First Industrial Realty Trust Inc (FR) 2011 Q3 法說會逐字稿

Good afternoon. My name is Sara and I will be your conference operator today. (Operator Instructions). I would now like to turn the call over to Mr. Art Harmon, Senior Director of Investor Relations. Mr. Harmon, you may begin.

Thank you, Sara. Hello, everyone, and welcome to our call. Before we discuss our third quarter 2011 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, 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 is 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, 2010, filed with the SEC and subsequent reports on 10-Q. Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report which is 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, 2011. Our call will begin with remarks by Bruce Duncan, our President and CEO, to be followed by Scott Musil, our Chief Financial Officer, who will discuss our results, capital position and guidance after which we'll open it up for your questions. Also on the call today are Jojo Yap, Chief Investment Officer, Chris Schneider, Senior Vice President of Operations and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now let me turn the call over to Bruce.

Thanks, Art, and thank you to everyone for joining us today. We continue to make progress in our business during the quarter. The First Industrial team is doing an excellent job of executing our strategy, and I thank all of my colleagues for their efforts and contributions. In our portfolio, occupancy improved again in the third quarter to 86.6%, up 50 basis points from last quarter and 300 basis points from a year ago. The third quarter gain was attributable to our dispositions which included several vacant properties.

Largely as a result of our occupancy gains throughout the year, our same store NOI on a cash basis turned positive this quarter. The first time since the fourth quarter of 2008. Excluding termination fees, same-store NOI was positive 2.7%. Looking at the overall state of demand, the US industrial market delivered its fifth consecutive quarter of positive net absorption.

We continue to see leasing activity across nearly all of our markets. But we have seen some prospects be more deliberate in committing to space as they assess all the headline news such as Europe, US budget debates, the volatility in the stock market, and the related impact on consumer confidence as seen in Tuesday's report. Hopefully today's news of the European Accord as well as the GDP number will give the business community some renewed conviction.

Our rental rate change during the quarter was minus 10.8% in line with our forecast reflecting the impact of the turnover of leases signed in years when market rates were higher. As we have in the past, we continue to be focused on achieving higher rental rate bumps. Escalations on long-term leases commencing in the quarter averaged 4.2% annually. We also continued to keep lease terms shorter as the average term was 3.9 years for leases greater than 12 months compared to our portfolio average of 5.9 years.

Regarding dispositions of non-strategic assets, we are on target toward our $100 million goal for 2011 with $74.2 million of total sales completed through September 30th. Third quarter sales totaled $43.2 million comprised of twelve buildings for $23.7 million, or $24 per square foot, and one land parcel for $19.5 million.

During the quarter we also disposed of a property with a book value of $3.2 million through a deed in lieu transaction. In total, third quarter dispositions exceeded their written-down book value by approximately 20%. More importantly, the in place yield on this $43.2 million of sales was less than 2%. Importantly, our sales are having an impact on improving the overall quality of our portfolio.

We continue to execute on user sales which accounted for 37% of the quarter's building sales by dollar value. User buyers remain active in the industrial marketplace and are key targets for many of our non-strategic assets. We are using sales to reshape our market concentrations as well as reflected in the sale of three buildings totaling 226,000 square feet in Detroit, 150,000 square foot building in Sumner, Iowa, and a 36,000 square foot property in Shreveport, Louisiana. Our largest sale during the quarter was an 82-acre parcel of land in Toronto that we sold for $19.5 million, a price that exceeded our original purchase basis.

We were again active on the balance sheet. We retired $129 million of our September 2011 convertible notes using the capacity on our line of credit per our plan we discussed last quarter. We executed $37.9 million of note repurchases during the third quarter with an average weighted yield to maturity of 7.6%. We also took the opportunity to lock in attractive economics by completing a 10 year secured financing for $77.6 million at the fixed rate of 4.85%.

Let me provide you with an update on our deleveraging efforts. As of September 30th our debt to EBITDA ratio was 7.2 times, within our targeted range of 6 1/2 to 7 1/2 times. We will look to improve this ratio primarily by growing EBITDA. We remind you that our target excludes our outstanding preferred stock which adds to our effective leverage.

We believe we have made great progress in deleveraging and extending the maturities on our balance sheet. Updating you on the investment front, our 692,000 square foot First Inland Logistics Center development in the Inland Empire in Southern California is on track with completion expected in the first quarter of 2012. The market continues to be active for large users and our job is to bring home a tenant. We will keep you apprised of our progress.

Our team is also working to source acquisition opportunities towards our goal of reinvesting sales proceeds into high quality properties in higher growth markets. We have a few properties on the radar screen but overall it is challenging to find quality assets at attractive prices. The good news is that we believe this has positive implications for the value of our existing portfolio. We will be disciplined as we deploy the capital we generate from sales, weighing our investment opportunities versus buying back debt as we have in recent quarters.

So, in sum, we continue to execute our plan with a heavy lifting done on the balance sheet, our team remains focused on leasing to drive cash flow, executing on our sales plan, and using the strength of our platform for disciplined new investments all towards the goal of creating value for shareholders. Now let me turn it over to Scott.

Thanks, Bruce. First let me walk you through our results for the quarter. Funds from operations were $0.19 per share compared to a loss of $1.96 per share in the year ago quarter. FFO per share results were impacted by a few one time items such as a $0.03 impairment on real estate primarily due to our held for sale portfolio, a $0.02 NAREIT compliant gain from our land sale in Toronto.

Our results were also impacted by a $0.02 charge from the mark-to-market accounting treatment for our hedge on our series F preferred stock resulting from the sizable decline in the 30 year treasury rate during the period. Comparing 3Q 2011 to 3Q 2010, before one time items such as balance sheet impairment, losses from early retirement of debt, gain from the sale of joint venture investment in the third quarter of 2010, and restructuring costs, funds from operations were $0.22 per share versus $0.30 per share in the year ago quarter.

EPS for the quarter was a loss of $0.10 per share versus a loss of $2.44 per share in the year ago quarter. Moving on to the portfolio, as Bruce discussed, our occupancy for our in service portfolio was 86.6%, up 50 basis points from 86.1% last quarter and up 300 basis points from 83.6% a year ago.

In the third quarter we commenced 5 million square feet of leases on our balance sheet. Of these 1.4 million square foot were new, 2.3 million were renewals, and 1.3 million were short-term.

Tenant retention was in line with our guidance at 70.1%. Same-store NOI on a cash basis was a positive 2.7% excluding lease termination fees. These results reflected the positive impact of average same store occupancy increasing 340 basis points compared to the third quarter of 2010. Rental rates were down 10.8% cash-on-cash consistent with our guidance.

On a GAAP basis rental rates were down 7.3%. Leasing costs were $2.96 per square foot for the quarter. Year-to-date through the third quarter leasing costs were $2.56 per square foot. Lease termination fees totaled $685,000 in the quarter.

Moving onto our Capital Market activities and capital position, as Bruce mentioned, we retired the outstanding $129 million of our September 2011 convertible debt using borrowings on our line of credit. During the quarter we continued our efforts to reduce indebtedness and interest costs by repurchasing $22.5 million of our 7.5% senior unsecured notes due in 2017, $6 million of our 5.95% notes due in 2017, and $9.4 million of our 7.6% notes due in 2028. Subsequent to quarter end we repurchased a total of $7.1 million of unsecured notes comprised of $6 million of the 7.6% notes due in 2028 and $1.1 million of the 6.42% notes due in 2014. We also completed a $77.6 million secured financing that Bruce discussed earlier.

Per our press release last month the financing is for 10 years, fixed at an interest rate of 4.85%, and secured by 24 buildings totaling 2.3 million square feet. Excluding our credit facility, our next significant debt maturity is the remaining $62 million of the 6.875% notes due April 2012. We have capacity under our existing credit facility earmarked to pay that maturity off.

As we noted last quarter, next up on the capital front is our facility which matures in September 2012. We expect to replace this credit facility by the end of the first quarter of next year. The bank market continues to be active and open and banks have demonstrated that they like REITs as borrowers given the industry's collective performance through the recent downturn. Bruce already walked you through the details on our sales.

Thinking about sources and uses, as we generate proceeds from future sales, we will use the proceeds for either new investments or debt reduction depending on the relative value of opportunities we see. Quickly summarizing our capital structure and current capital position, our weighted average maturity of our unsecured notes and secured financing is 7.1 years with a weighted average interest rate of 6.6%. These figures exclude our credit facility.

Our cash position is approximately $26 million and we have $148 million available of the $200 million revolving portion of our credit facility. We have $100 million outstanding on the term loan portion of our facility and our debt to EBITDA ratio is approximately 7.2 times using a normalized G&A expense run rate.

Moving onto our guidance, per our press release we tightened our FSO guidance range for 2011 to $0.81 to $0.87 per share. Our guidance range for 2011 before one-time items such as restructuring costs, losses from retirement of debt, and balance sheet impairment is $0.85 to $0.91 per share.

The midpoint is unchanged from our last call. I remind you our midpoint has remained unchanged throughout the year despite our two equity raises earlier this year. Given that the first three quarters are in the books, we have also tightened up the ranges for certain key components of guidance. We expect average in service occupancy of 85.5% to 86.5%, same-store NOI on a cash basis for the year is projected to be negative .5% to positive 1%, a $2 million reduction in our G&A guidance range to $20.5 million to $21.5 million, and JV FFO of approximately $1.7 million.

Our 2011 guidance does not reflect the impact of any further debt issuances or repurchases prior to maturity other than the notes we repurchased in the fourth quarter that I discussed earlier. Guidance also does not reflect future property sales or acquisitions, any NAREIT compliant gains, any impairment gains or losses, nor any potential additional equity issuance. We will provide guidance for 2012 on our fourth quarter call. With that let me turn it back over to Bruce.

Thanks Scott. Before we open it up to questions, let me offer a few brief concluding comments. We remain focused on executing on the drivers we have laid out for you. Leasing and improving cash flow, continuing our expense discipline, executing our asset management strategy, and using the strength of our platform to make disciplined investments that contribute to long-term growth.

As you know, we have our Investor Day on November 9th in New York City and a property tour the following day. Our goal for that event is to provide the investment community with additional insight into our portfolio, our opportunities, and our platform, including the bench strength of our team. We look forward to seeing those of who you join us in person, and we appreciate the participation of those who will be listening to the webcast of the event.

We would now be happy to take your questions and as a courtesy to 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.

You're welcome to get back in the queue. So now, operator, may we please open it up for questions.

(Operator Instructions). Your first question comes from the line of Craig Mailman from KeyBanc. Your line is open.

Hi, good afternoon. I was just hoping maybe you could give a little bit more color on your comments surrounding the hesitancy of some tenants just given the headlines that have been coming across. Have there maybe give us a sense of markets that it is in, type of tenants, if that's possible.

Well, Craig, let me expand upon that. We have had the activity is good in terms of we're seeing a lot of interest in space throughout the country, so that has been good. What the disappointing thing for us or at least for me is that in some of these markets we have been close on a couple of things and it just we have not been able to bring it over the line in terms of people just holding back and they were going to make a decision and saying, all right, now we're going it wait another couple months to do it, and so that has been disappointing and hopefully with the recent announcements today we are going to get better clarity and better confidence and people start making some decisions because we have had a bunch of leases in different markets where things have been put off.

Okay. That's helpful. And then just a quick follow-up. I know you guys haven't signed any leases yet out in the Inland Empire and the new development, but can you give us a sense of the number of requirements out there or maybe the square footage that you're tracking?

Sure, let me have Jojo handle that.

There are numerous requirements and there is plentiful over 600,000 square feet. Just to give you a sense, Craig, net absorption to date is about 12 million square feet on the Inland Empire, so that's a third quarter year-to-date, and there is a huge shortage for facilities over 600,000 square feet. In terms of rental rates, you're looking at low 30s, that meaning deals are being done today in the 32, 33, 34 net per square foot per month,.

So 32, 33, 34 per month.

Per month. Does that answer your question, Craig?

I just want to clarify, did you say 600,000 square feet of requirements that you're tracking? I didn't hear that first part.

Yes, 600,000 square foot and above. That's very active marketplace and there is not a lot of buildings that can accommodate that size today.

Great, thank you.

Your next question comes from the line of Ki Bin Kim from Macquarie. Your line is open.

Thank you. I want to clarify a quick point before I ask my question. Is it right that the occupancy in the portfolio didn't increase sequentially if you include the sold assets?

That's correct. In fact, it was down slightly 10 basis points.

And I guess can if you just provide a little more commentary on that? Is it really related to what you just said about tenants taking longer to sign that lease and is that basically what we're looking at?

Yeah. We are seeing good activity. We're seeing space in terms of negotiations, tenants, you know, visiting our properties, so we're encouraged by that, but we have not in terms of dash we are disappointed in the quarter that it both in Atlanta and Dallas to be two particular markets that certain transactions didn't get done during the quarter.

Did it change in October at all?

I would say we're still working -- we're still working on it.

Okay. And just last follow-up to that. I know the big swing factor for you guys in terms of same-store NOI performance has been free rent and could you give us a little color on where is that free rent number today in dollar terms and where was it in last quarter?

Ki Bin, this is Chris. The free rent right now is pretty much leveled off, so the number for 3Q was about $2.5 million. The number in 2Q was about $2.3 million, so actually went up slightly, but we are starting to see more leases done with the free rent starting to ease overall. I think more in future quarters you will see benefit of that free rent.

All right. Thank you.

Your next question comes from the line of Paul Adornato from BMO Capital Markets. Your line is open.

Hi. I was wondering with respect to dispositions given the success that you have had getting rid of some of the under performing assets, was wondering if that has allowed you to consider a larger portfolio sale as a means to delever perhaps a little bit more quickly and otherwise position yourself in assets that you like for the longer term?

We're happy with strategy we're focused on. Again, user sales is important component of it. If you look, as I said my script 37% of our buildings were to users, and again users pay a bigger price, so we like focusing on that and we'll probably continue with the same strategy in terms of getting rid of our nonstrategic assets, and again we feel very good about the progress we're making in terms of upgrading the portfolio.

As a follow-up, do you see any premium for portfolios of industrial assets these days?

It is not any more. There is a significant amount of demand across really industrial product, all across the nation. Of course there is more demand in the coasts, but right now because of the shortage of supply and the significant amount of capital trying to get in industrial product, you pretty much see the same amount of bidding anything above $10 million now.

Okay. Thank you.

Your next question comes from the line of Caitlin Burrows from Credit Suisse. Your line is open.

Hi. You mentioned that you tightened your 2011 FFO guidance. However, there is still somewhat wide range. Is there any reason for the remaining range?

Sure. This is Scott Musil. Our guidance of FFO before one-time items is $0.85 to $0.91 midpoint being $0.88, so it is about a $0.03 difference between the low point of the range and the midpoint and a $0.03 difference between the midpoint and the highpoint of the range. That gets you to about $2.5 million or $2.6 million of an FFO fluctuation, so there's two items that are causing that.

One is our occupancy guidance that we have from the fourth quarter. There is a range there that causes about $1.8 million of fluctuation. The other piece that we have as well is our G&A guidance. Our G&A guidance has about the low end of the guidance is about $500,000 below the midpoint, and the high-end of the guidance is about $500,000 as well, so when you accumulate those two items you get to that $2.6 million that I discussed.

Okay. So then my follow-up question was going to say how would numbers have to change in order to get to the bottom of that range, but it sounds like if you were just to be at the low-end of occupancy and high-end of G&A that that's how you would get there?

That's correct.

Okay. Thank you.

(Operator Instructions). Your next question comes from the line of Dan Donlan from Janney Capital Markets. Your line is open.

Thank you. Could you guys comment on why the held for sale portfolio was reduced from 158 properties to 75 in the quarter?

Sure. Dan, this is Scott Musil. I will go through the book value changes that we had, so at the end of the second quarter we had about $312 million of book value held for sale. In the third quarter we sold about $35 million book value of properties. We also reclassified about $42 million of those properties as strategic, and we also took out of the held-for-sale pool about $74 million of book value of properties.

Now, that $74 million is still nonstrategic and we do plan to sell those properties, but per the GAAP accounting rules, we are not allowed to include them in held for sale unless we are actively marketing those properties. So an example would be is there could be properties in that $74 million bucket that have say a 20% occupancy rate and we feel that it makes sense to lease that up to 90% before we start marketing efforts. So we're not able to include that in held-for-sale until we hit that point.

Okay. So basically you didn't reduce what you would like to sell from a total property standpoint, you just had to do it for accounting reasons?

Yes, we did move some assets back to nonstrategic to strategic. The nonstrategic assets our goal is to sell those properties over the next two to three years. In terms of the strategic properties moving from nonstrategic to strategic, there is some reasons, and Bob why don't you go through a couple examples?

I think, some of the better examples would be a number of the land parcels. Obviously our development in Southern California is an example of that where we saw the market recover. We accelerated our entitlement process and started developing, so that was a parcel of land that was nonstrategic that is now strategic. We have got a couple of other land parcels where a similar situation is going on, in Pennsylvania that will be on our Investor Day tour, where we are starting the entitlement process and thus have taken them out of the nonstrategic pool again because those markets have recovered quite nicely.

Okay. And what's the current occupancy of the held-for-sale portfolio now?

Dan, I don't have that number here. I will have to get back to you on that.

Okay.

We do have on the strategic nonstrategic we do have that breakdown, so the occupancy in the nonstrategic is about 79% and the strategic is about 88%.

Keep in mind the nonstrategic portfolio exceeds what is we have held for sale, Dan.

Okay. And then, sorry, last question. Scott, can you maybe give us a little bit of a range on the rate that you're looking at for the facility?

Less.

I agree, Bruce. Dan, it is Scott. It is just too early at this time to get into details what we think the rate is going to be, but as Bruce mentioned, we feel confident that it will be less of a spread than what we are paying now.

Okay. Thank you very much.

Your next question comes from the line of John Stewart from Green Street Advisors. Your line is open.

Thank you. Bruce, I was hoping you could come back to your comments about selectively pursuing acquisition opportunities and touch specifically on which markets you would be looking at and maybe your underwriting criteria as well and how you balance that capital allocation decision relative to buying back debt at a 7.5% coupon?

All right. Let me start in terms of probably a great example in terms of looking at what we are interested, or the markets, we are interested in Southern California, we are doing the development in Southern California, and the 692,000 square foot, we like that. In terms of -- and we bought the property, the 664,000 square foot property in Houston, we like that market, too. Our strategy in terms of acquisitions is going to be one off in terms of using our platform, using our people, boots on the ground to execute one off acquisitions then and probably have some value add lease-up risk and things like that, because we think that's where we will be able to get better pricing. As we said in the remarks, it is a competitive market out there, and we do look at the returns we are buying at or what we can buy at versus deleveraging by paying down debt.

Again, part of buying or buying keep continuing to focus on is upgrading the portfolio. That's why we are focused on selling this nonstrategic pool, and we are making progress on that, and then redeploying assets into goods markets and good assets, so that's another reason in terms of when we look at these assets we are going to buy high quality assets in good markets that will probably have a little bit of hair on them until we can get a better return, and we will weigh it versus buying back debt. As you looked in the quarter we bought back a bunch of debt.

Right. So what kind of stabilized deals are you seeing on acquisition opportunities in these target markets?

I would say in terms of you are looking at probably 7% to 8%.

Okay. Scott, could you share with us what triggered the impairment on the held-for-sale portfolio this quarter?

Sure. Under GAAP or required to look at our held for use and held for sale portfolio on a quarterly basis for impairment. So the $ 2.5 million impairment charge we took in the third quarter was on our held-for-sale portfolio. So as we get new data in regarding changes in what third parties think the worth of the portfolio is, or in some cases where we are still valuing the portfolio, the models, might be cases where some of the leasing assumptions have changed, those are basically the two reasons that cause the $2.5 million impairment that we took in the third quarter, and again that was on our held-for-sale portfolio.

Right. Any specific assets or markets that that pertained to?

It was pretty spread out between different markets. I think there was some impairment in Detroit. We have a nonstrategic asset in Tennessee that we took a charge on as well. There were quite a few assets that we took impairments -- quite a few assets like 19 or so that we took impairment on.

Okay. And then just lastly, Bruce, if you could remind us how much in total aside from what's classified as held-for-sale, how much in total do you consider to be non-core and maybe just a brief kind of strategic refresher in terms of what you want First Industrial to look like when it grows up and, which markets, how few markets you want to be in?

Okay. In terms of -- we start out the nonstrategic pool was about a little over $400 million. We are probably in terms of where we are today with sales, you are in the $300 million range. And our view of it in terms of what we are doing it throughout the portfolio going and we have identified billings that we think don't have that great of future in terms of be it functionality, be it location. If we think it is locationally challenged, so we are trying to move that merchandise.

In terms of where we want to be long-term, again we want to continue to upgrade the quality of the portfolio in each of the markets we are in. We will lighten the load in the Midwest over time. That doesn't mean we like having a national platform, but we will have less there and have more properties in some of the markets such as Southern California which is really I think our largest, second largest market right now. But we will continue to do more there and markets like Houston and the like.

Again, when we look at our portfolio, we think we -- our valuation, we do not get credit for what we have, and that is going to be a focus of Investor Day to try to show the quality of our portfolio in different buckets in terms of different types of real estate and show where our vacancies are and show that we think there is the plans, to lease up these vacancies, and we think we have a pretty decent portfolio, but the focus is again on the disposition side to get rid of the properties that just don't fit long-term and reduce the exposure to the Midwest and then also focus on new investments in good markets with very high quality buildings.

And how about the right number of markets? What do you think is the right mix there?

Right now, you know, we are in 20 some markets. My guess is you're going to lower that by a number over time, but again we will let you know in terms of as we lower -- as we make progress on disposing of assets. But from a most focus is we like having the platform, the national platform, and there are some markets that we think in terms of we need to whittle down in size.

Thank you.

Thank you.

Your next question comes from the line of Michael Mueller from JPMorgan. Your line is open. Thank you.

Hi, most of the questions have been answered. One clarification on the prior question, Bruce, when you talked about $300 million into the $400 million, that's $300 million left to sell, correct?

Yes.

And then second question on G&A with the G&A guidance down a little bit lower. Can you talk about where some of the savings are coming from and is it something that is a little more 2011 specific or it is going to be sticky and move into 2012 and beyond?

Mike, this is Scott Musil. We had a $2 million decline in the midpoint of our guidance in G&A, about $1 million of that is due to less projected expenses than anticipated. There is not one category that that relates to. There are a lot of different categories, whether it is salaries and wages or travel and entertainment or professional costs. So at this point in time since we are at the end of the third quarter we feel that those savings for this year is going to be permanent.

And then the other $1 million of reduction in G&A is really what I call noncash related in accordance with GAAP we are allowed to capitalize the compensation and overhead costs of our leasing function, and that capitalization is coming in a little bit higher by about a million dollars. As a result we are able to reduce G&A by that. 1 million of it, I am sorry, --

I just said, got it.

Okay.

Great. Thank you.

(Operator Instructions). Your next question comes from the line of Dan Donlan from Janney Capital Markets. Your line is open.

Thanks. Two quick ones. The $300 million of the nonstrategic portfolio how much NOI would you guess that generates?

Right now you're probably in the mid-20s in terms of NOI.

Okay.

20 million.

Okay. Lastly, if you could potentially classify what you have in terms of your vacancy, could you maybe give what portion, I mean what the average age is of some of those properties?

That's a good segue when you come to Investor Day. we are going to be going through and focusing on all the vacancies so that we will have a lot of detail there. Whether you come in person or access the webcast, that will be a good time to go through that.

Okay. You said the last one. There must be something incoming then, if that's the case. Thank you.

Thanks, Dan.

Your next question comes from the line of Chris Caton from Morgan Stanley. Your line is open.

Thanks. My question is on lease structuring. Bruce, you talked about 4.2% annual rent bump. I think you had something similar last quarter. Are you doing anything differently now in terms of structuring here versus your existing portfolio and also versus what is typical in the markets and if so where are you making concessions to achieve what is optimal in your view?

This is the strategy we have been employed for the last few years. It is just, we may start out with a lower rate, but we have fairly decent bumps in our portfolio. Do you want to add anything? The strategy with the bumps is that we are looking forward to where we think market rents are going to be in one, two, and three years, so consistent with that if those rebound we also want to have the rent steps built into the leases we're signing today, so we're trying to be consistent with that. That's why you are seeing a little bit higher rent steps overall compared to our historical average.

And then we are also seeing, you know, also expects further rent growth, so that's why you're seeing not tying up the space for a long time. That's why our durations are shorter than average.

And so your initial rate in the marketplace is a little bit lower then and do you believe you continue to need to do that to lease this space? Is that reading between the lines what I hear?

I think it depends. It is market by market in terms of space by space, but on average we have been able to achieve pretty decent increases in the leases that we have been doing and made a conscious effort to try to have shorter maturities than typical.

Thanks.

That doesn't mean we are going to turn down a 10 year lease for somebody.

Absolutely. As a follow-up, just how do you think that will affect your rental renewal spreads on a cash basis over the course of the next few years as you reported 10.8% down. How do you think that will trend over the next few years?

Obviously it is going to get better. As we especially as you have rents or leases that rolled from say 2007 and 2008, as you get further along, those starting or expiring rents will go down and also have the dynamic we're asking rents are starting to go up, so we will definitely see those spreads decrease over time.

Could it and some of your peers have said that they think by the end of 2012 that they could even see positive numbers, do you think it could happen that quickly for your portfolio?

Again, we'll give guidance next quarter call, but from our view point is there is going to be a inflection point some point either during 2012 or the first part of 2013 where it should happen. We are not giving guidance yet.

Thanks very much. Appreciate it.

Thank you, Chris.

Your next question comes from the line of Dave Rogers from RBC Capital Markets. Your line is open.

Hey, guys, from a leasing perspective, what are you seeing on the small blocks of space out there? Clearly it has been a weak part of the market. I think throughout much of the year. Curious on if you are seeing any type of rental rate growth or stabilization there and the demand for that type of space in the last quarter or two?

You know, one of the areas or one of our market where is we had some of the smaller tenants is Denver, and this past quarter from 2Q to 3Q we actually saw occupancy increase of about 3.7% in Denver. So we are starting to see a little bit more movement with those smaller tenants or smaller spaces starting to get a little bit more confident as far as the economy, but it is still rough going forward, but we are starting to see a little bit movement in example is Denver, for instance, where we saw occupancy increase.

You said that those tenants are just price sensitive or really economic driven at this point?

I think it is both. I think it is price sensitive and just confidence.

And then following up on your comments earlier and some other questions, how many single tenant or user sales do you think you have left of that or maybe what percentage of the $300 million that you quantified might go that route and I guess another way to think, is have you considered that you want to necessarily want to do this, but doing some equity at the same time and selling incremental assets it seems like there is a bid for triple net lease deals out there and user sales are kind of accelerating down the pipeline as the demand for assets seems to be outweighing the demand for fundamentals at this point in time.

We definitely think the user market is pretty good and we're working on that in terms of for the nonstrategic assets, but again it is hard to sort of plan or timing of that because they come around. They are at their own pace in terms of what they want to do. It is not like you put a package on the market and all the users come. They sort of take their time to do something and they end up doing it. We do think it is a great execution and they pay much more than the income buyers.

And in the interest of accelerating asset sales program or are we still going to continue on this solid pace that you have set?

I think we're going to continue on the solid pace, but to the extent there is an opportunity that we think to do it at good pricing, again, the key is pricing. We want to make sure we get good execution on the dispositions, and so far we have been very happy with it as evidenced by the what we saw 20% over the written-down book value and we're making progress on selling the assets that really are our worst performing assets.

Thank you.

Thanks, David.

Your next question comes from the line of John Stewart from Green Street Advisors. Your line is open.

Thank you. Just a couple of follow-up housekeeping items if I may. Scott, first of all, can you share with us the LTV on the mortgage that you did?

Yes. It was 70%.

70%. Okay. And you referenced I think specifically that your guidance for the fourth quarter excludes restructuring costs. Was that basically referring to what you incurred earlier this year? Do you expect to incur any charges in the fourth quarter?

It was what we incurred in the first two quarters of the year. We don't anticipate incurring any of those types of costs in the fourth quarter.

Okay. Thank you. And then what's your forecast for taxable income for the year?

Well, I can tell you at the REIT level for the first nine months of the year our preferred dividend did exceed our taxable results, and when you look out for all of 2011 what we are forecasting now is that our preferred dividends will exceed our taxable results as well. So we are not going to be required to pay a distribution under the REIT rules based on what we are seeing for 2011.

Okay. And, Bruce, do you have anything to add in terms of dividend policy going forward?

As a shareholder I look forward to the day we reinstate it, but again as we said before, our focus there is some steps we have to achieve before we do that, one of them, a big one, is getting the line of credit redone and again our goal is to get that done by the end of the first quarter, and continue to make progress on leasing up the portfolio. So our goal is to return to being a dividend paying stock and we want to do that as soon as we can. It is a focus.

Great. Thank you.

Your last question comes from the line of Ki Bin Kim from Macquarie. Your line is open.

Just a couple of quick follow-ups. First, could you comment on how much of the 2012 lease expirations you have been working on and how much is closed and if there is any trends that you can talk about from those activities?

Ki Bin as far as our lease expirations for 2012, I think we're sitting at about 19% rollover, so it is very similar to where we have been in past years. As always, we contact and well in advance from the expirations, and we do not have a lot of feedback where that is, but we are overall in the same position we have been in past years, so we feel comfortable with that.

Can you talk about how much of that you already have done or is that something you want to save until a couple weeks now?

We want to save that to make sure you are in attendance.

Right. And last question, a little bit fluffy, but just wondering if have you seen any movement from tenants downsizing from using maybe your smaller warehouses to self storage or anything like that?

Not really. Not really. I would say if anything the trend if you look at it in terms of the space tenants to use the space today retention -- I mean, the amount of space being used is high, and you see a lot of tenants talking about expansion and we just need them to sign the document and get it expanded. We haven't seen a move down in self storage.

Thank you.

There are no further questions in queue.

Great. Thank you, operator, and thank you all for participating on our call today and if you have any other questions, feel free to call us. We look forward to those calls and also most importantly, we look forward t seeing some of you at Investor Day on November 9th in New York City. As well as those of you we will see in NAREIT in Dallas in a few weeks. Thanks again. We appreciate it.

Thank you, Sara.

This concludes today's conference call. You may now disconnect.