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Executives

Art Harmon – Director, IR

Bruce Duncan – President and CEO

Scott Musil – Acting CFO

Chris Schneider – SVP, Operations and Chief Information Officer

Jojo Yap – Chief Investment Officer

Analysts

Ki Bin Kim – Macquarie

Paul Adornato – BMO

Steven Frankel – Green Street Advisors

Dan Donlan – Janney Montgomery Scott

Stewart Hanley [ph]

Ben Mackovjak – Rivanna Capital

Mark Lutenski – BMO

Presentation

First Industrial Realty Trust Inc. (FR) Q4 2009 Earnings Call Transcript February 24, 2010 11:00 AM ET

Operator

Good morning. My name is Kristy and I will be your conference operator today. At this time, I would like to welcome everyone to the First Industrial full-year 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Art Harmon, Director of Investor Relations.

Art Harmon

Thank you, Kristy. Hello, everyone and welcome to our call. Before we discuss our fourth quarter and full year 2009 results, let me remind everyone that the speakers on today's call will make various remarks regarding future expectations, plans and prospects for First Industrial such as those related to our liquidity, management of our debt maturities, portfolio performance and overall capital deployment, our plan dispositions, our development and joint venture activities, continued compliance with our financial covenants and expected earnings.

These remarks constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. First Industrial assumes no obligation to update or supplement these forward-looking statements. Such forward-looking statements involve important factors that 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, 2008, filed with the SEC and subsequent reports on 10-Q. Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in our supplemental report which is available at firstindustrial.com under the Investor Relations tab.

Today, we will begin our call with remarks by Bruce Duncan, our President and CEO, followed by a review of our results, our financial position and our initial 2010 guidance by Scott Musil, our Acting Chief Financial Officer, after which, we will be pleased to open it up for your questions.

The other members of senior management in attendance today are Jojo Yap, our Chief Investment Officer, Chris Schneider, Senior Vice President of Operations and Bob Walter, Senior Vice President of Capital Markets. Now, let me turn the call over to Bruce.

Bruce Duncan

Thanks, Art. Thank you all very much for joining us today on our call. Today, I would like to recap 2009 and talk about our major accomplishments for the year. I will also discuss our operations including our outlook for 2010, in terms of our portfolio and temp demands in the marketplace. As you know, I joined First Industrial a little over a year ago. At that time, it was clear to me that in the face of the challenging economic capital markets and industry conditions that the back-to-basics strategy we formulated was the right one.

So in 2009, we were focused entirely on capital management, expense management and portfolio management. And our entire First Industrial team contributed to some significant achievements. I thank them for their hard work, contributions and commitment to the company and our strategy. We clearly have some more work to do, which we will also talk about but I am confident we are moving forward along the right path.

With capital as the foundation of the company, it was critical that 2009 was dedicated to strengthening that foundation. Following our successful refinancing of our June unsecured debt maturities through the use of secured financing, we moved forward with our plans to use our diverse, largely unsecured asset base to raise additional proceeds via secured debt and for the year raised a total of $340 million.

We also successfully completed select asset sales of more than $100 million, exceeding our goal. On the strength of our progress with our plans, we were able to access the equity markets, raising a total of $84 million between our October equity offering and direct purchase feature of our dividend reinvestment program.

And our capital position also benefited from our $40 million tax refund. With the proceeds we generated through open market debt repurchases and our recently completed tender offer and including our cash on hand net of working capital, as of today we have successfully reduced our leverage by approximately $200 million since the beginning of 2009. Again, importantly, we demonstrated access to various forms of capital in 2009 which speaks to the demand for industrial as an asset class for lenders, investors and users.

This access to a range of capital sources is important as we are focused on further delevering. A major part of our capital execution has also been to extend our debt maturities and we have done a good job in that regard. As we look ahead to the rest of this year, we have very little in the way of debt maturing, just about $19 million, of which $6 million are principal payments and the remaining $13 million relates to a mortgage loan that matures in December.

Obviously, we have our eyes on our 2011 maturities as well. And as of today, we have reduced our maturities for the next two years to just $237 million, which was at $419 million a year ago. To take care of these maturities, our strategy is more of the same, use proceeds from select asset sales, secured financings and if it makes sense, the equity market.

Now, on to the expense side. During 2009, we made significant organizational changes to right size our company. Our 2009 G&A was 55% below 2008 levels and importantly our run rate is approximately $8 million per quarter for 2010, which is roughly 15% below 2009. As I have stated before, at our current G&A levels, we had the right resources to serve our existing customers and partners, leads our portfolio as well as additional capacity for future opportunities.

With capital and expenses covered, let's review the portfolio. Our overall portfolio results for 2009 were in line with our expectations. Our year-end occupancy was 82% and our average for the year of 83% was at the high end of our guidance range. Looking ahead in 2010, we see occupancy dipping in the first quarter due primarily to a 657,000 square foot move out in Atlanta. But we see occupancy trending back up throughout the year and expect our average occupancy for 2010 to be between 81% and 83%.

Rest assured we would like to see our occupancy turn faster and we will be working hard to do so, but our markets remain very competitive with existing supply to work through. The plus side of the current level of availability is that there is very little new supply coming online.

There certainly continues to be some other positive signs. The fourth-quarter GDP number was a welcome surprise since industrial real estate demand lags GDP growth but one quarter is not enough to declare victory. And with every positive sign, there seems to be a cautionary sign, like yesterday's consumer confidence number.

But in our day-to-day interaction with customers in all of our markets, we are seeing increasing traffic on virtually all of our available spaces. We particularly like the traffic we are seeing in our larger spaces. In early 2009, this was not the case.

Compared to early 2009, decisions are being made and leases are being signed. One notable lease of size for us was our lease with diapers.com in Eastern Pennsylvania that we announced in December. This is a very important lease to our company as it was the largest vacancy in our portfolio. Our team was able to attract this customer approaching them on an unsolicited basis.

The expanding Internet retailer took more than 800,000 square feet of distribution to support its growth expansion. And we would certainly be pleased to see them grow into the rest of this space. We are seeing demand from a wide range of industries and business confidence is improving for customers of all sizes.

Some of the active industries include 3PLs as well as food, health and government-related users. Again, with market vacancies high competition for tenants is fierce, putting continued pressure on rental rates. We expect cash-on-cash rental rates to be down 11% to 13% this year. Our leasing strategy remains the same as last year, aggressively pursued tenants to improve occupancy.

We are using our competitive advantage in the marketplace which includes the ability to fund TIs and free rent where they make economic sense. Within this rental rate environment, we are looking to keep lease terms shorter as we expect rents to rise in a few years as the economy pulls out of this downturn and occupancies firm up.

Moving on to our joint ventures, we and our partners continued to focus on the same things as our balance sheets, namely leasing and capital management. We are working with our partners to determine the best course of action for the remainder of our 2010 joint venture maturities. As we indicated previously, one of our co-investment partners exercised the buy-sell provision in the joint venture agreement and as anticipated, we accepted their offer.

We will continue to serve as asset manager for this program until May 2010. A few other items I would like to briefly cover are our dividend policy and our financial covenants. With regard to the dividend, as we discussed in prior quarters, our policy is to distribute the minimum amount required to maintain our REIT status. In 2009, our level of taxable income did not require us to pay common dividend.

For 2010 again, if we were required to pay a common dividend, we may elect to satisfy this obligation by distributing the combination of stock and cash. We will monitor this throughout the year and keep you updated. Taxable income levels are in part dependent upon the level and nature of our property sales.

As we caution in our January 8 business update press release, we continue to operate with little cushion in certain of our financial covenants under our line of credit agreement and unsecured debt indenture. If we meet our plan for 2010 including our target level of asset sales under favorable terms, we believe we will continue to be in compliance throughout 2010.

For 2010, we are again targeting asset sales in the range of $80 million to $100 million. With respect to the debt service covenant under our line of credit agreement, if we were otherwise unable to meet that covenant we believe we could meet that covenant by choosing to suspend dividends on our outstanding preferred stock for one or more quarters.

On a different matter, I would like to take a moment now to recognize Jay Shidler. As we recently announced, Jay will be retiring from the Board of Directors effective with our annual meeting in May. Jay has served the company as a founding partner, chairman and valuable member of our Board and on behalf of the entire company and our Board of Directors we thank him for his many years of service and counsel.

So before I turn it over to Scott, I'd now like to make a few comments on our initial 2010 guidance. Per our press release, we see FFO per share for the year in the range of $0.95 to $1.05 and that guidance reflects our occupancy expectations of 81% to 83%. At our current multiple, we are trading at a significant discount relative to our industry peers. And from these occupancy levels, we have an opportunity to drive future cash flow growth and ultimately value by successfully leasing up our vacancies.

We also believe our valuation is interesting when looked at on a price per pound basis, such as price to book value or looking at the value of our assets relative to reproduction costs. And we also have the opportunity to extract value from our portfolio from our delevering efforts by monetizing non-income producing assets like land or through vacant building sales to users as we did throughout 2009. Again, we have articulated the risk to our plan today and in our past disclosures, particularly our proximity to our covenant.

In 2009, we laid out our plan for you and we were successful in executing that plan last year. What you can expect from us is continued diligence in executing our back-to-basics strategy in 2010, leasing, expense management and capital management with an eye on our 2011 and 2012 debt maturities. We are focused on enhancing the value of our company and earning the confidence of our investors by continuing to do what we say we will do and we look forward to keeping you updated on our continued progress. So with that let me turn it over to Scott.

Scott Musil

Thanks, Bruce. First, I will walk you through our results for the quarter and the year which contain a number of one-time items. For the quarter, funds from operations were $0.60 per share compared to a loss of $0.96 per share in the year-ago quarter.

FFO results were helped by a few items including $0.19 per share from the gain on early retirement of debt and $0.19 per share for an income tax benefit primarily as a result of our additional tax refund related to the tax law changed announced in November of 2009. Results also include a restructuring charge of $0.02 per share and the impact of an impairment charge of approximately $0.02 per share related to an investment in our 2003 net lease joint venture.

EPS for the quarter was $0.18 per share compared to a loss of $1.67 per share for the year-ago quarter. For the year, funds from operations per share were $2.08 compared to $0.33 per share for the prior year. 2009 results include $0.64 per share from a gain on early retirement of debt and an income tax benefit of $0.43 per share, again primarily related to the effects of our tax refund.

Results also include $0.14 per share of restructuring charges related to our organizational changes and a total of $0.26 per share of impairment charges related to our investment in JVs and one balance sheet asset. Full-year EPS was a loss of $0.28 per share compared to $0.41 per share of net income in 2008.

Moving on to the portfolio. As Bruce mentioned, our occupancy at quarter end for our in-service portfolio was 82%, up from 81.7% last quarter. Our all-in occupancy increased two percentage points in the fourth quarter to 81.7% driven by the Diapers.com lease. As you think about our portfolio statistics, going forward I would note that our in-service portfolio is now comprised of all but one property, a 55,000 square foot redevelopment we are currently executing in the Baltimore market.

In the fourth quarter, we commenced 4.8 million square feet of leases on our balance sheet, up 11% in terms of square footage compared to the third quarter. Of the 4.8 million square feet, 2.8 million were new leases, 1.4 million square feet were renewals and we had 0.6 million square feet of short-term leases. For the fourth quarter, tenant retention was solid at 62.8%.

Same-store NOI on a cash basis was negative 6.8% excluding term fees and rental rates were down 13.3% cash on cash. These metrics were in line with our expectations and reflective of the competitive market conditions.

Leasing costs averaged $2.75 per square foot for the quarter. This was higher than our average rate over the past several years. This was really a function of the mix of leases commencing in the quarter where we had had a higher volume of new leases relative to renewals compared to the prior quarters.

We expect leasing and TI costs to be roughly $2.25 per square foot in 2010, which is slightly higher than our normal historical range. Moving on to our capital market activities and capital position, regarding asset sales, in the fourth quarter on balance sheet, we sold four properties totaling 598,000 square feet, including one vacant building, for a total of $43 million.

I would also note that the first quarter to date, we completed the sales of two properties totaling 166,000 square feet for $5.5 million. On the secured financing side, we closed six secured financing transactions with multiple lenders generating $139 million of proceeds secured by 49 properties totaling approximately 4.6 million square feet of GLA at a weighted average interest rate of 7.27% [ph] with ultimate maturities ranging from five to 10 years.

For the year, we successfully raised $340 million of secured financing, and as noted in our press release, we completed $19 million of additional secured financings in the first quarter to date. I will now update you on our debt buyback activity. In the fourth quarter, we repurchased a total of approximately $113 million of senior unsecured debt at an average purchase price of 86.8% of par consisting of approximately $13 million of our March 2011 notes, $52 million of our September 2011 exchangeable notes and $48 million of other notes with maturities beyond 2012.

Subsequent to the end of the quarter, we completed our tender offer. In the tender offer, we purchased a total of $160 million aggregate principal amount of notes comprised of $72.7 million of the March 2011 notes, $66.2 million of the 2012 notes and $21.1 million of the notes due 2014.

After completing our tender offer we have outstanding only $70.8 million of the March 2011 notes, $77.8 million of the 2012 notes and $91.9 million of the 2014 notes.

Just to remind you, our shorter term maturities also include $147 million of convertible debt due in September 2011 and that the term on our current line of credit ends in September 2012.

Quickly summarizing our capital structure and position. Our weighted average maturity is 7.1 years, significantly longer than many other companies in our industry. Our secured debt is approximately 11% of our total assets per the calculations on our line of credit and note covenants. Our maximum on these covenants is 40%.

We have less than $19 million of debt maturing in regularly scheduled interest principal payments through the end of 2010 and have adequate cash on hand to deal with these payments.

Our senior unsecured note maturities in March 2011 and September 2011 along with those in 2012 remain the primary focus of our debt reduction plan.

Our cash position today is approximately $65 million and our line balance as of today is $490 million. With regard to our loan covenants, we were in compliance for 2009 and expect to remain in compliance for 2010 subject to achieving our 2010 plan.

With regard to our JV maturities as provided in our supplemental, the total debt due for our JVs in 2010 was $565 million as of year-end and our share was roughly $59 million based on our ownership percentages.

Our ventures with our largest partner successfully repaid $200 million of this amount in the first quarter using existing credit facilities. This effectively pushed some of the maturities further into the future so as of today we have $365 million coming due the remainder of the year of which our share is approximately $39 million.

None of this joint venture dead is recourse to FR. We are currently working with our partner to determine our financing plans for these maturities, the financing markets are open and we also continue to look for opportunities to sell assets to reduce this debt.

On to 2010 guidance. Regarding 2010 guidance, as noted in our press release we provided an initial FFO guidance range of $0.95 per share to $1.05 per share. This guidance includes about a penny per gains and retirement of debt from our recently completed tender offer and also note, that our guidance does not reflect the impact of any further debt buybacks nor the impact of asset sales and any re-compliance gains that may occur.

Now, I will reiterate some of the key components of guidance for 2010 which are found in our press release. Regarding our portfolio, for the year we expect average in-service occupancy to be 81% to 83%.

Our forecast for same store NOI for the year is projected to be negative 5% to negative 7%. Our estimate for rental rate change for the year is negative 11% to negative 13%. Our JV FFO is expected to be approximately $6 million to $8 million and we expect our G&A for 2010 to be between $31 million and $33 million.

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

Bruce Duncan

Thanks, Scott. Before we open up to questions, let me summarize. We believe that there is significant unrecognized value in our portfolio and our platform. We are working on enhancing that value by leasing up our portfolio over time, tapping into the earnings power in our current vacancies, delevering and improving our capital position and remaining vigilant with respect to costs throughout the organization.

Our organizational cross structure is where it needs to be to serve our customers, partners, to manage and lease our portfolio. And we also have embedded capacity for future opportunities. We’ve made great strides in 2009 and we look forward to keeping you up-to-date on our continued progress in 2010.

And with that, we’d be happy to take your questions. As a courtesy to our other callers we ask that you limit your questions to one plus a follow-up in order to give the other participants a chance to get their questions answered. Of course, you are welcome to get back into the queue.

And so now, Kristy, can we please open it up for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ki Bin Kim with Macquarie.

Ki Bin Kim – Macquarie

Thank you. So it looks like you guys have done a lot of work on the balance sheet this year. I was wondering if, I noticed on your guidance for 2010 but internally what are your goals for net deleveraging in 2010 and how will you get there whether it be equity or land sales or asset sales?

Bruce Duncan

Ki Bin, hi. We have done a lot of deleveraging. We did about $200 – as we mentioned about $200 million in 2009. We continue to be focused on deleveraging and again, the ways to get there are asset sales and we said we are going to try and sell $80 to $100 million again this year. Also, in terms of lease up the portfolio and you could do a little equity.

From our standpoint, as you look at our balance sheet where we are with maturities. As we mentioned, we only have $19 million of maturities due this year, so and we have $60 million of cash on hand. So there is no hurry to do anything. In terms of our next big maturity it's about $70 million and it's in March of 2011.

So my guess is we will look at that as we get later in the year in terms of doing some secured financing to take care of that and see where we are in the asset sales. And in terms of equity we will look at that depending on the situation.

Right now we don't have a great need for that but that being said we do have a couple of million shares outstanding to be issued under our drip program. We will probably issue those and we might look to do a slow move on equity offering as well.

Ki Bin Kim – Macquarie

And just to follow-up, if you guys hit the low end of your guidance for 2010. And does that, well, if you hit that point would that trip your covenant?

Bruce Duncan

Well, if we hit the low end of our guidance, we will be in compliance.

Ki Bin Kim – Macquarie

Got you. Thank you.

Bruce Duncan

You’re welcome. Next question.

Operator

Your next question comes from line of Paul Adornato with BMO.

Paul Adornato – BMO

Hi. Good morning. I was wondering if you could walk us through your occupancy assumption, in order to get to the low end 81% for the year. How much of that is already in the bag versus additional leasing work that you have to do?

Bruce Duncan

Let me have Chris take over on that. Chris?

Chris Schneider

Sure. Paul, so in the guidance we gave for the overall occupancy we are at 81% to 83%. As Bruce had mentioned earlier in his comments, for the first quarter we are expecting a little bit of dip in occupancy. We have the large move out in Atlanta of about 650,000 square feet. But we do expect occupancy to stabilize your first and second quarter and then we’ll see that increasing over the last two quarters of the year.

Paul Adornato – BMO

And is that coming from leases or renewals that you already have signed or leases that are up for negotiation? Or, just trying to get a sense of how much progress you’ve made towards achieving that low end?

Chris Schneider

Sure. Yeah. I mean, as far as looking forward to retention, and looking in our lease rollover we are looking at it to be along the mid 60%s. So far this year through the first month of the year including that roll out of the 650,000, our retention is right at 65%.

So and, so we are overall, the other area too is if you look at, and we are including our entire development portfolio in our overall occupancy numbers. But if you look at the developments that were in lease up at December 31, 2008 at January 1, 2010 we are about 46% occupied in the development portfolio.

We are expecting by the end of 2010 that portfolio to be about 70% occupied. So that’s what we are seeing. We’ll see some of the pickup in the occupancy towards the end of the year.

Paul Adornato – BMO

Okay. Thank you.

Bruce Duncan

You’re welcome. Next question.

Operator

Comes from the line of Steven Frankel with Green Street Advisors.

Steven Frankel – Green Street Advisors

Thank you. Guys, I just have a couple of questions regarding the impairments. I guess first of all what motivated the impairment of these two JVs. Are these also queued for sale like the write-down last quarter? And what caused your write-down on the JVs and not really anything on the balance sheet this period?

Scott Musil

Sure. This is Scott Musil. I’ll go through that. You know, we evaluate our balance sheet properties and our joint ventures for impairment on a quarterly basis. And for joint venture properties we have an equity method investment. And we – what we have to do on a quarterly basis is value our equity interest in that venture and compare it to our carrying basis on our balance sheet. So it’s really – it's a fair value measure. And in the fourth quarter, in the venture that we took the impairment charge on, there were some changes in cap rates and occupancy that caused that impairment.

From a balance sheet point of view, we did not take impairment in the fourth quarter relating to any balance sheet assets and that’s a slightly different test per GAAP. That’s one where you look at a gross, undiscounted cash flow analysis and compare it to your book basis. So the methods are slightly different between JV investments and on balance sheet properties.

Steven Frankel – Green Street Advisors

Okay. Thank you.

Operator

Your next question comes from Dan Donlan with Janney Montgomery Scott.

Dan Donlan – Janney Montgomery Scott

Hi. Good morning. Just curious, page 52, the NAV detail, mortgage loans receivable it looks like to have gone up about $20 million. What’s driving that?

Bruce Duncan

Some of the property sales that we did in 2009 we took back some financing.

Dan Donlan – Janney Montgomery Scott

Okay. And just curious why don't you guys include that as an asset for your NAV detail?

Scott Musil

Why don't we include it as an asset?

Dan Donlan – Janney Montgomery Scott

Yes.

Scott Musil

Embedded in our NOI number is the interest income related to those mortgage loans receivable. So you are getting credit if you were to cap that amount to come up with a value.

Dan Donlan – Janney Montgomery Scott

Okay. Thanks.

Scott Musil

You are welcome.

Operator

(Operator Instructions) Your next question comes from Stewart Hanley [ph], a private investor.

Stewart Hanley

Hello, good morning. I guess my first question is for Scott. We are looking at guidance on occupancy of 82% for 2010 and per your supplemental you used 91% as a stabilized number now. I am wondering if you could comment on about, say a mid-ranged occupancy point. How much does that move you away from your covenants?

Scott Musil

Sure. The general – I can give you the general math. An increase of occupancy of 1% adds about $4 million of NOI on an annual basis. So eight percentage points would increase our net operating income about $32 million.

Stewart Hanley

Can you clarify that in terms of points that that moves you away from your current covenant numbers?

Scott Musil

Well, as we know it does help us out on a couple of fronts. It will help us out in our fixed charge coverage ratio, in our interest coverage ratio and some of our leverage covenants because they are based upon NOI when determining the asset base. I guess all I can say is it will help us out compared to where we are at right now.

Stewart Hanley

Okay. Then if I may ask a question of, Bruce, you talked about where you see the valuation of the company. We can all look at the book value, the undepreciated book value, the various multiples. You talked about doing an equity offering if it makes sense, yet we did one last year at what I considered to be a pretty lowball number and we are pretty much still at that number today. I guess I am trying to get a feel for if you would consider equity at anywhere near where the stock is today.

Bruce Duncan

I would say a couple things. Number one, we think we have good value. We think in terms of if we are going to continue, we need to delever. We did a good job last year delevering. We're going to continue that. Again, the best way for us to do it if we can is selling assets for empty buildings or vacant land and then lease out the portfolio. That gives us the best value.

We do have the ability to raise equity. And I think in terms of on a small basis we probably, during 2010, we will continue to raise a little equity with the dividend reinvestment plan that we have in place right now and maybe putting in a slow mode in place as we talked about. But again, we recognize the point that issuing equity is very dilutive and we are trying to balance that. Again, this is a long-term plan to delever the company.

Stewart Hanley

I understand. I think everyone expected an equity offering in '09 and we can all have our opinions as to the price. But I guess it is a little difficult, Bruce, to hear you on one hand talking about the value that you see embedded in it. Any shareholder would obviously see it as well. But then having that hang over the equity for the balance of the year, given that you already did an offering at small fractions to all of the various multiples.

Bruce Duncan

I think you have to look at what we have in terms of just the constraints we are dealing with, be it covenants and things like that. So the equity is helpful in terms of giving you some room on that, so it is a balancing process. We recognize the point that on an asset basis we seem like a very good value. On a multiple, we seem like we are a very good value. But again, we have too much debt and we need to delever the company. We are in the process of doing it, we have a long-term plan and we are executing on it. So stay tuned.

Operator

And your next question comes from the line of Ben Mackovjak with Rivanna Capital.

Ben Mackovjak – Rivanna Capital

Hi. Thanks for taking my call. You guys did talk about the value of the stock based on the replacement value. I think you called it a reproduction value. Can you just give us what you think is a current replacement cost for a foot of warehouse space, ballpark figure?

Bruce Duncan

Again, it all depends on where you are in terms of land and what you are building in terms of how much office component is in that. But when I look at it I say if you look at our portfolio we are probably valued in the range of $33 to $35 a foot. And I think that is pretty cheap relative to replacement costs.

We have built a spec building out in eastern Pennsylvania which became our largest vacancy, that we were probably in it for $50 a foot. And that should be a fairly cheaper building because it's so large. You get the economies of scale with that. So, again, that was sort of a recent building we built within the last year.

Ben Mackovjak – Rivanna Capital

Okay. Can you remind us which debt covenant is associated with the 60% max for unencumbered assets?

Scott Musil

The line of credit has a 1.6 times and the unsecured notes has a 1.5 times when it comes to unsecured leverage.

Ben Mackovjak – Rivanna Capital

Okay. And you can give – is there any wiggle room there? Have you considered trying to negotiate that down?

Bruce Duncan

In our opinion it seems like the best way to do it instead of issuing equity is just to kind of prolong this and pay it down with free cash flow over the years.

Scott Musil

And that’s what we have been doing. We have been using our free cash flow to pay down our borrowings. Our IRS refund as well as the equity offering so.

Ben Mackovjak – Rivanna Capital

So is there any wiggle room to maybe get that down to 50% or less?

Scott Musil

Well, like I said, we are at 1.6 times when it comes to the line of credit, 1.5 in the unsecured notes. And as we have mentioned in our prior filings, the two covenants that we are really, really close on are our fixed charge coverage in our line of credit and our unsecured leverage in our unsecured notes.

Bruce Duncan

We talk to our banks all the time. We have good relation with them. As we look at our line of credit, the maturity is – a good maturity of September of 2012 and we are paying 100 basis points over LIBOR. So it's very attractive financing. But if we could figure something out with the banks over the time it works for them and works for us, we would look at it.

Ben Mackovjak – Rivanna Capital

Okay. Thanks a lot, guys.

Operator

(Operator Instructions) Your next question comes from Jon Peterson [ph] with Macquarie.

Ki Bin Kim – Macquarie

This is actually Ki Bin. I wanted to quickly follow up, if you didn't have asset sales in 2010 could you give a rough range of your taxable income?

Scott Musil

Like I said, it's really highly dependent upon asset sales. I can tell you from 2009 without asset sales our ordinary income was pretty close to breakeven and that is probably a pretty decent proxy to 2010.

Ki Bin Kim – Macquarie

Okay. And to follow up. What has to happen for you guys to not pay out on your preferred shares? Would it be just an imminent covenant trip or would you ever consider doing it proactively just for the sake of deleveraging?

Bruce Duncan

We look at it all of the time. From our standpoint to the extent – if we meet our plans, we won't have to – we will be able to pay the preferred. And so we are looking in terms of meeting our plans. But there is always – you always have the option of paying it or not paying it.

Ki Bin Kim – Macquarie

Okay. Thanks.

Operator

Your next question comes from the line of Mark Lutenski with BMO.

Mark Lutenski – BMO

Hi, guys. Just a quick one. I was wondering what pushed up the development costs for you joint venture developments in the quarter sequentially. It looks like it went up by about 20 million or so and then your expected cap rate also went down 200 basis points. I think you touched on that before, but could you also sort of address that?

Jojo Yap

Sure. Sure. This is Jojo. We basically – this is just the unfund – the remaining unfunded costs in our joint venture to fund a build-to-suit. So that's reflected now in this quarter. In terms of the yield has come down, basically we have – every quarter we look at the rental market place. We look to meet the market and rents have come down in all the markets that we have development projects for our joint venture so we have adjusted it. And our goal is to meet the market and get those buildings leased.

Mark Lutenski – BMO

Okay. Thank you.

Operator

Your next question comes from Steven Frankel with Green Street Advisors.

Steven Frankel – Green Street Advisors

Just a follow-up on some of the covenant questions. You guys have a six-month grace period if you were in breach. From reading the way that the press release is worded. You are not currently in that grace period. Is that correct?

Scott Musil

That's correct.

Chris Schneider

That' correct.

Steven Frankel – Green Street Advisors

Okay. And then a second question just on the operating performance. You guys were able to cut expenses pretty heartily this year in the same-store pool. Can you just provide some color on how you were able to achieve that given the triple net nature of a lot of leases in your pool?

Chris Schneider

Yeah. The majority of where those drop in expenses came was from the in real estate taxes. Obviously, in this environment we are very aggressively pursuing, protesting the real estate taxes and the assessed value. So the majority of the savings came from a drop in real estate taxes.

Steven Frankel – Green Street Advisors

Okay. Thanks.

Operator

For our final question comes from Dan Donlan with Janney Montgomery Scott.

Dan Donlan – Janney Montgomery Scott

Yeah. I just curious, Bruce, how does the JV platform fit into your future strategy?

Bruce Duncan

The JV platform is important to us. We think – again we have got a wonderful platform throughout North America and our JV partners are important to us. We think that in terms of growing that over time, we will be able to grow that given the opportunities that will in people in terms of looking at the industrial space. So it's important to us. We are working right now in terms of we are not expanding it because we are focusing on really leasing up the properties and working on the entitlements. And really deleveraging the same way we are doing on our balance sheet. But it's an important platform to us and we are going to continue to focus it and grow it over time.

Dan Donlan – Janney Montgomery Scott

Okay. So your partners haven't expressed any interest of maybe just trying to sell out the properties in all these JVs at all?

Bruce Duncan

We are definitely trying to maximize value and opportunistically sell properties. If you looked in our joint ventures, we sold over $50 million worth of assets last year. And 100% of those assets were either vacant land or empty buildings and we got very good pricing for them. So we are definitely looking at monetizing assets where we can where it makes sense. But we are not interested in fire selling things. We think – we have been to this dance before and in these times if you get good pricing you sell. If you can't, you can hold on and a better deal will come down the pipe.

And we have seen that, if you look at the industrial market it's different than other types of real estate. And if you have users that really buy this property 33% of our sales last year on our balance sheet were users. And if you look at that they pay a better pricing than an investor would so again that has sort of been our focus in terms of disposing of assets.

Dan Donlan – Janney Montgomery Scott

Okay. And then if I may, your guidance for sale, I think you said 80 to 100 million. Why not just try to sell more, just get rid of these overhangs with the credit facility and the leverage and everything else? I mean you have got $700 million of land on your balance sheet. Why not try to sell 200 to 300 and just forget about all of these overhangs?

Bruce Duncan

It's a good question. When you look at it we have constraints with our covenants that, in terms of what we can sell. In terms of selling assets that are lost. It would prohibit us from doing that. So we really are selling properties that are breakeven or a slight loss to us or gain.

Dan Donlan – Janney Montgomery Scott

Okay. And then…

Scott Musil

That economic gain as calculated previously including non-neighboring compliant gains counts towards our fixed charge coverage ratio on our line of credit.

Dan Donlan – Janney Montgomery Scott

Okay. Okay. All right. That's it.

Scott Musil

Thank you.

Operator

There are no further questions at this time. I hand the program back over to Mr. Art Harmon.

Bruce Duncan

Kristy, thank you. This is Bruce. But again, thank you all for participating on our call today. And please feel free to call us with any questions that you have. And again, we look forward to keeping you updated on our progress next quarter towards the end of April. Thank you very much.

Operator

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

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Source: First Industrial Realty Trust Inc. Q4 2009 Earnings Call Transcript
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