First Industrial Realty Trust Inc (FR) 2008 Q3 法說會逐字稿

Good morning. My name is Shawana, and I will be your conference operator today. At this time I would like to welcome everyone to the First Industrial Realty Trust third quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS). Thank you.

It is now my pleasure to turn the floor over to First Industrial. You may begin.

Hello, everyone, and welcome to our call. 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. Let me turn the call over to our Ed Tyler, our interim CEO and Lead Director.

Thank you, and welcome to our third quarter 2008 earnings call.

Before we begin, I will introduce the other members of our Senior Management team who are here with me today. Mike Havala, our Chief Financial Officer, who many of you know, Jojo Yap, our Chief Investment Officer, and Rick Czerwinski, our National Director of Leasing and Asset Management, and you just heard from Art Harmon, who is our Head of Investor Relations.

I would like to offer a few introductory comments before turning the call over to the other members of our team. Per our announcement last week, I have stepped in as the interim CEO upon Mike Brennan's resignation. I will serve in that role until the search for the new CEO has been completed. Mike Brennan contributed greatly to the building of First Industrial's real estate platform, and the Company appreciates his dedication and leadership for more than 20 years. The Board however, believes that this is the right time to install new leadership at the CEO level and to move the Company forward in improving its valuations and achieving its full potential.

We are moving quickly to identify the next CEO, and the Board will be considering internal and external candidates. I cannot provide a firm timetable, but be assured it is my highest priority. I am pleased to have the benefit of the talents of the management team here on the call with me today and the commitment of all First Industrial employees. Our mission is to serve the industrial real estate needs of our customers, and to create value for the benefit of our shareholders, and our institutional partners remains intact.

As noted in our press release beginning next year, First Industrial is adopting NAREIT's FFO definition. The Board has also made a change to our regular dividend, which reflects our decision to align our dividend more closely with our portfolio income. Mike Havala will review these items in more detail shortly.

But before I turn it over to Mike, I would like to emphasize four things. First, our balance sheet capital position is solid, with a very manageable debt maturity schedule. Second, our portfolio, our primary income source, continues to deliver a solid performance. Third, we have undertaken significant actions to align our costs with the current transactional and economic environment. And fourth, we have in-place institutional investment capacity to take advantage of attractive investment opportunities.

With that said, I would like now to turn the call over to Mike.

Well, thanks, Ed. We have a lot to go through with you here today, so I will thank you in advance for your patience, as I will talk a little bit longer than usual.

With regard to the capital markets environment, as you well know, we have been in a tough capital markets environment since the middle of 2007. But increasingly in September and October, there was a rapid deterioration in conditions, and this was of course spurred on by the major shocks to the financial system which have frozen the capital markets. As a result, this materially impacted the level, the pricing, and the timing of real estate transactions.

Looking ahead, we expect and have planned for a continuing tough capital markets environment in 2009. Regarding the overall industrial real estate markets, looking back at the third quarter, fundamentals were reasonably healthy but there were certainly signs of weakening, with forecasts for declining market absorption and occupancy. Our view is that real estate fundamentals will likely deteriorate somewhat in 2009.

Having said that, it is important to note that our portfolio for the quarter performed quite well. Our occupancy increased 20 basis points to 93.7%, and that is versus the national average of a little over 89%. We have high tenant retention at 87%, and strong same-store NOI growth at 4.3%. Our rental rate growth on a cash basis for the quarter was 3.2%, and our leasing costs were low at $1.53 per square foot.

Our portfolio results are evidence of the underlying strength of our portfolio, which is comprised of quality buildings in key markets. We have diversification by market, by product type, and by tenant, as we have approximately 2,100 tenants. Given the economic picture that I previously went through, I would like to walk through with you some of our thoughts and actions in response to this more challenging environment.

I have six major points that I want to make. The first major point is that we have a strong balance sheet. Our weighted average debt maturity is 7.5 years, which is significantly longer than many other companies. Our coverage ratios are healthy at 2.9 times and 2.4 times for interest coverage and fixed charge coverage for year, respectively. All of our permanent debt is fixed rate and then 96% of our assets are unencumbered by mortgages.

The second major point I want to make, is that we are in a very good liquidity position, and here is why. We have very little debt maturing the next two years, only about $135 million. Regarding the debt that is maturing, we have a number of options to repay that debt. First of all, we anticipate by the time that debt comes due, most of it in June of 2009, we will have enough capacity on our credit line to pay off 100% of that debt. Secondly, we have tremendous financial flexibility, in that 96% of our assets are unencumbered, which means that in addition to the possibility of issuing unsecured notes, if that market happens to be open, we also have the capacity to raise secured debt, which is achievable even in today's markets. And then the last point that I wanted to make with respect to liquidity, is that we only have $34 million that is needed to fund the reminder of our development in process, and that includes both our balance sheet and our pro-rata share of joint ventures. So there's really no big pressure here.

The third major point I wanted to make is earlier this month, we executed on our plan to significantly reduce costs. In total, we have reduced G&A expense by $33 million, or approximately one-third. This of course makes sense, as our transactional business is down. But we have also taken it a step further, as we have reviewed every line item and have reduced many of our other discretionary costs. Regarding changes in our personnel, in October we reduced our staffing levels by over 20%, or approximately 120 people. And please note that of course we did not take the decision lightly to reduce our staffing levels. An important consideration was to make sure that we could continue to provide the industry leading service levels that we have been known for by our customers and our partners. We built a very valuable platform and we want to make sure we preserve it's value. And at the same time, we need to make sure that our expenses are appropriate for the more difficult environment that we are in.

The fourth major point I want to make, is that we will continue our intense focus on property operations regarding leasing and property management with a special emphasis on occupancy and tenant retention.

The fifth major point that I want to make is that we are being extremely selective on new investments and dispositions. We see value creation opportunities in two main areas. The first is deeply discounted acquisitions, which is a long-running core competence here at First Industrial. And we expect to see some of these originating from liquidity-strained investors, as well as corporate customers. The second opportunity in a value creation area is in the build-to-suit. We will sell properties from our balance sheet and joint ventures, but only on a selective basis, for example to fund higher returning investments.

The sixth major point I want to make, is that we have formally renewed our strong relationship with CalSTRS, with whom we have over $4 billion of joint ventures. We did this by extending the terms of the joint ventures to go through December of 2018. We view this as a significant endorsement by the second-largest public pension fund in the US, which is especially meaningful in these challenging times. Having joint venture capital is a competitive advantage, especially in this market. Regarding the debt in our joint ventures, there is a total of $1.4 billion of debt inside our seven joint ventures. Of this amount, only $75 million, or about 5%, matures without a unilateral extension right through the end of 2009. So we are in very good shape here.

The next thing I want to talk about is our new FFO definition. Starting January 1 of '09, we will report FFO under the NAREIT definition. We have decided to report this way, in order to provide the investment community with a simple and more comparative measure to other REITs. Note it is still important that investors consider other measures, such as GAAP net income, et cetera. We will handle the transition to the NAREIT definition this way. We will report 2008 under both our old FFO definition and the NAREIT definition, and then we have also provided you with 2008 guidance under both the old and the NAREIT definitions. For 2009, we are providing our guidance under the NAREIT definition.

Next let me talk about our dividend. As I am sure you all have read in our press release, the Board of Directors has changed our dividend policy and declared our regular fourth quarter dividend at $0.25. Our new dividend policy now sets the regular dividend primarily based on more predictable cash flows, such as portfolio income. From time to time, in addition to the regular quarterly dividend, the Board may declare a special dividend and that will generally be connected to gains generated from capital recycling. In January 2009, we expect to pay a special dividend related to the fourth quarter of no less than $0.20. And again, this is in addition to the $0.25 already declared for the regular fourth quarter dividend. The decision to change the dividend policy is one the Board of Directors, of course took very seriously. Long-term, we believe that this new policy will prove to be the best policy for the Company and shareholders.

As a reminder, I wanted to mention that the Company also has approximately $60 million remaining under its stock repurchase program.

Turning now to our guidance, our guidance was developed with the expectation of a challenging capital market and economic conditions throughout 2009. For 2008, our FFO guidance range under the previous FFO definition is $3.17 to $3.37 per share and that's a $0.33 reduction of the midpoint of our previous guidance, due primarily to one-time expenses associated with severance costs for our headcount reduction, the departure of our CEO, and a reduction in expected sales. Under the NAREIT definition for 2008, our guidance range is $1.50 to $1.60 per share. And then we have updated some of the components of our guidance in investment activity as follows: for 2008 investments on balance sheet, we expect to be between $400 and $450 million, and dispositions are expected to be in the range of $600 to $650 million for the year. We expect development starts for 2008 to be about $330 million. And our average occupancy for the year is expected to be about 93%, our same-store property NOI is estimated to be flat to 2% positive for the year, and rental rates are expected to be positive. Regarding our G&A expense, we expect G&A to be about $92 million to $94 million in 2008, this includes the one-time charge of $12 million, which is comprised of $7 million of cash, and $5 million non-cash in the fourth quarter due to severance cost due to our headcount reduction and CEO departure. While this is a one-time charge, we have reduced our FFO for this.

Regarding our 2009 guidance, we are now providing guidance pursuant to the NAREIT definition of FFO. We expect FFO per share to be $1.40 to $1.60. Here are some of the key components of that guidance for 2009. With respect to the portfolio, we expect our average occupancy to be between 90% and 91%, our same-store NOI to be flat to slightly down, and rental rate changes to be moderately positive. As a reminder, as we head towards 2009, our first-quarter portfolio metrics are typically lower, as they are affected by calendar year lease expirations. Regarding G&A, our G&A expense for 2009 is expected to be between $64 million and $67 million, and that of course, reflects the actions that we have taken to reduce our expenses. For JV FFO we expect this to be in the range $20 million to $30 million. And then with respect to investment and disposition activity, we expect that to be down from 2008 levels, but we are not providing specific numbers now at this time, due to the volatility in the capital markets.

So with that, let me make a few concluding remarks. First, I would like to state that the management team here has many years experience in the business. In addition to the many years of business experience that Ed Tyler brings, the other three members of management on the call, Jojo, Rick, and myself, combined we have more than 60 years of experience in our industry.

We have navigated through many cycles in the past, including several recessions, in the early 1990s when there was virtually no capital available for the real estate business. This is a Company with a strong backbone. While we are faced a tough environment, we are making the tough decisions. By doing this, we will be one of the survivors, and likely better for it. This isn't just wishful thinking, ut is based on the four pillars of #1) a strong and diversified portfolio and our focus on operations. #2) a solid balance sheet, with little debt maturing through the end of 2010. #3) a reduced expense structure that is more suitable to the current economic conditions. And #4) in-place institutional capital, that allows us to be able to take advantage of opportunities in the marketplace. We have a valuable Company and our job is to make sure that value is recognized and our potential is captured.

One last comment before I open it up to questions. There are many topics that we discussed today, we tried to lay out and explain these as best we could in a summarized fashion. We do expect a number of questions, and are happy to answer those questions of course, but we would like to ask you to limit your questions to one or two per person, in order to give other participants on the call a chance to get their questions answered as well. And like always, management will be available after the call, for further discussion and questions.

And so now, Operator, can we please open it up for questions?

At this time, the floor is now open for questions. (OPERATOR INSTRUCTIONS). Please hold while we wait for our first question. Our first question is from Lou Taylor from Deutsche Bank. Please go ahead.

Good morning. Ed, can you give a little bit of color in terms of the G&A costs, with regards to where were they in the organization, were they capitalized costs, were they G&A that was expensed? Are you exiting any markets, or any regions, or any kind of business lines, like development?

Okay. Yes, hi, Lou, this is Mike Havala. With respect to the G&A costs, the majority of the G&A cost reductions that we had are related to our transactional part of our business. So that would include developments, especially, as well as acquisition and sales.

The $33 million that we quote, that is the number that impacts the P&L, so that impacts specifically the G&A line. We did also cut some costs that were previously capitalized, but the $33 million that we mentioned, are the costs that are specifically expensed. Lou, does that answer your question?

Yes, thank you, Mike.

Thanks, Lou.

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

Hey, good afternoon, guys.

Hi, Mitch.

Given how quick these decisions, these changes came about, how long has the Board been contemplated possibly making these changes, and quite honestly why wait until now, and why not do it earlier?

Yes, Mitch, that is a good question. Basically with the occurrences in the marketplace in September and October, this dramatically changed the environment, not just for us, but obviously for everybody. And so with respect to the FFO definition and with respect to the dividend, the Board met this week and we declared the dividend, and announced it as we talked about. So clearly this is something that we are focused on, September and October of course brought about a very different environment than previous, which was still a tough capital market, but not what the world is facing here, based on what happened in September and October.

Can you just go over some of your discussions with CalSTRS? It seems like the structure, maybe the structures of the JVs have changed, from more of a transaction dependent strategy to more of a long-term hold strategy. Is that correct?

No, the mission of our ventures with CalSTRS has not changed. It is still focused on value-add opportunities, which in this marketplace, you expect there to be a number of value-add type of opportunities, as well as build-to-suit. Clearly we are reducing our spec build-a-suit activity dramatically, as would you expect, but we are very focused on build-to-suit opportunities which we are seeing in the marketplace. So no, there has not been any change in focus or strategy within our joint ventures.

Great. And then just one last question. On your definition of FFO, land sale gains and value-add dispositions, will gains related to those two be included on a forward basis?

It will be based on the NAREIT definition. Under the NAREIT definition, land sales are included in there, and then if you have gains that are undepreciated assets, those are also included under the NAREIT definition. So what we will be excluding, of course, would be gains related to previously depreciated properties.

Great. Thanks.

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

Hi. Just to follow-up on the joint ventures. Have you discussions with CalSTRS, since the announcement that you extended the cadence with them?

Paul, I am sorry, your line was breaking up. Maybe you can repeat the question for us?

Yes, sure, I am sorry, with respect to the CalSTRS joint ventures, the announcement of the extension was made after, made before the big changes announced at the corporate level. I was wondering if you had any discussions with CalSTRS since the CEO change.

Sure, absolutely. Good question, Paul. Anything important going on with the Company we of course are in communication with our partners, and so yes, we have had very specific conversations with our partners, with respect to the CEO change and the staff reductions, and so forth.

And with respect to the staff reductions, it seems like a lot of the areas that you are now deemphasizing, would have also contributed to the business of the joint ventures. Any comment on that aspect?

Sure. When we looked at the reductions, we looked at the activity that we expected going forward. Remember we had also built up the Company for growth and so we reduced some of the costs associated with growth that had been built into our costs as well. But clearly our mission is to make sure that we will serve our partners, and that we have all the capacity here internally, to make sure that we do all the activity that we are going to do in our joint venture. So we see no issue with respect to undercutting our ability to execute on the plans that we have for our joint ventures.

Okay. And finally, just one quick one on international expansion. You recently dipped your toes in Europe. Is that still a priority?

Yes, hi, this is Jojo. Yes, we have a fully integrated platform today in Belgium, Netherlands, France, and Germany. And as you have seen in one press release that we have a forward commitment on a class A institutional distribution project in the Golden Triangle in Belgium. Today we are looking at several opportunities. Just like Mike had mentioned, we are extremely selective, and we have increased our risk adjusted returns in the future for value-added and deep discount acquisitions and redevelopments. So that is one thing that what we do here in the US, we will continue to do in Belgium, Netherlands, France, and Germany. Does that answer your question?

Yes, thank you.

Thanks, Paul.

Thank you. Our next question is coming from Bill Crow with Raymond James. Please go ahead.

Good morning. Ed, first of all, congratulations, better late than ever with the great news. Second of all have Mike, can you give us the first and second quarter FFO actuals in NAREIT definitions?

Yes, Bill. In the Supplemental, in one of the footnotes, we have provided that reconciliation, so if you go back to the footnotes in the Supplemental, we have laid that out for you, as far as the four quarters for 2007, as well as the first three quarters of 2008.

Terrific. I will take a look at that. Could you talk about the dividend, and the decision to bring it back at $0.25 a share, which implies $0.25 a quarter, which implies almost a 16% yield today. Is that because taxable income required it? It seems like you brought it back at a still relatively high level?

Sure. The level that the dividend was set was a level that the Board was very comfortable with. We set the dividend in between our taxable income on the low side as the minimum, and our FAD as constructed based off of the NAREIT FFO definition. That is the minimum and the maximum, if you will, of where the dividend is set. And so the $0.25 per share was set along those guidelines. We will have special dividends from time to time as we already announced for the fourth quarter, payable sometime in January, a minimum of $0.20 a share, and that will be more connected to our capital recycling activities, which also would generate cash gains, as well as taxable income as well.

One final question of your guidance for next year, for '09. How much of that is from land sales gains and gains from unappreciated assets?

Yes. Actually I am glad you asked that question because for 2009, very little is included in our expectations for our FFO for next year. We have about $2 million built into our guidance for 2009 for NAREIT-compliant gains. So in our guidance for 2009, of the midpoint of $1.50 a share for NAREIT FFO, in that number there is only $2 million of gains.

Great. Thanks, guys. Appreciate it.

Thanks, Bill.

Thank you. Our next question is coming from Cedrik Lachance with Green Street Advisors. Please go ahead.

Thank you. Mike, in the past you have provided a breakdown of your FFO. You are doing portfolio operations, JVs, and capital recycling activities. In those documents, you basically had about 75% of your previous FFO as being portfolio operations. If you look at the second quarter, it would look like your FFO would have been about $3.00 or $3.50 run rate. That seemed to me would have been about the same as the NAREIT-type definition. Is there anything that has changed in terms of the accounting practices, that would explain why your current NAREIT FFO is about $1.50?

Good question, Cedrik, and let me address that. Under the NAREIT definition of FFO, remember that you include all expenses. So to the extent that we have overhead expenses as well as capital costs, say interest expense, et cetera, for projects that produce profits that are not reported under the NAREIT definition, then that sort of hampers your FFO under the NAREIT definition. Let me say it a little better, under the NAREIT definition of FFO, you have all of the expenses in there but you don't have all revenues, because when you have asset sales that are not NAREIT-compliant, if you will, those do not get included in that definition. So I think that is where your question stems from.

Okay. As far as the breakdown of assets, you have historically had about 25% of your portfolio in a taxable REIT subsidiary, given the change in mandate internally, in terms of focusing more on being a rent collector, what do you do with those assets, do you bring them into the REIT umbrella and keep paying taxes on them? What is the efficient way of managing that part of your portfolio?

Sure. With respect to the assets that are in the taxable REIT subsidiary, we really don't expect much change there. With the new law that passed, the RIDEA law, the holding period is now two years versus four years for the Safe Harbor, so we anticipate more assets going into the operating partnership, relative to the taxable REIT subsidiary. The changes we have made here, really do not impact necessarily, the decisions to put something in the taxable REIT subsidiary versus putting it into the operational partnership.

What's the impact on income of having a big chunk of your portfolio in a subsidiary and taxable entity?

Cedrik, your line is breaking up, and I will do the best I can to answer your question. I think you said, what is the reason or what is the advantage of having something in a taxable REIT subsidiary.

Actually no. The question is, how much does that cost you ultimately, if the subsidiary is paying taxes on all of the operating gains there. How much of that is dilutive essentially to your cash flows?

You are saying our tax is dilutive to our holdings, from our activities in the TRS versus not in the TRS?

Yes, essentially what is the--?

Cedrik.

What I am trying to understand is, now that you have so much of your assets in a TRS, that you are going to be collecting rent, what does that do to the cash flow you had, versus the cash flow you would have received if those assets had been sitting on balance sheet in a REIT structure?

The assets that we have in the taxable REIT subsidiary to the extent they are collecting rents there. And most of what is in there, of course is development and value-add type of assets, but to the extent that we are collecting rent, that of course, goes into our taxable income. But remember taxable income also factors in your capital costs, so interest expense as well as your tax depreciation. So those tend to eliminate, if you will, your taxable income from rents, because most of the properties in the TRS are for value creation and less about rent collection. Cedrik, if we haven't answered your question exactly, what I would recommend that we talk post the call, because we are having a lot of trouble on the line hearing you. And so we have done the best we could on answering your questions, but give us a call afterwards, and we will make sure that we have addressed it 100% perfectly.

Thank you. Our next question is coming from David Taylor with David P. Taylor & Company. Please go ahead.

Thank you. I have two questions. One is, not much has been said about the capital recycling program, which has historically been sort of a keystone of First Industrial. Is this going on as we look forward?

Yes, it is. We will acquire and develop and sell assets as appropriate, to the extent we have other opportunities that we see. But clearly, both in this environment and what we see going forward, is we will be doing it at a meaningfully reduced level.

For the time being, I mean --

Let me also -- I am sorry. Is on the balance sheet is what I meant with respect to that. Within our ventures, remember some of our ventures are very much focused on capital recycling type of activities, including development and redevelopment and value add opportunities. And so we will continue, of course to do that within those joint ventures, if that is the mandate of those joint ventures.

Okay. So you are going to be generating as much in the way of capital gains, as is available. Obviously under the current circumstances, that is not much, but this too shall pass. Second question. Dividends. The $0.25 quarterly, plus the $0.20 extra, $0.20 or more extra that you talked about in your, didn't declare, but talked about in your press release. Is this to specifically meet REIT tax status or is there some other reason?

The special dividend is connected with capital recycling activities, but obviously is very connected also to taxable income.

Is the $0.20 or more special necessary for REIT? I mean is that the way you are looking at it, or is there some other way you are looking at it?

We look at that as something that we do, need to pay or we should pay for REIT status, yes.

Okay. So then going forward, I am assuming that you are going not to raise it $0.25. Who knows, you probably will some time, but certainly not in the short-term. Do you plan to keep that $0.25 sort of as a floor, and are you going to declare these extras on a quarterly basis as you sell properties? Or is this going to be an annual thing declared at the end of the year?

On the special dividend, it is a special dividend. And so that will be "to be determined". So I guess that is all I really have to say about it, and that will be something that will be done by our Board of Directors. But we will announce special dividends from time to time, as appropriate under the circumstances.

Thank you. Our next question is coming from Jeff Lafferty with Oscar Gruss & Son. Go ahead.

Thank you for taking my questions. I had just two quick questions about the revolving credit line you have in place. First is the easy one. What is your outstanding availability on that as of the end of the quarter, and then secondly, I kind of noticed that the outstanding balances have continued to creep up over the past year, and now they are pretty much close to $400 million outstanding on that. I am wondering if you are having any sort of internal discussions, about perhaps terming out some of that exposure, just to free up more of your revolver, to keep it more in-line with working capital uses, and whatnot? Thank you.

Sure. Yes. As you said, our revolver balance on balance sheet was $396 million as of the end of the third quarter. Our goal is to reduce that balance, as I mentioned certainly before our debt maturity of our $125 million bonds, which is June of next year. We want to make sure we have enough capacity on our line to take that out, in case the capital markets are very rough between now and then, but yes, we do expect to carry a lower line of credit balance going out into the future.

What is the availability right now, the $500 less the outstanding, or are there other limitations for that from a borrowing basis?

It's$500 million less the outstandings.

Got you. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question is coming from George Eber, a private investor. Please go ahead.

Hi, good morning. Just a quick question. You didn't mention anything about the declaration of dividends on your Series J and K preferred stocks. Is that still business as usual on those?

Yes. And that dividend typically gets declared in December, with our December Board meeting for the fourth quarter.

Okay. Then there was nothing declared, I mean on the for the third quarter yet or--?

The third quarter was declared already, yes.

Okay. So the next determination would be in December you say?

That is typically when we announce the dividends for our preferred stock is yes, in December of the year for the fourth quarter, yes.

All right. And those are cumulative preferred stocks, right?

Yes.

Okay. All right, thank you. That is it.

Thank you. Our next question is from James Feldman with UBS. Please go ahead.

Hi, John Peterson sitting in for Jamie today. Just a question on the CalSTRS. I was just wondering the terms of the new agreement. I know it was extended, but I was wondering if anything else was changed along those lines that we should be aware of?

Good question. Basically it is the same agreement as before.

Okay.

Just extended out the terms.

Is there any of a different strategy that you guys are looking at, when you talk to CalSTRS as far as developing, acquisitions?

Well certainly on the development side, we are much more focused on build-to-suit versus spec. On the acquisition side, with the market where it is today, we are very focused on deeply discounted value-add opportunities.

This is Jamie actually, can you give us a little bit of a color on what the fundraising market looks like right now? Like how have expected returns from fund investors changed, and kind of what is their attitude toward the sector right now?

Sure. In the fundraising arena, quite honestly, much of it is on hold. With what went on in September and October, much of it is on hold, at least temporarily, until this market sorts itself out. That is probably the primary element. With respect to pricing because of most of it, there being a lot of inactivity we will see what happens to pricing as we come out the other side of this frozenness in the capital markets.

I guess how have potential investors return requirements changed as you are talking to them these days?

Well, certainly they have gone up and it varies between what type of investments they are making. For example, is it a core investment, is it a value-add development, opportunistic investment. Certainly the return requirements have gone up in this marketplace.

Where would you put each of those?

Yes, I don't want to quote you a specific number on each of those, because generally there is a range, and a range among different investors, and I guess I don't want to go into the detail of it, but clearly the returns have gone up.

Alright. Thank you.

Thank you. Our next question is coming from Stephanie Krewson with Janney Montgomery Scott. Please go ahead.

Hey, guys. Pardon my voice, and I have a cold and was cheering for the Titan Phils last night in Citizens Park, so I didn't improve it. Just to clarify further, I don't mean to beat this to death, but regarding your capital recycling activities, let me just get further clarification. Could you just answer yes or no, are you basically transitioning your capital recycling activity from the REIT level over the next several years, to be primarily at the joint venture level? Is that a goal?

Yes. Good question, Stephanie. Yes, the capital recycling activities will be more weighted towards our joint ventures than the balance sheet as compared to the past. Yes, that's right.

Perfect. Thank you. Two more quick questions. This one I don't mean to be impolite, but this is a question for Ed Tyler and the Board, which is, I covered your company since 1997, so I have been through quite a lot with you all, and Brennan was a co-founder of your Company, and was a very strong operator. That being said, he was elevated to CEO when Mike Tomasz stepped down. And because he was an insider, he was never given full credit by the Street and literally started with a strike against him. Why would the Board even consider elevating someone internally, despite the fact that I know you have a lot of talented folks there. Can they kind of commit to a bias of recruiting some new blood from the outside?

Stephanie, I will try to answer the question. We have formed a search committee of the Board. It's a strong committee of five Board members. And we are looking at external people, and we will probably engage a search firm. We have talked to quite a few of them already. It is a high priority of mine and of course the Board. The way I believe these searches, or the way this process should go, is you look externally to find the best candidate or candidates you can find, and use that person, him or her, and measure against internal candidates and then the Board will make the most appropriate decision for the best possible candidate for the future of the Company. For me to say anything more than that would be a mistake at this time, because the process is just starting, but I will say that it is something that is now my highest priority.

Thank you for that clarification. And I will end with an easy question for Mike Havala. Over what time period do you expect to be able to buy back shares, according to the existing $60 million capacity of your authorization? Because I can't imagine that you can get better current returns anywhere else, other than buying your own shares at this point.

Stephanie, as you point out, we do have capacity under our prior authorization on the stock buyback, but of course, that would probably not be very appropriate for us to comment on that at this point.

Right. So for modeling purposes though, I understand that there are liquidity constraints as to how many shares you can buy back, can you give us any sort of, should we just amortize it over the next 12 months or something?

Again, Stephanie, it would not be appropriate for us to comment on that.

Okay. Thanks, guys.

Thanks, Stephanie.

Thank you. Our next question is a follow-up from Cedrik Lachance. Please go ahead.

Thanks. Mike, can you address where you have been with regard to your covenants on your unsecured debts, in terms of leverage covenants and cash flow covenants. What are the tests? And based on the calculations from those covenants, where are you at?

Sure, with respect to our covenants on our bonds and our line of credits, we have been in compliance with those, and we anticipate that we will going into the future. Based on our guidance, we certainly would be in compliance with those covenants. I am not going to go through the litany of covenants that there are, but we will be happy to go through this more in detail and not take up the time in the call, Cedrik. But certainly, we have met our covenants in the past and expect to in the future.

Given that this is probably the most important thing nowadays, given that debt is basically all investors care about. With regards to the leverage covenants, isn't it 60% debt, and based on calculations in those debt indentures, what is your leverage ratio?

The leverage in our covenants is 60%. That is the covenant max and we are under that threshold. So I just, I will just leave it at that.

Are you at 58% or 48%? Where are you at basically?

We are underneath that covenant.

Okay. A question in regards to JVs. When you extended the JV for 2018, were there any changes to the fee agreements with CalSTRS?

No, there were not.

Good. All right. That is it. Thank you.

Okay. Thank you.

Thank you. Our final question is coming from Matthew Pitkin, a private investor. Please go ahead.

Yes. I have a question regarding the focus on build-to-suits. And are you, the leases with these tenants that you are doing build-to-suits, are you doing those on a return on cost, and if so what is that return on cost?

Yes. Hi, this is Jojo Yap. Our focus on our built-to-suit is to leverage off our existing land holdings based on strategy first, based on the holdings we have on balance sheet and on joint ventures. And when we do our build-to-suits, our goal is to try to get the highest return for our balance sheet and our joint venture partners. In today's market, capital is key. And in today's market, having very well-positioned land is the key. So we will use the capital to our advantage. And then secondarily, so basically we will try to get as much as we can. And secondarily, of course historically, we have been targeting, we have been able to deliver a 15% return on cost on average.

Okay. And one final question. Is that return on cost based upon, I am in the business as well, and we are starting to find costs of raw materials coming down. So would this return on costs be based upon the previous pro forma amounts of raw materials, or would that be based upon the final costs of going out the door?

Good question. The nice thing about build-to-suits, since you are in the business, is that it is a pretty short cycle. Six months construction, a six to eight month construction cycle. You can always readjust your pricing to meet market demands. We always go out there and readjust our pricing, based on basically the current construction prices. So that is what we do. Does that answer your question?

At this time, I would now like to turn the call back over for any closing comments.

Yes. Again, thank you everyone for participating on our call today. We hope to see many of you at NAREIT here in November. And again, thanks once again for being on our call.

Thank you. This does conclude today's First Industrial conference call. You may all disconnect and have a great day.