First Industrial Realty Trust Inc (FR) 2013 Q2 法說會逐字稿

Good afternoon. My name is Dawn and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial second-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)

Thank you. Mr. Art Harmon, Senior Director of Investor Relations, you may begin your conference, sir.

Thanks, Dawn. Hello, everyone, and welcome to our call. Before we discuss our second-quarter 2013 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. 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, 2012 filed with the SEC, and its subsequent Exchange Act reports.

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. 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, July 26, 2013. Our call will begin with remarks by Bruce Duncan, our President and CEO, as well as Scott Musil, our CFO. After which we will open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Chris Schneider, Senior Vice President of Operations; Bob Walter, Senior Vice President of Capital Markets and Asset Management; and Peter Schultz, Executive Vice President for our East region.

Now let me turn the call over to Bruce.

Thanks, Art. And thanks to all of you for joining us today. Our team delivered an excellent quarter in all aspects of our business -- leasing, the balance sheet, new investments, and dispositions. So, kudos and thanks to all of my colleagues around the country.

Leasing is the essential driver of cash flow and value for our Company. As such, we were pleased to achieve 91.2% occupancy at quarter end, an increase of 160 basis points, compared to the first quarter. 125 basis points of the gain was the result of leasing, while the impact from asset sales was 35 basis points.

Year-over-year occupancy was up 330 basis points. We are making good progress towards our year-end occupancy goal of 92%. But still have some work to do. I assure you that our team is focused on this opportunity. And ultimately, the opportunity to stabilize our portfolio in the mid-90%s.

Market fundamentals are supporting absorption of industrial space. And tenant demand has been growing along with the economy. While we acknowledge that there is more development underway, it is at levels still well below historical averages and the pace of tenant demand.

We are seeing good activity across our market and across and across the spectrum of customers, including the smaller tenant segment. That being said, we are entering the height of summer, when tenant decision-making tends to slow down, which could make it difficult to pinpoint when some of that activity can be converted into new leases. Needless to say, we would prefer sooner rather than later.

On the capital side, we've been advancing toward our goal of returning to investment grade and reducing our cost of capital. As we look at our maturity schedule for the next several years, returning to investment grade is important, as we want the enhanced flexibility of having efficient and cost-effective access to the public debt market.

During the quarter, we raised approximately $42 million of common equity through our ATM at an average price of $18.43. We also generated $41.4 million from dispositions, which I will discuss in more detail shortly. We used these proceeds to help fund debt and preferred paydowns, as well as new investments. We completed the redemption of two series of preferred stock. As discussed on our last call, we retired the remaining $100 million of our 7.25% Series J preferred stock in April. Since then, we also redeemed all $50 million of our 7.25% Series K preferred stock, which was completed in the third quarter. These actions helped both our fixed charge coverage and leverage metrics, which are critical to our efforts to regain investment grade status.

We were also successful in buying back $25 million of unsecured notes during the quarter and have paid off $12 million of mortgages. With the benefit of these capital actions, our ratio of net debt plus preferreds to EBITDA, annualizing our second-quarter EBITDA, was 6.7 times, within our target range of 6.5 times to 7.5 times. As you know, we view this ratio as the most relevant measure of leverage, as it incorporates both capital obligations and cash flow.

As announced earlier this week, we added more flexibility and capacity to our balance sheet, to support our growth, by closing on a new, expanded, $625 million line of credit maturing in September of 2017. The current rate is at LIBOR plus 145 basis points, a 25 basis point improvement from our prior line. On behalf of the FR team, I would like to thank our banking partners for their continued support and capital commitments.

Regarding investments and dispositions, we have continued to make progress on our mission to improve portfolio quality and drive long-term cash flow growth. On the acquisition side, we bought a 509,000 square-foot distribution center for $20.5 million in the Chicago market, at the intersection of I-55 and I-80. The building is a high-quality, 32-foot clear, cross-dock facility built in 2005. We acquired it vacant, so, it is currently reflected in our out-of-service category. Our budgeted GAAP yield is in the high 6s. We believe that market demand continues to grow for this type of product, in this location, as users in Chicago's I-55 corridor seek additional space for growth or consolidation. Like all of our investments, we will keep you up-to-date on our leasing progress and ask that you judge us on how we perform.

On the development side, we are using our platform to execute on new projects that we believe offer good risk-adjusted returns, long-term cash flow growth, and contribute to our quality mission. As you may recall from our last earnings call, during the second quarter, we placed in service the 300,000 square-foot First Chino Logistics Center in the Inland Empire, which we successfully leased a year ahead of pro forma. We will soon be starting our First 36 Logistics Center at Moreno Valley in the Inland Empire, a 555,000 square-foot distribution center, featuring 36-foot clear heights. Estimated total investment is $32 million, with expected completion in the first quarter of 2014. Our targeted first-year GAAP yield is approximately 6.9%.

At the time of our last earnings call, we had just closed on the $16.6 million acquisition of 69 acres in Moreno Valley through a complex land assemblage. This development site is within one mile of the First 36 Logistics Center and our 692,000 square-foot First Inland Logistics Center that we leased in 2012. We are still entitling the site, which can accommodate either a one- or two-building configuration, totaling approximately 1.4 million square feet. We expect to launch development in the latter part of 2014.

In the next few weeks, we are also going to start the 43,500 square-foot First Figueroa Logistics Center on our two-acre site in Los Angeles. The incremental investment will be approximately $5 million, bringing our total investment, including the land, to approximately $9 million. From a return standpoint, at our base case, we would deliver GAAP returns of 6.7% on our incremental investment. The all-in return, including the land, would be 3.6%, which is thin, but since we already own the site, and like the location, we are moving forward.

Updating you on our Houston site we announced last quarter, we are working to obtain the required approvals and expect to start construction in 2014. This site will be the home of the 350,000 square foot First Northwest Commerce Center, with an expected total investment of $20 million.

Regarding our developments in process, we are just wrapping up construction of our 489,000 square-foot First Bandini Logistics Center in LA County. We are also on track to complete the 708,000 square-foot First Logistics Center at I-83 in central Pennsylvania in the fourth quarter. We don't have anything specific to share with you on the leasing front for these buildings at this time, but we are encouraged by the demand we are seeing in both of these markets. We will keep you posted on our progress.

On the disposition side, as I mentioned, we had a good quarter, selling eight buildings, comprised of approximately 1.1 million square feet, for $41.4 million. The buildings were 68% occupied at the time of sale, with an in-place cap rate of 3.5%. Our largest sale was our only building in Omaha, a 356,000 square foot bulk distribution facility we sold to the tenant, for $13.2 million. We also sold our last building in Canada in Stratford, Ontario. Finally, we had two user sales in both Minneapolis and Dallas. And one each in Baltimore and New Jersey. In the third quarter to date, we completed the sale of another 56,000 square-foot property in Dallas, as well as the sale of a small land parcel in Philadelphia, for a total of $2.3 million. As you know, we are targeting $75 million to $100 million in sales this year. So we are on pace. And we will continue our disciplined approach to maximize value and to upgrade our portfolio through addition by subtraction.

So, we made great strides this quarter, throughout our business. In leasing, on our way to our 92% occupancy goal for year-end 2013, and onward to stabilization in the mid-90%s. In capital management, by strengthening our liquidity position, improving our fixed charge coverage, and lowering our capital costs, on our way back to investment grade. And, in upgrading our portfolio through new investments and sales.

With that, let me turn it over to Scott. Scott?

Thanks, Bruce. First, let me walk you through our results for the quarter. Funds from operations were $0.20 per share, compared to $0.15 per share in Q2 2012. Second-quarter 2013 results include a loss of $0.03 per share related to the retirement of our Series J preferred stock and a $0.04 per share loss on early retirement of debt. Before one-time items -- namely, the impact of the early retirement of debt, the Series J preferred redemption, and our IRS agreement in Q2 2012 -- funds from operations were $0.27 per share versus $0.27 per share in the year-ago quarter. EPS for the quarter was $0.05 versus a loss of $0.16 in the year-ago quarter.

Moving onto the portfolio, Bruce told you about the strong leasing performance as we grew occupancy to 91.2%, up 160 basis points since last quarter, and 330 basis points from a year ago. Regarding leasing volume in the quarter, we commenced approximately 4.2 million square feet of leases. Of these, 1.3 million square feet were new, 2.1 million were renewals, and 0.8 million were short term. Tenant retention by square footage was 74.5%. Same-store NOI on a cash basis, excluding termination fees, was positive 1.9% due to occupancy growth, the impact of contractual rate bumps, and less free rent. Given the $1 million of restoration fees, plus some one-time tax refunds we had in the year-ago quarter, we are pleased with our same-store results. Same-store NOI growth including termination fees was a positive 0.8 %. Lease termination fees totaled $243,000 in the quarter.

Cash rental rates were down 5.2%, and on a GAAP basis they were up 1.1%. Leasing costs were higher than typical at $3.94 per square foot. The costs associated with the higher mix of new leases were a driver, mainly from two long-term leases for buildings that required higher finish. We expect leasing costs to moderate the balance of the year.

Moving on to our capital market activities and capital position. Bruce already hit the highlights but let me walk you through the details. We are pleased to have closed our new, expanded line of credit of $625 million, which has $175 million more capacity than our prior line. The maturity date is September 29, 2017, and we have a one-year extension option. Our current rate is LIBOR plus 145 basis points, an improvement of 25 basis points. And we have opportunity for further savings, depending on our credit ratings. Through our ATM, we issued 2.3 million common shares at an average price of $18.43, for total net proceeds of $41.8 million. We have approximately $64 million of capacity remaining on our ATM.

In the second quarter, we redeemed the remaining $100 million of our 7.25% Series J preferred stock, and also announced the redemption of all of our 7.25% Series K preferred stock for $50 million, that was completed last week. We paid off $12 million of secured debt at an interest rate of 7.4%. We repurchased $25 million of unsecured debt, comprised of $19 million of our 7.6% 2028 notes, $5 million of our 5.95% 2017 notes, and $1 million of our 7.75% 2032 notes, at a weighted average yield to maturity of 5.8%. In the third quarter, to date, we prepaid $14 million of mortgage loans at a weighted average interest rate of 7.5%.

Regarding our leverage metrics, at Q2 2013, our net debt plus preferred stock to EBITDA is 6.7 times, in line with our target range of 6.5 times to 7.5 times. Our weighted average maturity of our unsecured notes and secured financings is 5.1 years, with a weighted average interest rate of 6.3%. These figures exclude our credit facility. Our credit line balance today is $203 million. And our cash position is approximately $13 million.

Before moving on to guidance, I would like to briefly discuss the impairment charge during the quarter. The charge totaled $1.6 million related to two properties that we are actively marketing to sell, and the building we sold in the third quarter. During our marketing process, it was determined that the fair value of the properties was less than the book value.

Moving on to our 2013 guidance. Our FFO guidance range is $0.91 to $1.01 per share. Recall that guidance for the year includes the losses from debt that we retired to date, including the $14 million of mortgages we already paid off in the third quarter, and the remaining $32 million of mortgage debt we plan to pay off in the final two quarters of 2013. The total impact for the year will be $0.06 per share. Guidance also includes a $0.05 per share loss related to the Series J preferred stock redemption in 2Q and the Series K preferred stock redemption completed in the third quarter. Excluding these losses and the NAREIT-compliant gains recognized in the first quarter, FFO per share is expected to be in the range of $1.02 to $1.12 per share.

The key assumptions are as follows. Average in-service occupancy end of quarter of 90.5% to 92%. Average quarterly same-store NOI on a cash basis of positive 1.5% to 3%, a tightening of the bottom of the range based upon our performance year to date. G&A of $21.5 million to $22.5 million. Full year JV FFO is expected to be approximately $500,000. Guidance reflects the impact of the redemption of the Series J preferred stock and the Series K preferred stock. And, as noted last time, guidance includes the incremental costs to complete the two developments in process that we launched in 2012, and the incremental costs related to the new First 36 Logistics Center at Moreno Valley, and the First Figueroa Logistics Center we will start in 3Q. Note that in total for the year we will capitalize roughly $0.03 per share of interest related to our developments.

Guidance does not reflect any potential lease-up of either our First Bandini Logistics Center or First Logistics Center at I-83 developments in process. Recall that their pro formas assume one-year for lease-up post completion. Guidance does not reflect the lease-up of the Chicago distribution center we acquired during the quarter. Please note that our guidance also does not reflect the impact of any future debt issuances, the impact of any future debt repurchases or repayments, other than those discussed prior, any additional property sales or acquisitions, any further development other than those discussed earlier, any future NAREIT-compliant gains, though it does reflect the gains recognized in 1Q, and any future impairment charges, nor the potential issuance of equity.

With that, let me turn it back over to Bruce.

Thanks, Scott. Before we open it up to questions, let me say that we are focused on winning tenants to grow our cash flow and hit our 92% occupancy goal by year-end. Beyond that, we can increase cash flow by stabilizing our portfolio in the mid-90% range. We can also grow cash flow as we lease up our developments in process and our recent acquisition. Our balance sheet is in very good shape. Our new, expanded credit facility improves our flexibility, as we invest for growth and manage our maturities. By refinancing higher-cost debt, we can further lower our cost of capital, on our way towards our goal of achieving investment grade.

We are upgrading our portfolio through addition in the form of new investments, and through addition by subtraction from targeted sales. And, from a valuation standpoint, we still trade at a discount to our public company peers, as well as the private market transactions. We have the opportunity to close those gaps as we deliver on our strategy, and further demonstrate the value of our portfolio and our platform.

One final item I'd like to mention before we take your questions. We hope that many of you will join us on Tuesday, November 12, for our Investor Day in Southern California. We chose Southern California because it's our largest market, at 10.6% of our rental income as of the second quarter. And growing, as we execute on lease-up of our new development and our existing portfolio. We will conduct a presentation regarding where we've been and, more importantly, where we are going. And you will also have the chance to tour some of the high-quality additions we are making to our portfolio there. Please contact Art Harmon if you are interested in more information about attending.

With that, we will now be happy to take your questions. 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 are, of course, welcome to get back into the queue. Now, operator, may we please open it up for questions.

(Operator Instructions)

Craig Mailman with KeyBanc.

Just a question on the occupancy ramp this quarter. Just curious, did the leasing activity knock out any of the top 10 vacancies you guys have talked about previously? Also, curious -- any markets you are upside surprised to relative to initial planning for the year?

Let me start and then Bob will talk about the top 10 list. In general, this is a broad-based strength. We are seeing good strength in almost all the markets. I would say the markets that probably are doing better than most, Denver, we saw a lot of activity. So, we are very encouraged by that. But again, I think we are pretty encouraged about most of the markets. Bob, do you want to talk about the top 10?

Sure, Bruce. Craig, as of the end of the quarter, we still had about 90 basis points of upside from the original top 10 list we outlined at Investor Day back in November of 2011. As you may recall, at that point, we had about 320 basis points of upside. But quarter over quarter, there wasn't a lot of growth. Let me ask Peter to update you a little bit on some of the specific opportunities we have in that list.

Craig, the bulk of the remaining vacancies in the top 10 list are really four properties, two in Atlanta, and two in Central Pennsylvania. In Atlanta, that's a market, as you know, that's continued to lag its peers. But the good news is, no new supply with the delivery of only one spec building on the west side. We really like the leaseability of our properties. And these two properties we have made steady progress on. So it's just the remaining piece for us to lease. And we are encouraged by the activity and the continued absorption in the market. And then in Central PA, the other two buildings, likewise, we continue to see positive momentum and new activity there, as well.

Great. That's helpful. Then just a follow-up. Maybe just help us get a sense of the ramp in occupancy gains for the balance of the year. I know, Bruce, you said maybe we see a summer slowdown here. But, beyond that, do you guys have any other large move outs or expirations you know about that could prevent you from hitting the 92% before year end?

There's a lot of things that could prevent it. But our goal is to hit that number, and we are very encouraged by the second quarter. We've got 80 basis points to go here to meet that goal. And we got two quarters. As you know, we've had decent growth the last couple of years in the fourth quarter. So we're encouraged if the world keeps going this way.

Great. Thank you.

Ki Bin Kim, SunTrust.

I know this is an over-used term, but congrats in the quarter. Just a couple quick follow-ups on the same-store NOI question. You mentioned in the opening remarks that there was some one-time items that impacted the 1.9% growth. What would it have been on a more cleaner number, year over year?

Chris, do you want to take that?

Sure, Ki Bin. The biggest impact was, that we had mentioned before on restoration fees, we had some restoration fees a year ago, about $1 million. And the change from this year is a drop of about $500,000. If you took those out of the numbers, then the same-store would be up about 2.9%.

Can you say that again? I missed that. 2.9%?

It would be up about 2.9% if you took out --.

Yes, if you took out the restoration fees from both years, both quarters, it would be up 2.9%.

Got it. That answers most of my questions. But was there any additional upside in that number? Could there be any additional upside in that number, given maybe you could talk a little bit about the timing of the occupancy gains during this quarter, if it was more back-end weighted? And if that number on a pro forma basis could be a little better. And, also, could you remind us how much of cash same-store NOI growth is locked in on an annual basis due to contractual rent step-ups on a portfolio level?

Ki Bin, if you are talking about our guidance that we issued, we did increase our same-store guidance in the quarter. And that was because of the outperform we had in the second quarter related to NOI. Predominantly lower bad debt expense compared to plan, and higher real estate tax refunds. So, when you look out, a couple of things that could impact same-store in third quarter and fourth quarter, they could be those types of things, as well. We budget about $750,000 per quarter in bad debt. That's more normalized. As we mentioned, probably in the last two years our bad debt has come in. That would be one thing that could cause outperform in the next quarter. Again, one-time items, like real estate tax refunds, could cause that, as well. I will turn it over to Chris to talk about the rental rate bumps.

Ki, on the rental rate bumps, this year in 2013, the bumps are averaging about 4.2%. That's on about 50% of all our leases. So, effectively, it's about a 2% increase in rental revenue. And going forward, we'll probably see that tick down slightly. Historically, we've been averaging bumps about 2.5% to 3%.

Why would bump average down a little bit?

I'm sorry, Ki Bin, could you repeat that?

You said rent bumps in your leases are averaging down a little bit going forward. Why would that be?

Historically we've been at 2.5% to 3% as far as our long-term historical run. We are not seeing quite as favorable in the past couple years where you had some bigger increases in the first part of the lease. You will probably see less of that going forward.

You had lower teaser rates and higher bumps. So now you're getting more normalized so you'll probably go back to the 2.5% to 3% average.

That's what I was alluding to, the fact that you're doing less upfront teasers, then.

Right.

Yes.

All right, Thank you.

Dave Rodgers with Robert W. Baird.

I just wanted to start maybe on the leasing side, if you could. And talk a little bit about the verticals that drove the strong leasing performance during the second quarter, and really during the first half of the year. Maybe subdividing it between some of the smaller spaces, given your average size, around 90,000 square feet, and then some of the bigger deals that you talked about earlier.

This is Peter. The activity, as Bruce said in his comments today, was pretty broad-based across many of our markets. But we saw a strong increase in a lot of the smaller spaces. Denver, as an example. South Florida, as an example. There really wasn't any one deal that drove that, it was a broad-based improvement across many markets.

And maybe in terms of the verticals of customers that drove that, was that similarly broad-based? Or did you see any concentration of housing or Internet-based activity?

Broad-based, as well. We continue to see demand from a variety of uses -- consumer products, energy, oil and gas out in the Denver area, automotive. We certainly see more from the housing-related side -- the shower door guy, the window guy. I wouldn't say enough to make it a trend, but we're definitely seeing an increase in that. And we think we have additional upside on some of our smaller spaces as that continues to expand.

Okay. Thank you. And then I think Jonathan Pong had a follow-up to that.

Maybe drilling in on the development side. If you look at what you guys have placed in service and have in the pipeline right now, it's a pretty good diversity in terms of size. It seems to be trending a little bit on the larger size, over 400,000 square feet. I was wondering if you guys could talk a little bit about your outlook for the size of product and where you think that demand is going to come from, and where your bias is towards future development.

Jojo, why don't you take it. But let me just add, we are focused on larger product. We think that that, in terms of large distribution product. And, again, we are developing in key markets -- Southern California, Houston, Central PA. We are pretty excited about the developments we are doing. And we think there's good opportunity there. Jojo?

First of all, we build to the market. We got to meet the market. And we are very strict in looking at where demand is stronger and where supply is short. So, give an example, when we built First Inland Logistics Center, 700,000 square feet in Moreno Valley, that was the biggest shortage. In Chino, market was tight for 300,000 to 500,000. We built a 300,000 and we got that leased. In our design in Commerce Vernon, that is both a multi-tenant, partial and large market. So we have designed a building to really accommodate multiple users, or a large building user that can accommodate 489,000 square feet. As you move to the East Inland Empire, there is where you need larger space. And buildings over 500,000 square feet. So, like Bruce has said, in the third quarter, we will build the 555,000, but this recent land assemblage that we did, that's going to accommodate up to 1.4 million square feet. Because that is where a confluence of large users. So, bottom line is, is that we build to the market.

Great. That's helpful. Thanks a lot, guys.

(Operator Instructions)

Josh Patinkin with BMO Capital Markets.

Just following up a little bit on the development side. We've talked in the past about how much of the new supply is REIT sponsored. I'm curious to know where you peg that today, and if you think it's changed at all, recently.

I still think the bulk of the new developments, in terms of spec, are coming from the public REITs. But that will change over time. Because more capital will come into the development of industrial. So that will change. But right now, I think we are probably doing more than 50% of it.

More than 50%, okay. Okay. For the private developers, has construction financing terms changed at all in the last couple of months? Is it loosening up a bit?

I would say that it's loosening up a little bit, but not a lot. Today, it's still one of these things that doing spec construction, you need a lot of equity and great sponsorship. So, we haven't seen the spigot open in terms of that. Again, if you talk about worries down the road, I think we've got a decent runway for the next two, three years. But at some point the spigot will open and you'll see a lot of new development. But to date, we haven't seen that.

Okay. And then, speaking a little bit about -- you mentioned that cash rental rate spreads are down about 5% on the quarter. I was curious if that's broad-based across the portfolio. Or can a few leases explain that?

What you have to remember is that the mix of new deals and renewal deals has a big impact on that. So the new deals that we did have a much higher mix. That probably had the biggest impact as far as the impact on the rental rate.

Right. Given that we had such a good increase in occupancy, 160 basis points, of which 125 were from leasing, a lot of that was a lot of the new leasing. That's usually a bigger negative than the renewals.

Okay. Where are renewals trending right now in terms of cash rent spreads?

The first quarter we had a positive. This quarter they were down about 2.5%. But, overall, we still think renewals should be slightly positive on the entire year.

Eric Frankel with Green Street Advisors.

Bruce, could you remind us how much of the non-core pool you have remaining to sell in terms of book value?

Asset-management is an ongoing process. But I would say that by the end of next year we should have gotten rid of a lot of this stuff that we had focused on a couple years ago. But, again, we will continue to sell property beyond -- after we get through with the pool -- just keep going in terms of selling assets, and continuing to upgrade the portfolio.

Okay. My follow-up question, I'm just going to go back to development, as well. I certainly understand that development is well below historical averages. But is that really the case in the Inland Empire, Houston and Central PA? It just seems like there is a lot more activity in those markets because they're relatively healthy. Thank you.

Jojo can jump in on this. I would say the Inland Empire, if you look at the development there, there is the potential for a bunch of development out there. And you are seeing that. So, I would say that I feel, in terms of our new project out there, the 555,000 footer, I feel that it's a little bit more aggressive than when we started our 692,000 footer a couple years ago, First Inland Logistics. But we feel pretty good about the market. And we are doing everything we can to build a great product with a lot of bells and whistles that we think will make it attractive for our users. So we feel pretty good about dealing with that. But, Jojo, do you want to talk about Houston and Inland Empire and --?

Overall, we came from a time where we had a significant shortage, where there were three tenants for every building spec. So, it is probably practical to feel that, since there is more development right now, and be concerned. But the reality is that there is absorption that is actually meeting the supply today. As we look today, we are closer to equilibrium today than versus two years ago, where we had a significant shortage. So, at this point, there is healthy activity, and we have to be diligent on the supply. In our First 36 Logistics Center, we are very pleased with that because there's very few 36-foot clear buildings. And this is going to be one of the most functional buildings in the Inland Empire. And our basis is great. And in addition to that, our land position on the new 69 acres is probably the lowest -- you will probably see, that's the lowest comp in the market for this year.

Then if we go to Houston, again, there are a number of buildings going up in Houston. But if you add the square footage, it's not much relative to the overall market there. So we are not worried about that. We feel very good about our location in Houston for our 350,000 footer that we hope to start next year. And then, Pennsylvania, Peter, do you want to talk about our 701,000 in the market there, 708,000?

Eric, as Bruce mentioned in his comments, our new building in Central PA is on track for year-end completion. In fact, we just completed tilting of all the wall panels this week. But from a demand standpoint, there continues to be very strong interest from a variety of users in the marketplace. While we acknowledge that there is future development potential, there have been no new competitive starts in that submarket at the moment. But, as Jojo mentioned, we continue to see absorption of existing space. We were pleased, in fact, to hear Liberty talk about the leasing of a large piece of their building in Carlisle on their call, which will reduce the competition for our asset. But we very much like the location and positioning of our asset. Recall that we've assumed 12 months of lease-up post-completion. And as we've said, we look forward to keeping you updated on our progress. But we continue to be very bullish on these markets.

We are encouraged about our position. And, again, judge us on how we do in terms of getting these leased up at pro forma, and built on time and on budget.

Great. Thanks, guys. Appreciate the explanation.

Michael Mueller with JPMorgan.

First of all, on the building acquisition that was vacant, how are you thinking about the prospects for leasing that up? Is there a budgeted timeframe you are looking at?

Mike, we are very excited about this acquisition. Again, it's 509,000 feet, it's in a great location, great building, built in 2005. It is vacant. Our job is to get it leased up. We think there's good activity in that area. We budgeted a year lease-up, and judge us on how we do. But I'll be disappointed if we don't get it leased up ahead of that time.

Got it. Then, secondly, for the second-quarter asset sales, when did they close in the quarter? Was it back end? Middle? Beginning?

I'm not exactly sure. My guess is it was probably throughout the quarter.

It was pretty well spread throughout the quarter.

Okay. Great. Thanks.

(Operator Instructions)

Craig Mailman with KeyBanc.

Curious, a follow-up on the sale question, here. Just curious. The pace is pretty good this quarter. Are people just trying to get ahead of rising interest rate expectations, and that's why you guys saw the better pace? Do you think that continues to help here?

I think it depends. Again, we're looking for is, primarily, user-buyers. You can't predict. But we were very pleased with the sales. The $41 million-plus sale was good pricing in terms of the products that we were able to sell and then move that money into the new investment in Chicago and the new land that we are going to be developing on. We think it's a great trade. The in-place cap rate was like 3.5%, because it was only 68% leased. So, we feel very good. But, again, our strategy is to look for user-buyers, primarily, for the assets, and maximize pricing. But we were very encouraged and hope the trend continues, as we are well on our way to hit our $75 million to $100 million target for the year.

Okay. And then just on development, the comments we're probably closer to equilibrium at this point in the cycle. And just putting that together with the rise in the tenure here, and expectations that rates may move higher. Have you changed at all your underwriting on developments to account for the risk of competition from new supply? Then just where exit caps may be down the road.

If anything, rising interest rates are going to make it harder, in terms of people will do less building, because of the returns in terms of the hurdles. So I think that will make it more difficult. From our standpoint, again, we think our development yields are pretty good. We try and pencil in 100 to 150 basis points more than what we think we can sell the asset for, if we got it up and leased. And we are encouraged. But, from our standpoint, that's what we're doing.

And we are not going to change our downtime assumptions today. And then we're total return investors. We will still look for that rent growth and it's not all just going on yield. We want to make sure that we continue to invest in submarkets that we have rent growth.

Okay. And then just one last quick one for Scott. It sounds like adjusting for the restoration fees in the quarter, about 100 basis points. Is it fair to say, normalized for the year for guidance, 2.5% to 4% is a decent way to think about it?

Are you talking about same-store for the rest of the year, Craig?

The same-store assumption on guidance, the 1.5% to 3%. If you normalize it, is it like to 2.5% to 4%

I would say it's probably 2.5% to 3%, is more where you're seeing the mid point to be.

Okay. Thanks.

Jon Peterson with MLV.

Good job on the quarter. The fundamentals look great. But I wanted to focus on the balance sheet for a minute here. I know you are hyper focused on getting that investment-grade rating. Your net debt to EBITDA in the mid 6s. Fixed charge coverage 2.2, very in line with your peers. And I'm looking at Prologis right now, it almost looks better than them. And they're three notches above you. So I'm trying to get -- don't compare yourself to Prologis, but I'm trying to get some insight into your conversations with the credit agencies, and what the hesitation is to upgrading your rating. Is it just a matter of time? Or are there still hurdles you need to cross?

I think some of it's time based. We had some traction after our first-quarter call. S&P upgraded us from BB to BB-plus. Moody's upgraded us from Ba3 to Ba2, and kept us on positive outlook. And Fitch kept us at BB flat, but they increased our outlook to positive. So, we think we are making traction with the agencies. You are right, some of it is time. But when we look out and the improvements we've made to our balance sheet, even, an example during the quarter, issuing $42 million of equity and taking out the preferred stock, our ratios are looking very good. We were at 7 times debt and preferred to EBITDA last quarter, we're down to 6.7 times. And our fixed charge coverage in the second quarter on a standalone basis is a little north of 2 times. And fourth-quarter standalone should be in about the 2.2 times area. So, we like the trends that we see. We will go and visit the agencies at the end of the year, and hopefully we will make more traction at that point in time. But we feel very good about the progress we've made and where we are going to be at the end of the year.

Okay. Great. Thanks, guys.

Eric Frankel with Green Street Advisors.

Just two quick questions. One, of the 330 basis point occupancy increase from last year, how much of that is probably attributable to vacant building sales, or less than 100% occupied building sales?

[The impact of sales accounted for approximately 120 basis points of the 330 basis point occupancy gain from June 30, 2012.] (corrected by company after the call)

Okay. And, Bruce, obviously you had a pretty hard deadline of when you'd like to reach 92% occupancy, and that's by the end of the year. Any chance you want to set an additional goal of when you want to reach your mid-90% occupancy goal?

I tell you what, if you come to Investor Day, we will focus on that for you.

(inaudible) Hopefully we can get an In-N-Out burger (laughter)

We look forward to it.

Again, we set this goal back in November of 2011. At that time I think we were about 87% or something like that. We were focused on this 92%. The team has done a heckuva job. We're making good progress. We still have some work to go to get there by the end of this year. But, again, it is a focus that we do believe we're going to get to the mid-90%s over the next few years. But we'll talk about that on Investor Day. And we encourage all of you to come join us.

Great. Thanks again, Bruce.

(Operator Instructions)

Ki Bin Kim with SunTrust.

Just to quickly follow-up on your leverage questions. If I look at your debt plus preferred EBITDA on a look-through basis, so excluding the CIP you have in process right now, it's actually below your low end of your leverage target. So, my question is, how much are you willing to let that rise? Are you willing to let that rise 7.5 times? And, with that, are converts a more attractive equity vehicle, or financing vehicle, given that you are so low on your leverage targets? And would that be preferred over a straight secondary offering going forward?

Ki Bin, this is Scott. I would say on the debt and preferred to EBITDA, I think that's something that we would have an increase on a temporary basis over that 7 times goal. And that's if our development pipeline really ramps up. As far as the converts are concerned, we've been looking at that product for the last several years. It's probably not one that we are fond of right now. I just think the interest rates that you are getting now with the premium aren't worth it. But, Bruce?

I would come back and say, to me, when I look at where our leverage is right now, and our ratio, we are in great shape. Again, that ratio, we are spending the money for these developments. We don't have the income in for these developments in Bandini, in California, and Pennsylvania. So, as you get that income, it may go up temporarily, but it's going to keep coming down as we keep leasing up. So, I'm feeling very good about that. I think our balance sheet, if you look at it, we've got a lot of capacity in terms of where we are. We've got a new $625 million line of credit. We only have $200 million outstanding on it. We are in very good shape. I feel like Jamie Dimon -- we have a fortress balance sheet compared to a lot of people. Again, it's important to us to get to the investment grade rating. We are going to keep doing that, keep moving it down. But, again, the best way we can do that is by keep leasing up the portfolio.

Okay. Just one last question. The 95% goal for occupancy, how much of that, let's just call it, year-end -- let's say your year-end target is 92% -- how much of that additional 300 basis points gain is by addition by subtraction versus traditional occupancy leasing?

First, it's the mid-90%s, not 95%. We said mid-90%s. At Investor Day, we can talk more about it. In terms of how much of that is from sales versus leasing, I think, in terms of most of it, in terms of where we are, it will come from leasing. But, again, we will talk more about that when we are together on Tuesday, November 12. And we look forward to seeing you there with us, Ki Bin.

All right. Thank you guys.

And there are no further questions at this time. I would now like to turn the floor over to our presenters for any closing remarks.

Great. Thank you, operator. And thank you to everyone for participating on today's call. If you have any questions, call Scott, Art or myself. And, finally, again, this Investor Day, we really hope you will come out and join us. We did this a couple of years ago. We are going to try and make it meaningful for you. And we want you to see what we are doing, what the strategy is. And see the execution of what we've been able to do out in California. We look forward to sharing that with you. Again, thank you. We look forward to seeing you in November.

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