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First Industrial Realty Trust, Inc. (NYSE:FR)

Q2 2010 Earnings Call Transcript

August 3, 2010 10:00 am ET

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 Office

Analysts

Ki Bin Kim – Macquarie

Suzanne Kim – Credit Suisse

Steven Frankel – Green Street Advisors

Dan Donlan – Janney Capital Markets

Nathan Isikoff – Transwestern

Mattie Elan [ph] – Alumot-Sprint Fund

Tony Cutinelli – CLC Management

Stuart Henley [ph]

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the First Industrial second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Art Harmon, Director of Investor Relations. Sir, you may begin your conference.

Art Harmon

Thanks a lot, Paula. Hello, everyone and welcome to our call. Before we discuss our second-quarter 2010 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, our overall capital deployment, our planned 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 the forward-looking statements, including those risks discussed in First Industrial's 10-K for the year ending December 31, 2009 filed with the SEC and our subsequent report on 10-Q.

Reconciliation 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.

Our call will begin with remarks by Bruce Duncan, our President and CEO, to be followed by Scott Musil, our acting Chief Financial Officer who will review our results, our financial position and guidance, after which we will be pleased to open it up for your questions. Also 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. And thank you all very much for joining us today. My comments will focus on the primary driver of the long-term value of our company, leasing, where he made some good progress this quarter. I’ll also discuss our balance sheet and what we are doing in our capital management efforts. Then I will also briefly review for you the anticipated wind down of certain of our joint ventures.

I am pleased to report that we saw occupancy increase 70 basis points from the end of last quarter to 82.1%. This increase was driven by 3.5 million square feet of new, renewal and short-term leasing across all of our markets. So it was truly a team effort from everyone at First Industrial and I would like to thank our entire team for moving the occupancy needle forward.

And with our occupancy increase, we outperformed the overall national industrial market, which as a whole showed signs of stabilizing as national occupancy was basically flat down just 10 basis points in the quarter according to CB Richard Ellis, Econometric Advisers.

As we look to the second half of 2010 and beyond, we share the same concern that pervades the business community and the equity market, about GDP growth slowing in the second quarter 2.4%.

We are also concerned about how consumers are faring given the lack of employment growth and the recent declines in consumer confidence, but other factors are potential positives for the eventual movement towards equilibrium in the industrial space. There is virtually no new development in the United States coming online this year, nor starting.

Looking at other metrics that could bode well for future industrial real estate demand, container and trucking volumes have been showing decent trends, albeit off low bases. Business spending is up and the inventory to sales ratio remained near an all time low.

And again, while some potential customers may be becoming hesitant about committing to new space, our leasing markets continue to be active. We are seeing more activity with tenants contemplating space needs across a wide range of size requirements.

Now, while we’re pleased with our improvement in occupancy, pricing remains competitive as reflected in our rental rate change of minus 15.9% in the quarter, which is in line with what has been reported by some of our industry peers. We would expect to see rental rates on new and expiring leases to continue to show mid double-digit declines for the next several quarters.

When thinking about that rental rate decline, I would note for a number of our leases we have been successful in structuring them with higher rent step ups than our historical experience. That is our typical range has been 2.5% to 3% per annum but our average annual rent steps and leases with bumps signed thus far in 2008 have been 6%. This will help to counter rent roll down, which will be part of the industrial market for the foreseeable future.

Looking at the leasing traffic in our region, Houston, Central Pennsylvania and Baltimore Washington are among the best markets in terms of activity. Among our challenging markets, Atlanta, Dallas and Florida remain very competitive but we are seeing some new leasing traffic in each of these markets compared to earlier this year, particularly in Dallas.

Regarding occupancy for the remainder of the year, we expect third quarter to be roughly in line with where we finished the second quarter and based on our leasing pipeline, we expect to see occupancy improve a bit in the fourth quarter.

Moving onto the investment market, we had two user sales totaling approximately $9 million, one in Dublin, Georgia, which is more than two hours southeast of Atlanta and one in Baltimore DC market. While the level of sales is off the pace of the first quarter, we are primarily are focused on selling vacant buildings and land.

Regarding the investment market as a whole, we continue to see strong levels of investor and user their interests. We think this demand bodes well for our future sales effort and for the value of our portfolio. During the quarter, we also completed three acquisitions for a total of $22.4 million using the proceeds from our 1031 exchange requirement. The weighted average cap rate for these transactions was 7.7%.

As we noted last quarter, our goal was to reduce our leverage by $200 million with a focus of this effort on our near term maturities. Our targeted level of sales towards that goal is $100 million to $200 million for 2010, which if you exclude our 1031 investments, is roughly $80 million to $100 billion for deleveraging.

Equity is also part of our plan in pursuit of that goal, but it must make sense for our shareholders as we remain mindful of dilution and the price of our equity and matching our sources with our capital needs.

During the quarter, we raised approximately $4.4 million through our ATM program that we put in place in the quarter at an average price of $8.13 per share. Clearly meeting that $200 million goal will be a tall order. We will continue to strive to meet it, but only at a responsible pace and cost.

On the secured debt side, we completed a $27.1 million transaction with a rate of 6.5% for a 10 year term. As we look ahead to the third quarter, we have another $50 million or so of secured financing transactions in our pipeline with rates in the low to mid 5s.

Now moving onto our joint ventures. As noted in our press release, we anticipate concluding our joint ventures with CalSTRS and continue to work on finalizing our agreement with our partner. In closing the joint ventures, we expect to receive proceeds of $5 million which is reflected in our guidance.

In the next several months, we may continue to receive certain fees and return of equity related to leases, sales and tenant improvement work that we were working on prior to the conclusion of the joint ventures. Note that we are not factoring any of these items into our guidance.

As a result of these anticipated changes to our joint venture relationship, we regretfully are making some additional changes to our infrastructure affecting some of our team. As part of these changes, we will be engaging third party providers to manage our portfolios in Phoenix, Nashville, Seattle and Miami with oversight from regional directors in nearby markets. Per our prior disclosures, these changes are expected to offset our loss of revenues from debentures.

As we talk about capital, I would like to again cover our dividend policy and our financial covenants. With regard to the dividend, as we discussed previously, our policy is to distribute the minimum amount required to maintain our REIT status. If we were required to pay common dividend in 2010, we may elect to satisfy this obligation by distributing a 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 sales. Again, we know that dividends are important to our investors over time, but we still have work to do on our deleveraging plans.

As we cautioned previously and in our press release again last night, 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 with our fixed covenants throughout 2010.

With respect to the fixed charge covenants for our line of credit facility, if we were otherwise unable to meet that covenant, we believe we could meet it by choosing to suspend dividends on our outstanding preferred stock for one or more quarters. We have declared and paid our preferred dividend for the first and second quarters.

As it relates to our covenants under our unsecured line of credit, which expires in September of 2012, we are engaged in active discussions with the banks that are in our line of credit. We believe a reworking of our line agreement to allow us additional flexibility to sell assets as part of our deleveraging plan and overall management of our portfolio could be beneficial to us, to our lenders and to our other stakeholders.

We are currently limited in our ability to incur economic losses from asset sales as these negatively impact our EBITDA and thus our fixed charge coverage ratio as calculated per our line of credit agreement.

As we have stated, if we can get something done that makes sense for all parties, we will. We have 11 banks in our line of credit and any change to the facility requires approval from all 11. We would anticipate that any potential change to our line of credit would likely require a pay down and reduction in capacity as well as an increase in rates.

I would also like to comment briefly on the recent rating revisions from two rating agencies. Since our last review in 2009, we believe we have made significant progress in deleveraging, extending our debt maturities and rightsizing our cost structure.

We have demonstrated access through a range of capital sources, namely the equity and secured financing markets and through select asset sales. So we were surprised and disappointed with the recent rating changes.

I would like to be clear that the recent rating changes have no impact on our debt or line of credit covenants or on our line of credit pricing. That said, we are focused on the long-term success of our company and we would like to be an unsecured issuer over time, so we view the ratings as important.

So now let me turn it over to Scott to give you the specifics for the quarter and our outlook for the balance of the year. Scott?

Scott Musil

Thanks, Bruce. First let me walk you through our results for the quarter, which contain a number of one-time items. For the quarter, funds from operations were $0.16 per share compared to $0.50 per share in the year ago quarter.

FFO results were impacted by a few onetime items during the quarter, such as a loss on retirement of debt of $0.06 per share related to the retirement of the remaining 2011 notes in the second quarter, a $0.04 per share income tax provision and a $0.02 per share loss from the mark-to-market of our Series F preferred stock coupon hedge.

Second quarter results also reflect a onetime charge of $0.01 per share related to our headcount reduction related to the anticipated changes to our joint ventures. Excluding onetime charges such as gains and losses from debt repurchases and income tax provisions and benefits, funds from operations were $0.26 per share compared to $0.37 per share in the year ago quarter. EPS for the quarter was a loss of $0.29 per share versus a loss of $0.17 per share in the year ago quarter.

Moving onto the portfolio, our occupancy for our in-service portfolio was 82.1%, up 70 basis points since the last quarter. In the second quarter, we commenced 3.5 million square feet of leases on our balance sheet. Of these, 1.1 million square feet were new, 1.5 million were renewal, and 900,000 were short-term. So far in the third quarter, we have commenced another 3 million square feet.

For the quarter, tenet retention was 58.6% so our first half weighted average was 66%. Same store NOI on a cash basis was negative 1.5% excluding lease termination fees. Same store NOI came in better than expected, primarily due to the fact that our occupancy was better than we forecasted and we had lower bad debt expense. Lease termination fees in the quarter were approximately $300,000.

Rental rates were down 15.9% cash-on-cash reflective of the competitive leasing market and leasing costs averaged $2.51 per square foot for the quarter, which brings our weighted average for the first half to $2.05. We expect leasing costs to be roughly $2.20 per square foot for the second half of 2010.

As Bruce mentioned, during the quarter we completed three acquisitions totaling $22.4 million at weighted average expected cap rate of 7.7% using proceeds from a 1031 exchange.

As detailed in our press release, our largest acquisition in the quarter was a $14.6 million 285,000 square foot long term net lease state-of-the-art distribution center located in the Minneapolis market. We also completed the acquisition of 158,000 square-foot port-related building in Seattle for $5.9 million. Note that the acquisition excludes the land which was acquired in a 2008 transaction. We also acquired a 48,000 square-foot facility in Houston for $1.9 million.

Moving onto our capital market activities and capital position, as Bruce discussed, asset sales in the quarter totaled $9.3 million comprised of the sale in Georgia and another in Baltimore both of which were to users and totaled 266,000 square feet. And on the secured financing side, we close one transaction, collateralized by approximately 0.5 million square feet generating $27.1 million of proceeds and an interest rate of 6.5% with a 10 year maturity.

During the quarter, we issued 549,000 shares raising approximately $4.4 million at an average price of $8.13 per share through our ATM program. Regarding our debt management activities in April as we previously disclosed, we completed the repurchase and retirement of the remaining $71 million of our 7.375% notes due March of 2011.

Since we retire these bonds at a premium of 6% or roughly $4 million, this repurchase resulted in a $0.06 per share loss on retirement of debt in the second quarter. After completing this repurchase over the next three years, our senior note maturities are $147 million of convertible debt due in September 2011 and $78 million due in April 2012. And I remind you that our $500 million line of credit matures in September of 2012.

Quickly summarizing our capital structure and position, our weighted average debt maturity at 7.5 years; our secured debt is approximately 13% of our total assets for the calculations per our line of credit and note covenants, our maximum secured leverage on both of these covenants is 40%.

We have $16 million of maturing debt and regularly scheduled principal payments for the remainder of 2010 with $13 million related to a mortgage maturity in December. Our cash position plus line of credit availability as of today is approximately $69 million.

With regard to our loan covenants, we were in compliance in the first and second quarter of 2010 and expect to be in compliance for the remainder of the year, subject to achieving our 2010 plan.

Regarding 2010 guidance, as noted in our press release, we increased our FFO per share guidance range to $0.90 to $1 per share from our prior range of $0.76 to $0.86 per share due to the following items.

First, a $0.05 per share increase to our guidance related to an increase in NOI, which is comprised of $0.02 per share related to the net operating income for the property acquisitions closed in the second quarter; $0.02 per share related to lower bad debt expense, which is a bright spot in our portfolio. Year-to-date, we only incurred $300,000 of bad debt expense. The result is a $0.01 per share of other items.

Second, a $0.04 per share increase to our guidance due to overhead reductions in the corporate office in our regions, $0.02 per share of these cost savings will reduce our G&A and the other $0.02 per share will reduce our property expenses, which positively impact net operating income.

Third, $0.10 per share of additional FFO primarily related to the gain from the expected termination of our joint ventures with CalSTRS. This is comprised of approximately $8 million or $0.12 per share of gain related to the buyout of our equity. This is made up of the $5 million cash buyout plus the reversal of our negative $3 million investment in the CalSTRS JVs. This is offset by a decline of approximately $1 million or $0.02 per share related to the reduction of fees and our share of FFO in the third and fourth quarters.

Fourth, a $0.01 per share decrease to our guidance from additional restructuring costs related to the headcount reduction we discussed earlier. And last, a $0.02 per share decrease relative to our prior guidance due to a mark-to-market loss on our Series F preferred stock coupon hedge we recognized in the second quarter.

Given the number of one-time items flowing through our FFO results and guidance, if you deduct our year-to-date FFO results from our full year guidance and the $0.10 per share gain related to be anticipated buyout of the JVs, you get approximately $0.53 to $0.63 per share of FFO for the second half of the year, which represents our expected recurring FFO from our portfolio plus FFO from our net lease joint venture.

Our guidance does not reflect the impact of any further debt buybacks nor the impact of further asset sales and NAREIT compliant gains as they occur in the remaining quarters of 2010. Guidance also does not reflect any potential additional equity issuance, but includes the impact of secured financing transactions totaling approximately $50 million expected to be closed in the third quarter at coupon rates in the low to mid 5s.

Some of the other key components of our guidance for 2010, which is found in our press release is as follows. For the year, we expect average in-service occupancy to be 81% to 83%, which is unchanged from our last call.

Our forecast from same store NOI for the year is projected to be negative 4% to negative 6%, a 1% improvement versus our prior guidance due to the positive variances in the second quarter discussed earlier.

JV FFO is expected to be $14 million to $15 million, a $7.5 million increase at the midpoint due to the economics from the anticipated sale of our equity interests in our joint ventures with CalSTRS. G&A guidance is reduced $1 million at both ends of the range from our last quarter's guidance due to our staffing reduction and is now at $30 to $32 million.

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

Bruce Duncan

Thanks, guys. Before we open up to questions, let me state that our focus continues to be on leasing to increase our cash flow, which is the main driver of the value of our company. We also need to continue to de-risk our balance sheet. We have a great team that's working hard on all these fronts and we’ve a valuable platform and we will continue to use that platform to enhance the value of our company.

Despite the variations in the equity markets, we were operating our business for the long-term benefit of our shareholders. We have made good progress but we know there is much more work to be done. And as we have shown, one of the most challenging economic and capital market environments, we will get it done.

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 other participants a chance to get their questions answered. Of course, you are welcome to get back in the queue.

And so now, Paula, could you please open it up for questions?

Question-and-Answer Session

Operator

Yes. (Operator Instructions) Your first question comes from Ki Bin Kim of Macquarie.

Ki Bin Kim – Macquarie

Thank you. For my first question, surrounds your JV closing structure. It looks like if I look at, if you compile the NOI from the four different funds and you could put a cap rate range of like 8% to 9% on it. Am I correct that those JVs are probably worth less than the debt that's on them and so does that help your covenant because it includes a JV portion?

Bruce Duncan

I would say that again when you look at these JVs, you’ve to take into account and not just look at the cash flow because there's a lot of land in the adjacent joint ventures. Probably the bulk of it is land of the $1.5 billion of asset value and there's debt of about $1.1 billion or so. But it was non-recourse to us.

So I don't know what it's worth. From our standpoint is we think if you look at the cash flow for us this will be a net positive as it relates to the FFO that we’re getting out of these ventures is less than the overhead reductions that we’re going to be able to achieve.

Scott Musil

Yes. If you look at our joint ventures with CalSTRS, we had one, most of them were marked down to zero in the fourth quarter of '08. GAAP required us to do that and we had another venture that was worth about, that we have on our books for about $2 million and our fee was $5 million.

Ki Bin Kim – Macquarie

But if – so if the asset values embedded more in land and cash flow, doesn't that help your covenant cushion even further? Because you don't lose any NOI related to that asset sale.

Scott Musil

Yes. Well, I think, well, here and I’ll go through a couple of pieces of it. One is if you look at our economics, if the deal closes in the third quarter, we're going to pick up about of an $8 million gain related to the sale of our equity in these joint ventures. $5 million of it relates to the cash that we are going to receive.

Our overall investment in the joint ventures, Ki Bin, is about negative $3 million. So the difference between the two is that $8 million gain. The lion share of that is going to be able to be included in our EBITDA for the calculation of our covenants.

And then if you want to look at on a go-forward basis what the JVs were, what the JVs were earning compared to what our G&A was. If the G&A costs related to the ventures happened on one-one and the ventures terminated on one-one of this year, we would have a G&A savings of a little over $5 million. We would also lose about $4 million of JV FFO. That gives you a little bit of a touch point on what the impact would have been if these were to terminate on the first of the year.

Ki Bin Kim – Macquarie

That's great. That I was getting to. But isn't there, don't you also get a benefit from your pro rata share of interest costs, I'm sorry, that's FFO rate. That is included in FFO?

Scott Musil

That’s factored in the FFO.

Ki Bin Kim – Macquarie

Right, right, right.

Bruce Duncan

Yeah.

Ki Bin Kim – Macquarie

And In terms of timing, is it all in the third quarter or is it kind of an ongoing process?

Scott Musil

We anticipate that it's going to close in the third quarter and there could be a little bit of a tail in terms of just with some of the leasing and tenant improvement work, whatever that was ongoing prior to our closing. So you could have a little bit of a tail, but most of it we’re not factoring it into our guidance.

Ki Bin Kim – Macquarie

And the tail would be in the form of a fee or additional gains like that…

Bruce Duncan

Yes. Leasing fees, TI fees, some return of capital, that sort of thing. But again, it's not going to be a significant amount.

Ki Bin Kim – Macquarie

Okay. Thank you.

Scott Musil

One other point, Ki Bin as well, I want to bring up is with regards to our leverage ratios, the JV debt did not get included in the leverage ratio. It didn't before and obviously, when it's gone it's not going to be included as well, so I just wanted to clarify that point also.

Ki Bin Kim – Macquarie

Got you. Thank you.

Bruce Duncan

Thank you.

Operator

Your next question comes from Suzanne Kim of Credit Suisse.

Suzanne Kim – Credit Suisse

Hi. Good morning. I’m calling about your financial covenants phrase that you guys used in your earnings release. I'm just calling to see what exactly needs to happen in order for that phrase to start to be eliminated from your earnings, future earnings releases in terms of equity raises, acquisitions at retirement, what will it take for you guys to eliminate that phrase?

Scott Musil

Sure. I mean, really as we have said before, it's pretty easy. We say we’re close on the covenants on our unsecured notes and our unsecured line of credit. To the extent we’re able to get more cushion in those covenants either by growing the economics or delevering the company or getting something done with our line lenders which would give us some relief on that, that may help us rid that language from our 10-Qs and from our press releases.

Suzanne Kim – Credit Suisse

And can you reveal how close you are?

Bruce Duncan

Close.

Suzanne Kim – Credit Suisse

Okay. Thank you.

Operator

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

Steven Frankel – Green Street Advisors

Thank you and good morning. You guys previously laid out a deleveraging target of $200 million, which comprised $80 million from equity. It sounded like in the comments earlier that the $80 million equity is not really on the table for this year anymore.

You guys raised equity earlier at $8 a share, clearly that's a very different share price than where you guys are today. But at what point does the share price have to be before you start to take raising equity a little bit more seriously at this point?

Bruce Duncan

I think you have to watch us and see what we do. I think as you've seen, we issued equity at over $8. I think, we think our equity at the year. When we look at things, we're looking at our goal is to do the $200 million of deleveraging this year, but again it's a goal. We have to look at, we don't really have any really near-term maturities until September of 2011 where we've got the $147 million due.

And if you look at what we have right now in cash on the balance sheet, we've got about $69 million and we're doing about $50 million worth of secured financing. So we've got a big chunk of that taken care of, if you will. So we want to delever. We’re going to delever, but we want to have it at better pricing than where we are today.

Steven Frankel – Green Street Advisors

Is there a certain target you have in mind as to where you are willing, does it have to be over $8 a share again or is there something in the middle between where we are now and they are acceptable?

Bruce Duncan

I think you'll just have to look and see what we issue it at.

Steven Frankel – Green Street Advisors

Okay. Also you guys mentioned about 6% rent bumps in the previous comments, in the prepared remarks I should say, regarding new leases. That's well above what the majority of people in the market have been indicating that they can get.

Is that achievable in part just starting out at just a lower teaser rate initially in the lease and then you end up having more outsized rent bumps as the lease continues or is it due to going further on the credit scale, or you guys are just able to get really good deals in the market relative to your peers?

Art Harmon

No. I think it, it’s Art Harmon, I think, the market is the market, I think it, some of this is lowered rates in the front-end to get people in and then you bump them up to more normal levels. So, I mean, I think that's a function of it. But again, our strategy is to try and fill the space and but I think these rent bumps will be helpful as we go forward.

Steven Frankel – Green Street Advisors

Okay. And then if we look at your guys same store for the quarter, what portion of it is really just not having the same level of bad debt reserve relative to last quarter of – last year, the comparable quarter period?

Chris Schneider

Yeah. This is Chris. On the same store, just to give you a frame of reference, if you look at the second quarter of 2010 versus the second quarter of 2009, the change in the bad debt was about $1 million. So that's where we are seeing that pick up.

Steven Frankel – Green Street Advisors

What percentage of your same store was that? You say you guys were down 1.5%. If that reserve was consistent, what would your same store have been down?

Chris Schneider

That is about 2% to 2.5%. So our same store NOI is about $50 million to $55 million for the quarter.

Steven Frankel – Green Street Advisors

Okay. And then for your guidance for the rest of this year regarding same store with the uptick in same store, is that primarily attributable to the bad debt provision because your average occupancy is the same as it was last quarter?

Chris Schneider

Yeah. The permanent change obviously or the – is the second quarter was the bad debt being lower. So that's the majority of it, yes.

Steven Frankel – Green Street Advisors

Okay. And then finally, one of your remaining JV partner, I guess was KSH. Have you had any discussions with them regarding the future of that joint venture as well?

Bruce Duncan

In terms of that venture is passed. Its investment period and my guess is over the next three to five years, we will be in the disposition mode there.

Art Harmon

Thanks, Steve. And we're going to move on and, Steve, you are welcome to get back in the queue.

Operator

Your next question comes from Dan Donlan of Janney Capital Markets.

Dan Donlan – Janney Capital Markets

Thank you. Good morning. Just first question for you, Bruce, as we think about cutting the preferred, if we do get to a fixed charge issue, is it safe to say that you guys are closer to renegotiating the line of credit before you would cut the preferred?

Scott Musil

Here, what I would say about that is we said in the remarks. We think that there's a lot of reasons that make sense to amend the line of credit that for us, for our bank group and for our other stakeholders, we think there's a lot of reasons to do that and that's our first choice depending on what can get done.

But again, there's no assurances we are going to be able to get something done and if we don't, then we will continue to do what we have been able to do, which is to work through it without getting coverage. I think we can do that. We feel confident that for the rest of the year we can do that.

I think that in terms of the preferreds, that's an option we have in terms of spending the dividends, but again, we are not anticipating suspending the dividend for the balance of the year. But we look at it every quarter.

Dan Donlan – Janney Capital Markets

Okay, that's helpful. As you discussed, if you do renegotiate the line that you might have to pay some down or to just take lower capacity. Do you know how much capacity you think you would lose there?

Scott Musil

You know, we don't want to speculate in that, but my guess is if you look at what's happened to lines that have been redone in the last year, I'd say down 15%, 20%.

Dan Donlan – Janney Capital Markets

Okay. That's reasonable. And then just one last one and then I will circle back. So as we think about your unconsolidated and indebtedness, at year-end if everything goes as planned, should there be about $25 million basically less? Is that number right, Scott?

Scott Musil

I'm sorry, what are you – Are you referring to the JVs? Or what are you referring to, Dan?

Dan Donlan – Janney Capital Markets

The unconsolidated joint venture debt, how much do you anticipate having at year-end? I'm just thinking about for NAV purposes.

Scott Musil

Okay. If the joint ventures with CalSTRS, if those close in the third quarter, we are just left with our 2010 three net lease fund and there's about for 2010, what's maturing is about $19 million at the venture level. Our share would be $2.85 million of it. The total debt at that JV is about $167 million, 15% of it would be about $25 million net.

Operator

(Operator Instructions) Your next question comes from Nathan Isikoff of Transwestern.

Nathan Isikoff – Transwestern

Good morning. I saw something recently that indicated – I think it came out of Green Street that indicated a cap rate from First Industrial of about 9 something percent, whereas for AMB I think it was something south of 8%. Given the assumption that the properties are in similar markets, why should there be such a dramatic difference in the cap rate attributed to your property?

Bruce Duncan

I think you should talk to Steven Frankel of Green Street on that.

Nathan Isikoff – Transwestern

I heard – yeah, he's listening but…

Bruce Duncan

From our standpoint, again, we have got a national portfolio across North America where we think we have good assets. I personally don't agree with the 9.5% cap rate, but every person has their opinion and that's their opinion and they are smart people.

If you look at the market today, the market is very strong. I think in terms of – if you look at what you are able to sell properties at today, it's probably the range of 6.5 to 8.5 and I think that it also is a property. So I think if you look at our portfolio and I think if you look at our portfolio, people that have done that, we've got a decent portfolio. Our portfolio compared to our competitors save AMB, I think our portfolio is pretty good.

Nathan Isikoff – Transwestern

I'm just a simple practitioner of industrial real estate and I have looked at your portfolio and I don't think there's any justification whatsoever for that much difference in cap rate between say an AMB and I haven't checked to see what the others are capped at. But assets are worth what they're worth depending upon the market and the particular characteristics of the asset. There just isn't that much difference unless there's a difference in the markets.

Bruce Duncan

We agree with you.

Scott Musil

Thanks, Nathan.

Nathan Isikoff – Transwestern

Thank you.

Operator

The next question comes from Mattie Elan [ph] of Alumot Sprint Fund.

Mattie Elan – Alumot-Sprint Fund

Hi, guys.

Scott Musil

Hi. How are you?

Mattie Elan – Alumot-Sprint Fund

I have a quick question there regarding the covenants again. Everybody is asking about it. I guess we are all concerned about the covenants. In terms of the covenants, can you talk about it a little bit more now after we finished with the second Q? How do you guys feel about it and do you feel you're going to have some problems meeting it without stopping the dividend, the preferred dividend for the rest of the year?

Scott Musil

Yeah. Sure, this is Scott Musil. What we've been saying is we have our 2010 plan. If we meet that plan for the next two quarters, we will pass our covenants.

Mattie Elan – Alumot-Sprint Fund

Okay. In terms of progress and the end of the second quarter, I mean, do you see any change coming up? I know you need to wait for the third quarter, but we are past almost a month after that.

Scott Musil

We issued guidance last night and we are comfortable with that guidance, which is the basis for our plan. If we meet our plan in the third and fourth quarter, we will meet our covenants.

Mattie Elan – Alumot-Sprint Fund

Okay. And one more quick question. Can you talk about the – I mean the continuation of the decrease in the rates? I mean you guys – Bruce just spoke about it, about it's going to take another few quarters, but do you guys see any improvement in terms of geographically maybe or something like that?

Bruce Duncan

Here, I would say look at it two ways. Number one, the rates are bottoming across the country. We feel like we've hit – we're at the bottom. Things – we think they will start going up in certain markets. They are going up, but most markets are really flat I would say. But we think they will go up as occupancy increases and you get your occupancy back up to over 90% in terms of these markets.

I would say from a perspective of rollover, remember, a lot of these leases we've done were five, seven, eight years leases. But back then rents were higher than where they are today. So you are going to have rent rollover if you take – say the peak of the market was 2007 or 2008 – you will have rollover for the next couple of years, roll down I mean.

Scott Musil

Thanks, Mattie.

Operator

(Operator Instructions) Your next question comes from Tony Cutinelli, CLC Management.

Tony Cutinelli – CLC Management

Hi, guys. Just a quick one. Have you made a decision yet on the third-quarter preferred dividend?

Bruce Duncan

No, we haven't. We do that in September, early September.

Tony Cutinelli – CLC Management

Okay. And over the past quarter, would you say that the balance sheet has improved and moved to farther away from your covenants or have you moved the other way, closer to triggering those covenants?

Scott Musil

What we have said is we are close on the covenants and our notes and our line of credit and really very close on our fixed charge coverage ratio and our line of credit and our unsecured leverage in our line of credit.

Bruce Duncan

But the good news is occupancy to me – when I look at it, I look at it and say occupancy is up and good things start to happen when that happens. So I think that's a good sign and I think it's not just us. I think the world is better in the overall industrial markets. That is nothing new is being built and you're getting stabilization. So I think that bodes well for us.

Tony Cutinelli – CLC Management

That sounds good. Has there been –? Last question, has there been any consideration to maybe offering a tender for these preferreds, not necessarily at the price they were issued at a lower price so you could get these off your books considering the high rate that you are paying?

Bruce Duncan

I would say our focus to date has been on our short-term debt maturities. So I would think about that.

Tony Cutinelli – CLC Management

Okay. Thank you.

Operator

Your next question comes from Ki Bin Kim of Macquarie.

Ki Bin Kim – Macquarie

Thanks. Just a quick follow-up. On your operating expense side, it looks like it went down a bit this quarter. How much of that – could you describe that? How much of that was due to restructuring?

Scott Musil

Well, the restructuring doesn't affect the operating expense from the property operating expense and again, the primary drop was the reduction in bad debt expense. We had some other general expenses that went down like real estate taxes, but the majority of that was due to the bad debt expense. Again, the property operating expense would not be affected by the restructuring.

Ki Bin Kim – Macquarie

Even – if you?

Scott Musil

As of the past but it will be reduced in the third and fourth quarter.

Bruce Duncan

But the second quarter wouldn't have had an impact.

Ki Bin Kim – Macquarie

Okay. So what would be a good run rate?

Scott Musil

What we have said is about $0.02 per share for the third and fourth quarter would be – Our operating of property expenses would be reduced related to the headcount cuts.

Ki Bin Kim – Macquarie

Okay. Thanks.

Bruce Duncan

So that's five months.

Ki Bin Kim – Macquarie

And how much – I guess it's a touchy subject, but if you had to do it, how much more G&A could you cut or are you pretty much down at the core minimum level?

Bruce Duncan

I think we've got a great team. I think we are at a level that – where we are going to be.

Ki Bin Kim – Macquarie

Okay. Thank you.

Bruce Duncan

Thank you.

Operator

The next question comes from Dan Donlan of Janney Capital Markets.

Dan Donlan – Janney Capital Markets

Yes. I was just curious. How much were your rental rates down on a GAAP basis?

Scott Musil

Dan, on a GAAP basis for the quarter, they were down 11.2%.

Dan Donlan – Janney Capital Markets

Okay. And then lease terms for the quarter? I'm sorry if I missed that.

Scott Musil

It was $300,000.

Bruce Duncan

Lease terms.

Scott Musil

You're talking about lease termination fees? Is that what your question was?

Dan Donlan – Janney Capital Markets

Yes, sir.

Bruce Duncan

Okay. Absolutely.

Dan Donlan – Janney Capital Markets

That's it for me.

Bruce Duncan

All right. Thanks, Dan.

Operator

Next question comes from Steven Frankel of Green Street Advisors.

Steven Frankel – Green Street Advisors

Thank you. On the sales this quarter, what are the occupancy for both of the – the blended occupancy for Baltimore and Atlanta? I guess from your comments, Atlanta was empty.

Bruce Duncan

Atlanta was leased, but it was as of the end of the quarter, it was empty. And the other building was empty.

Steven Frankel – Green Street Advisors

Okay. So both buildings were empty?

Scott Musil

Yeah.

Steven Frankel – Green Street Advisors

Okay.

Scott Musil

The Atlanta asset was going to be – the lease was expiring in the next quarter, so as of the sale date, but it was going to be empty as of next quarter.

Steven Frankel – Green Street Advisors

Okay. Thank you.

Operator

Next question comes from Stuart Henley [ph], a private investor.

Stuart Henley

Good morning. Thank you. Am I correct on your coverage ratios on page 16 of the Q2 supplemental that the one ratio actually did pick up and show some improvement this quarter over Q1?

Scott Musil

Yes, it did.

Stuart Henley

Thank you. And regarding the equity offering that commenced in May, around that time when the stock was over eight and markets were stronger, a stock actually traded quite a bit of volume. So my question would be did you sell the amount of stock that you wanted to or did the market start running away from you?

Bruce Duncan

I would say the market started going in a different direction from where we wanted it, right.

Stuart Henley

Thank you very much.

Operator

(Operator Instructions). Your next question comes from Dan Donlan of Janney Capital Markets.

Dan Donlan – Janney Capital Markets

Just last question. Jojo, I was curious if the expansion of the heartland corridor has had any effect on some of your Midwest markets. I was thinking Columbus, possibly Chicago?

Jojo Yap

From a gross absorption side, it would, but just want to mention that there is still a lot of product in that corridor and primarily both distribution space. So in terms of fundamentals, there's significant competition. So in order to really get better fundamentals or increasing rail rates, what's going to happen is that supply really has to come down a bit or absorb.

Operator

Thank you. At this time there are no further questions. This concludes the question-and-answer session of today's call. I would now like to turn the conference back over to Mr. Bruce Duncan for any closing remarks.

Bruce Duncan

Great. Thank you, Paula and thank you all for participating on the call today. Please follow up with Art or Scott or myself if you have any questions. We would love to make sure that we answered all. Thank you very much.

Scott Musil

Thank you.

Operator

Thank you. This concludes your conference. You may now disconnect.

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Source: First Industrial Realty Trust, Inc. Q2 2010 Earnings Call Transcript
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