First Industrial Realty Trust Inc (FR) 2010 Q3 法說會逐字稿

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Industrial third-quarter results 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).

Thank you. I will now turn the call over to Art Harmon, Director of Investor Relations. Please go ahead, sir.

Thanks, Chris. Hello, everyone, and welcome to First Industrial's call. Before we discuss our third-quarter 2010 results, let me remind everyone that 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, 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 10-Q.

Reconciliation from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report available at FirstIndustrial.com under the Investor Relations tab.

Since this call may be accessed via replay for a period of time, it is important to note that today's call includes time-sensitive information that may be accurate only as of today's date, October 27, 2010.

Our call will begin with remarks by Bruce Duncan, our President and CEO, to be followed by Scott Musil, our acting Chief Financial Officer, who will discuss our results, our capital position and guidance, after which we will be pleased to open it up for your questions.

Also 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, I would like to turn the call over to Bruce.

Thanks, Art, and thank you all very much for joining us on our call today. As you saw in our press release last night, we have some good news to report. With respect to our portfolio, our team continues to do a very good job of leasing, as we improved occupancy again this quarter by 150 basis points to 83.6%.

As you saw in our announcement on Monday, we are also pleased to announce that we were successful in amending the terms of our credit facility. We view this amendment as a game-changing event for our company in terms of long-term strategy, including our execution plan for the next two years.

The amended line gives us covenant relief such that we now have cushion on all covenant ratios, and also removes economic gains and losses from the calculation of the fixed charge covenant. Scott will walk you through the specifics on the amendment. We thank our bank group for their support and cooperation in reaching this agreement, which we believe benefits all of our stakeholders by setting the stage for further deleveraging and our ability to refine our portfolio.

So as we were working towards this line agreement, we've also been hard at work over the past several quarters at re-examining our portfolio. We performed a bottom-up review of every asset, which was truly a concerted effort, involving our regional teams with their local market and property level expertise, our dispositions group and the senior management team.

Through this process, we've determined a pool of assets that we view as nonstrategic to our portfolio. With the covenants no longer a governor on which assets we can sell, we are going to reshape our portfolio by selectively disposing of these assets, while generating funds to further reduce our debt.

Related to this nonstrategic pool, we took an impairment charge totaling approximately $164 million this quarter, which reflects the change in our asset management strategy and expected holding period for these assets. The total book value of this pool is now approximately $414 million. Scott will talk more about the composition of the impairments in his remarks.

Let me characterize the properties in this pool for you and why we view them as nonstrategic relative to our long-term strategy. Vacant buildings and land that are primarily suited to user-buyers continues to be a focus. This is really a continuation of what we've been doing over the past several quarters, where we have had some very good execution in terms of pricing and portfolio impact.

Also, a number of targeted market properties are in locations where we have limited holdings and lack economies of scale, or our assets in tertiary markets, which were, for the most part, acquired in portfolio acquisitions over the years.

Additionally, although First Industrial has historically been an investor in a range of properties in the industrial supply chain, our concentration has been in bulk and regional distribution centers and light industrial. We would like to move that concentration higher over time through this process, and in the future when we begin to invest again.

So within this pool we are targeting the sale of buildings that are not optimal for high-throughput distribution and light industrial users, but can serve as good homes for a range of user-buyers. Also in this category are some [flex] assets in certain markets.

Let me be very clear. Given our flexibility with these assets sales, we are seeking appropriate pricing and value. That is, we are not engaging in a buyer sale. This is a deliberate, thoughtful process. From this pool of nonstrategic assets, we are targeting $250 million to $300 million in sales by September 2012.

Capital generated from these asset sales will first and foremost go toward deleveraging. That is our clear priority. Once deleveraging is complete, we will look primarily to increase our capital allocation in coastal markets with prospects for above-average rental rate growth and select infill opportunities in supply-constrained submarkets in key distribution hubs.

Over the next few years, these planned sales proceeds, combined with our capacity to access a secured debt market, as well as equity, depending on market conditions, gives us a clear capital plan for our debt maturities and deleveraging. Scott will walk you through the road map for sources and uses through 2012 shortly.

Now, let me talk about the leasing market. We increased our occupancy 150 basis points, our second consecutive quarterly increase. This was ahead of our guidance, as our team did a great job of bringing home leases to the tune of 5.3 million square feet of total leasing across all of our markets.

As a point of comparison for our occupancy gain in the quarter, the overall national industrial market improved a modest 10 basis points, according to CB Richard Ellis Econometric Advisors, although a positive number for the industry is a welcome sign to us, and I'm sure to our industry peers.

As we look toward leasing in the fourth quarter and beyond, our markets remain competitive. We are seeing good leasing activity, though. Tenant concessions are beginning to lessen, and in our conversations with tenants, more are contemplating expansions compared to what we were hearing earlier in the year. New construction is virtually nonexistent, and at current market rates and with the availability of existing assets, there is little motivation for new development, except for select build-to-suit requirements.

Again, while the overall demand picture is picking up, pricing remains tough, and our rental rates were in line with our expectations of mid-double-digit percentage declines. On the whole, we expect rental rates on new and expiring leases to show mid-double-digit declines again in the fourth quarter.

Regarding our leasing strategy, we continue to aim to keep lease terms shorter in order to preserve the value and long-term NOI growth potential of our assets. Leases commencing year to date have averaged term of 4.3 years compared to our overall portfolio average of six years. If you include short-term leases, the average term for the quarter was 3.6 years.

Last time we also spoke to you about the higher rental rate step-ups we have been successful in structuring into our leases signed this year. Updating you on those numbers, our average annual rent step-up in leases with bumps commencing in 2010 is now 6.7%. Our typical range has been 2.5% to 3% per annum, so these increases will help to offset a portion of the expected rent rolldowns in the next several quarters.

Looking at the leasing traffic in our regions, New Jersey, Houston, Baltimore-Washington, St. Louis and Indianapolis are all showing good activity. Atlanta, Florida and Dallas remain highly competitive, but we've had some leasing wins in each of these markets.

Regarding occupancy for the remainder of the year, with our performance in the third quarter outpacing our expectations, we expect the fourth quarter to be roughly in line to slightly ahead of our third-quarter figure. We will provide guidance for full-year 2011 on our fourth-quarter call.

Moving on to the investment market. The activity in the industrial sales market continues to ramp up, with some highly publicized portfolio sales by a few of our peers. Demand is being driven by the need for yield and investors expecting industrial to benefit from a recovery, even if it is a slow-paced one. This stronger sales market should benefit us as we execute our portfolio management strategy.

Users continue to be an important market for our properties. During the quarter, we completed $9 million of sales on balance sheet, all to users. We sold four vacant assets, located in Detroit, Cleveland, Minneapolis and Philadelphia. These sales serve as a preview for the type of execution we will be looking to achieve with our nonstrategic assets. It is a particle-intensive process, but we have a good track record here, and the team and the infrastructure in place to be successful in achieving our goals.

For another indicator of the sales market, we sold a leased asset in Southern California as part of the winddown of certain joint ventures during the quarter for $27 million at $153 per square foot. Interest was very high, with this asset receiving numerous serious bids. So we are encouraged by what we are seeing in the sales market as far as what it means to our sales plan and, by implication, what it means to the value of our income-producing properties.

Now, I would like to address the dividend. As a REIT, we know that our investors look forward to the day that we reinstate our dividend. Management and the Board will continue to review it on a quarterly basis, but there is still work to be done deleveraging and increasing our occupancy. I remind you that our dividend policy is to distribute the minimum amount required to maintain our REIT status. If required to pay a common dividend in 2010, we may elect to satisfy this obligation by distributing a combination of stock and cash. Taxable income levels are, in part, dependent upon the level and nature of our sales.

Regarding our preferred dividends, with our relaxed covenants and our amended credit facility, we have increased cushion such that we would expect to continue paying our preferred dividend as we have been doing. As a matter of course, we review our position quarterly, and dividends are approved by the Board.

So before turning it over to Scott, let me just say our team has been focused on leasing as the long-term driver of value of our company. We will apply that same focus towards executing our portfolio management strategy as we seek to sell nonstrategic assets for deleveraging and reshaping our portfolio.

Valuations in the industrial real estate market continue to improve. As we execute our strategy and continue to demonstrate the value of our platform and portfolio, we will enhance our value for our shareholders.

So 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 a loss of $1.96 per share compared to income of $0.57 per share in the year-ago quarter. FFO results were impacted by a few one-time items during the quarter. Non-cash impairment charges of $2.39 per share related to the nonstrategic pool of assets we plan to sell that Bruce described, which I will walk you through in detail in a moment.

JV FFO was $10.7 million or $0.16 per share, primarily reflecting the economics of the winddown of certain of our joint ventures. Included in this figure was approximately $1.3 million, or $0.02 per share, related to a sales transaction that occurred after the sale of our joint ventures closed, for which we were entitled to certain economics. We had not factored in this into our prior FFO guidance.

Excluding one-time charges, such as impairment charges, gains and losses from debt repurchases, income tax benefits and the gain related to the sale of certain of our joint ventures, funds from operations were $0.29 per share compared to $0.34 per share in the year-ago quarter. EPS for the quarter was a loss of $2.44 per share versus a loss of $0.04 per share in the year-ago quarter.

Let me quickly walk you through the non-cash impairment charge, which is made up of two pieces. First, at September 30, management had approved for sale two parcels of land. Since these land parcels were held for sale for accounting purposes, we compared the sales price less cost to sell to the book value to determine if an impairment charge was warranted. Since the fair value less cost to sell for these two land parcels was less than book value, we recorded an impairment charge of $1.5 million.

Second, since the amendment of our line of credit now allows us to sell properties at economic losses, we are marketing for sale a group of nonstrategic assets that is comprised of 195 properties totaling 16.4 million square feet and 694 gross acres of land. Since the approval to sell these properties occurred in the fourth quarter, at September 30, these properties aren't considered held for sale, but rather held for use for accounting purposes.

Under held for use accounting, we compare the undiscounted cash flows of these properties through the projected hold period to the carrying value of these assets. This is done on a property-by-property basis. Since our line of credit covenants are no longer a restriction on our ability to sell these properties, the whole period of these assets has been reduced. Based on this exercise, the majority of the assets within this pool didn't meet the impairment test, which required us to write these assets down to fair value, which resulted in an impairment charge of approximately $162.4 million.

In the fourth quarter, these properties will be considered held for sale for accounting purposes, and we will be required to book impairment charges of approximately $11 million related to the anticipated sales costs. Lastly, we will also book approximately another $3 million of an impairment charge in the fourth quarter related to property that passed the impairment test under held for use accounting, but didn't pass under held for sale accounting.

Moving on to the portfolio. Our occupancy for our in-service portfolio was 83.6%, up 150 basis points since the last quarter. In the third quarter, we commenced 5.3 million square feet of leases on our balance sheet. Of these, 1.5 million square feet were new, 2.2 million were renewals and 1.6 million were short-term. So far in the fourth quarter, we have commenced another 2 million square feet.

For the quarter, tenant retention was 69.8%, and our weighted average for the first nine months was 67%. Same-store NOI on a cash basis was negative 1.3%, excluding termination fees. Same-store again was better than expected due to higher-than-expected occupancy. Termination fees were $1.1 million, which was slightly higher than recent quarters.

Rental rates were down 15.3% cash-on-cash, reflective of the competitive leasing market. On a GAAP basis, rental rates were down 11.2%. Leasing costs were $2.04 per square foot for the quarter, in line with our expectations. We expect fourth-quarter leasing costs to be roughly $2.20 per square foot.

Moving on to our capital market activities and capital position. As Bruce discussed, on balance sheet, in 4Q we sold four vacant assets to users, amounting to 256,000 square feet, for sales proceeds of $9.1 million. On the secured financing side, we closed one transaction in the third quarter, totaling $41.2 million with the (inaudible) company, backed by 11 buildings with a 10-year maturity at a coupon rate of 5.55%.

Subsequent to the end of the quarter, we closed one transaction for $9.8 million with a local bank, secured by two properties with a five-year maturity at a 5% interest rate.

Due to the line of credit amendment, we paid down $100 million on October 22, and in the third quarter, we also completed the repurchase of $16 million of our notes due April 2012.

Let me briefly walk you through our planned sources and uses through 2012. First, the uses. As Bruce described, we have $147 million of the 2011 converts, $62 million of the 2012 notes and $34 million of mortgage maturities through 2012. Plus, we are planning to make another $100 million paydown on our credit facility. These uses total $343 million.

As we look at the arrows in our capital quiver, we have discussed our plan to sell $250 million to $300 million of assets from the pool of nonstrategic assets from now through September of 2012. In addition, we are targeting another $100 million in secured financings by June 2011. Total sources approximate $375 million, which exceeds the $343 million of uses I just discussed.

We also will likely consider additional equity, depending upon market conditions, as part of our deleveraging process. Recall that we had our ATM program in place for 9.5 million shares. Note that we did not issue shares under this program in the third quarter. Any excess proceeds would predominately go towards retiring other debt. So you can see that we have a clear plan and path to take care of our maturities through 2012.

Quickly summarizing our capital structure and position. Our weighted-average maturity is 7.4 years. We have $15 million of maturing debt and regularly scheduled principal payments for the remainder of 2010, with $13 million related to a mortgage maturity in December. Our cash position is approximately $32 million.

Now, let me cover for you briefly our line amendment. The capacity is now $400 million, following or $100 million paydown. The facility is comprised of a $200 million term loan and a $200 million revolver. The interest rate on the term loan is LIBOR plus 325 basis points, with no facility fee. The interest rate on the revolving facility has been increased from LIBOR plus 100 basis points to LIBOR plus 275 basis points at our current credit rating, plus a 50 basis point facility fee. The maturity date remains September of 2012.

The amended credit agreement contains relaxed covenants. The fixed charge coverage ratio limit was reduced from 1.5 times to 1.2 times through maturity. Additionally, the value of unencumbered assets ratio was also revised, with the limit reduced from 1.6 to 1.3 for an initial period ending September 30, 2011, after which it reverts back to 1.6 times through the maturity date. As Bruce highlighted, economic gains and losses on asset sales are no longer included in EBITDA in the calculation of the fixed charge coverage ratio.

You can find the covenant metrics for our unsecured notes and our line of credit in our supplemental on page 20.

As we have discussed on prior calls, the two covenants we were very close were the fixed charge coverage ratio and the ratio of value of unencumbered assets to outstanding consolidated senior unsecured debt under our line of credit. At September 30, our fixed charge coverage ratio was 1.53 times compared to 1.2 times per the covenant, and our value of unencumbered asset ratio was 1.57 compared to the covenant of 1.3.

Regarding 2010 guidance, as noted in our press release, our FFO per share guidance range is now a loss of $1.65 to $1.70 compared to our prior guidance of $0.90 to $1.00 per share due to the following. A $2.60 impairment charge we are recognizing in 3Q and 4Q related to the nonstrategic portfolio of properties we are marketing for sale. An additional $0.02 per share of restructuring charges we will recognize in 4Q related to the sublease of office space in our corporate office.

A $0.04 per share reduction in G&A due to two items -- approximately $0.02 per share relates to permanent expense savings. The other $0.02 per share relates to a cost allocation between G&A and operating property expenses reflected in NOI. The net FFO impact to this second adjustment is zero. A $0.05 per share decrease in NOI, $0.02 per share related to the cost allocation I just discussed. This has no impact on cash paying rents. The majority of the other $0.03 per share relates to a decrease in straight-line rent due to reserves on some of our tenants. A $0.02 per share increase in JV FFO was discussed earlier.

Excluding the fourth-quarter impairment charge, we see FFO at $0.20 to $0.25 per share in the fourth 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 quarter of 2010. Guidance also does not reflect any potential additional equity issuance.

I will reiterate some of the key components of our guidance for 2010, which is found in our press release as well. For the year, we expect average in-service occupancy to be 82% to 83%, an increase in the bottom end of the range. Our forecast for same-store NOI for the year is projected to be negative 3% to negative 4%, an increase in the midpoint and a tightening of the range due to the positive variances in the third quarter versus our prior guidance.

JV FFO is expected to be $15 million to $16 million. I would note that on a go-forward basis, our only ongoing venture is our 2003 net lease joint venture, from which we earn roughly $300,000 per quarter of JV FFO. We may receive some additional economics related to our former FirstCal joint ventures in the coming quarters, but those are not reflected in our guidance.

G&A guidance is reduced to a range of $28 million to $29 million versus our prior range of $30 million to $32 million. With that, let me turn it back over to Bruce.

Thanks, Scott. Before we open up to questions, I just want to spend a few moments talking about the opportunity we have at First Industrial and the opportunity we offer to investors in light of our line of credit amendment.

As we have stated in the past, we acknowledge that our leverage is too high and that we need to reduce our debt to EBITDA to 6.5 to 7.5 times from where we stand today, at around 9 times. We are committed to deleveraging, and we have laid out our path for you on the capital side, which includes sales of nonstrategic assets and possibly equity, depending on market conditions.

We also plan to help our leverage ratio by increasing the EBITDA in the denominator by growing occupancy. Even with our occupancy increase this quarter to 83.6%, we still have much room to drive increased cash flow from our portfolio. Every 1% increase in occupancy increases our cash flow by about $4 million, so we have great internal growth potential embedded in our portfolio.

In looking at us from any relative valuation metric, we look cheap relative to our peers. At $6.50 a share, we trade at around 7.2 times our run rate FFO. On a price per pound basis, we trade at just under $38 per square foot, substantially less than our peers, and more importantly, well below replacement costs and below where sales comparables would suggest is appropriate in today's market.

In addition to our earnings power, we have a very valuable platform and a talented team that has done a fantastic job of executing our back-to-basics plan of portfolio, capital and expense management. Our path ahead is now even more clear. We look forward to keeping you apprised of our progress as we enhance value for our shareholders.

We would now 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 other participants a chance to get their questions answered. Of course, you are welcome to get back into the queue. And so now, operator, can we please open it up for questions?

(Operator Instructions) Ki Bin Kim, Macquarie.

Thanks, and congratulations on getting your credit facility amended. In regards to the 195 properties that you identify for dispositions, I just want to clarify your comments. You said you are targeting $250 million to $300 million for sale by 2012. Is that the total 195, or is that -- what percent of that 195 is that?

It is just a dollar amount. We are saying that of that pool of 400 and some million dollars, we are saying we are going to be selling $250 million to $300 million by September of 2012. Because we didn't want to say we're going to sell all of them, because we want to make sure we have flexibility to be able to maximize value.

Okay. And as a follow-up, given that fundamentals are improving in the right direction from occupancy and you got your credit amendments -- your credit covenants are relaxed and you have a ton of assets that you want to sell, how does that make you think about your need to raise equity, especially at these prices?

Again, we view our equity as very dear to us, in the sense, if you notice, we have not raised any equity in the last quarter with our ATM. We have an ATM in place. We view it as another arrow in our quiver. If you look at it, we think with the plan we've outlined, we can take care of our maturities, including an additional $100 million plan paydown with our line -- when the line matures in September 2012, by just executing on our sales plan of these nonstrategic assets, as well as using some secured debt.

So we have the ability to raise equity, but we will look at that depending on the market price.

So is it safe to say at today's prices, it's probably highly unlikely that would happen?

I would they just keep looking in terms of what we've done. We have not been issuing equity at these prices, so I would not anticipate it. But, you know --

Okay, thank you.

It is important to us in terms of the value we see in our business that equity is dear.

All right. Thank you.

Steven Frankel, Green Street Advisors.

Good morning, and thank you, and like Ki Bin, congratulations on the covenant renegotiation.

I have a couple different questions for you regarding some of the assets you are selling. I just want to try to understand price discovery here. We saw Blackstone purchase about $1 billion of assets from ProLogis in a national portfolio at $40 a foot and an 8% cap rate. What do you think about the pricing on that, and what do you think that indicates in terms of the pricing that you guys are hoping to achieve on some of your sales?

Steve, I don't know the exact asset that they were selling. What I heard from other people is these weren't the best properties that ProLogis has that they were selling, and they were nonstrategic to them. So in terms of the pricing at $40 a foot and an 8% cap rate, it sounds reasonable. But I can't comment because I don't know the exact assets they are selling.

Okay. And with your capital -- as a follow-up to that, with your capital road map, you guys mentioned another $100 million paydown, it sounds like between now and when the line of credit matures. Is this something that the banks have sought out or is this something that you are proactively trying to do to stay compliant with the amended covenants when they revert back to where they were previously at the end of next year?

This is more our view of -- when 2012 comes around, we want to make sure we are in a position that we can roll over the line with no issues. And for our sample, we think we need to reduce that line from where it is now at $400 million to $300 million. But no, this is strictly our own program.

[Nondiscretionary].

Okay, and just as a clarification question, you guys mentioned you want to sell 724 acres of land in the press release, but the land inventory shows 661 total acres. Is there a definitional difference between those, or how does that reconcile?

Yes, there is a definition -- that's total acreage; what is in the supplemental is developable. What we are selling represents the majority of the land on that schedule you are looking at in the supplemental.

Great. Thank you.

Suzanne Kim, Credit Suisse.

I'm just curious as to whether you have any of the real estate under contract for sale at this point.

There are two parcels of land that are held for sale. One of those parcels sold already, and one of them, I do not think, is under contract. I think it might be under letter of intent. Other than that, none of the other assets in the pool are under contract or letter of intent.

Okay, great. And with the 10-year secured deal that you did at a 5.5%, that you did last quarter, where do you think -- what was the LTV on that deal, and where do you think it would price today?

Bob, why don't you take that?

The LTV on that transaction was about [68%]. The debt yield was right around 13%. Given where the yield curve is today, 10-year paper is probably trading right around 5%. So we think it is probably 50 basis points inside of that.

I would also note that in that transaction that we closed in the third quarter, we had a fair bit of prepayment flexibility, which caused a little bit of a premium in spread. But we thought it was very much worth it to give us more flexibility going forward to continue to deleverage.

Great. Thank you so much.

Paul Adornato, BMO Capital Markets.

Good morning. If you were to strip out the nonstrategic portfolio, what would some of the operating metrics be for your remaining core portfolio? Specifically, what would occupancy be, what would perhaps same-property NOI look like for that remaining portfolio?

I think if you -- this is Bob Walter again. If you took out the nonstrategic portfolio, you would probably see a pickup in our occupancy, probably along the lines of 200 to 300 basis points. NOI is around the $30 million number.

Okay. And so I guess another way to ask that is what is the occupancy of the nonstrategic (multiple speakers)?

It's in the mid-seventies.

Mid-seventies. Okay. Thank you.

Dan Donlan, Janney Capital Markets.

Good morning. As a follow-up to what Paul was saying, did you say that the total portfolio that you're looking to sell generates about $30 million of NOI?

Yes.

Okay. And was just curious, as you do sell these assets, is there going to be further reduction, do you think, in G&A that you'll be able to realize?

I think in terms of the platform, we think the platform is very valuable. We will talk about in terms of -- we'll give you our budget for 2011 in the next quarter, when we do the guidance for the year. But my guess is our run rate G&A today is probably -- I mean for next year will be in the ballpark of $25 million, $26 million. That is probably a decent figure, but don't hold me to it. We will give you a firm number next quarter.

Sure, understood. I guess as a follow-up, are any of these assets that you are looking to sell, are any of them already encumbered?

No.

Okay. Thank you.

(Operator Instructions) Mike Mueller, JPMorgan.

Good morning. It's Ralph Davies with Mike. I had a question in regards to your G&A. You talked about $0.02 of, I guess, permanent savings. But if I look at your guidance for the year, the $28 million to $29 million, I'm coming out with a fourth-quarter G&A run rate that kind of looks like your 2Q. I was just wondering if you might be able to kind of walk through that.

Sure. If you look at our second quarter, our G&A was $4.9 million. And you are probably around high 6, 7 for the fourth quarter, based upon our midpoint guidance. There is some timing items involved between the differences between the third quarter and fourth quarter.

The other thing, as Bruce mentioned, if you want to get a good run rate for what we think 2011 is going to be -- and again, don't hold us to it, because we are still firming up the budgets -- we think it is going to be a range of $25 million to $26 million for 2011.

Okay, got it. And then, I know you talked about $30 million of NOI out of the aggregate portfolio. But in terms of the mix for next year, that $250 million to $300 million, do you have a sense for how much of that is land versus income-generating property?

I think it is going to be a function of what we see in the market and what we get, in terms -- so really, we will give you color on that every quarter, as we show you what we are able to sell.

Thank you.

Joe Rice, Erie Insurance.

Good morning. Just had a brief question. During the call, you had made a comment regarding the preferred dividends, and you had highlighted the covenants that you were able to exchange, which was great.

But you said that also then increased the cushion to continue paying the preferred dividends. And I guess I just wanted to zero in on what you meant by increased cushion, and what we should kind of look to going forward to how to measure and look at that cushion, as far as the preferreds being -- continuing to be paid.

If you look at page 20 of the supplemental, it runs through the covenant calculations. And the main covenant that is impacted by the payment of the preferred stock is our fixed charge coverage ratio and our unsecured line of credit. And just to give you a reference point where we stood at September 30, we were at 1.53 times, and the current covenant at this point in time under the amended line is 1.2 times. So we feel that cushion is enough to enable us to keep paying on the preferred. But as we mentioned, that is something that the Board has to approve every quarter.

So is it safe to assume that as long as you exceed that 1.2, that you will look at that positively? Or is there some sort of cushion over the 1.2?

I think what Scott is saying is we've got a lot of cushion. We anticipate paying the dividend, but as a matter of course, the Board makes that determination every quarter, in terms of -- and approves the dividend. But my guess is that will be good. You should expect that being paid.

(Operator Instructions) Ki Bin Kim, Macquarie.

Just a quick follow-up on -- so if you look at the 195 properties and your 150 basis points increase in occupancy, what percent of that increase in occupancy was related to the nonstrategic assets?

What percentage of --?

The increase in occupancy that you (multiple speakers).

The 1.5% that we just did?

Yes, the 1.5% in occupancy increase, what percent of that was related to nonstrategic assets versus your core?

For the quarter, we sold the four properties, and all four properties were sold as vacant properties. That impact was about 35 basis points.

No, I mean -- I guess you might have misheard my question. So your portfolio increased occupancy by 150 basis points this quarter. So if you had to split that up between your core and the 195 properties you are putting out for sale, how does that increase in occupancy divide up between the two pools?

Asking what is the occupancy change on the 195 for the (multiple speakers).

I don't think we have that question for you -- the answer. But we will get that and get back to you.

Okay. And can you give any commentary on what markets those properties are in?

It's all over.

Okay. All right. Thank you.

(Operator Instructions) Ben Mackovak, Rivanna Capital.

Nice quarter. Thanks for taking my call. For the 195 properties, can you share with us the book value for those after the impairment charge?

Yes, as we said in our remarks, the book value after that is about $412 million.

Okay. And then looking at the debt maturity for 2012, it is $583 million in the supplemental. It's that just $483 million now -- we should take $100 million off that?

You should, because that was effective as of September 30, but if you pro forma the $100 million paydown, yes, you should take $100 million off of that.

Okay. And then the $83 million, is that preferreds?

The $83 million is the $62 million of our 2012 notes coming due in April of 2012. And we've got some principal payments there of about $7 million, $8 million in that year. And then the remaining is just mortgage maturities that we have.

Okay, great. Thanks a lot.

Mike Mueller, JPMorgan.

Just a question in regards to the occupancy uptick. I was wondering if that kind of happened or was weighted more towards the end of the period. And I ask that just because I would think that that occupancy uplift would overshadow, I guess, the negative spreads you are seeing. But in just looking at your top-line revenue number, it looks like it kind of went down sequentially. I was wondering if maybe you might be able to walk through that a little bit.

Sure. On the sequential increase, we said 150 basis points. On an average occupancy from the second quarter to third quarter, it was about 110 basis point increase. So yes -- so the increase was more in the third quarter. So -- and then also, from NOI, the other part was we had an increase in bad debt from the second quarter to third quarter. So that is kind of the summary.

Okay, but that wouldn't feed into your revenue number.

Correct. Just commenting from a -- sequential NOI from second quarter to third quarter.

But no, your point is a good one. The occupancy was back-end loaded later in the quarter.

Okay. Thanks.

Steven Frankel, Green Street Advisors.

(technical difficulty) went up sequentially from 2Q to 3Q. Then also that more expenses are now going in the property line item as opposed to G&A. But your same store looks like it was entirely driven by expense reductions of about 2.7% in the quarter versus the year-ago period.

If I took the G&A stuff out of there, that probably means your expenses even went down more, but you're saying bad debt also went up in the period. Can you just help me understand how your same-store number is down only 1.3, given that picture?

The bad debt -- on a same-store basis, even though bad debt went up in the third quarter compared relative to a year ago, the bed debt actually dropped about $600,000, $700,000, when you compare the Q a year ago.

What about the other expenses? I mean, if I took the G&A part and I assumed that it wasn't in there, that looks like your expenses must have gone down even more than 2.7%.

Yes, we had some other overall expenses with respect to real estate taxes that went down in the current quarter.

Is that because property -- you sold properties that had higher tax basis? Or I'm not sure why they would mark down your real estate tax.

Is just an ongoing -- as far as the tax valuation process, it's an ongoing process. And the property values that we're actually holding are going down. So directly related to that, our real estate taxes are going down from a year ago.

Okay. Thank you.

At this time, there are no further questions. I will now turn the call back over to management for closing remarks.

Great. Thank you. And thank you all for being on the call. If you have any questions, please call Scott, Art or myself. We would be happy to take them.

We are pleased with our progress. We think the line of credit amendment is a big deal for us. It allows us to focus on our plan of deleveraging, and we are going to be hitting it hard. We look forward to seeing you at NAREIT in November. And again, thank you for your support.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.