First Industrial Realty Trust Inc (FR) 2010 Q1 法說會逐字稿

Good morning. My name is Julianne and I will be your conference operator today. At this time I would like to welcome everyone to the First Industrial first-quarter results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Art Harmon, Director of Investor Relations. Mr. Harmon, please go ahead.

Thanks, Julianne. Hello, everyone, and welcome to our call.

Before we discuss our first-quarter 2010 results let me remind everyone that the speakers on today's call will make various remarks regarding future expectations, plans, and prospects for First Industrial such as those related to our liquidity, the management of our debt maturities, portfolio performance, our overall capital deployment, our planned dispositions, our development and joint venture activities, continued compliance with our financial covenants, and expected earnings.

These remarks constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. First Industrial assumes no obligation to update or supplement these forward-looking statements.

Such forward-looking statements involve important factors that could cause actual results to differ materially from those in forward-looking statements, including those risks discussed in First Industrial's 10-K for the year ending December 31, 2009, filed with the SEC and subsequent reports on Form 10-Q. Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report available at firstindustrial.com under the Investor Relations tab.

Our call will begin with remarks by Bruce Duncan, our President and CEO, which will be followed by a review of our results, financial position, and guidance by Scott Musil, our Acting Chief Financial Officer. After which we will be pleased to open it up for your questions.

The other members of senior management in attendance today are JoJo Yap, our Chief Investment Officer; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets. Now let me turn the call over to Bruce.

Thanks, Art, and thank you all very much for joining us today. Today my comments will center on our view of our markets in terms of leasing as well as investor demand. I will also review our capital plans for the year as we continue on our mission to delever our balance sheet. And then I would like to update you on the status of our joint ventures.

On the leasing front, as noted last quarter, we have experienced a pickup in traffic and demand in virtually all of our markets and spaces. Industrial real estate demand tends to lag GDP growth so with projections for a continued economic recovery we may be seeing the light at the end of the tunnel.

We believe that most markets are at or close to bottoming out and we are seeing market rents stabilizing. But lease negotiations still remain difficult given that the level of competing available supply in most of our markets gives tenants many choices with the national industrial market at roughly 86% occupied.

Within our own portfolio some of the markets where we have picked up some occupancy over the past two quarters include Central Pennsylvania helped by our Diapers.com lease, as well as New Jersey, Ohio, Phoenix, and Los Angeles. In addition, Seattle, Houston, and northern New Jersey continue to remain strong from an occupancy standpoint.

For our overall portfolio we continue our occupancy to be relatively -- we expect our occupancy to be relatively stable for the next two quarters and then turn upwards in the fourth quarter. We continue to aggressively pursue tenants to improve occupancy. We are using everything in our toolbox -- location, functionality, our reputation for great customer service, free rent, and our ability to fund TIs. And we are trying to keep lease terms short so we can benefit from a recovery in rents and protect the long-term prospects for our properties.

While our business depends on a healthy economy, we are doing what we can to control our own destiny by blocking and tackling. Our team is doing a great job day in and day out and I thank them for their hard work. They are doing everything they can to drive occupancy, such as executing our program to make our vacancies lease ready, working with our broker partners to find properties that meet customers' needs, making unsolicited lease offers, being creative with lease structures, and finding users with temporary space needs to pick up incremental cash flow.

One positive regarding the current level of availabilities is that there is virtually no new supply coming online. New deliveries in the United States for 2010 are expected to be below 30 million square feet compared to 70 million square feet in 2009 and 184 million square feet in 2008. Additionally, investment demand for industrial properties continues to improve as there is significant capital on the sidelines seeking a home.

We expect that the bid-ask spread should continue to narrow which should ultimately result in improved sales volumes and higher pricing for sellers. Obviously, a better sales environment will be helpful for us as additional asset sales are an important part of our capital management plan which I will now discuss.

As I outlined in my letter to stockholders our goal for the remainder of 2010 is to reduce our leverage by $200 million. We will continue our focus on our near-term maturities, namely our $147 million of converts due in September of 2011 and the $78 million of our April 2012 unsecured notes that are still outstanding.

As noted in our press release, we recently completed the retirement of approximately $71 million of our notes due in March of 2011 through the available make-whole provision. We chose to use this provision as it has been difficult to acquire these bonds on the open market and as part of our plan we are clearing the runway of our near-term maturities.

The first source of capital for deleveraging is asset sales. Here our focus is on selling vacant buildings and land to users. During the second quarter we completed $45 million of asset sales including $22 million of user sales, the largest being a $14.5 million land parcel sale to a user in Toronto.

Now I should note that not all of the sales proceeds will go towards deleveraging as we have one property for which we will be doing a 1031 exchange.

As a result of our success in the first quarter we are increasing our targeted sales range by $20 million to $100 million to $120 million for the year. So given that goal, that leaves roughly an $80 million to $100 million funding gap to fill towards our overall deleveraging plan for this year.

We have capacity for additional secured financings but our ability to buy back debt at a substantial discount has been limited by the improvement in the pricing of our bonds and the strong performance of the overall bond market. So raising more secured debt to buy back notes would not have a major deleveraging impact. Thus, we are not planning for much in the way of secured financing for the remainder of the year, especially given that we only have $18 million of maturing debt and regularly scheduled principal payments this year.

Our secured financing pipeline is roughly $27 million and we would expect to close this transaction in June. So that leaves us with equity as the main source to meet our deleveraging goal.

As we have stated before, we are very mindful of dilution but we are also very mindful of the fact that we believe it is in the best interest of all of our shareholders to reduce our debt levels and create more cushion relative to our line and note covenants. Equity could be raised through a few methods including filed offerings or through a continuous equity program also known as an ATM.

Moving on to our joint ventures. As we noted last quarter our various ventures with our partners, CalSTRS, have approximately $350 million in total of debt maturing later this year. We and our partner have had an active dialogue on how these maturities should be handled in the context of the ventures' intent, market conditions, and our partner's publicly stated desire to delever.

At this time, it is clear that the desires of the partners with respect to the size and pace of deleveraging do not match. Given our focus on deleveraging our balance sheet, we do not want to commit additional equity to these ventures at this time. Thus we would anticipate that our FirstCal joint venture relationship will be significantly reduced in the coming months. We are working with our partner to structure a solution that works for all parties and at this point I cannot provide more specific details on the economics of a potential separation.

I will tell you that our projected share of NOI, fees, and promotes from these FirstCal ventures for the second, third, and fourth quarter of 2010 were expected to total approximately $2.5 million. Any revenue loss from these ventures would be offset by commensurate overhead reductions such that any change in these joint ventures would have a negligible impact on our earnings this year and allow us to continue to pass our debt covenants.

Unfortunately, changes to these joint ventures would require some difficult decisions that would affect some of our team members. Also, the current book value of our FirstCal joint ventures is approximately $1.5 million.

Even with a potential adjustment in overhead, as we look to the future we maintain a broad infrastructure and institutional knowledge to execute new joint ventures or co-investment programs in the future. We would expect any future ventures to be acquisition-focused as we believe that acquiring properties or portfolios will offer the best investment opportunities in the coming years as opposed to new development.

As we talk about capital I would like to again cover our dividend policy and our financial covenants. With regard to the dividend, as we discussed previously, our policy is to distribute the minimum amount required to maintain our REIT status. If we were required to pay a common dividend in 2010, we may elect to satisfy this obligation by distributing a combination of stock and cash. We will monitor this throughout the year and keep you updated.

Taxable income levels are, in part, dependent on the level and nature of our sales. As a REIT we know that dividends are important to our investors and we look forward to the day when we can reinstate them where they will be aligned with our recurring cash flow.

As we cautioned in our press release last night and previously, we continue to operate with little cushion in certain of our financial covenants under our line of credit agreement and unsecured debt indenture. If we meet our plan for 2010, including our target level of asset sales, under favorable terms, we believe we will continue to be in compliance with our financial covenants throughout 2010.

With respect to the debt service covenants under our line of credit agreement, if we were otherwise unable to meet that covenant we believe we could meet it by choosing to suspend dividends on our outstanding preferred stock for one or more quarters. As you saw we declared and paid our preferred dividend for the first quarter.

Before I turn it over to Scott let me state again that our focus is squarely on leasing, deleveraging, and managing expenses. While stock prices improved since we spoke last, we believe our valuation continues to be interesting when viewed relative to our peers, particularly given our opportunities to improve cash flow over time by leasing our current vacancies as demand for industrial space from customers continues to improve.

With that, Scott?

Thanks, Bruce. First, let me walk you through our results for the quarter which contain a number of one-time items.

For the quarter funds from operations were $0.11 per share compared to $0.38 per share in the year-ago quarter. FFO results were impacted by a few one-time items including an impairment charge of $0.14 per share related to one balance sheet property and a $0.01 per share gain from early retirement of debt. Results for the quarter also included approximately $0.02 per share of NAREIT compliant gains.

If you exclude these one-time items, FFO per share would have been roughly $0.22.

I would also like to note that G&A expense for the quarter was higher than our projected run rate that we provided last quarter largely due to a $0.02 per share cost related to the settlement of certain legal matters. EPS for the quarter was a loss of $0.35 per share as it was in the year-ago quarter.

Moving on to the portfolio. Our occupancy for in-service portfolio was 81.4% down from 82% last quarter. As we noted on our last call, our in-service portfolio is now comprised of all but one property, a 55,000 square-foot redevelopment in the Baltimore market. In the first quarter we commenced 4.9 million square feet of leases on our balance sheet. Of this 4.9 million, 1.9 million were new leases, 3 million were renewals, and we had 800,000 square feet of short-term leases.

For the quarter tenant retention was a solid 69.4%, particularly in the light of the 657,000 square-foot move out in Atlanta that we discussed on our last call. Same-store NOI on a cash basis was negative 6.9% which excluded lease termination fees, and rental rates were down 13.1% cash on cash. These metrics were in line with our expectations and reflected the competitive market conditions.

Leasing costs averaged $1.81 per square foot for the quarter and we expect leasing costs to be roughly $2.20 per square foot in 2010. First-quarter leasing costs were lower than average due in part to the high percentage of renewals with many on an as-is basis.

Moving on to our capital market activities and capital position. Assets sales in the quarter totaled $44.5 million. Sales were comprised of four buildings totaling 266,000 square feet including three buildings to customers, one of which was vacant. We also sold one leased land site and the land parcel in Toronto that Bruce mentioned in his comments.

On the secured financing side we closed for transactions with one lender generating $27.5 million of proceeds secured by four properties totaling about 800,000 square feet. Each loan was at an interest rate of 7.4% with a maturity of five years.

During the first quarter we also issued approximately 900,000 shares of common stock raising approximately $6 million through the direct stock purchase feature of our DRIP program. We now have approximately 1.1 million shares remaining under this program.

Regarding our debt management activities, in the quarter we completed our tender offer in which we purchased a total of approximately $160 million aggregate principal amount of notes comprised of $73 million of the March 2011 notes, $66 million of the April 2012 notes, and $21 million of the June 2014 notes. As Bruce mentioned, we recently completed the repurchase and retirement of the remaining $71 million of our 7.375% notes due March 2011.

Since we retired these bonds at a premium of 6% or roughly $4 million, second-quarter and full-year EPS and FFO will have the impact of a $0.06 per share loss on retirement of debt. After completing this repurchase our next senior note maturities are $147 million of convertible debt due in September 2011, $78 million of the notes due April 2012, and $92 million of the notes due June 2014. And I remind you that our $500 million line of credit matures in September 2012.

Quickly summarizing our capital structure and position, our weighted average maturity is 7.4 years. Our secured debt is approximately 12% of our total assets per the calculations of our credit line and note covenants. Our maximum secured leverage on both of these covenants is 40%. We have less than $18 million of maturing debt and scheduled principal payments for the remainder of 2010, and our cash position plus line of credit availability as of today is approximately $32 million.

With regard to our loan covenants, we were in compliance in the first quarter of 2010 and expect to be in compliance for the remainder of the year subject to achieving our 2010 plan.

Regarding 2010 guidance, as noted in our press release, our FFO per share guidance range is now $0.76 per share to $0.86 per share from our prior range of $0.95 per share to $1.05 due to the following one-time items from the first quarter as I discussed a moment ago, namely $0.02 per share of NAREIT compliant gains and the $0.14 per share impairment charge all recognized in the first quarter.

Guidance also reflects the impact of the $0.06 per share loss on retirement of debt through the exercise of the make-whole provision related to the repurchase and retirement of the 2011 notes that we just completed which will be recorded in the second quarter. Our guidance does not reflect the impact of any further debt buybacks nor the impact of further asset sales and NAREIT compliant gains that may occur in the remaining quarters of 2010.

Guidance also does not reflect any potential additional equity issuance but includes the impact of one secured financing transaction totaling approximately $27 million expected to be closed in the second quarter.

In addition, I would note that our net income and FFO guidance reflects an additional $0.03 per share loss to be recorded in the second quarter related to a provision for state income taxes resulting from the reversal of a tax court appeal. This change does not impact our covenant calculations.

I will now reiterate some of the other key components of our guidance for 2010, which is also found in our press release. Please note that these components are unchanged from our last call.

For the year we expect average in-service occupancy to be 81% to 83%. Our forecast for same-store NOI for the year is projected to be negative 5% to negative 7%. Our estimate for rental rate change for the year is negative 11% to negative 13%. JV FFO is expected to be between $6 million to $8 million and G&A expense guidance remains unchanged at $31 million to $33 million.

Please note our joint venture FFO and G&A expense guidance does not reflect any potential changes to our joint ventures. As Bruce discussed, any changes to our JV earnings stream would be roughly offset with related overhead reductions.

With that let me turn it back over to Bruce.

Thanks, Scott. Before we open up to questions let me state that in terms of tenant demand and occupancy we are encouraged by the activity and interest in our facilities. We are working hard every day to get our vacancies leased and to retain our existing tenants. We remain focused on deleveraging our balance sheet and mitigating risk related to our covenants.

Our energies are dedicated to enhancing the value of our portfolio through leasing and executing select asset sales, particularly vacant buildings and land. While we are disappointed with the possible changes to our current joint ventures, our platform is valuable and difficult to assemble or replicate. Currently our main focus is on leasing and reducing our balance sheet leverage, but we will look for appropriate future joint venture opportunities to utilize the expertise and experience of our organization to add value for our shareholders.

With that we would be happy to take your questions. As a courtesy to our other callers we ask that you limit your questions to one plus a follow-up in order to give the other participants a chance to get their questions answered. Of course you are always welcome to get back into the queue.

Now, Julianne, could we please open it up for questions?

(Operator Instructions) Ki Bin Kim, Macquarie.

Thanks, guys. To the extent possible could you just talk about the stated JV with CalSTRS dissolution process as part of the contract?

Ki Bin, I would say that in terms of -- right now we are having discussions with them. We haven't really formally, no one has formally gone to a buy/sell or something like that. We are just trying to negotiate a solution.

But there is in each of the documents a mechanism subject to certain requirements that you can dissolve the partnership through a buy/sell or similar type mechanism.

And so if you had to dissolve the JV and sell the assets to just a third-party and if -- in a scenario where the asset sales prices is below the debt associated with it what would happen then?

Let me be clear. Remember, this debt, these ventures, when we went in to them the intent was to have -- there is 65% financing. The financing is subscription debt; it is not recourse debt or secured debt. So there is no recourse to First Industrial on any of this debt.

And the debt is not secured by assets. Okay, so there is no exposure to us.

Okay. Is the interest cost, is that part of your total corporate covenants from the JV?

No, the interest covenants are not part of the line of credit covenants.

All right, thank you.

Steven Frankel, Green Street Advisors.

Thank you and good morning. Can we just talk a little bit more about the deleveraging plan? Your guys' share price has done really well this year. I think you have outperformed your peers by 40% or something. What has held you guys back from raising equity over the last couple of months when you guys are now trading at a pretty hefty premium to your NAV?

Secondly, with the JVs why not just hand them the keys on the debt there? Why not just hand them the keys on the properties? Those ventures are pretty levered at this point. It would seem that would be an effective way of handing it in.

And then kind of third of all, your sales target for the year is $100 million, $120 million but you have already done $50 million this year. Is there a reason why you are not anticipating if the log jam of sales is ending and more and more buyers are coming into the market and the bid/ask spread is narrowing as opposed to widening why sales wouldn't be higher during the year?

I think there are three questions there so let's try and take them one by one. In terms of equity sales I think that we are pleased with the way our stock has performed this year and I think from what we are seeing I would anticipate that we will be reaching out to the equity market between now and the end of the year to hit our goal to delever by $200 million. So I think you could anticipate that.

In terms of giving back the keys to the lenders, the lenders don't have any security for the keys here. And from our standpoint the loans are really guaranteed by CalSTRS, but again we are working with CalSTRS and trying to figure out something that works for the partnership and works for the partners. That is really our goal.

The final question was on sales. Again, we were pleased with what we were able to sell in the first quarter. We are pleased -- when we look at the way the market is, the demand for product is pretty strong. That is why we increased our goal by $20 million. And, again, we will have to see as we go along through the year in terms of how we do.

Remember we do have a requirement that if we sell assets for losses it affects our covenants, so that is a governor, if you will, in terms of what you can sell and what you can't sell. So that is our focus and our focus again still is to sell vacant land and vacant buildings.

I would note that -- we had a great sale of that land, piece of land in Toronto at a profit. We just bought that just two years and it was a very good sale, $14.5 million. Again, we will look at how -- what the market gives us and we will report back in the next quarter. But we are going to stick with what we are having of $100 million to $120 million.

Paul Adornato, BMO Capital Markets.

Thanks, good morning. Bruce, you said that one of your strategies would be to try to have shorter lease terms. I was wondering how flexible the potential tenants are to those shorter terms since they do have so many choices. Are they willing to entertain shorter terms?

It's a good question. It depends; some people see this as a great opportunity and are locking this in for longer term. Our goal is, if we are being real flexible on rates, is to keep it as short as possible.

If you look at the space we did in the first quarter, our average lease term was a little over three years. So it was pretty short which we were very positive about that, we like that.

And so do you think that is why your cash-on-cash comparisons are perhaps a little bit worse than some of your peers, because of the shorter terms?

I would say I think we are fairly much in line with some of our peers in terms of [that].

Another major peer, I guess without stating who they are, they were about negative 12%. And we have said we are going to see rental rates from a cash-on-cash perspective they are going to be rolling down for the next two to three years. While on the flipside we are seeing market rents or asking rents are starting to stabilize, so that is pretty consistent with what we are seeing.

Okay, thank you.

(Operator Instructions) Dan Donlan, Janney Capital Markets.

Good afternoon. So, Bruce, can you guys -- can you just not recognize the $112 million you have in debt with CalSTRS? Can you just basically not pay that anymore?

Yes, that is not on our --

Dan, those investments and the ventures are equity method of investment so the debt is not carried on our balance sheet. The debt is not counted toward our covenants as well. And as we mentioned, the debt is non-recourse to First Industrial.

Okay. So for NAV purposes we can just take that away if you guys just decide to go the other way with it?

Yes.

Okay. And then also thinking about your fixed charge coverage ratio, which you guys have said you are close on, I am just curious as to -- and I am probably not going to make any friends with the preferred shareholders here -- but why won't you just go ahead and cut the preferred instead of selling assets which is reducing your NOI? Has there been any thought process behind that?

Well, no. Again, to the extent we can continue to pay the preferred we will. At the end of the day if we don't pay the preferred at some point you got to make it up and pay that because we are going to be paying dividends down the road to shareholders. You got to make sure the preferred is all caught up by then.

So again our philosophy, what we are going to continue to do is go about running our business. The only reason we put in that we have the ability not to pay the preferred is to show that we have got cushion here if it gets close to not pay it to make sure we don't hit the covenants in the line of credit.

Plus, Dan, the other benefit of the sales is delevering. We are using that proceeds to pay down debt.

Understood. I will go back in the queue.

Ben Mackovak, Rivanna Capital.

Thanks for taking my call. The guidance you gave at the end of last quarter for FFO, did that include the $0.02 charge for the legal fees and also the $0.06 charge for the retirement of debt?

The legal fees was embedded within the guidance and then the $0.06 of costs related to the retirement of debt in the second quarter was not included in the guidance for the fourth quarter.

So essentially (technical difficulty) guidance versus like --

I am sorry, we couldn't hear that.

So you took up guidance versus where it was last quarter?

Well, if you net all the pluses and if you take out all the one-time items, Ben, we are pretty close to what our guidance was in the fourth quarter for FFO.

Okay. All right, thank you.

Ki Bin Kim, Macquarie.

Just wanted to go back to your commentary that you are expecting an occupancy bump up in the fourth quarter. So what gives you the confidence that will happen? Is it more based on the timing in the general economy or are you guys in some decently sized lease negotiations that'll commence in the fourth quarter?

Ki Bin, this is Chris. There is a couple of things that we are seeing as far as that, and again what we are anticipating is that we see stabilization of the occupancy in the third -- or second and third quarter then an uptick in the fourth quarter.

What we are seeing is that -- first of all, our retention rate for the first quarter, as we have mentioned, it was relatively strong at 69%. Of course that included also our move out of 657,000 in Atlanta and we had anticipated that previously. So we feel going forward that our negotiations with tenants that we are anticipating relatively strong retention for the remaining three quarters.

Another thing that we are seeing too is that, as Bruce had mentioned, definitely the traffic or the activity and the prospective tenants is up.

Another thing we are looking at is just we are seeing the amount of tenants that are now asking for an expansion of space as opposed to a reduction of space. Over the last three quarters -- third quarter of 2009 for instance, we had about 200,000 square feet in expansions and about the same number in reductions so it was a net zero.

Last quarter we saw about 70,000 in expansions and about 90,000 in reductions for a net negative absorption of about 21,000. But in this quarter we saw about 180,000 square feet in expansions and reductions were about 70,000 square feet. So we saw a net absorption from that perspective of about 120,000.

So those are a couple of the factors that we are seeing. We see some good factors out there and we think we will have the slight increase in the fourth quarter.

I would also add we only have one tenant over 200,000 square feet that is coming due between now and the end of the year. So we don't have a big rollover of large tenants.

Right. But then obviously the lease, the retention is a huge factor, when we can retain the tenant versus having to lease that out. So that is another positive factor we are seeing.

Are you seeing a return of any big bulk users in a big way, like any new leases that you are negotiating in the 100,000 square foot plus for new tenants?

We are constantly negotiating with people but we really like to talk about it once we sign a lease.

Okay, thanks.

Deeds, not words.

Stewart Hindley, private investor.

Hello, good morning. I would like to make a brief comment since we all have our $0.02 worth on the stock price. As a private investor I personally would like to say that I view that the NAV of the stock is well above the current trading price. And as an investor I try not to use how well a stock has done year-to-date as rationalization of any of my moves and I am sure that you will do the same.

My question -- and I appreciate, Bruce, the detail that you gave about the capital plans. Do you feel that there is anything specific that you will be able to do with the 2011 convertible notes prior to their maturity given that they are probably -- well, if I owned that security I would probably be picking up the phone and talking with you.

Again, from our standpoint we have capital in terms of to buy back debt and we will look at that depending on the pricing of it as we look at all of our -- how we want to allocate our capital. We will look at that. And again there is a lot of time between now and September of 2011 so we may have an opportunity to buy back some of that but who knows.

Have you had conversations with those holders since you bought back that piece of it last year?

We continue to have discussions with holders to date in terms of the pricing and what they would be willing to sell it at. It hasn't been what we felt very attractive.

And the sales activity of our bonds has been pretty light since the tender offer that we closed in early March, in early February.

And, again, we look at all of our bonds as well. But we just have not seen a lot of activity in terms of people willing to sell at reasonable prices.

[Michael O'Dell], AIG Asset Management.

Thanks for taking the question. Just trying to get some color in terms of who the buyers are of the land and the vacant buildings. Are these local players? Just any additional detail you can provide there.

Sure. Let me add some and JoJo can jump in. The land in Toronto it was a user that had some property very close, within probably two or three miles of us. And they were getting moved out by zoning in terms of it was getting too dense around them.

It was amazing in terms of that they were able to move so quickly to buy this land and close because we were still in the process of getting it zoned. But they are getting some help from the local zoning people to try and expedite things. So it was a very good sale for us.

Want to talk about some of the others JoJo?

Yes, for the three other sales to our customers all of them wanted to own the building rather than lease. They were planning significant improvements to their space and they wanted to take control of the space. And so in that case it was a real win-win situation. Selling the property to them had a -- we were very pleased with the price and them basically buying the buildings.

Two of them were in Dallas and then one was a vacant building that we sold in St. Louis.

Okay. And then in terms of the JVs, is there anything that you are seeing now where you could run into the same situation as you are running into with CalPERS in terms of handing back the keys to the lenders?

It's CalSTRS, not CalPERS.

Sorry.

In terms of -- aside from the CalSTRS venture we have a venture with the Kuwaiti Finance House and that is our sort of long-term net leases. At this time we are in the process of -- I guess over the next three to five years that partnership will be selling those assets. They have held them for a long period of time.

The investment period on that expired a bit ago.

Good.

(Operator Instructions) Steven Frankel, Green Street Advisors.

Thank you. Can we just talk about the two secured debt offerings you guys have pointed to in the results? There is a huge divergence in interest rate. Is the LTV just materially different between both loans where you were able to get 100 basis points of a lower interest rate on a five-year longer maturity?

Let me ask Bob to comment on that.

Sure, Steve. The transactions that we closed in the first quarter were four individual loans on single-asset buildings, not cross collateralized or cross-defaulted. They also contained a fair bit of prepayment flexibility and we were committed in the latter part of 2009. So I think that was reflective of the market then.

The new transactions that -- the new transaction, rather, that we are pursuing is clearly reflective of what we are seeing in the debt markets in terms of interest rates dropping and advance rates increasing even for longer terms.

Okay. Is there an LTV, though, on the new loan that you guys are working on?

The new loans are in the range of 70% LTV.

And have you guys talked to your line lenders just about covenants and what you guys are doing in 2012 when that huge slug of debt comes due?

We constantly talk to our line of banks and they have been very supportive. As you know, we have a line of credit that expires in September of 2012 that we pay 100 basis points over LIBOR, so it's very attractive financing.

To the extent -- we could get some flexibility on our covenants and also give us the ability to sell assets that have losses that would be helpful. If we can work something out with the banks, if it works for them and for us, it's something we would consider. But we have constant conversations with them and we will keep you posted on it.

Thank you.

Dan Donlan, Janney Capital Markets.

Just had a question on the -- starting off with the margins, well, actually your operating expenses here. It looks like they ticked up quite a bit from the fourth quarter to the first quarter. I think there is probably some seasonality to that.

And I don't know if you commented on this in the beginning part of the call, I was late getting on. Could you maybe give us a run rate of where you think operating expenses might be for the last three quarters? Is it similar to what it is in 2009?

I think the margins in the first quarter -- there were a lot of expenses related to snow removal in the first quarter. Some of the winters out east were a little bit worse. As far as the margins are concerned, Dan, we will get back to you on that.

Dan, also what Scott mentioned as far as there definitely is a seasonality with the snow removal. Out east we were hit pretty hard with that but I keep in mind the majority of that is recoverable. So it's a minimal impact on the net NOI number.

Okay. What were lease termination fees in the quarter?

They were $249,000.

Okay. Could you break out what your GAAP -- the declines in GAAP rental rates were for new versus renewal leases?

Yes, actually we report everything on a cash-on-cash basis so the breakdown for the 13.1% for this quarter were on new deals, the drop was about 25%, and on renewal deals it was about 7.7%.

And you don't have that number?

That is cash-on-cash versus GAAP.

Do you have it for GAAP though?

For GAAP we have an overall number, the GAAP drop was about 9%.

9%, okay. And then you talked about $80 million to $100 million in sales you anticipate potentially for the last three quarters of the year. Any sense of how much of that would be land versus occupied buildings versus vacant buildings?

No, we will have to -- we will keep you posted as we go. Again the focus is on selling the unoccupied buildings and land but we will see what the market gives us.

Okay.

It's $100 million to $120 million also.

But that is for the year.

Okay. Maybe I am missing something here, the developable land inventory went from $92 million at the end of the fourth quarter to about $90.3 million this year but you guys -- or excuse me, at the end of this quarter. But you guys sold the 55 acres of land in the Inland Empire. I know you said something about being leased. Why didn't that go down by more?

Well, the first thing is the land in the Inland Empire was not part of that because that was leased land, but we did sell some land in Toronto. So that reduced the fair value of land compared to the fourth quarter, but then there was some other land parcels that the value increased. So that is how we got to the first quarter.

For instance, the land that we sold in Toronto we got a very good price. It was greater than what we had it valued at and we also own another parcel next to it so the value of that went up as well. So, again, last quarter it went down because of the sale in Toronto and then we had some new mark-to-markets on some other land parcels that we had in that population.

Okay. And then two more if I may. Your deferred rent calculation keeps steadily rising. Is that one particular tenant or can you maybe talk about what is driving that?

What do you mean? Are you talking just the straight-line rent income? Is that what you are getting at, Dan?

If you look on -- on the liability side of your balance sheet it says deferred rent, and maybe I am looking at it incorrectly.

Well, there is deferred leasing intangibles on the liabilities but --

Maybe I read it wrong. Okay. I guess I read it wrong.

Then lastly, how are you determining what properties to sell to reduce leverage? What is the criteria? Is it stuff that you can achieve a gain on? Is it stuff that is maybe not necessarily core or what is your general criteria there?

Well, right now in terms of -- our number one thing to sell are properties that we are going to sell close to breakeven or at gain. But given that caveat we are looking to sell empty buildings, vacant land are our top priorities.

All right. Next question, operator.

There are no further questions at this time. I will now turn the floor back over to Mr. Duncan for any closing comments.

All right. Well, thank you very much. Thank you, operator. Thank you all for participating on our call today.

Please feel free, again, to call us with any questions. We look forward to seeing many of you at NAREIT in Chicago in early June. Thanks a lot.

Thank you all for participating in today's conference call. You may now disconnect.