First Industrial Realty Trust Inc (FR) 2014 Q1 法說會逐字稿

Good afternoon, my name is Hope, and I will be your conference operator today. At this time I would like to welcome everyone to the First Industrial first-quarter earnings 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 Investor Relations, please go ahead, sir.

Thanks, Hope. Hello everyone and welcome to our call where we will discuss our first-quarter 2014 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, 2013 filed with the SEC and 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, April 24, 2014.

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 Schulz, Executive Vice President for our East Region.

Now let me turn the call over to Bruce.

Thanks, Arthur, and thank you all for joining us today.

As we entered 2014, the clear focus for our Company was the same as it always is, capturing the long-term cash flow opportunities in our business. We made progress in some areas in the first quarter but we have much work ahead of us in others.

Before we get into the specifics of the quarter, let me comment briefly on the overall market. The fundamentals in the industrial real estate sector are very healthy. The first quarter marked the 15th consecutive quarter of positive net absorption. New supply is in check and tenant demand is being driven by an economy that continues to move in the right direction.

We finished the first quarter with our occupancy at 92.4%, down 50 basis points from the end of the fourth quarter and up 280 basis points year-over-year. Occupancy came in a little better than we expected as some incremental leasing partially offset the impact of the known 400,000 square foot move out in Atlanta that we told you about on our last call.

As we look across our portfolio today, we are seeing solid activity but we don't consider it good activity until we have signed leases.

As I noted in my recent letter to shareholders, one particular surprise and disappointment has been our 509,000 square foot acquisition in the Chicago market at I-55 and I-80 that we bought in the second quarter of last year. We allowed a year for lease up in our underwriting for this investment and we are fast approaching that one-year anniversary. While we are seeing a number of prospects, we have yet to ink a deal. So to be prudent, we are moving the lease up for this building out to the end of the fourth quarter in our guidance.

Per our reporting policy, the building will enter our in-service portfolio in the second quarter and could have an approximately 80 basis points impact on our in-service occupancy if we don't bring home any tenants by the end of the second quarter.

We adjusted our guidance range for average quarter end occupancy downward to reflect the impact of this building being in service and vacant until the end of the fourth quarter. Our guidance still contemplates us ending the year with occupancy of approximately 94%.

Our results on rental rate change and leasing costs were quite positive. Rental rates were up 3.1% on a cash basis; our leasing costs were lower than typical at $1.97 per square foot. However, I would temper these results by noting that one quarter does not make a trend. Most of these measures were helped by the mix of renewal versus new leasing in the quarter and will be affected going forward as we execute on more new leasing. Our expectations for cash rental rates for the year are unchanged at roughly flat. And leasing costs are expected to be higher the rest of the year.

On the capital side in the first quarter, we continued to have good execution on several fronts that we discussed on our fourth-quarter call. We closed a seven-year unsecured term loan totaling $200 million that we swapped to an effective initial fixed-rate of 4.04%. We also retired our remaining $75 million of preferred stock.

Lastly, we obtained an investment grade rating on our unsecured notes from Standard & Poor's but still have some work to do with the other two agencies.

While we have limited near-term maturies and significant capacity on our line of credit, returning to investment grade is an important part of our capital plan. As we discussed at our recent Investor Day, by doing so, we hope to capture some of the long-term savings opportunities in the unsecured market while interest rates remain low.

On the portfolio management side, sales were light. We sold three buildings totaling 73,000 square feet for $3.5 million. As we said on our last call and consistent with past practices, we expect sales to be back-end waited toward our goal of $75 million to $100 million for the year.

Acquisitions continue to be challenging as pricing for the types of buildings we want to own is very competitive. We did acquire one building during the first quarter that we discussed on our last call, a 252,000 square foot distribution center in Minneapolis that is 100% leased for $13.4 million at a 7.3% cap rate.

We added to our development pipeline in the first quarter in Houston and Dallas where the business environment and tenant demand is robust. We started our First Pinnacle Industrial Center in Dallas, a two-building complex comprised of a 376,000 square foot distribution center and a 222,000 square foot facility. The total estimated investment is $26 million and the pro forma yield is 7.5%.

In Houston, we commenced the 351,000 square foot First Northwest Commerce Center. Total investment is estimated at $20 million with a pro forma yield of 8%. We expect to complete these two developments by the first quarter of 2015 and are including a year for lease up in our assumptions.

Regarding our developments in process, this quarter we will complete our 555,000 square foot First 36 Logistics Center at Moreno Valley in the Inland Empire and our 43,500 square foot First Figueroa Logistics Center in the South Bay of Los Angeles. In total, we have approximately $195 million of completed or committed spec developments plus vacant acquisitions. We like the competitive positions of each of these assets and we are seeing activity but we need to get them leased.

Our other development investment is an $8.8 million, 250,000 square-foot expansion to a 600,000 square-foot facility for Rust-Oleum in the Chicago market that will be completed and placed in service in the third quarter.

So, before I turn it over to Scott, let me say that we have the opportunity to grow cash flow through lease up, built-in rental rate bumps, lower CapEx and lower capital costs. And along with it, grow the dividend as we did in the first quarter with a 20.6% increase. And we are encouraged by the increased activity across our markets, the direction of market rental rates and the current state of supply.

Our job is to capitalize on our opportunities in this environment by executing our plan and our team is focused on it.

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 $0.24 per diluted share compared to $0.24 per share in 1Q 2013. First-quarter results included a loss related to our Series F and G preferred redemptions, acquisition costs, loss from retirement of debt, and a portion of a one-time restoration fee.

Before one-time items, funds from operations were $0.25 per fully diluted share versus $0.25 in the year-ago quarter. Also included in our first-quarter results is $0.01 per share related to a non-cash write-off of a straight-line rent receivable for a tenant that vacated one of our properties prior to its lease expiration. There was a sublease in place that we assumed so on a go-forward basis in 2014, there will be minimal impact from an in-place cash rent perspective.

EPS for the quarter was $0.02 versus a loss of $0.05 in the year-ago quarter.

Moving on to our portfolio, occupancy was 92.4%, down 50 basis points from the fourth quarter and up 280 basis points from a year ago. Regarding leasing volume, we commenced approximately 4.3 million square feet of leases in the quarter. Of these, 0.8 million square feet were new, 2.5 million were renewals, and 1 million were short term. Tenant retention by square footage was 65.8%.

Same-store NOI on a cash basis excluding termination fees was a positive 2.3%. Note that this figure excludes the portion of the one-time restoration fee we mentioned on our fourth-quarter call that we also excluded from our same-store guidance. Including the first-quarter impact of this restoration fee, same-store would have been 3%.

Lease termination fees totaled $108,000 in the quarter and same-store cash NOI growth including termination fees was also 2.3%.

Cash rental rates in the quarter were up 3.1% overall with renewals a positive 5.2% and new leases down 4.6%. On a GAAP basis, the overall rental rate change was a positive 8.2%.

Moving on to our capital market activity and capital position, Bruce already reminded you of our new $200 million seven-year unsecured term loan we fixed at 4.04%, effectively taking care of 37% of our total maturities through 2017 we discussed at our November Investor Day. He also covered our preferred redemptions.

Quickly moving on to our leverage metrics, at the end of 1Q 2014, our net debt plus preferred stock to EBITDA is 6.8 times within our target range of 6 to 7 times. At March 31, the weighted average maturity of our unsecured notes and secured financings is 4.8 years with a weighted average interest rate of 6.1%. These figures exclude our credit facility.

Our credit line balance today is $72 million and our cash position is approximately $12 million.

On the rating agency front, we are making progress. S&P currently rates our unsecured notes investment grade. Both Moody's and Fitch rate our unsecured notes one notch below investment grade but both have positive outlooks. We are hopeful that with the progress we have made and continuing execution that we will reach our goal of obtaining these last two upgrades by the end of the year.

Now onto our updated 2014 guidance per our press release last evening. Our FFO guidance range is now $1.10 to $1.20 per share. Guidance includes the $0.01 per share net impact of income from the one-time restoration fee partially offset by losses from the redemption of our Series F and G preferred shares, loss from retirement of debt related to our planned early mortgage payoffs, and acquisition costs. Excluding these items, FFO per share is expected to be in the range of $1.09 to $1.19 which is $0.02 per share less than our prior midpoint. $0.01 of the difference is due to the non-cash write-off of the straight-line rent receivable in 1Q that I just discussed. The other $0.01 is due to pushing back the lease up of our Chicago asset to the end of fourth quarter.

The other key assumptions are as follows: average in-service occupancy end of quarter of 92% to 93%, a reduction of 50 basis points at each end of the range primarily reflecting the revised projected lease update for the Chicago asset. Average quarterly same-store NOI on a cash basis of positive 3% to 5% again excluding the aforementioned one-time restoration fee of approximately $0.02 per share being recognized this year. G&A of $23 million to $24 million which is unchanged. Please note that in the second quarter, we may recognize approximately $1.5 million or $0.01 per share of expense related to accelerated vesting of incentive compensation if our stock incentive plan is approved.

Full-year JV FFO is expected be approximately $400,000. Guidance includes the costs related to the new development starts in Houston and Dallas and the incremental costs related to our other developments in process and completed developments.

In total for 2014, we expect to capitalize $0.01 per share of interest related to our developments. Guidance assumes lease up of First Bandini Logistics Center and First Logistic Center at I-83 in the fourth quarter. Recall that each of their pro formas assume one year for lease up.

Lastly, guidance assumes the payoff of $44 million of secured debt at an average interest rate of 6.8% split between the end of 2Q and 3Q and our 6.42% 2014 notes in the amount of $82 million due in June. Guidance now also reflects our plan to pay off two secured loans totaling approximately $22 million in June with an interest rate of 4.8%.

Other than what I have noted, our guidance does not reflect the impact of any future debt issuances, the impact of any future debt repurchases or repayments, any additional property sales, acquisitions or further developments, any future NAREIT compliant gains or losses nor the impact of impairments nor the potential issuance of equity.

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

Thanks, Scott. Before I open it up for questions, let me say that the industrial real estate environment continues to be good as tenant demand is growing along with the economy. New supply while increasing is still moderate compared to historical levels and net absorption is positive. And we acknowledge that we have work to do towards our 2014 goals particularly in capturing our leasing opportunity to drive incremental cash flow. But rest assured, we are all over it. We look forward to updating you in future quarters on our progress.

We will now open it up for 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.

So operator may we now open it up?

(Operator Instructions). Craig Mailman, KeyBanc Capital.

Good morning guys. I was just wondering if maybe you can give us a little more color on Chicago. Is it a product or location issue or did you guys have a tenant maybe that was on the hook that kind of disappeared? What is going on with the delay?

Craig, the Chicago asset, we like it a lot. We like the location. Again, it is right at I-55 and I-80. We like the quality of the building, a very high-quality building. We like the market. The market -- the Chicago market has improved considerably and there is great activity and we like the basis we bought it at, we are in at $42 a foot. So that is -- we feel very good about that.

So again, we've had good activity on this site. We just haven't been able to bring home a lease but we are still seeing a lot of interest in it. Again, it's been a disappointment as I said in the script. I am surprised it is not leased by now. But there is activity on it and it's a good building and we are glad have it in the portfolio.

What was the initial underwriting from a yield perspective and what is the kind of the drag on leasing due to that?

Ask the question again, I didn't quite hear the first part.

The original underwriting in terms of the yield expectation and what is the delayed lease up due to that expectation?

We thought we were going to get about a mid six in yield on the investment and that was using a rate that was probably just sub $3.00. We think we will do better on the rate than what we underwrote. But the lease up will be a little bit of a drag.

Okay, and just a follow-up on Bandini and Central PA, do you guys feel good about that? I know you still have three quarters left in the pro forma underwriting but is there a chance that may need to be pushed out as well or are you guys seeing really good activity there?

I certainly hope not because we love those assets. Let me ask Peter to comment on I-83 in York and our 700,000 foot development there and Jojo to talk about Bandini.

Craig, it's Peter. Yes we feel good about the activity following completion of the building in the fourth quarter and seeing accelerated activity following the weather improvement here. You know there has been no change in the competitive supply and certainly no new supply since we started the building. We are seeing good interest from a variety of users in the market.

With regard to First Bandini, we feel good about the pro forma lease up and leasing assumption. Again, the market is active today. We have a very, very high-quality product. Just a great access really, all of the functional attributes exceeding any competition out there so but our job is to get it leased.

Great, thank you.

Dave Rodgers, R.W. Baird.

Hey guys, wanted to follow up on development, a lot of your competitors are going forward with build-to-suit activity for the development pipeline and have been growing it that way. You have elected to go more on the speculative side. I guess maybe focusing on Houston and Dallas, can you talk about what gives you confidence in those two markets? There's been a number of broker reports suggesting those are two of the more overbuilt markets from a spec perspective. And so maybe go through a little bit of your confidence in those assets.

Sure, all right let's take them one at time. In terms of Houston, Houston again we started the 351,000 footer in the northwest part of the city, the strongest submarket. We feel very good about it. It is a good asset, a good location and again as we look to Houston, there absolutely has been new construction there in terms of a lot of stuff starting to be built. But again, absorption is stronger than what has been started. And I think if you look at our portfolio in Houston, we are 100% leased.

So we like the Houston market. We are very excited about this building and we feel good about its prospects.

In terms of Dallas, and Dallas has probably been more started relative to the stock than any place. I would say when we look at our Dallas portfolio, we are 94% leased and what we are building with First Pinnacle is two buildings. One is about 222,000 square feet, the other is like 336,000 square feet. So we're not building the big bombers. If you look at what typically is being built right now, the new supply, it is over 400,000 square feet, 400,000 or 500,000 square feet. So we are building to what we think is a pretty strong market.

And again, as Jojo said, it is up to us to get these things built and leased but we feel good about both of these assets.

And in terms of build-to-suit in all of our sites, if there are requirements that fit -- that our site would fit, we would respond to RFPs but we got to balance that with the projected yields returns that we can get between build-to-suits and spec. Build-to-suit has been primarily a low yield business and so in one situation, like in First Pinnacle, the development in Dallas we started, we elected to go spec because we feel that we can get a higher risk-adjusted return there.

Okay, thanks for that color and then maybe a follow-up for Scott. You know, Scott, I guess as we look at the seven assets or so in the development pipeline most of which would not really be ready for leasing until late this year or early next, and then throw Atlanta in there as well, I am assuming that there be no additional downside to guidance throughout the year if none of those spaces are leased? Is that correct?

Well, I would say the two developments that we completed last year at First Logistics Center at I-83 and First Bandini Logistics Center per our guidance, we have them leasing up in the fourth quarter, that is the one year. And if you look at all the other developments in process at March 31, this is page 20 of our supplemental, we do not have anything baked into our guidance as far as NOI is concern related to those developments.

And Atlanta?

Which Atlanta are you referring to, Dave? I'm sorry.

The move out, the backfilling of the move out that you noted in the first quarter.

I will leave that up to Peter to answer that.

So Dave, this is Peter. In Atlanta as we talked about on our call last quarter, we had a move out of 400,000 square feet. That is a 32-foot clear cross dock buildings and activity continues to improve and we are actually just finished expanding one of our existing tenants in that building. So we are on our way to backfilling some of that space.

Okay great. Thank you.

John Guinee, Stifle Nicholas.

Great, thank you very much. Bruce, or whoever, I was just looking quarter-over-quarter for the last four quarters and it looks like your rental revenue is basically $64 million, $65 million trending down a little bit. And then when I look at property expenses offset by tenant recoveries, it looks like you have a fairly consistent $8 million or $9 million a quarter loss there. So a couple of questions.

Was the first quarter here an aberration in terms of a high OpEx but high recoveries?

And then second, given the big gap between OpEx and recoveries, do you just have a lot of gross rents in the lease in your portfolio that allows there to be such a difference between OpEx and recoveries?

Chris?

John, this is Chris. The first question as far as the recoveries, yes, this quarter obviously we were hit by the severe winter weather, our snow removal expenses were up about $2.5 million. So you have obviously there you have an offset of recoveries so your recoveries went up also. We are recovering about 90% of that number. So that's the reason for that change.

And just overall as far as what we have in the gross, as far as gross leases, it is a pretty small percentage but we do have gross and we also have some industrial gross leases where you have a base year, for instance, on real estate taxes and insurance. So that so you have a little bit more impact than from the true triple net.

Okay. And then the second question is it appears to me mid-point of your new guidance, doing the quick math and subtracting $0.24, gets you $0.30 quarters for second, third and fourth quarter which is a pretty healthy number. How do you get from $0.24 this quarter to $0.30 on average quarters two, three, and four? And is there a little bit of a hockey stick ramp up there or down or how does that $0.30 actually break out quarter by quarter?

John, this is Scott. Our guidance is midpoint $1.14. That is before one-time items and you are correct, there is going to be a ramp up. A couple of different reasons for that. One is just increase in occupancy in the in-service portfolio throughout the year so we expect increases in that. As you know, the first quarter we generally have a drop off. And we dropped off about 50 basis points in the first quarter.

The other thing is we've got a couple of developments, First Bandini and First I-83 which in our guidance we plan to have leased up in the fourth quarter so that is causing an increase as well.

The other item that you have is we have these debt prepayment opportunities that are happening in the second and third quarter so as we prepay that debt, we are financing it on the line of credit and as a result our interest expense is going down and that is causing a growth in our FFO per quarter as well.

And I would say the last item that caused a little bit of decline in our FFO for the first quarter is we sold $75 million of properties in the fourth quarter, most of those were back-ended and we used those dollars to pay down our line of credit. That money stayed paying down the line of credit for the months of January and February. We redeployed that money taking out our preferreds, our Series F and G in March. So once the second quarter comes through, we shouldn't have any of that sales dilution just because those preferreds had about an average coupon yield of about 6.6%.

So when you look at those four factors, that what is causing the increase in our FFO in the remaining three quarters of 2014.

Okay. And then lastly, anymore low hanging fruit on the financing side or has that pretty much played out with debt repays or early prepays earlier this year?

I mean you always have -- sure, John, this is Scott again. You always -- may have opportunities in your unsecured notes in the open market. The 2016s and 2017s are pretty expensive. We do have some 2027s, 2028s, 2032s -- a little below $50 million. There really hasn't been much traded there. So that leaves our secured debt basically if you look at what is left in our secured debt, everything if we are able to pay it off has a yield maintenance premium associated with it which is pretty onerous.

The only other piece of secured debt that we have open for prepayment at a fixed prepayment penalty is at the end of fourth quarter of 2015 and that is about a little under $40 million. So that is really the only other opportunity that we have at a fixed prepayment penalty on our secured debt.

Great, thank you.

(Operator Instructions). Eric Frankel, Green Street Advisors.

Thank you very much. Scott, I was wondering if you maybe could quantify how the weather impacted same-store NOI growth?

Yes, this is Chris. As mentioned, the severe weather had an impact, our snow removal costs were up about $2.5 million. We also had some increases in the utilities so the combination of those that is not recovered had about a 0.8% impact on the same store this quarter.

Okay, thank you. And I was wondering if -- in your spec development pipeline seems to be building up a little bit. Bruce, could you remind us what you think your limit is and how big that spec development pipeline can be without any additional leasing?

Sure. Well right now we have got about $175 million of spec development including the two developments we just started in Houston and Dallas assuming they are fully funded. So that is $175 million. You've got about $20 million from the Chicago acquisition so it totals about $195 million. We have an internal self-imposed cap of about $250 million so we have got about $55 million left of capacity in there and hopefully we will be leasing up some of these properties pretty quickly so we will have even more capacity under that cap.

Thank you.

Thank you.

Brandon Cheatham, SunTrust.

This is actually Ki Bin and Eric asked the question I was going to ask right now but maybe I can ask it a little bit different way. Is that a hard cap and if you don't get the leasing that you are expecting, would you basically self-impose a slowdown in new development starts?

Ki Bin, again we think $250 million is a good level for us. We have got $55 million more capacity assuming we don't get anything leased. We have got good activity. We like the projects we're building. We like to development. We are going to continue to develop but we are going to continue -- we are going to lease up these developments we have too. So we think we have capacity. We can do $55 million more of new starts but we are going to lease up some of those properties we've built.

And I mean obviously (multiple speakers)

And it's worth serious money to us if you think about it, we have got -- if you take that $195 million, and $195 million, so you lease it up at the 7% or 7.5% cap rate, you know that it's worth 12 -- serious cabbage to you in terms of -- on our about $0.12, $0.13 a share. So again, it is a great opportunity for us. And as I said, we are focused on it and we're going to get this stuff leased.

Okay. And just on that same line of questioning, you mentioned spec versus build-to-suit, could you just quickly talk about what kind of incremental yield you get for going spec versus build-to-suit?

And it is probably a little bit early but obviously your cap rate expectations on your development pipeline have not changed. And is it basically what is taking longer is that you are holding firm to the kind of rent and tenant quality you want to get for those properties or is that a little bit slower than expected demand profiles or I guess wondering what would you attribute this little bit of a delay to?

All right, let me start and then Jojo can have it. Let's slow down for a minute. Here, let's review the bidding what we have accomplished. A couple of years ago we did a 692,000 square foot building, built it in the Inland Empire; we leased it up to 15 years to Harbor Freight. We did a 300,000 foot building in Chino last year that finished up in like May and we leased it in May to a tenant for a long-term basis. All right, so then the other buildings we have we just finished in the fourth quarter of this year, Bandini which is 489,000 square foot, a great asset right off of 710 in LA. And Peter talked about I-83, the 708,000 square footer in York, Pennsylvania. These are great assets. And we just put them in service in December.

So we feel good about those. It is now April so we've got plenty of time to get these things leased. It is good activity.

So then in the first quarter, we will start this quarter, I mean the second quarter, we will finish the 555,000 square foot First 36, again it is great quality buildings, Jojo talked about some of its attributes in terms of being the First 36-foot clear, spec property in the area. And then the 43,500 square foot First Figueroa. So again, that completes this quarter.

So we are not off target. The only thing we missed which I talked about is Chicago in the sense of we planned to have it leased by the second quarter, we are pushing back guidance because we think it is prudent but there is activity on it. So we feel good about what we are doing. We like the assets, the yields we're developing to are substantially higher than what you could buy this type of product for and we feel very good about the quality of the assets and the locations.

So, and again we acknowledge it, it is all on us to get these things leased but we are very encouraged by the market and where we are right now.

Ki Bin, just to address your build-to-suit versus spec, in today's market if you have a build-to-suit for a quality, high functional warehouse distribution product, the yields are being driven down. The spreads are being almost driven down to zero. What typically happens unless you have a unique site. If you have a site where you are competing with three or four other sites, what would happen is that the structure is being priced almost to the point where it is almost like a sale of an existing lease asset because the process is very, very efficient. So at most I would say maybe you can get zero to 50 spread.

Now on a spec deal today, you get spreads anywhere from 100 to 175 depending upon the market. So I hope that gives you an idea.

Okay, thank you.

Emil Shalmiyev, JP Morgan.

Hi, good morning. I'm not sure if I missed this earlier. You had a pretty light quarter on disposition. Is your earlier guidance still the same? I think it was 75 to 100.

Yes, our guidance stayed the same, it is 75 to 100 as we said on the last call, that it is going to be back-end loaded. But still the guidance is $75 million to $100 million.

Okay thank you.

(Operator Instructions). Jon Peterson, MLV & Company

Great, thank you. (inaudible), I think you touched on Atlanta a little bit already but I was looking at a broker report that came out a week ago, net absorption there is at levels back to what we haven't seen since 2007.

So before your report, I kind of crossed my fingers that we would see a little more movement in your Atlanta portfolio. Can you talk about how you guys are positioned in that market and how you are going to take advantage of I guess the strength that we have seen in recent quarters in the Atlanta industrial market?

Sure John, this is Peter. The vacancy in our Atlanta portfolio is primarily in two bulk buildings, one in the Northeast and one in the Southwest not too far from the airport. The one in the Northeast is where we had the tenant move out of 400,000 square feet in the first quarter, and as I mentioned a few minutes ago, we've already made some headway with a substantial expansion of one of our existing tenants and we will update you on that further with our Q2 results. But we feel good about activity. There is really no new supply to speak of in Atlanta particularly in those submarkets. And these are both functional buildings and we like the leasability and location. It is just up to us to get it done.

Okay, so these aren't buildings that -- are they ones that once you get them leased up they might get put in the non-core portfolio and sold or kind of sounds like that is not the case.

No, these are both buildings that we will continue to own and operate in our portfolio. Both good clear height, loading, trailer parking and so forth, good quality assets. Just up to us to get them leased.

All right, sounds good. Thank you.

Dave Rogers, R.W. Baird.

Thanks guys. I think maybe Scott in your comments you talked about and maybe it was Bruce sorry, but there was short-term leases that amounted to about 1 million square feet in the quarter. If I heard that right, can you talk about when those expire, when we should expect to see those roll back out?

This is Chris. As far as the volume in short-term, that is pretty consistent with what we have in most quarters. So they vary in lengths of six months to eight months. So there should be no real impact quarter over quarter as far as that is concerned.

Okay. Last question. Can you remind me maybe Bruce if you have it, what the impact from dispositions this year would be to your year-end occupancy number or target?

Dave, this is Scott. We don't -- basically our occupancy target that we gave is without sales and based upon what we sell throughout the year, we will have to figure out whether there is any impact to that occupancy number.

All right, thank you.

Eric Frankel, Green Street Advisors.

Thank you very much. I was wondering given the amount of investment product that seems to be out of the market, whether there is any consideration to some type of change in portfolio mix, is there any type of combination that can potentially work especially as an investor interest in all types of assets increases?

Eric, again Jojo can add to this but I mean we look a lot -- the quality of what we are seeing and the pricing to us is very aggressive. So we thought a better way to spend our dollars more in the development side than investing. But Jojo, do you want to talk about that?

Yes, just to add to what Bruce has already said, we see all the large packages out there and when we make an investment, a lot of things have to fit. Number one it has to fit in our core strategy, you know a functional product in the markets that we want. And second of all, the returns have to meet our criteria. And at this point, we haven't seen any of the packages meet that.

And so rather than again like Bruce said, the returns are very competitive and we are getting good risk-adjusted returns on development and that is why we are pursuing. But of course look at us to continue to pursue one-off quality acquisitions just like the one we did in Minneapolis you know first quarter.

Okay, thank you.

And there are no further questions at this time. I would now like to turn the conference back over to Mr. Bruce Duncan for the closing remarks.

Great, thanks operator. Again, thank you for your interest. We'll be around today if anyone has any questions, Art, Scott or myself and we look forward to seeing some of you at the Baird conference next week I guess in Chicago. Great, thank you very much.

This concludes the First Industrial first-quarter earnings conference call. You may now disconnect.