Markets.

Just to be clear on the last question the pipeline is $1.4 billion as of the end of the second quarter as we spelled out in our press release.

Thank you. Our next question is coming from Michael Bilerman with Citigroup. Please go ahead.

Am I magically back on the queue now? I was trying to figure out on the acquisition side, is there something that didn't close coming out of the first quarter or did you push back on pricing? What sort of happened? The pipeline was very big, I would have expected a lot of it to close in the second quarter, so just give a little bit of color what's happening.

Yes, the primary reason for the non-closure rate on what's on the agreement and letter of intent was we dropped a lot of land transactions. We -- we felt that given the economic slowdown, that the pricing that we were at, were not appropriate for future underwriting. So there was a significant amount of land assets under letter of intent that we did not want to close on.

And did you have money hard on any of that?

None.

And what sort of volume are we talking about, 3 - $400 million?

Yes. There was one -- one big pipeline asset there was a large transaction, was a very large transaction.

Okay. But you didn't have to write off any costs?

No, no. No under -- and that is something if we do, we reflect that in our earnings, too, just want to point out, but, no, we did not.

There might have been a few pursuit costs, but --

Very little.

-- very little, but no earnest money.

Okay. And then, Mike Brennan, just to clarify, you talked about how your -- the sales and the acquisitions were both done on a 7.6 yield. My understanding was that you quote those yields differently where the acquisitions are a forward, expected yield and the sales are a current in-place, but I want to make sure that I'm understanding what is going on.

Your understanding is essentially correct. Jojo any clarification needed for that?

No, no. That's exactly-- Mitch, you're correct. I just wanted to add a little bit of color to that. Over 80% of our acquisitions on balance sheet is in the markets of Southern California and a big part of that is LA County, which is one of the -- which continues to be -- which includes South Bay -- which continues to be one of the tightest submarkets in the U.S., including when you factor in positive net absorption. So if you look at a seven -- additional color is if you look at the 7.6 yield. As we see it today, for stabilized, functional industrial assets in LA County, those trade anywhere from 5.5% to 6.5% with a mid-point somewhere at 6%. So we really are excited about those value-added investments because we're performing about a 7.6% cap.

But that 7.6% cap is what you expect it to be. What is it currently? You went in to these --

That's right. We would not want to comment on the-- in-place yield, but let me just say that there is redevelopment and repositioning that we have to do in those assets.

So it would probably be in line of where the market cap rates you just quoted?

No.

You're saying lower?

Basically much -- much lower because, you know, if -- if you take on -- for example, in LA County, if you take on an under-leased asset and you do your proper approvals and proper plans for repositioning, immediately you can create value already and then that value increases all the way down to a 5.5% to 6.5% once you get it leased.

And then on your dispositions, that is a cash in-place cap rate?

Yes. In-place first year.

And how are you guys dealing with sort of transaction costs in both the acquisitions and the dispositions in terms of the cap rates you're quoting?

Oh, all the transaction costs in our investments are put as part of our total investment.

Okay.

Baked into the basis.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Paul Adornato with BMO Capital Markets. Please go ahead.

Hi. I was wondering if we could switch to your new European markets. First of all, what type of due diligence did you do prior to entering those markets and could you characterize the nature of those markets, that is, just the makeup of the players and the level of real estate that's owned by corporate users, some color like that?

Sure. Paul, this is Mike Brennan. I will start on the due diligence side, kind of the overall preparation to enter and then Jojo can talk about some of the markets and the composition of the ownership there. Not to get long winded on you, but it started probably about two years ago and the type of due diligence that we did involved types of financing, the competition, the level of talent, the ownership, where the cities were that would provide the engines of growth, specifically supply chain or pockets of consumption or port activity. And, that was followed up with field visits and so forth, speaking to any number of brokers and owners, et cetera. Again, this took place, it started a couple of years ago. We clearly understood the benefits of Germany and France, but we liked as a starting point Belgium and Amsterdam.

One of the most important things for us was the identification of talent. We -- and so we hired and interviewed a number of headhunters and we -- people that were really well acquainted with the talent there and so we went first to find our leader in Jan Scheers. And of course I think I've mentioned this in the past, that leader, Jan Scheers of our European operations was formerly the Chief Operating Officer of Eurinpro's north Europe operations. So, came well equipped and well credentialed to handle it. After that we hired a number of people from Jones Lang LaSalle, from SEGRO, et cetera, that had great, great experience. And so, I mean obviously this has gone through board levels and discussions, but it was -- this, Paul, took place, again, beginning in the last couple of years. So -- and then with that, some of our findings, maybe we'll stick with France and Germany: what was it and why did we open an office in Dusseldorf and Paris. And maybe let Jojo talk a little bit about the composition of ownership there as well.

Sure, sure. Mike already alluded to the -- one of the major drivers of industrial real estate absorption there, which is supply chain reconfiguration due to long-term increased international trade. So just to add color there, remember that Netherlands, Belgium and France and Germany are all close to the three largest ports in Europe, which is Hamburg, Antwerp and Rotterdam, and overall they are projected to receive continued increased international trade. In terms of supply chain reconfiguration, that again pushes industrial absorption; I just want to add one more thing. So the port activity is similar to what the U.S. is going through, but there is one more dynamic that's happening in the EU that is not happening in the U.S. and that is the intra-EU outsourcing where the western European countries are outsourcing intra-, inside the EU through central and eastern Europe. What's happening is that because of the shifting of manufacturing within EU, that is creating a different kind of supply chain dynamic. So there is a force happening wherein the supply chains are becoming more and more pan-European. So that's driving a lot of the activity -- one more thing I just want to add to that in terms of a driver, is the corporate real estate ownership.

By and large, when you look at the EU, there is a high -- even higher level of corporate ownership there versus the U.S. and, that is something that we find exciting because we have cut our teeth here in the U.S. in terms of corporate ownership. In terms of competitors, you really have a lot of investors and competitors out there. You have the U.S. REITs, you know who they are. I will name some large publicly traded institutions who invest there, SEGRO, for example, is a large investor, AXA and Proudreed. are major investors there, too. And you -- I'm sure you've heard of Goodman. So they are large investors and developers. Gazeley, also, is one that's been recently acquired. Now, but overall, you also have private leveraged, private investors and developers. So, by and large you -- there's really -- no difference in terms of a makeup of the type of investors, but, of course, a lot more European based. A lot of U.K., French, German investors out there because that's where quite a bit of capital is coming in and also going into Europe. I hope that answers your question.

Yes, sure. And secondly, I was wondering if you could talk about how many people you have on the ground in both Germany and France and how many you expect to have when you're fully staffed and what the, quarterly G&A implications are for that staff up?

This is Mike again. In Germany, France, we have one person in Germany and one person in France. I think overall, obviously, they're going to add to that with an analyst and so forth and administrative and development assistants as the time -- when it's appropriate. Overall, we have about 16 people in our European operation and what they're going to do -- and the gentlemen that have joined us in Germany and in France have both extensive development, redevelopment and acquisition backgrounds as well as a strong operational background as well. So they'll be, I think, well equipped to run the First Industrial model and to be able to utilize half a billion dollars of joint venture capital that we have to assist them in that. With respect to -- I don't have it at my fingertips, the precise numbers on G&A in Europe, that's going to be a function of the activity that we have. So I am not sure that a number that I could give you would be necessarily totally reliable because it's going to depend a little bit on the volume. So -- but it's not materially -- it's not materially different from any of the projections we've given in the past.

Okay. Thank you.

Yes.

Thank you. Our next question is coming from Jamie Feldman of UBS Investment Bank. Please go ahead.

Great. Thank you very much. Can you just talk about -- there's a big increase on the expense side of same store. Can you just talk about what the drivers of that are and how much of that will be reimbursed and how we should think about that going forward?

Hey, Jamie, this is Mike Havala. As I mentioned in my opening remarks, the biggest element of the expense increase in same store, related to two tenants where we had some bad debt charge-offs and then it related to Indianapolis where we had some real estate tax adjustments, if you will true-ups, in the second quarter. So those two items were a big piece of that increase in expense. Without those two items, which we look at as being more specific to the quarter, not ongoing of course, absent those our same store actually would have been positive for the quarter.

Okay. And then remind me, your full year guidance on same store.

Our guidance on same store for the year is 0 to 2% positive. Okay.

And then in terms of guidance, so you guys brought down your balance sheet sales guidance, but I think you kept your net economic gains the same. Can you just rectify that for me?

Yes. We just have better visibility in terms of our projected sales through the second half of '08, so basically that's why we provided you that guidance. We've looked at each and every asset, we've estimated our economic gains and that's the range we came up with.

Yes. And I'll add that, the margins have been a little bit higher than originally expected in the first half as well. So it has to do with margins being a little bit higher.

Okay. And then finally the follow up on the European discussion, I mean you guys are definitely in kind of the heat of ramping up the expansion. How do you think the world is -- I mean the world has changed a little bit since you guys started. I mean if we were standing here today, would you still be expanding into Europe? I guess how would you think about how the opportunity has changed and the timing?

Yes. Well, yes, maybe, -- Jamie, this is Mike Brennan. Yes, we absolutely would. Jojo has mentioned the opportunities that we saw there. I mean think about where we decided to go in Amsterdam, in Brussels where we're going to have both the benefit of the pocket of consumption and the two big ports one, two and now with our German addition, three, serving three of the largest ports. Especially in Amsterdam and Brussels, we're on the edge of where supply chain reconfiguration activity is taking place. Lots of corporate ownership, 75% versus about 65% here. And you know what, we come to Europe, not only have we put together a great team, but we've come fully financed, if you will, at a time when people are not. So I'd love -- that -- if you could describe a circumstance or a time in which you would want to open up an office, I think it would be a time when you had -- we had a material competitive advantage. So, yes, absolutely we would-- this is actually a very, very good time to launch it, maybe as opposed to a couple of years ago. So, yes, I mean obviously we must be careful, there's -- we're incurring an overhead that's -- that's not small and we need to make sure that we execute on our plan. But, the -- again, when we take a look at the type of activity that we could potentially do in the market and we see some of the competitors, we don't see too many people that have a model like ours and we don't see any people that I know of that has a model like ours with the capitalization that we have. So I feel very good about our chances of continuing to do well there and I'm happy to say that Europe, as I mentioned in my remarks, got on the board with a pipeline of about $150 million. So, yes, I think it's a good time to be there and most importantly, it's the leadership and the people that we have in the cities that I -- that gives me great comfort. So.

Thank you for that.

Thank you. Our next question is coming from Arnab Dasgupta with Zephyr Management. Please go ahead.

Good morning or good afternoon. Two questions, really. The first one on the composition of the dividend and the second one regarding the sustainability of it. The composition of the dividend, if you could breakdown (inaudible) property level NOI against capital recycling, and with regard to the dividend sustainability in an environment where we might expect slowdown in transaction activity, could you provide a little bit of color as to how you see the makeup of that dividend changing? And also a little bit of clarity on the transactions. Are these developments built to -- and then sold or are these land parcels which have inherently more risk?

Let me -- this is Mike Havala. Let me answer your first question there about the composition of our dividend and I think really the best way to answer that is look at the competition of our earnings or look at our composition of our FFO. Last quarter, and we've continued that, of course, this quarter, we introduced some new disclosure and specifically that's on page six and then page 11 and then some additional foot notes, but it breaks down the composition of FFO into three categories, that's portfolio operations, joint venture operations and then capital recycling activities. So I guess I should refer you to those pages because there's a lot of information that I think will be very helpful to your analysis.

I see that. Thank you.

Regarding the second part of the question --

Yes, this is Jojo. Just to mention to you that, again, our sales are from a very diversified set of investments. That's one thing with First Industrial over the past -- since our inception, we have never -- quarter by quarter, we've not really been large portfolio sellers. It's really by one-off sale transactions. And if you look at those transactions, primarily in the last year and going forward, we've been at about in the 50% to 55% level merchant transactions. And by that I mean, out of that we sell developments that we built, speculative or build-to-suits, also we also sell land and we also sell assets that we've stabilized at closing which we can immediately re-sell. So those are a pool of assets.

In addition to that, about 50% to 55% are assets that we own on balance sheet. And so then in addition to that, we have joint venture assets, of course, that are in various stages of asset management plans. So it's really a wide pool. And the only thing I would add to that is across every market in the United States plus now, we would expect that our sales would also come from Canada and in Europe. So, it's basically both wide and deep and, we like that in terms of, our ability to be able to harvest value that way.

Thank you. (OPERATOR INSTRUCTIONS) Our last question in queue is coming from Cedrik Lachance with Green Street Advisors. Go ahead.

Thank you. Regarding Europe, you said in your press release at the time of expansion in France and Germany, that you could invest both in the JV as well as directly on the balance sheet. Could you give us a sense as to how you'll decide which property goes in the balance sheet versus going into the JV?

Yes, Cedrik, basically our joint ventures -- I should say our joint venture that we have set up for Europe, the focus of it is for development and repositioning or redevelopment type of assets and so those investments will be focused on -- we'll focus those investments in our joint venture and then other type of investments we will invest on using our balance sheet. So that's basically -- in its simplest form, I guess, where you'll see us invest joint venture versus balance sheet, at least as we start our investments in Europe.

Something like sale leaseback, for instance, would be on balance sheet?

That would be something that would be outside of the venture and if we did it today, it would be more likely on balance sheet, yes.

Okay. You stated that the properties sold this quarter were on average or had been owned on average by -- for 5.9 years. Last year, if I recall well, usually your average was roughly two years of ownership. What explains the difference this year?

Again, it's -- Cedrik, hi, this is Jojo. It's really the age of, meaning the holding periods of our sales would change quarter to quarter, year over year, and we really look at this. We look at each property, we look at where we progress in terms of asset management plans and then once we feel that we've maximized the value because of occupancy and achieving top of the market rents, we'll position it. But we will only sell property if we can find a -- the ability -- if we can find opportunities to reinvest at a higher return. So that's the capital recycling model.

Cedrik, this is Mike Brennan. One thing that -- just some specifics. There was a couple of properties, I think there was a -- there was a property in Minnesota, there was a property in Tampa, there was a couple of properties in the Philly area that we got done with our redevelopment, it took us a little bit longer, they were tenant intensive, those are -- Jojo, as I think of some of the things that caused that to go up, those are ones that we are done with our plan and maybe -- maybe those weren't the best fit for us and then we ended up selling. Now, we did quite well, but those we held a little bit longer as well.

Well, in regards to margin achieved, you're achieving roughly the same margins this year as last year except that if I look at properties acquired six years ago, I would expect that those properties were acquired at cap rates that were in excess of 9%. Why isn't the margin any greater in this quarter?

Depends on the mix of properties. I don't think you could make the statement that they should be better because they were bought earlier or later. It just all depends on the plan and all depends on the property in the market.

Okay. You continue to be a sizable land acquirer. Can you give us a sense as to changes of land prices that you've seen and explain your strategy at this point of focusing on acquiring land?

Yes. Okay. In terms of changes in pricing, it's really -- it really varies. The more land constrained, the locations are -- I mean the less, pricing differential, we've seen. The more green-field your sites are, the larger, if you may, the price decrease is. One thing that -- one thing that we've done when we bought assets, we underwrote all of the assets we acquired at well below market. A lot of times when we've acquired these assets, these are highly selective acquisitions wherein there was a situation where we can acquire it below fair market value. So that's what we were focusing on. Even today, that is what we're focused on.

Just specifically on -- just specifically on land strategy today. Overall, in terms of capital allocation, we still feel that going forward, the eastern seaboard of the United States clearly requires a little bit more focus from us. So, look forward to some strategic positions there just like we have strategic positions that you already know. In terms of -- in terms of just pricing, we'll use our capital wisely. That is a competitive advantage we have today. In fact, I -- we really think it's -- it's a competitive advantage we can use to get discounts. So, that's basically, what we're going to look for.

Good. And perhaps one final question. On the allocation that you made to net economic gains and FFO from JVs and net operating income on page six. When I look at the allocation of interest income, you allocate about, -- you allocate about 45% of your -- sorry not interest income, interest expense -- you allocate about 45% of your interest expense to capital recycling activities and the remainder to your portfolio operation, yet what you sell in a given year is probably 25 to 30% of your total asset base. I'm trying to understand why there's a disproportionate allocation of interest to this particular portfolio.

Sure. Remember that a number of properties have multi-year asset management plans, so you've got to look at things from a multi-year perspective in considering that. And basically, we describe this in our supplemental as well, but we look back at the contribution of our assets that we've sold, the IRR, how much of that IRR was achieved through call it gain or net economic gain versus operations or NOI and that's how we've made that allocation because obviously with properties that you're -- that we're acquiring and the value-add, so forth, you have both NOI and gain associated with those properties, with those economics in the IRR. So that's how we've done that and, again, we've described that in the supplemental.

I'll turn the call over for closing comments.

Thank you very much. I just want to say thanks for people that called in and listened to the call and taking interest in the company and we look forward to updating you in another 90 days. Thank you very much.

Thank you. This does conclude today's conference call. You may now disconnect.