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First Industrial Realty Trust (NYSE:FR)

Q3 2008 Earnings Call

October 30, 2008 12:00 pm ET

Executives

W. Edwin Tyler – Interim Chief Executive Officer,

Michael J. Havala – Chief Financial Officer

Johannson L. Yap – Chief Investment Officer

Rick Czerwinski – National Director of Leasing and Asset Management

Art Harmon – Director of Investor Relations and Corporate Communications

Analysts

Lou Taylor – Deutsche Bank

Mitch German – Bank of America

Paul Adornato – BMO Capital Markets

William Crow– Raymond James

Cedrik Lachance – Green Street Advisory

David Taylor – David C. Taylor & Company

Jeff Laferty – Oscar Gruss & Son

George Everett– Private Investor

James Feldman – UBS

John Peterson – UBS

Stephanie Krewson – Montgomery Scott

Matthew Pitkin – Private Investor

Operator

At this time I would like to welcome everyone to the First Industrial Realty Trust Third Quarter Results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to First Industrial. You may begin.

Art Harmon

Hello, everyone and welcome to our call. Before we discuss our results for the quarter let me remind everyone that this call contains forward-looking statements about First Industrial. A number of factors may cause the company's actual results to differ materially from those anticipated. These factors can be found on our earnings press release that is available at our website at www.firstindustrial.com.

Now let me turn the call over to Ed Tyler, our Interim CEO and Lead Director.

W. Edwin Tyler

Thank you, and welcome to our third quarter 2008 earnings call. Before we begin, I will introduce the other members of our senior management team who are here with me today. Mike Havala, our Chief Financial Officer, who many of you know, Jojo Yap, our Chief Investment Officer and Rick Czerwinski, our National Director of Leasing and Asset Management. And you have just heard from Art Harmon, who is our head of Investor Relations.

I would like to offer a few introductory comments before turning the call over to the other members of our team. Per our announcement last week, I have stepped in as the Interim CEO upon Mike Brennan's resignation and I will serve in that role until the search for the new CEO has been completed. Mike Brennan contributed greatly to the building of First Industrial's real estate platform, and the company appreciates his dedication and leadership for more than 20 years.

The Board, however, believes that this is the right time to install new leadership at the CEO level and to move the company forward in improving its valuation and achieving its full potential. We are moving quickly to identify the next CEO and the Board will be considering internal and external candidates. I cannot provide a firm timetable, but be assured it is my highest priority.

I am pleased to have the benefit of the talent of the management team here on the call with me today, and the commitment of all of First Industrial employees. Our mission to serve the industrial real estate needs of our customers and to create value for the benefit of our shareholders and our institutional partners remains intact.

As noted in our press release, beginning next year First Industrial is adopting NAREIT FFO definition. The Board has also made a change to our regular dividend, which reflects our decision to align our dividend more closely with our portfolio income. Mike Havala will review these items in more detail shortly. But before I turn it over to Mike, I'd to emphasize four things.

First, our balance sheet capital position is solid with a very manageable debt maturity schedule. Second, our portfolio, our primary income source, continues to deliver a solid performance. Third, we have undertaken significant actions to align our costs with the current transactional and economic environment. And fourth, we have in place institutional investment capacity to take advantage of attractive investment opportunities.

With that said, I would like now to turn the call over to Mike.

Michael J. Havala

Well thanks, Ed. We have a lot to go through with you here today, so I will thank you in advance for your patience as I will talk a little bit longer than usual. With regards to the capital market's environment, as you well know we have been in a tough capital market's environment since the middle of 2007. But increasingly in September and October, there was a rapid deterioration in conditions and this, of course, was spurred on by the major shocks to the financial system, which have frozen the capital markets.

As a result, this materially impacted the level, the pricing and the timing of real estate transactions. Now, looking ahead, we expect and have planned for a continuing tough capital markets environment in 2009. Regarding the overall industrial real estate markets, looking back at the third quarter, fundamentals we're reasonably healthy, but there's certainly signs of weakening with forecast for declining market absorption and occupancy. Our view is that real estate fundamentals will likely deteriorate somewhat in 2009.

Having said that, it's important to note that our portfolio for the quarter performed quite well, our occupancy increased 20 basis points to 93.7% and that's versus the national average of a little over 89%. We had high tenant retention at 87%, and strong same-store NOI growth at 4.3%. Our rental rate growth on a cash basis for the quarter was 3.2%, and our leasing costs were low at $1.53 per square foot.

Our portfolio results are evidence of the underlying strength of our portfolio, which is comprised of quality buildings in key markets. We have diversification by market, by product type, and by tenant as we have approximately 2,100 tenants. Well, given the economic picture I previously went through, I'd like to walk through with you some of our thoughts and actions in response to this more challenging environment, and I have six major points that I want to make.

The first major point is that we have a strong balance sheet. Our weighted average debt maturity is 7.5 years, which is significantly longer than many other companies. Our coverage ratios are healthy at 2.9 times and 2.4 times for interest coverage and fixed charge coverage for the year, respectively. All of our permanent debt is fixed rate, and then 96% of our assets are unencumbered by mortgages.

The second major point that I want to make is that we are in a very good liquidity position and then here is why. We have very little debt maturing in the next two years, only about $135 million. Regarding the debt that is maturing, we have a number of options to repay that debt.

First of all, we anticipate by the time that debt comes due, most of it in June of 2009, we will have enough capacity on our credit line to pay off 100% of that debt. Secondly, we have tremendous financial flexibility in that 96% of our assets are unencumbered, which means that in addition to the possibility of issuing unsecured notes, if that market happens to be open, we also have the capacity to raise secured debt, which is achievable even in today's markets.

And then the last point that I want to make with respect to liquidity is that we only have $34 million that is needed to fund the remainder of our development in process. And that includes both our balance sheet and our [Correta] share of joint ventures, so there's really no big pressure here.

The third major point that I wanted to make is earlier this month we executed on our plan to significantly reduce costs. In total we have reduced G&A expense by $33 million, or approximately one-third. This of course makes sense as our transactional business is down. But we've also taken it a step further, as we have reviewed every line item and have reduced many of our other discretionary costs.

Regarding changes in our personnel, in October we reduced our staffing levels by over 20%, or approximately 120 people. And please note that, of course, we did not take that decision lightly to reduce our staffing levels. An important consideration was to make sure that we could continue to provide the industry leading service levels that we've been known for by our customers and our partners.

We built a very valuable platform and we want to make sure we preserve its value, and at the same time we of course need to make sure our expenses are appropriate for the more difficult environment that we are in.

The fourth major point that I wanted to make is that we will continue our intense focus on property operations regarding leasing and property management, with a special emphasis on occupancy and tenant retention.

The fifth major point that I want to make is that we are being extremely selective on new investments and dispositions. We see value creation opportunities in two main areas. The first is deeply discounted acquisitions, which is a long running core-confidence here at First Industrial, and we expect to see some of these originating from liquidity strained investors, as well as corporate customers.

The second opportunity in the value creation area is in builder suits. We will sell properties from our balance sheet and joint ventures, but only on a selective basis, for example, to fund higher returning investments.

And then the sixth major point that I want to make is that we have formally renewed our strong relationship with CalSTRS, with whom we have over $4 billion of joint ventures. We did this by extending the terms of the joint ventures to go through December of 2018. We view this as a significant endorsement by the second largest public pension fund in the U.S., which is especially meaningful in these challenging times. Having joint venture capital is a competitive advantage, especially in this market.

Regarding the debt in our joint ventures, there is a total of $1.4 billion of debt inside our seven joint ventures, and of this amount only $75 million, or about 5%, matures without a unilateral extension right through the end of 2009, so we are in very good shape here.

The next thing I want to talk about is our new FFO definition. Stating January 1 of '09 we will report FFO under the NAREIT definition. We have decided to report this way in order to provide the investment community with a simple and more comparative measure to other REITs. Note that it is still important that investors consider other measures such as GAAP, net income, etc. We will handle the transition to the NAREIT definition this way.

We will report 2008 under both our old FFO definition and the NAREIT definition. And then we've also provided you with 2008 guidance under both the old and the NAREIT definitions. For 2009 we are providing our guidance under the NAREIT definition. Next, let me talk about our dividend.

As I'm sure you all have read in our press release, the Board of Directors has changed our dividend policy and declared our regular fourth quarter dividend at $0.25. Our new dividend policy now sets the regular dividend primarily based on more predictable cash flows such as portfolio income. From time to time in addition to the regular quarterly dividend, the Board may declare a special dividend, and that will generally be connected to gains generated from capital recycling.

In January of 2009, we expect to pay a special dividend related to the fourth quarter of no less than $0.20. And again, this is in addition to the $0.25 already declared for the regular fourth quarter dividend. The decision to change the dividend policy was one the Board of Directors, of course, took very seriously. Long term, we believe that this new policy will prove to be the best policy for the company and shareholders. And then as a reminder, I wanted to mention that the company also has approximately $60 million remaining under its stock repurchase program.

Turning now to our guidance, our guidance was developed with the expectation of a challenging capital markets and economic conditions throughout 2009. For 2008, our FFO guidance range under the previous FFO definition is $3.17 to $3.37 per share, and that's a $0.33 reduction of the midpoint of our previous guidance and that's due primarily to one-time expenses associated with severance costs for our head count reduction, the departure of our CEO, and a reduction in expected sales.

Under the NAREIT definition for 2008 our guidance ranged $1.50 to $1.60 per share. And then we've updated some of the components of our guidance and investment activity as follows. For 2008 investments on balance sheet, we expect to be between $400 million and $450 million, and dispositions are expected to be in the range of $600 million to $650 million for the year.

We expect development starts for 2008 to be about $330 million, and our average occupancy for the year is expected to be about 93%. Our same-store property NOI is estimated to be flat to 2% positive for the year, and rental rates are expected to be positive.

Regarding our G&A expense, we expect G&A to be about $92 million to $94 million in 2008, and this includes the one-time charge of about $12 million, which is comprised of $7 million of cash and $5 million of non-cash in the fourth quarter due to severance costs for our head count reduction and CEO departure. And while this is a one-time charge, we have reduced our FFO for this.

Regarding our 2009 guidance, we are now providing guidance pursuant to the NAREIT definition of FFO. We expect FFO per share to be $1.40 to $1.60, and here are some of the key components of that guidance for 2009. With respect to the portfolio, we expect our average occupancy to be between 90% and 91%. Our same-store NOI to be flat to slightly down, and rental rate changes to be modestly positive.

And then as a reminder as we head towards 2009, our first quarter portfolio metrics are typically lower as they are affected by calendar year lease expirations. Regarding G&A, our G&A expense for 2009 is expected to be between $64 million and $67 million, and that of course reflects the actions that we've taken to reduce our expenses. For JV FFO, we expect this to be in the range of $20 million to $30 million.

And then with respect to investment disposition activity, we expect that to be down from 2008 levels, but we're not providing specific numbers now, due to the volatility in the capital markets. So with that let me make a few concluding remarks. First, I would like to state that the management team here has many years experience in the business, in addition to the many years of business experience that Ed Tyler brings.

The other three members of management on the call, Jojo, Rick and myself, combined we have more than 60 years of experience in our industry. We’ve navigated through many cycles in the past including several recessions in the early 1990’s when there was virtually no capital available for the real estate business.

This is a company with a strong backbone, and while we’re faced with a tough environment we’re making tough decisions. By doing this, we will be one of the survivors and likely better for it and this isn’t just wishful thinking.

It’s based on the four pillars of number one, a strong and diversified portfolio and our focus on operations. Number two; a solid balance sheet with little debt maturing through the end of 2010. Number three; a reduced expense structure that is more suitable to the current economic conditions. And then number four; in-place institutional capital that allows us to take advantage of opportunities in the market place.

We have a valuable company and our job is to make sure that value is recognized and our potential is captured. And then one last comment before I open it up to questions there are many topics that we discussed today. We tried to lay out and explain these as best we could in a summarized fashion.

We do expect a number of questions and are happy to answer those question of course, but we would like to ask you to limit your questions to one or two per person in order to give other participants on the call a chance to get their questions answered as well. And like always management will be available after the call for further discussion and questions.

And so now operator can we please open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Lou Taylor from Deutsche Bank.

Lou Taylor – Deutsche Bank

Ed can you give a little bit of color in terms of the G&A costs with regards to where were they in the organization, were they capitalized costs, was the G&A expensed? Are you, Ed, getting any markets or any regions or any kind of business lines like development?

Michael J. Havala

Okay, yes, hi, Lou, this is Mike Havala, with respect to the G&A costs, the majority of the G&A costs reductions that we had related to our transactional part of our business. So that would include developments, specialty, as well as acquisitions, and sales.

The $33 million that we quote, that’s the number that impacts the P&L. So that impacts specifically the G&A line. We did also cut some costs that were previously capitalized, but the $33 million that we mentioned are the costs that are specifically expensed.

Lou, does that answer your question?

Operator

Your next question is from Mitch German with Bank of America. .

Mitch German – Bank of America

Given how quick these decisions that we have just seen have come about, I mean how long has the board been contemplating possibly making these changes and quite honestly, why wait until now and why not do it earlier?

Michael J. Havala

Yes, Mitch, that’s a good question. Basically with the occurrences in the market place in September and October this dramatically changed the environment, not just for us but obviously for everybody. And so with respect to the FFO definition and with respect to the dividend, the Board met this week, to declare the dividend and announced it as we talked about so.

So, clearly this is something that we are focused on. September and October, of course, brought about a very different environment than previous, which was still a tough capital market, but not what the world is facing here based on what happened in September and October.

Mitch German – Bank of America

And can you just go over some of your discussions with CalSTRS. It seems like maybe the structure of the JVs have changed I mean from more of a transaction dependent strategy to more now of a long-term hold strategy, is that correct?

Michael J. Havala

No. The mission of our venture with CalSTRS has not changed. It’s still focused on value add opportunities, which in this marketplace you expect there to be a number of value add type of opportunities, as well as build a suit.

Clearly, we are reducing our spec building activity dramatically as you’d expect, but we’re very focused on build a suit opportunities, which we’re seeing in the marketplace. So no, there’s not been any change in focus or strategy with in our joint ventures.

Mitch German – Bank of America

.

And then just one last question, on your definition of FFO, are land sale gains and value add dispositions, will gains related too those two be included on a forward basis?

Michael J. Havala

We are reporting based on the NAREIT definition, so under the NAREIT definition land sales are included in there. And then if you have gains that are undepreciated assets, those are also included under the NAREIT definitions. So what we’ll be excluding of course, will be the gains related to previously depreciated properties.

Operator

Your next question comes from Paul Adornato with BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Just to follow up on the joint ventures, have you had any discussion with CalSTRS since the announcement that you extended the venture terms?

Michael J. Havala.

Paul, I’m sorry you’re line was breaking up. Maybe you could repeat the question for us?

Paul Adornato – BMO Capital Markets

Yes, sure I am sorry. With respect to the CalSTRS joint venture, the announcement of the extension was made after or made before the big changes announced at the corporate level. I was wondering if you have had any discussion with CalSTRS CEO change?

Michael J. Havala.

Sure. Absolutely, good question Paul. Yes, anything important that’s going on with the company, we are of course are in communication with our partners. And so, yes we’ve had very specific conversations with our partners with respect to the CEO change and the staff reductions and so forth.

Paul Adornato – BMO Capital Markets

And with respect to the staff reductions, it seems like a lot of the areas that your now deemphasizing would have also contributed to the business of the joint ventures. Any comment on that aspect?

Michael J. Havala

Sure. Paul, when we looked at the reductions, we looked at the activity that we expected going forward, remember we had also built up the company for growth. And, so, we reduced some of the cost associated with growth that had been built into our costs as well.

But clearly our mission is to make sure that we will serve our partners, and that we have all the capacity here internally to make sure that we do all the activity that we’re going to do in our joint ventures. So, we see no issue with respect to undercutting our ability to execute on the plans that we have for our joint ventures.

Paul Adornato – BMO Capital Markets

And finally, just one quick one on international expansion, you recently dipped your toes in Europe. Is that still a priority?

Johannson L. Yap

Yes, hi, this is Jojo. Yes, we have a fully integrated platform today in Belgium, Netherlands, France and Germany. And as you’ve seen in one press release that we have a forward commitment on a class A institutional distribution project in the Golden Triangle in Belgium.

Today, we are looking at several opportunities. Just like Mike had mentioned, we are extremely selective and we have increased our risk adjusted returns in the future for value added and deep discount acquisitions and redevelopments.

So that’s one thing that what we do here in the US we'll continue to do in Belgium, Netherlands, France and Germany. Does that answer your question?

Paul Adornato – BMO Capital Markets

Yes thank you.

Operator

Your next question comes from Bill Crow with Raymond James. .

Bill Crow – Raymond James

Mike can you give us the first and second quarter FFO actuals in NAREIT definitions?

Michael J. Havala

Yes, Bill in the supplemental, in one of the foot notes, we have provided that reconciliation. And so if you go back into the footnotes in the supplemental we’ve laid that out for you, as far as the four quarters for 2007, as well as the first three quarters for 2008.

Bill Crow – Raymond James

Could you talk about the dividend and the decision to bring it back at $0.25 a share, which implies $0.25 a quarter which implies almost a 16% yield today? Is that because of taxable income required it? It seems like you brought it back at a still relatively high level?

Michael J. Havala

Sure. The level that the dividend was set was a level that the Board was very comfortable with. We set the dividend in between our taxable income on the low side, that's the minimum. And our FAD as constructed based off of the NAREIT FFO definition. So, that’s the minimum and the maximum if you will where the dividend is set, and so the $0.25 per share was set along those guidelines.

We will have special dividends from time to time as we already announced for the fourth quarter, payable sometime in January, a minimum of $0.20 a share. And that will be more connected to our capital recycling activities, which generates cash gains, as well as taxable income as well.

Bill Crow – Raymond James

One final question, of your guidance for next year for ’09, how much of that is from land sales gain and gains from under-appreciated assets?

Michael J. Havala

Yes, and actually I’m glad you asked that question, because for 2009 very little is included in our expectations for our FFO for next year. We have about $2 million built into our guidance for 2009 for NAREIT compliant gains. So, in our guidance for 2009, the midpoint of $1.50 a share for NAREIT FFO, in that number is only $2 million of gains.

Operator

Your next question comes from Cedrik Lachance with Green Street Advisors

Cedrik Lachance – Green Street Advisors

Mike, in the past year you had provided the breakdown of your FFO between portfolio operation, JV’s and capital recycling activities. In those documents, you basically had about 75% of your previous FFO as being portfolio operations.

If you look at the second quarter, it would look like the FFO would have been about 300 or 350 run rate. That seemed to me that would have been about the same as a NAREIT type definition. Is there anything that’s changed in terms of the accounting practices that would explain why your current NAREIT FFO is about $1.50?

Michael J. Havala

Good question, Cedrik, let me address that. Under the NAREIT definition of FFO remember that you include all expenses. So, to the extent that we have overhead expenses, as well as capital costs, say interest expense et cetera, for projects that produce profits that are not reported under the NAREIT definition that sort of hampers your FFO under the NAREIT definitions.

So again, let me maybe say it a little better. Under the NAREIT definition of FFO, you'd have all the expenses in there, but you don’t have all revenues because when you have asset sales that are not NAREIT compliant, if you will, those do not get included in that definition. So I think that’s where your question stems from.

Cedrik Lachance – Green Street Advisors

What is the breakdown of assets used? I think historically you had about 25% of your portfolio on a taxable [resubsidiary]. Given the change in mandate and generally in terms of focusing more on being the rent collector, what do you do with those assets? Do you bring them into the REIT umbrella? Do you keep [inaudible] on them? What’s the efficient way of managing that part into your portfolio?

Michael J. Havala

With respect to the assets that are in the taxable REIT subsidiary, we really don’t expect much change there. With the new law that passed, the RIDEA Law, the holding period is now two years versus four years for the Safe Harbor. So we anticipate more assets going into the operating partnership relative to the taxable REIT subsidiary. But the changes we made here really do not impact necessarily the decisions to put something in the taxable REIT subsidiary versus putting it into the operating partnership.

Cedrik Lachance – Green Street Advisors

What's the impact of income of having a big chunk portfolio in there, a subsidiary of taxable entity?

Michael J. Havala

Cedrik your line is breaking up and I’ll do the best I can to answer your question. I think you said what’s the reason or what’s the advantage of having something in a taxable REIT subsidiary.

Cedrik Lachance – Green Street Advisors

The question is how much is it going to cost you ultimately if your significant subsidiary you’re paying taxes on all the open gains there. How much of that is diluted essentially to your cash flow?

Michael J Havala

Are you saying our tax is diluted to our shareholders, our holdings from or our activities in the TRS versus not in the TRS?

Cedrik Lachance – Green Street Advisors

Yes essentially what’s the —

Michael J. Havala

Cedrik —

Cedrik Lachance – Green Street Advisors

What I’m trying to understand is not that you have so much of your assets in TRS, but you're going to be collecting rent. [Inaudible] the cash flow you get was that the [inaudible] on balance sheets in the restructure?

Michael J. Havala

The assets that we have in the taxable REIT subsidiary is, to the extent that they’re collecting rents there, again most of what’s in there of course, is development and value add type of assets. But to the extent that they’re collecting rent, that of course goes into our taxable income. But remember taxable income also factors in your capital costs, so interest expense, as well as your tax depreciation.

So those tend to eliminate your taxable income from rents because most of the properties in the TRS are for value creation and less about rent collection. And Cedrik, if we haven’t answered your question exactly, what I would recommend is that we talk post-call, because we’re having a lot of trouble on the line hearing you. And so we’ve done the best we could in answering your question. But give us a call afterwards and we can make sure that we’ve addressed it 100% perfectly.

Operator

Our next question is from David Taylor with David C. Taylor & Co.

David Taylor – David C. Taylor & Company

I have two questions, one is, not much has been said about the capital recycling program which is historically been sort of a keystone of First Industrial. Is this going on as we look forward?

Michael J. Havala

Yes it is, we still will acquire and develop and sell assets as appropriate. To the extent we have other opportunities we seek. But clearly, both in this environment and what we see going forward, we’ll be doing it at a meaningfully reduced level.

David Taylor – David C. Taylor & Company

Yes for the time being I mean.

Mike J Havala

This is on the balance sheet is what I meant with respect to that. Within our ventures remember, some of our ventures are very much focused on capital recycling type of activities including development and redevelopment and value add opportunities. And so we will continue of course to do that within those joint ventures as that is the mandate of those joint ventures.

David Taylor – David C. Taylor & Company

So you’re going to be generating as much in the way of capital gains as is available. Obviously under the current circumstances that’s not much. But this too shall pass. Second question dividends. The $0.25 quarterly, plus the $0.20 or more extra that you talked about in your, didn’t declare, but talked about in your press release.

Is this specifically to meet REIT tax status or is there some other reason?

Michael J. Havala

Yes the special dividend is connected with capital recycling activities, but it’s very connected also to taxable income.

David Taylor – David C. Taylor & Company

Is the $0.20 or more special necessary for REIT? I mean is that the way you’re looking at it. Or is there some other way you’re looking at it?

Michael J. Havala

We look at it as something that we do need to make; we should pay for REIT status yes.

David Taylor – David C. Taylor & Company

So then going forward looking, I’m assuming you’re not going to raise it $0.25, who knows you probably will some time, but certainly not in the short term. You plan to keep that $0.25 sort of as a floor and are you going to declare these extras on a quarterly basis as you sell properties or is this going to be an annual thing that you will declare at the end of the year?

Michael J. Havala

On the special dividend, it is a special dividend and so that will need to be determined. So I guess that’s all I really have to say about it and that would be something that’s done by our Board of Directors. But we will announce special dividends from time to time as appropriate under the circumstances.

Operator

Our next question is coming from Jeff Laferty from Oscar Gruss & Son

Jeff Laferty – Oscar Gruss & Son

I have two quick questions about the revolving credit line that you have in place. First is the easy one, what is your outstanding availability on that as of the end of the quarter? And then secondly, we’ve noticed that the outstanding balances have continued to creep up over the past year and now they’re pretty much close to $400 million outstanding on that. I’m wondering if you’re having any sort of internal discussions about perhaps terming out some of that exposure just to free up more of your revolver to keep it more in line with working capital uses and whatnot?

Michael J. Havala

Yes as you said our revolver balance on balance sheet was $396 million as of the end of the third quarter. Our goal is to reduce that balance as I mentioned certainly before our debt maturity of $125 million bonds which is June of next year. We want to make sure we have enough capacity in our line to take that out in case the capital markets are very rough between now and then. But yes we do expect to carry a lower line of credit balance going out into the future.

Jeff Laferty – Oscar Gruss & Son

What is the availability right now, is it just the $500 less the outstandings or are there other limitations to that from borrowing base or something?

Michael J. Havala

It’s $500 million less the outstandings.

Operator

Our next question is coming from George Everett, a Private Investor

George Everett – Private Investor

Just a quick question, you didn’t mention anything about the declaration of dividends on your series of J and K preferred stocks. Is that still business as usual on those?

Michael J. Havala

Yes, that dividend typically gets declared in December with our December board meeting for the fourth quarter.

George Everett – Private Investor

There was nothing that cleared on the, for the third quarter yet, or was that?

Michael J. Havala

The third quarter was declared already, yes.

George Everett – Private Investor

The next determination will be in December you say?

Michael J. Havala

That’s typically when we announce the dividends for our preferred stock is in December of the year for the fourth quarter yes.

George Everett – Private Investor

And those are accumulative preferred stocks right?

Michael J. Havala

Yes.

Operator

Our next question is from James Feldman – UBS

John Peterson – UBS

This is John Peterson sitting in for Jamie today. Just a question on the CalSTRS. I just wondered the terms of the new agreement, I know it was extended. I just wondered if there was anything else that was changed along those lines that we should be aware of?

Michael J. Havala

Good question, basically it’s the same agreement as before; just extended out the terms.

John Peterson – UBS

Is there any other different strategy that you guys are looking at when you talk to CalSTRS as far as developing acquisitions?

Michael J. Havala

Well certainly on the development side, much more focused on built to suit versus spec on the acquisition side. With the market where it is today, we’re very focused on deeply discounted value add opportunities.

James Feldman – UBS

This is Jamie, could you give us a little bit of a color on kind of what the fund raising market looks like right now like how returns, expected returns from fund investors changed. What’s their attitude towards the sector right now?

Michael J. Havala

In the fund raising arena, quite honestly, much of it is on hold. With what went on in September and October, much of it is hold at least temporarily until this market sorts itself out. So I think that’s probably the primary element, with respect to pricing because of most of it, there being a lot of inactivity we will see what happens to pricing as we come out the other side of this frozenness in the capital markets.

James Feldman – UBS

I guess how have potential investors return requirements changed as you’re talking to them these days?

Michael J. Havala

Well certainly they’ve gone up and it’s it varies between what type of investments they’re making. For example, is it a core investment? Is it a value add development, opportunistic investment? Certainly the returns requirements have gone up in this market place.

James Feldman – UBS

And where would you put each of those?

Michael J. Havala

I don’t want to quote you a specific number on each of those because generally there’s a range and a range among different investors. So I guess I don’t want to go into the detail of it, but clearly the returns have gone up.

Operator

Our next question is from Stephanie Krewson from Montgomery Scott.

Stephanie Krewson – Montgomery Scott

Just to clarify further and I don’t mean to beat this to death, but regarding your capital recycling activities, I know a lot of people have asked a lot about this. Let me just get further clarification, could you just answer yes or no, are you basically transitioning your capital recycling activity from the REIT level over the next several years to be primarily at the joint venture level?

Michael J. Havala

Yes good question Stephanie. Yes, the capital recycling activity is more weighted towards our joint ventures than a balance sheet as compared to the past, yes that’s right.

Stephanie Krewson – Montgomery Scott

Two more quick questions, this one I don’t mean to be impolite, but this is a question for Ed Tyler and the board, which is I’ve covered your company since 1997 so I’ve been through quite a lot with you all. And Brennan was a co-founder of your company and was a very strong operator. That being said, he was elevated to CEO when Mike Tomasz stepped down and because he was an insider he was never given full credit by the street and literally started with a strike against him.

Why would the board even consider elevating something internally, despite the fact that I know you have a lot of talented folks there? Can they commit to a bias towards recruiting some new blood from the outside?

W. Edwin Tyler

Stephanie, I’ll try to answer your question. We formed a search committee of the board. It’s a strong committee of five board members. And we are looking at external people, and we will probably engage a search firm. We have talked to quite a few of them already. It is a high priority of mine and of course the board. The way I believe these searches, or the way this process should go, is you look externally to find the best candidate or candidates that you can find. And use that person him or her and measure against internal candidates.

And then the board will make the appropriate decision for the best possible candidate for the future of the company. For me to say anything more than that would be a mistake at this time because the process is just starting. But I will say it’s something that is now my highest priority.

Stephanie Krewson – Montgomery Scott

Thank you for that clarification and I’ll end with an easy question for Mike Havala. Over what time period do you expect to be able to buy back shares according to the existing $60 million capacity of your authorization? Because I can’t imagine that you can get better current returns anywhere else other than buying your own shares at this point?

Michael J. Havala

Stephanie as you point out we do have capacity under our prior authorization on the stock buy- back. But of course that would probably not be very appropriate for us to comment on that at this point.

Stephanie Krewson – Montgomery Scott

But for modeling purposes though, I understand that there are liquidity constraints as to how many shares you can buy back. Can you give us any sort of, should we just amortize it over the next 12 months or something?

Michael J. Havala

Again Stephanie, it would not be appropriate for us to comment on that.

Operator

Our next question is a follow-up from Cedric Lechance – Green Street Advisory.

Cedric Lechance – Green Street Advisory

Mike, I’d like to ask where you stand in regards to your covenants on your unsecured debt, in terms of leverage covenants and cash flow covenant, what are the [inaudible] and base debt-to-capital ratios in those covenants; where are you at?

Michael J. Havala

With respect to our covenants on our bonds and our line of credit, we’ve been in compliance with those and we anticipate that we will going in the future. Based on our guidance we certainly would be in compliance with those covenants. So I’m not going to go through the litany of covenants that there are, but we’d be happy to go through this more in detail and not take up the time of the call, Cedric. But certainly again, we have met our covenants in the past and expect to in the future.

Cedric Lechance – Green Street Advisory

Given that this is probably the most important thing though nowadays given that debt is basically investors care about. In regard to a leverage covenant, is it 60% debt and based on the calculations and those ventures what is your average ratio?

Michael J. Havala

The leverage in our covenants is 60%. That is the covenant max and we are under that threshold.

Cedric Lechance – Green Street Advisory

[inaudible] where are you at basically?

Michael J. Havala

We’re underneath that covenant.

Cedric Lechance – Green Street Advisory

One question in regards to JVs, when you extended the JVs to 2018, were there any changes to the fee agreements with CalSTRS?

Michael J. Havala

No there were not.

Operator

Our final question is coming from Matthew Pitkin – Private Investor

Matthew Pitkin – Private Investor

I have a question regarding the focus on build-to-suits. And are you, the leases with these tenants for whom you’re doing build to suites, are you doing those on a return on costs and if so what is that return on cost?

Johannson L. Yap

Our focus is to leverage off our existing land holdings based on strategy first. On, based on the holdings we have on balance sheet and on joint ventures and when we do our build to suits, our goal is to try to get the highest return for our balance sheet and our joint venture partners.

And in today's market, capital is key. And in today’s market having very well positioned land is the key. So we will use that capital to our advantage and secondarily; so basically we will try to get as much as we can. And secondarily, of course historically we’ve been targeting a, we’ve been able to deliver a 15% return on costs on average.

Mike Pitkin – Private Investor

One final question is that return on cost based on, I’m in the business as well and we’re starting to find costs of raw materials coming down. So with this return on cost based upon the previous pro-forma amount of raw materials or would that be based upon the final cost of going out the door?

Johannson L. Yap

Good question, the nice thing about builders is. Since you’re in the business, is that it is a pretty short cycle, six to eight months on construction cycle. So you can always readjust your pricing to meet market demand. So we always go out there and readjust our pricing based on basically the current construction prices. So that’s what we do. Does that answer your question?

Operator

At this time I would like to turn the call over for any closing comments.

Michael J. Havala

Thank you everyone for participating in our call today, we hope to see many of you at NAREIT here again in November and once again thanks for being on our call.

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Source: First Industrial Realty Trust Q3 2008 Earnings Call Transcript
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