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First Industrial Realty Trust, Inc. (FR)

JP Morgan Small/ Mid Cap Conference

December 11, 2013 10:30 AM ET

Executives

Art Harmon - IR

Scott Musil - CFO

Analysts

Mike Muller - JP Morgan

Mike Muller - JP Morgan

Good morning everybody and everybody online as well. I am Mike Muller, part of the equity research group for the REIT space at JP Morgan. I am thrilled that we’re hosting the panel here today, with First Industrial, obviously a REIT, that focuses non-industrial product throughout the U.S. With me today I have two people from management. To my immediate left is Art Harmon who runs investor relations and at the podium is Scott Musil, their Chief Financial Officer, and he has been the CFO of the company since 2008, previously held titles of Chief Accounting Officer, Treasurer. And prior to joining FR he was with Arthur Andersen for quite some time. So I am going to turn it over to Scott and we will open it up for Q&A a little later.

Scott Musil

Thank you Mike, I appreciate it. Thank you for calling in and live in the webcast. We appreciate your interest. On page 2, before I continue, I will refer to our Safe Harbor Statement. So please read that when you have a chance. I will give you a quick overview of the company, a couple of quick bullet points; our ticker symbol is FR, we are traded on the New York stock exchange. We’re an owner, operator and developer of real estate across the U.S. We got an equity market cap of $2 billion, a total market cap of $3.4 billion. And our current dividend yield is 2%. Please keep in mind we have a 55% AFFO payout ratio which I will get into a little bit later.

Flipping on to the next page. We have a broad platform in presence. We’ve got about 62 million square feet across the U.S., in all the major markets. We’ve got another 2.3 million square feet in some development center in process, plus an acquisition that we made in the second quarter in the Chicago market. The entire industrial stock is about 25 billion square feet and we look at our percentage compared to that and we think there is definitely opportunity for growth based upon the size and the market.

Our major markets as you can see are southern California with a 9.7% of rental income. Our other large markets are going to be central and eastern Pennsylvania which are main distribution hubs for the East Coast. Minneapolis, Chicago and Dallas, Fort Worth are some of our other large markets as well. So besides being diversified by geography we are also diversified by tenant. Our large tenant is about 3% of rental income and our top 20 tenants represent about 21% of rental income.

Flipping on to the next page. I am going to go through where we have been since the end of ’08 and as you can recall that was obviously a difficult time for most companies and especially real estate companies. So what we have done -- achievements in 2009 and 2010, first and foremost was to fix the balance sheet. So we addressed liquidities and maturities. We had a big wall of debt coming due in the next several years. We didn’t have a lot of liquidity, as far as cash on hand it was concerned on the line of credit availability. And I will walk through later the progress we’ve made there. We redefined our strategy as well. Prior to 2009, besides being an owner operator and developer of real estate, we also had a very large joint venture platform and we were very active buyers and sellers of real estate.

So the first thing that Bruce Duncan, our new CEO did is, he redefined the strategy. He took out the joint venture business, wound that down. We currently have one joint venture in process. Our investment in it is very de minimus and might be a million dollars. And we also discontinued the transactional part of the business. So that took volatility out of our strategy. The other thing that we’re able to do because we changed our strategy as we rationalized our G&A. We had a lot of G&A reductions during that time. Our G&A for this year is going to be around $22 million range. If you look back for the full year 2008 it was probably around the mid 80s. And because we are able to do this we set the stage for portfolio refinement which I will go over in a little bit.

Flipping to the next slide, 2011 to date, what we’ve been doing is driving occupancy. We’ve increased occupancy 620 basis points since the end of 2010, and occupancy is a large driver of our cash flow. Again we strengthened the balance sheets. We ended up doing some equity offerings and some property sales and took out some indebtedness. We implemented our program, addition by subtraction, so at the end of 2010 what we did is we had all our regions look at all the properties, and we came up with a portfolio. Our bottom 10% of the portfolio that we wanted to sell off, so we started that program during that point in time.

And we also started up our acquisition/development program in that period as well. And then lastly in this year we reinitiated our common dividend. It’s that $0.34 a share per year, and again that represents about a 55% payout ratio and if we compared ourselves to our peers or there REITs their payout ratios are a lot higher. And we think it is important to have that conservative payout ratio for that conserves cash for growth, and I will go through some of our growth initiatives later. And also it allows us to grow the dividend on a go-forward basis. And I will go through some math with you in a little bit and what we think the opportunity is to grow cash flow.

Couple of statistics relating to the portfolio. Occupancy as I mentioned is the most important statistic because that determines most of your cash flow. End of 2009 we ended up at about 82% end of third quarter of 2013 we’re at 91.2% our goal for the end of the year is to be at 92%. What we did in our Investor Day of November of this year is we’d laid out a new goal by the end of 2015 our plan is to be plus or minus 95% occupied.

As you can see cash rental rates have been challenged the last several years. Basically what’s been happening, our rents leases that were signed pre-2009 rolled in ’09, ’10, ’11, and ’12, as a result the rates in those current markets were down or less than what the rates were in the old markets. But as you can see that gap is been closing and we’re in about negative 2.8% for the first three quarters of 2013. As far as 2014 is concerned we’re running through budgets now we’re not giving not guidance, but one statistic that we look at is the percentage of leases expiring in 2014 that were signed post 2008, and that percentage is about 85%. So again in 2014 about 85% of the leases maturing in that year were signed post 2008. Same store NOI we’ve seen some traction in that close to breakeven in 2011, 2012 it’s been positive and that’s been driven mostly by occupancy gains in the portfolio.

Next is on the capital side. As I mentioned before we had a large wall of debts to maturities, large maturities at the end of 2008. So if you look the first bar here we have about $2.3 billion of net debt and preferred stock to EBITDA, that represents a ratio of about 11.1 times. And we’ve done is we’ve reduced that to about 1.4 billion and our net debt and preferred EBITDA is about 6.7 times. And again we did that through strategic equity offerings. We didn’t do one large equity offering in 2009. We did a couple of equity. We did equity offerings periodically when we like where the stock price was at. And again we use net sales proceeds as well to reduce debt leverage.

We had earlier in the year established a goal of net debt to preferred EBITDA of 6.5 times to 7.5 times at the end of the third quarter we were inside the midpoint at 6.7 times. So at Investor Day this year in November, we put out a new goal of being 6 times to 7 times. So if you see the traction that we’ve made here we’ve also made some traction with the rating agencies as well, prior to the downturn we were an investment grade rated company. In the second quarter this year we’ve made some tractions with the rating agencies. We like where our metrics are going. Our fixed charge coverage is strong as well if you look at standalone third quarter of this year our fixed charge coverage is about 2.2 times.

So as we stand today S&P has us about as one rating away from investment grade and Moody’s and Fitch has us two ratings away from investment grade. And our goal is to be investment grade rated by the end of 2014 and we think we have the current metrics and based upon the improvement of the portfolio the future metrics to earn that goal.

One of the other items I mentioned before is upgrading the portfolio. It’s adding to the top 10% and selling the bottom 10%. So you can see here what we’ve outlined or the investments that we’ve made since 2010 and this includes acquisitions and developments and process. It’s been about 337 million, about a 12% increase to our book value assets in third quarter of 2010. Since the fourth quarter of 2010, that’s when we kicked off the sales of our bottom 10% of the portfolio. We’ve sold $249 million of assets for about a 9% decrease. So net-net we’ve reduced the portfolio or increased the quality I should say by about 21% via these acquisitions and developments that would fit in our top 10% of our quality and by selling of the bottom 10%.

We also have favorable fundamentals. This is a slide that shows net absorption in the industrial real-estate market across the U.S. And as you can see here in 2009, we don’t like to see a bar like that, that obviously means a lot of tenants were leaving, reducing their space. As you can see in ’11, ’12 and ’13, there was a lot of net absorption in the market. And these yellow bars represent development completions. So what that means is that as that trend continues occupancy will continue to be sopped up. And if you look at the forecast here by CBRE, it looks like absorption continues to be positive in ’14, ’15, ’16 and ’17, and it will exceed the estimated development completions in that period.

So what are we going to do on a go forward basis? This is our strategy boxes related to how we’re going to grow cash flow. And the first thing is increasing occupancy to plus-minus 95% year end 2015, second goal is to grow rents not only rents related to expiring leases but I’m going to walk through a little bit later. We have what we call rental rate bumps embedded in the lease and that’s going to represent a fair share of cash flow growth over the next several years.

Normalizing TIs and leasing commissions and CapEx; we’re at about $52 million of capital expenditures that includes what we need to do to repair roofs HVAC and parking lots but it also includes TI’s and leasing commissions to lease the space up. And we think we have an opportunity over the next several years to reduce those costs which will add to our bottom line.

And then lastly as customer service focus and this is very important in any unitary but in industrial real estate it is as well to the extent that you could retain a tenant and it helps to be able to retain a tenant if you have very good customer service, that tenant will stay. If that tenant doesn’t stay what will happen is you’ll have downtime in the space it could be nine months to 12 months of cash flow compared the renewal. And also the costs to re-tenant that space were a lot higher. I would say it’s about five times as higher to re-tenant a new lease as opposed to renewing a lease. It’s roughly $1 of square foot compared to $5 a square foot.

On the balance sheet side, again conservative and a flexible balance sheet. We’re going to keep having our meetings with the rating agencies and push to get our investment grade rating by the end of 2014 that’s our goal. And we think by doing this we’re also we’re going to have an opportunity to reduce the amount of our financing costs on our balance sheet which will flow through our adjusted funds from operations. And then lastly on portfolio management we continue to do this. We’re going to do select the acquisitions and developments in over the next couple of years we’re also going to continue to sell off the bottom 10% of the portfolio.

This slide here shows the potential opportunity that we have from now until the end of 2017 for cash flow growth; I’ll go over these quickly in summary. The first one and then I’ll go through them in detail; first represents the balance sheet of $4 million to $10 million, that represents refinancing higher cost stat and I’ll go through that math in a little bit; the next item is small tenant opportunity. Leasing the small tenants is going to be part of how we get to 95% occupancy by the end of ’15 then we have rental rate bumps and then reducing TI’s leasing commissions and other CapEx.

These other three items, the east, central and west region, represent our top 10 key bulk opportunities in that market and also we’ve got several developments that are under process in which we spent the capital and we’ve got a couple of acquisitions in which we have got in full year’s cash flow there, so that should add to the bottom line in the future as well. So when you look at the math here, we can grow AFFO $0.46 to $0.60 a share over the next several years to the end of 2017 on a base currently in 2013 of $0.65 a share that represents a range of growth of 70% to 90% over that period of time.

The next slide has to do with the balance sheet and how we get to the growth from that. So as you can see we’ve got about $543 million of debt coming due over the next several years, average interest rate of 6.32%. So what we assumed is what would the savings be on a go forward basis if we’re able to refinance that debt at 5.5% and 4.5%. The math comes up to about $4 million to $10 million, which represents about $0.04 to $0.09 a share. A key in order -- to key to getting to this goal is getting our investment grade rating back. Right now I would say where we’re rated compared to investment grade our spread is about 75 basis points to a 100 basis points higher than investment grade. So that’s going to be one important part to getting to that goal.

The next sheet shows the $29 million to $36 million broken out between various buckets; $8 million to $9 million for small tenant leasing, and again I’ll walk through the details in a bit; rental rate bumps of 14 million to 19 million; a reduction in capital expenditures is 7 million to 8 million, which is a total of about $29 million to $36 million or about $0.25 to $0.31 a share.

The next slide shows how we’re going to get there from a small tenant point of view; so if you look on the chart here, our regional warehouse, light industrial and our R&D flex, this is where primarily our small tenants reside. If the current occupancies are 92%, 88% and 83.3%, getting these occupancies up to 96% for regional warehouse, 92% and 92% for light industrial and R&D flex, that would generate about $8.7 million of additional cash flow and that gets us roughly to the 95% range that we have. We admit there is work to be done here but we think this is a reachable goal. Rental rate bumps; this is a fairly sizeable piece here. For those of you not familiar with the real-estate market, most leases have escalators or rental rate bumps built-in. So if you sign a lease say at $1 per square foot, there is sometimes 2% to 3% increases on an annual basis in those leases.

So what we did is we gave you a couple of data points for you to get comfortable with our math. First one here is at 50 -- this is on the top right of the slide, 50% all of our leases in 2014 have average annual rental rate bumps of 4.2%. The other data point we want to give is 71% of the leases signed these are long term leases in 2013 contain bumps of 2.7%. What we also did is we laid out the cash flow relating to leases in place as of the third quarter of 2013. And that you could see we got rent rate increases of about $5 million, $4 million, 3.3 and $2 million; the reason that those go down as leases expire, were not replenishing those in that math. So what we said is we took our NOI in the third quarter of $230 million, this was annualized, and we said, what if we grow this on a compounded basis, 1.5% to 2%. That gets you about $244 million to $249 million of additional cash flow by the end of 2017 which is about $14 million to $19 million of cash flow growth or $0.12 to $0.17 per share.

The next item is the TI leasing commission and CapEx opportunity. The simple math here is that in 2013, we’re leasing our portfolio up about 200 basis points. We’re going from roughly 90% and 92%. The cost of doing that’s about $7 million. Once we reach stabilization of the portfolio which is plus or minus 95% we are not going to have to do that additional new leasing and remember that new leasing is very expensive. In 2013 it’s about $5.50 to $6 a square foot. So once we hit stabilization we are not going to have to incur those additional cost, and that lower CapEx will flow right to the bottomline.

We don’t have anything in our estimate that’s relating to increases in rents and new and renewal leasing. That’s a very difficult metric to forecast. But what we did is we provided some research from CBRE and you can look at the last peak was 2008, the trough was 2010 - 2011. And as you look we continued to escalate up. And right around 2016 we should hit that peak. And then after that they feel that we should exceed the peak from 2008. So we think, based upon this slide, if it turns to be true, we think there is going to be some incremental cash flow benefits to the company on a go forward basis.

The next piece of this has to do with our ten top key opportunities as well as some additional lease up we have for some developments in process and some acquisitions. The east regions contributing $6 million to $7 million, the central 5 million to 6 million, and the west 8.5 million to 9.5 million for a total of 19.5 million to 22.5 million and I will walk through some of the math here.

In each of the east, central and west, there is ten top key bulk opportunities which I am listing here. These add up to about 1.4 million square feet. It’s about 220 basis points of occupancy and about $8.3 million of cash flow. And we think these spaces are quality spaces, are well located spaces. And if we feel that these are definitely part of the plan they get to 95%. And due to time constraints today I am not going to walk through them, but please feel free to look on the website for investor day presentation in November of this year. We’ve got a detailed slide on each of these sites, each of these properties for you to make up your mind in the leaseability of them.

The additional opportunities in the east, the first one here is our first logistic center in I-83. This is the development that we’re going to finish in the fourth quarter, this quarter this year. There is no cash flow embedded in 2013. But all the cost had been spent. We give ourselves a year time to lease it up after completion. So when we hit our pro forma of leasing, we feel this is going to generate an extra $2.9 million of cash flow. The central region has a couple of deals on it. First and foremost is the I-94 distribution center. This was an acquisition that we made in the fourth quarter this year, fully leased asset, well located, high quality. It’s about $1.9 million of incremental cash flow. We’re putting it on the list just because we’ve only gotten about a month and a half or two months of cash flow.

The other couple of items here is the Rock Creek acquisition. This was 500,000 square feet vacant building that we acquired in the second quarter, again the capital was embedded within our 2013 numbers. We don’t have cash flow. So that will be another million for NOI pickup there. And then we have an expansion that we are working on now with Rust-Oleum. It’s about 250,000 square feet. And that will be another $600,000 of cash flow.

And we have listed a couple of other opportunities. We don’t give ourselves credit for them because none of the capital cost related to the development of those assets earned better in our 2013 number. But we do definitely have some growth opportunities with this property and Houston First Northwest Commerce Center for 350,000 feet. This is a two building development in Dallas. First Pinnacle Logistic Center, that market is showing great positive net absorption. And then we have some land in Asheville, about 1.5 million square feet which will be more built to suite related.

Going on to the west we got a couple of developments in process. First is our First Bandini Logistics Center for 489,000 square feet. We finished that in the third quarter. The incremental cash flow was about $3.5 million. We have our First 36 Logistic Center. This is in the east Inland Empire, 555,000 square feet. We just started this development in the third quarter. When it’s completed and leased up it will be another $2.2 million and then we have another small development in the South Bay market of Los Angeles, First Figueroa Logistics Center for 43,000 square feet for another $300,000 so for a total $6 million of incremental cash flow. We also have further development opportunities here. We have our First Nandina Logistics Center land. We just bought that earlier this year this could house about 1.37 million square foot development, are two building roughly half the size that’s in the Inland Empire as well, well located land. We have got a potential expansion and another property that we owned in the Inland Empire and then we have some land in the Northern California. I wouldn’t expect doing anything on that for the next several years and it’s probably going to be more build-to-suit related.

To give you an idea some of the quality assets that we have been building, this is our First Bandini Logistics Center here as you can see it’s straight up the 7-10, it’s about 20 minutes North of the Ports right here very well located, class A real estate on an infield location. If you want to tour this market, there aren’t many building that look like this in the market, estimated investment $54 million and our estimated GAAP yield is 6.5%. Again, we completed that in the third quarter we have got activity on the space, nothing at this point of time sign, but again we gave ourselves a year to lease it up.

Next is our First Logistics Center at I-83, 708,000 square foot development total dollar invested about $34 million, estimated gap yield about 8.4%. So to summarize, we feel we have a great opportunity for investors, we feel we can go grow cash flow $0.46 to $0.60 a share compare to base of $0.65 in 2013 that represents about 70% to 90% growth rate over the next four years. Also if you compare ourselves to some of our comps specifically DCT and Eastgroup, we feel we trade at a wide discount of them and we don’t think we should, so if you look at the implied cap rate, implied cap rate for First Industrial is about 6.7%, compare to DCT at 5.5 and Eastgroup at 5.3%. We don’t think there should be such a significant gap in cap rates compare to our peers.

And with that I’ll open up to questions. Thanks you.

Question-and-Answer Session

Mike Muller - JP Morgan

Obviously if there are any questions out here, please feel free to chime in and ask anything, kick it off and just. With one question little bit bigger picture here. When we talked to folks particularly generalist interest rates are front in center on everybody’s mind, I was wondering can you talk a little bit about how you think about interest rates from a business standpoint from an investment standpoint and what’s changed with the business since May?

Scott Musil

Well, I will tackle that question from two points of view. In general, when interest rates rise that usually means there is greater GDP growth, we think that’s positive for our business that means occupancies increase that means we’re going to have more friction when it comes to rental rates we’re going to be able to negotiate higher rates. For some reason rate rise and you don’t have that GDP growth obviously that’s not as good for the operation in the fundamentals of the business.

On the investment side of the business since the end of May when the Fed made its announcement about discontinuing tapering, I would say when we looked at our sales program what we’ve done in second quarter and third quarter we haven’t seen any impact on pricing. The increase rate hasn’t increased what we think we can get for real estate. Now intuitively though, you think there is got to be an impact on a long term basis so my guess on a long term basis with the increase in interest rates it will impact the pricing of real estate but as of now we haven’t seen it.

Mike Muller - JP Morgan

You were talking about CapEx and I think you’ve said the numbers about $52 million you’re running at now.

Scott Musil

Yes.

Mike Muller - JP Morgan

What do you see as a more normalized level?

Scott Musil

Well, I would say if you looked at the slides we went through before, we think we could once the portfolio is stabilized at plus or minus 95% occupancy. We think we should be able to shave about $7 million after of that so we think our more normalized CapEx is going to be about $45 million per year and again all that’s assuming is that the portfolio stabilized and we don’t have to spend those additional dollars. What we don’t have included in here and this is question mark is the market is tightened up; hopefully we won’t have to giveaway as much in TI concessions as we are now.

Mike Muller - JP Morgan

And that doesn’t reflect any future changes we make to the portfolio through addition and subtraction changing the mix of the building that owned? And sticking with mix a little bit and thinking about investment add on and dispositions, I think there is slide that said you sold about 250 million since 2010, you added about 339.

Scott Musil

Correct.

Mike Muller - JP Morgan

Can you talk a little bit about what’s in the 339, is that include debt investments, debt buybacks or is that just real estate?

Scott Musil

The 330 number is just real estate and what we’ve been focusing on most is more both warehouse investments. We did a couple of investments in 2011 and 2012 and investment in central Pennsylvania and Houston fully leased asset both distribution assets. We have finished to 692,000 square foot development in the east portion of the Inland Empire that leased up at the end of 2012 and it includes the developments that we have in progress currently and the two acquisitions that we did this year. And from a sales point of view again it includes the bottom line, which say 10% of the portfolio and as we see in go forward basis what our sales are going to be my guess it’s probably going to be $75 million to $100 million this year and next year. As far as future years are concerned, we always say assets management is continual process so I would assume that 3 to 4 years down the road we’re also going to see property sales as well. I just don’t what the number is at this point in time.

Mike Muller - JP Morgan

I mean do you think you’re still - should we think of post 2015 is the expectation that we you think you’ll net deployer capital or is the plan to just kind of match fund of recycle.

Scott Musil

We would love to be the net deployer or have more investments compare to our sales this year. The issue is that the investment markets are very-very tight right now it’s tough sourcing acquisitions that First Bandini Logistics Center that I just discussed before 489,000 square feet infield LA Vernon Commerce sub-market, we’re building that for 6.5ish percent yield. If we would have buy that similar piece of real estate leased up would be some 5%, so investments have been very-very tough in market. We’ve sourced a couple of investments but we have been more focused on developments because we think risk return is more in favor for development at this point of time.

Another example would be our First Inland Logistics Center at I-83 that was the 708,000 square foot development we have in central Pennsylvania. Once it’s leased up our pro forma assumption is about 8.4%. If would have buy that asset leased in that market, it would be 6%. So lately we’ve been focusing more on developments because the spread been 150 basis point more compare to what we can buy but Mike we love to be able buy more than what we’re selling, but it’s just been very tough market to source deals at reasonable rates.

Mike Muller - JP Morgan

Got it and you’ve mentioned about 150 basis points spread on that deal, if you’re thinking about the economics of buying versus developing, is that spread helped constant if we think about pre-downturn is that roughly what that spread has been and then can you talk a little bit about - it seems like almost every quarter every other quarter there is an announcement of we’ve bought a parcel of land, we’re starting a new development, how tough is to define me is there descent shadow pipeline where you see this kind of continuing traction holding on?

Scott Musil

Yes, I think land has been getting more expensive. The land we bought for a couple of developments was bought in the second or third quarter of 2012, I would say land prices have been getting more expensive, returns have been going down, but what we’ve been successful to do with our team and platform our Southern California team, what we’re looking for our assemblages of land. One example of that is in Southern California in the Inland Empire east market we’ve got a pocket of one completed development there that’s least one being started.

This piece of land that would house a 1.37 million square foot one building or two buildings half that size, we worked with 10 or 11 sellers and we’re able to buy that at a cheaper price compare to just buying that land. So what we’ve been trying to focus on lately on land acquisition is doing these assemblages but they’re very-very difficult, trying to coordinate 10 or 11 people enclosing on the same date it’s very difficult to juggle.

Mike Muller - JP Morgan

Got it. We’re thinking about the development pipeline, I mean, how big can that be as CFO when you think about risk and you think about funding, how big relative to the overall entity, can development be number one and realistically how big do you think that will be at any given time? Do you think if you have a couple of hundred million in process that’s about as big as it gets?

Scott Musil

What we’ve done as we’ve established a cap of $250 million of spec development in process, to the extent that development is leased up it gets taken out of that numbers, so we call a revolving cap I guess the lack of better term. Right now with our developments in process we’ve got about $130 million of that 250, we’re also including in there vacant acquisitions again we made a $20 million acquisition in the Chicago market in the second quarter that gets to about $150 million to 250.

We went through the math on what the impact would be to our debt and preferred EBITDA by going up to 250 obviously our debt and preferred EBITDA would go up that would on a temporary basis still in a very reasonable range. And once the properties are leased up it would wrench it down to the point we’re at now. As far as what the future holds it, it really just depends on some of these land opportunities we have on our balance sheet and when we think we’re going to start those developments.

Mike Muller - JP Morgan

I mean switching gears for a little bit. Thinking about assets sales and the 250 have done so, if I think about all the REITs across the property types, it seems like there has been a trend even, no offence anybody in the middle of the country, it’s kind of sellout of product in the middle of the country and move to the coast. I mean is that something if we look at what you have sold, it kind of fit that bill and you’ve been doing that and then more on a go forward basis I mean where the sales coming from?

Scott Musil

The sales are really a mix between all of our markets what -- the portfolio that we established back in the fourth quarter of 2010 represented buildings practically almost everyone of our markets, so it’s really been mix of sales between all different geographies of the company. As far as where we’re redeploying it lot of the developments have been on the coasts. We’ve got several developments going on in Southern California. We’ve got two developments we think we’re going to start next year; one in Houston, one in Dallas. Central Pennsylvania it’s we call sort of the ports to the East Coast it’s the distribution hub for that. But we also have done some acquisitions on the Chicago market which we like really well also. Again we did a 500,000 square foot acquisition in I-55, I-80 corridor and we did another acquisition in Southeast Wisconsin which we would call part of the Chicago market in the fourth quarter.

Mike Muller - JP Morgan

Thinking about internal growth a little bit, you talk about tenant demand. I mean you mentioned occupancies up I think about 600 basis points since the peak. Where we now at roughly 91% and talk about the pace of tenant demand versus expectations? Is it as strong you thought it would be at the beginning of the year was there any kind of back-off because the tapering government shutdown. I mean just what’s happening on the ground today?

Scott Musil

There is always when something happen we experienced just a couple of years ago with the government shutdown in their budget talk. So is always sometimes a little hesitancy in the market for folks to make decisions but it’s the short term so you might have a quarter of it but then in the next quarter you definitely pick up the demand. So I would say when we’ve experienced it, it hasn’t been a year-long type of the deal, it’s been more of a quarter and then it picks up right after when people get more comfortable with what’s going on. But I would say our strong growth markets are definitely Southern California and I give an example the England Empire where last year there was 12 million square feet of net absorption in that market. This year it’s roughly year-to-date third quarter about 7 million square feet so you’re going to get close to that love that market.

We look at our Houston market average market occupancy is little over 95%, we’re at 99% as a result we’ve got that one development first northwest logistics center that we think we’re going to start middle of next year, and our Dallas market’s also been very lately it’s been doing well. The absorption has been quite explosive in that market the first three quarters of the year. And as a result we think we’re going to start our First Pinnacle Logistics Center sometime in the middle of next year. So I would say that those are definitely three markets that are exhibiting strong growth.

Mike Muller - JP Morgan

And you said on development it takes about your pro forma of about 18 months I think. Is it about 18 months to stabilize, what’s been the reality of how that’s working out now?

Scott Musil

Yes, I mean look it’s generally nine months to complete the development of a industrial building that’s start of shoveling the ground, that doesn’t include the entitlement time. And then we give ourselves about 12 months to lease it up. We’ve got one development that was finished back in 2011 and I think that was about nine or 10 months to lease up after completion that was in our England Empire development for 692,000 feet. But another example we finish the project called our first Chino Logistics Center. This is in the western most west portion of the England Empire about 300,000 square feet. We lease that up in the second quarter, the day that we literally hammered in the last snail. So that’s an instance where we’re able to beat the pro forma. But in general we gave ourselves 12 months to lease these developments up.

Mike Muller - JP Morgan

And it’s been coming in a little bit better than that, so what’s that?

Scott Musil

Yes, I would say for the two developments that we have finished it has one of them again was 10 months compared to 12 and one was immediate. And then immediate I wouldn’t expect that at over other developments, we were just very fortunate to hit the market at the right time with our building.

Mike Muller - JP Morgan

Okay. And no other questions I’ve got just two more quick ones here, one on the balance sheet side. You’ve been very active going through in just buying debt back proactively. I mean if we -- I know you put up the accretion coming from debt refis going forward. I mean what is that coming from, is that natural explorations and do you see that -- do you see yourselves being more proactive as you have been in the past few years?

Scott Musil

Right, that include -- basically that includes unsecured note maturities that are being paid off in maturity. It includes the mortgage debt that’s coming due to the extent that we can prepay that early that’s included in that slide as well. It doesn’t include any repurchase of unsecured bonds in the open market. So it’s basically the maturities of our unsecured notes over that period and our maturities of our secure debt and there is a couple of instances we’re able to prepay early which we have assumed in that slide.

Mike Muller - JP Morgan

Got it. And last question here I mean you obviously talked to a lot of investors you went to the navy (Ph) conference few weeks ago. What do you think people get about the story today and what do you think are there certain aspects of it that you still think people are missing?

Scott Musil

Yes, I think it’s starting to change but we have work to do and it’s perception of asset quality. And I think that had to do with the strategy that we had prior to 2009. As I shown in the chart with the investments that we’ve made since 2010 and the sale since the fourth quarter of 2010, we really have changed the portfolio. But we don’t think we should trade at such significant discounts to our peers being DCT and East Group, but it’s our job to prove the market wrong on that. And as we continue to invest developing these great properties that I’ve shown before sell off the bottom 10%. And again get our occupancy to plus or minus 95% stabilization we think that will take the excuse away from the investment market to describe such a large discount to our company.

Mike Muller - JP Morgan

Great, thank you. I want to thank everybody for coming, everybody for listening online and certain thank management.

Scott Musil

Thank you very much.

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