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Executives

Art Harmon – Senior Director, IR

Bruce Duncan – President and CEO

Scott Musil – CFO

Jojo Yap – Chief Investment Officer

Chris Schneider – SVP, Operations

Bob Walter – SVP, Capital Markets

Analysts

Craig Mail – Keybanc Capital Markets

Ki Bin Kim – Macquarie Research Equities

Paul Adornato – BMO Capital Markets

Dan Donlan – Janney Capital Market

John Stewart – Green Street Advisors

Michael Muller – JP Morgan

Dan Donlan – Janney Capital Market

Chris Caton – Morgan Stanley

Dave Rodgers – RBC Capital Markets

First Industrial Realty Trust, Inc. (FR) Q3 2011 Earnings Conference Call October 27, 2011 12:00 PM ET

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today.

At this time, I would like to welcome everyone to the First Industrial Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be a question-and-answer session.

(Operator Instructions) I would now like to turn the call over to Mr. Art Harmon, Senior Director of Investor Relations. Mr. Harmon, you may begin.

Art Harmon

Thank you, Sarah. Hello everyone and welcome to our call. Before we discuss our third quarter 2011 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 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 provision 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 risk discussed in First Industrial 10-K for the year ending December 31st, 2010, filed with the SEC and subsequent report 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. Since this call may be accessed via replay for a period of time, it is important to know that today’s call includes time sensitive information that may be accurate only as of today’s date, October 27, 2011.

Our call will begin with remarks by Bruce Duncan, our President and CEO, to be followed by Scott Musil, our Chief Financial Officer who will discuss our results, capital position and guidance. After which we will open it up for your questions.

Also on the call today are Jojo Yap, our Chief Investment Officer; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now, let me turn the call over to Bruce.

Bruce Duncan

Thanks, Art, and thank you to everyone for joining us today. We continue to make progress in our business during the quarter. The First Industrial team is doing an excellent job of executing our strategy and I thank all of my colleagues for their efforts and contributions.

In our portfolio, occupancy improved again in the third quarter to 86.6%, up 50 basis points from last quarter and 300 basis points from a year ago. The third quarter gain was attributable to our dispositions which included several vacant properties, largely as a result of our occupancy gains throughout the year.

Our same store NOI on a cash basis turned positive this quarter, the first time since the fourth quarter of 2008. Excluding termination fees, same store NOI was positive 2.7%. Looking at the overall state of demand, the US industrial market delivered its fifth consecutive quarter of positive net absorption and we continue to see leasing activity across nearly all of our markets.

But we have seen some prospects be more deliberate in committing the space as they accept all the headline news such as Europe, US budget debates, the volatility of the stock market and the related impact on consumer confidence as seen in Tuesday’s report. Hopefully, today’s news of the European accord, as well as the GDP number, will give this business community some renewed conviction.

Our rental rates changed during the quarter with minus 10.8%, in line with our forecast reflecting the impact of the turnover of lease to sign in years where market rates were higher. As we have in the past, we continue to be focused on achieving higher rental rate bumps. Escalations on long-term leases commencing in the quarter averaged 4.2% annually. We also continued to keep lease term shorter as the average term with 3.9 years for lease is greater than 12 months compared to our portfolio average of 5.9 years.

Regarding dispositions of non-strategic assets, we are on target toward our $100 million goal for 2011, with $74.2 million of total sales completed through September 30th. Third quarter sales totaled $43.2 million, comprised of 12 buildings for $23.7 million or $24 per square foot, and one land parcel for $19.5 million.

During the quarter, we also disposed of a property with a book value of $3.2 million through a deed in lieu transaction. In total, third quarter dispositions exceeded their written down book value by approximately 20%. More importantly, the in-place yield on this $43.2 million of sales was less than 2%. Importantly, our sales are having an impact on improving the overall quality of our portfolio.

We continue to execute on user sales, which accounted for 37% of the quarter’s building sales by dollar volume. User buyers remain active in the industrial market place and our key target for many of our non strategic assets. We’re using sales to reshape our market concentrations as well, as reflected in the sale of three buildings totaling 226,000 square feet in Detroit, 150,000 square foot building in Sumner, Iowa; and a 36,000 square foot property in Shreveport, Louisiana.

Our largest sale during the quarter with an 82-acre parcel of land in Toronto that we sold for $19.5 million, a price that exceeded our original purchase basis. We were again active on the balance sheet. We retired $129 million of our September 2011 convertible notes, using the capacity on our line of credit per our plan we discussed last quarter.

We executed $37.9 million of note repurchases during the third quarter with an average weighted yield to maturity of 7.6%. We also took the opportunity to lock in attractive economics by completing a 10-year secured financing for $77.6 million at a fixed rate of 4.85%.

Let me provide you with an update on our deleveraging efforts. As of September 30th, our debt-to-EBITDA ratio was 7.2 times, within our targeted range of 6.5 to 7.5 times. We would look to improve this ratio primarily by growing EBITDA. We remind you that our target excludes our outstanding preferred stock, which adds to our effective leverage. We believe we have made great progress in deleveraging and extending the maturities on our balance sheet.

Updating you on the investment front, our 692,000 square foot First Inland Logistics Center Development in the Inland Empire in Southern California is on track, with completion expected in the first quarter of 2012. The market continues to be active for large users and our job is to bring home a tenant. We will keep you apprised of our progress.

Our team is also working to source acquisition opportunities towards our goal of reinvesting sales proceeds into high-quality properties in higher growing markets. We have a few properties on the radar screen, but overall, it is challenging to find quality assets at attractive pricing.

The good news is that we believe that there’s positive implications to the value of our existing portfolio. We will be disciplined as we deploy the capital we generate from sales, weigh in our investment opportunities versus buying back debt as we have in recent quarters.

So in sum, we continue to execute our plan. With the heavy lifting done on the balance sheet, our team remains focused on leasing the dry cash flow, executing on our sales plan and using the strength of our platform for discipline new investments all towards the goal of creating value for shareholders.

Now, let me turn it over to Scott.

Scott Musil

Thanks Bruce. First, let me walk you through our results for the quarter. Funds from operations were $0.19 per share compared to a loss of a $1.96 per share in the year-ago quarter. FFO per share results were impacted by a few one-time items such as a $0.03 impairment on a real estate primarily due to our held-for-sale portfolio, a $0.02 NAREIT-compliant gain from our land sale in Toronto.

Our results were also impacted by a $0.02 charge for the mark-to-market accounting treatment for our hedge on our Series F preferred stock resulting from the sizable decline in the 30-year Treasury rate during the period. Comparing 3Q 2011 to 3Q 2010 before one-time items such as balance sheet impairment, losses from early retirement of debt, gain from the sale of joint venture investment in the third quarter of 2010, and restructuring costs, funds from operations were $0.22 per share versus $0.30 per share in the year-ago quarter. EPS for the quarter was a loss of $0.10 per share versus the loss of $2.44 per share in the year-ago quarter.

Moving on to the portfolio. As Bruce discussed, our occupancy for our in-service portfolio was 86.6%, up 50 basis points from 86.1% last quarter and up 300 basis points from 83.6% a year ago.

In the third quarter, we commit 5 million square feet of leases on our balance sheet. Of these, 1.4 million square feet were new, 2.3 million were renewals and 1.3 million were short-term. Tenant retention was in line with our guidance at 70.1%. Same store NOI on a cash basis was a positive 2.7%, excluding lease termination fees.

These results reflected a positive impact of average same store occupancy increasing 340 basis points compared to the third quarter of 2010. Rental rates were down 10.8% cash on cash, consistent with our guidance. On a GAAP basis, rental rates were down 7.3%. Leasing costs were $2.96 per square foot for the quarter. Year-to-date through the third quarter, leasing costs were $2.56 per square foot. Lease termination fees totaled $685,000 in the quarter.

Moving on to our capital market activities and capital position. As Bruce mentioned, we retired the outstanding $129 million of our September 2011 convertible debt using borrowings on our line of credit. During the quarter, we continued our efforts to reduce indebtedness and interest cost, by repurchasing $22.5 million of our 7.5% senior unsecured notes due in 2017, $6 million of our 5.95% notes due in 2017, and $9.4 million of our 7.6% notes due in 2028.

Subsequent to quarter end, we repurchased a total $7.1 million of unsecured notes comprised of $6 million of the 7.6% notes due in 2028 and $1.1 million of the 6.42% notes due in 2014. We also completed a $77.6 million secured financing that Bruce discussed earlier.

For our press release last month, the financing is for 10 years, fixed at an interest rate of 4.85% and secured by 24 buildings, totaling 2.3 million square feet. Excluding our credit facility, our net significant debt maturity is the remaining $62 million of the 6.875% notes due April 2012. We have capacity under our existing facility earmarked to pay that maturity off.

As we go to last quarter, next up in the capital front is our facility which matures in September of 2012. We expect to replace this credit facility by the end of the first quarter of next year. The bank market continues to be active and open and banks have demonstrated that they like REIT [ph] borrowers given the industry’s collective performance through the recent downturn.

Bruce already walked you through the details on our sales. Thinking about sources and uses, as we generate proceeds from future sales, we will use the proceeds for either new investments or debt reduction depending on the relative value of opportunities we see.

Quickly summarizing our capital structure and current capital position. Our weighted average maturity of our unsecured notes and secured financing thing is 7.1 years, with a weighted average interest rate of 6.6%. These figures exclude our credit facility. Our cash position is approximately $26 million and we have $148 million available of the $200 million revolving portion of our credit facility. We have $100 million outstanding on the term loan portion of our facility and our debt-to-EBITDA ratio is approximately 7.2 times using a normalized G&A expense run rate.

Moving on to our guidance. For our press release we tightened our FFO guidance range for 2011 to $0.81 to $0.87 per share. Our guidance range for 2011 before one-time items such as restructuring cost, losses from retirement of debt and balance sheet impairment is $0.85 to $0.91 per share. The midpoint is unchanged from our last call and I’ll remind you that our midpoint has remained unchanged throughout the year despite our two equity raises earlier this year.

Given that the first three quarters are in the books, we have also tightened up the ranges for certain key components of guidance. We expect average in-service occupancy of 85.5% to 86.5%. Same store NOI and the cash basis for the year is projected to be negative 0.5% to positive 1%, a $2 million reduction in our G&A guidance range to $20.5 million to $21.5 million, and JV FFO of approximately $1.7 million.

Our 2011 guidance does not reflect the impact of any further debt issuances or repurchases prior to maturity other than the notes we repurchased in the fourth quarter that I discussed earlier. Guidance also does not reflect future property sales or acquisition, any NAREIT Compliant Gain, any impairment gains or losses, or any potential additional equity issuance. We will provide guidance for 2012 on our fourth quarter call.

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

Bruce Duncan

Thanks, Scott. Before we open it up to questions, let me offer a few brief concluding comments. We remained focused on executing on the drivers we have laid out for you. We’ve seen an improving cash flow, continuing our expense discipline, executing our asset management strategy and using the strengths of our platform to make disciplined investment that contribute to long-term growth.

As you know, we have our investor day on November 9th in New York City and a property tour the following day. Our goal for that event is to provide the investment community with additional insight into our portfolio, our opportunities and our platform, including the bench strength of our team. We look forward to seeing those of you who joined us in person and we appreciate the participation of those who will be listening to the webcast of the event.

We would now be happy to take your question. And as a courtesy to other callers, we ask that you limit your questions to one, plus a follow-up, in order to give other participants a chance to get their questions answered. You’re welcome to get back into the queue.

And so now, operator, may we please open it up for questions?

Question-and-Answer Session

Operator

(Operator instruction) And your first question comes from the line of Craig Mailman from Keybanc. Your line is open.

Craig Mail – Keybanc Capital Markets

Good afternoon. I was just hoping maybe you could give a little bit more color on your comments surrounding the hesitancy of some tenants just given the headlines that have been coming across. Maybe give us a sense of markets that it’s in, type of tenants, if that’s possible.

Bruce Duncan

Well, Craig, let me expand on that a little bit. The activity is good in terms of the – we’ve seen a lot of interest in space throughout the country. So that has been good. The disappointing thing for us or for me is that in some of these markets, we’ve been closed on a couple of things and we haven’t been able to bring over the line in terms of people who are just holding back and we’re going to make a decision. They’re saying, “All right, now, we’re going to wait another couple of months to do (inaudible).”

That has been disappointing and hopefully with the recent (inaudible) we’re going to get a better clarity and better confidence when people start making decisions, because we’ve had a bunch of leases in different markets where things have been put off.

Craig Mail – Keybanc Capital Markets

Okay. That’s helpful. Then just a quick follow-up. I know you guys haven’t signed any leases yet out in the Inland Empire and the new development, but can you give us a sense of the number of requirements out there or maybe the square footage that you’re tracking?

Bruce Duncan

Sure. Let me have Jo handle that.

Jojo Yap

Yes, there’s been numerous requirements and there’s plentiful over 600,000 square feet. Just to give you a sense, Craig, net absorption to date is about 12 million square feet on the Inland Empire. So that’s the third quarter year-to-date. And there is an acute shortage for facilities over 600,000 square feet.

In terms of rental rates, you’re looking at low 30s that meaning deals are being done today in the 32, 33, 34 net per square foot per month.

Bruce Duncan

So 32, 33, 34 (inaudible) per month.

Jojo Yap

Correct, per month. Did I answer your question, Craig?

Craig Mail – Keybanc Capital Markets

I just want to clarify. Did you say 600,000 square feet of requirements that you’re tracking? I didn’t hear the first part.

Jojo Yap

Yes, 600,000 square feet and above. That’s very (inaudible) and there’s not a lot of buildings that could accommodate that size today.

Craig Mail – Keybanc Capital Markets

Great. Thank you.

Jojo Yap

Thank you.

Operator

Your next question comes from the line of Ki Bin Kim from Macquarie. Your line is open.

Ki Bin Kim – Macquarie Research Equities

Thank you. I just want to clarify one quick point before I ask a question. Is it right that the occupancy in the portfolio didn’t increase sequentially if you include sold assets?

Bruce Duncan

That’s correct. In fact, they’re down slightly 10 basis points.

Ki Bin Kim – Macquarie Research Equities

Okay. I mean, can you just provide a little more commentary on that? Is that really just related to what you just said about tenants are taking longer to sign that lease? And is that basically what we’re looking at?

Bruce Duncan

Yes, we’re seeing good activity and phases in terms of negotiations, tenants visiting our property. So, we’re encouraged by that. We’re disappointed in the quarter that both in Atlanta and Dallas that these two particular markets, certain transactions didn’t get done during the quarter.

Ki Bin Kim – Macquarie Research Equities

Did it change in October at all?

Bruce Duncan

I would say we’re still working on it.

Ki Bin Kim – Macquarie Research Equities

Okay. And just a last follow-up to that. I know it’s a big factor for you guys in terms of same store NOI performance has been free rent. And could you just give us a little color on where is that free rent number today in dollar terms and where was it in the last quarter?

Christopher Schneider

Ki Bin, this is Chris. The free rent, right now, it’s pretty much leveled up. So the number for 3Q was about $2.5 million. The number in 2Q is about $2.3 million. So it actually went up slightly, but we are starting to see more leases done, with the free rent starting to ease overall. So I think more in future course, you’ll see benefit of that free rent (inaudible).

Ki Bin Kim – Macquarie Research Equities

All right. Thank you.

Operator

Your next question comes from the line of Paul Adornato from BMO Capital Markets. Your line is open.

Paul Adornato – BMO Capital Markets

Hi. I was wondering, with respect to dispositions, given the success that you’ve had, getting rid of some of the underperforming assets. I was wondering if that has allowed you to consider a larger portfolio sale as a means to delever perhaps a little bit more quickly and otherwise position yourself in assets that you like for the longer term.

Bruce Duncan

Well, we’re happy with the strategy we’re focused on. Again, user sale is an important component of it. As I said in my script, 37% of our buildings were to users. And again, users pay a bigger price. So, we like focusing on that and we’ll probably continue with the same strategy in terms of getting rid of our non-strategic assets. And again, we feel very good about the progress we’re making in terms of upgrading the portfolio.

Paul Adornato – BMO Capital Markets

As a follow-up, do you see any premium for portfolios of industrial assets these days?

Christopher Schneider

It’s not anymore. There is a significant amount of demand across the industrial product all across the nation. Of course, there’s more demand in the coast. But right now, because of the shortage of supply and the significant amount of capital trying to get in industrial product, you pretty much see the same line of bidding anything about $10 million (inaudible).

Paul Adornato – BMO Capital Markets

Okay. Thank you.

Christopher Schneider

Thank you.

Operator

Your next question comes from the line of Katelyn Burrows from Credit Suisse. Your line is open.

Katelyn Burrows – Credit Suisse

Hi. You mentioned that you tightened your 2011 FFO guidance; however, there are still somewhat of a wide range. Is there any reason for the remaining range?

Scott Musil

Sure. This is Scott Musil. Our guidance of FFO before one-time items is $0.85 to $0.91, midpoint being $0.88. So, it’s about a $0.03 difference between the low point of the range and the midpoint and a $0.03 difference between the midpoint and the highpoint of the range.

That gets you to about $2.5 million or $2.6 million of an FFO fluctuation. So, there are two items that are causing that. One is our occupancy guidance that we have from the fourth quarter. There is a range there that causes about $1.8 million of fluctuation.

The other piece that we have as well is our G&A guidance. Our G&A guidance, the low end of the guidance is about $500,000 below the midpoint and the high end of the guidance is about $500,000 as well. So, when you accumulate those two items, you get to that $2.6 million that I discussed.

Katelyn Burrows – Credit Suisse

Okay. So then, my follow-up question was going to say how would numbers have to change in order to get to the bottom of that range? But it sounds like if you were just to be at the low end of occupancy and high end of G&A that that’s how you would get there.

Scott Musil

That’s correct.

Katelyn Burrows – Credit Suisse

Okay. Thank you.

Operator

(Operator instruction) And your next question comes from the line of Dan Donlan from Janney Capital Market. Your line is open.

Dan Donlan – Janney Capital Market

Thank you. Could you guys comment on why the held-for-sale portfolio was reduced from 158 properties to 75 in the quarter?

Scott Musil

Sure. Dan, this is Scott Musil. I’ll go through the book value changes that we had. So, at the end of the second quarter, we had about $312 million of book value held-for-sale.

In the third quarter, we sold about $35 million book value of properties. We also reclassified about $42 million of those properties that’s strategic and we also took out of that held-for-sale pool about $74 million of book value of properties.

Now, that $74 million is still non-strategic and we do plan to sell those properties. But per the GAAP accounting rule, we’re not allowed to include them in held-for-sale unless we’re actually marketing those properties. So, an example would be is, there could be properties in that $74 million bucket that has, say, a 20% occupancy rate. And we feel that it makes sense to lease that up to 90% before we start marketing efforts.

So, we’re not able to include that in held-for-sale until we hit that point.

Dan Donlan – Janney Capital Market

Okay. So, basically, you didn’t reduce what you’d like to sell from a total property standpoint. You just had to do it for accounting reasons?

Bruce Duncan

Yes. I think that we get to move some assets back to non-strategic. The non-strategic assets, our goal is to sell those properties over the next two to three years. In terms of the strategic properties moving from non-strategic, there are some reasons. But Bob, why don’t you just go through a couple of examples.

Bob Walter

Yes. I think some of the better examples would be a number of the land parcels. Obviously, our development in Southern California is an example of that where we saw the market recover. We accelerated our entitlement process and have started developing.

So that was a parcel of land that was non-strategic that is now strategic. We’ve got a couple of other land parcels where a similar situation is going on in Pennsylvania that will be in our investor day tour where we’re starting the entitlement process and does have taken them out of the non-strategic pool again because those markets have recovered quite nicely.

Dan Donlan – Janney Capital Market

Okay. And what’s the current occupancy of the held-for-sale portfolio now?

Scott Musil

Dan, I don’t have that number here. I’ll have to get back to you on that.

Dan Donlan – Janney Capital Market

Okay.

Christopher Schneider

Dan, on the strategic, non-strategic, we do have that breakdown so the occupancy and the non-strategic is about 79%, and the strategic is about 88%.

Scott Musil

And keep in mind the non-strategic portfolio exceeds what we have held-for-sale then.

Dan Donlan – Janney Capital Market

Okay. And then, sorry, last question. Scott, can you maybe give us a little bit of range on the rate that you’re looking at for the facility?

Bruce Duncan

Yes.

Scott Musil

I agree, Bruce. Dan, it’s Scott. It’s just too early at this time to get into detail to what we think the rate is going to be. But as Bruce mentioned, we feel confident that it will be less of a spread than what we’re paying now.

Dan Donlan – Janney Capital Market

Okay. Thank you very much.

Operator

Your next question comes from the line of John Stewart from Green Street Advisors. Your line is open.

John Stewart – Green Street Advisors

Thank you. Bruce, I was hoping you could come back to your comment about selectively pursuing acquisition opportunities and touch specifically on which markets you’d be looking at and maybe your underwriting criteria as well and how you balance that capital allocation decision relative to buying back debt at 7.5% coupon.

Bruce Duncan

All right. Well, let me start in terms of – probably a great example in terms of looking at what we’re interested in the market. I mean, we’re interested in Southern California. We’re doing the development to Southern California, the 692,000 square feet. We like that. In terms of – and we bought the property, the 654,000 square foot property in Houston, we like that market too.

Our strategy in terms of acquisition is going to be one-off in terms of using our platform, using our people, boots on the ground to execute one-off acquisition, and there probably have some value add lease stuck rents and things like that because you think that’s where we’ll be able to get it better pricing. But as we said in the remarks, it is a competitive market out there and we do look at the returns we’re buying at or we can buy (inaudible) leveraging by paying down debt.

And again, part of buying we’re continuing to focus on is upgrading the portfolio. That’s why we’re focused on selling non-strategic pool, and we’re making progress on that, and then redeploying assets in the good market and good assets. And so that’s another reason in terms of when we look at these assets. We’re going to guy high-quality assets and good markets and we’ probably have a little bit of hair on them until we get a better return, but in a way of versus buying back debt. As we (inaudible) in the quarter, we bought back a bunch of debt.

John Stewart – Green Street Advisors

Right. So, what kind of stabilized yields are you seeing on acquisition opportunities in these target markets?

Bruce Duncan

I would say in terms of – you’re looking at probably 7% to 8%.

John Stewart – Green Street Advisors

Okay. Scott, could you show with us what triggers the impairment on the held-for-sale portfolio this quarter?

Scott Musil

Sure. Under GAAP, we’re required to look at our held-for-use and our held-for-sale portfolio on a quarterly basis for impairment. So, the $2.5 million impairment charge we took in the third quarter was on our held-for-sale portfolio. So, as we get new data in regarding changes and what third parties think the worth of the portfolio is, or in some cases where we’re still valuing the portfolio via models, there might be cases where some of the leasing assumptions have changed. Those are basically the two reasons that cause the $2.5 million impairment that we took in the third quarter. And again, that was on our held-for-sale portfolio.

John Stewart – Green Street Advisors

Any specific assets or markets that that pertain to?

Scott Musil

It was pretty spread out between different markets and there was some impairment in Detroit. We have a non-strategic asset in Tennessee that we took in-charge on as well. But there were quite a few assets we took in impairment – I mean, quite a few assets like 19 or so that we took impairment on.

John Stewart – Green Street Advisors

Okay. And then, just a lastly, Bruce, if you could remind us how much in total – aside from what’s classified as held-for-sale, how much in total do you consider to be non-core and maybe just a brief kind of a strategic refresher in terms of what you want – First Industrial will look like when it grows up and which markets or how few markets you want to be in?

Bruce Duncan

Okay. We start out with the non-strategic pool. It was about a little over $400 million. Probably, in terms of where we are today with sales, you’re in the $300 million range. And our view of it in terms of what we’re doing is throughout the portfolio going and we identified buildings that we think we don’t have that great a future in terms of – be it functionality, be it location. We think location is a challenge. And so, we’re trying to move merchandise.

In terms of where we want to be long-term, again, we want to continue to upgrade the qualities of portfolio in each of the markets we’re in. We will lighten the load in the Midwest overtime. That doesn’t mean we like having a national platform, but we will have left there. We will have more properties in some of the markets such as Southern California, which is really I think our largest market right now. But we’ll continue to do more there and market like Houston and the like.

Again, when we look at our portfolio, we think we – our valuation, we don’t get credit for what we have and that’s going to be a focus on the investor day to try and show the quality of our portfolio in different buckets in terms of different types of real estate and show where our vacancies are and show that we think there’s a plan that leads up to these vacancies and we think we have a pretty decent portfolio.

But the focus is, again, on the disposition side, to get rid of the property we just don’t fit long-term and reduce the exposure to the Midwest. And then, also focus on new investment in good markets with very high quality buildings.

John Stewart – Green Street Advisors

And how about the right number of markets, what do you think is the right mix there?

Bruce Duncan

Right now, we’re in 20-something market. My guess is you’re going to lower that by a number over time. But again, we’ll let you know in terms when we lower it as we make progress on disposing of assets. But the most focus is we like having the platform, the national platform, but there are some markets that we think in terms of we need to whittle down on size.

John Stewart – Green Street Advisors

Okay. Thank you.

Bruce Duncan

(inaudible)

John Stewart – Green Street Advisors

Thank you.

Operator

Your next question comes from the line Michael Muller from JP Morgan. Your line is open.

Michael Muller – JP Morgan

Hi. Most questions have been answered. One clarification on the prior question, Bruce. When you talked about 300 million ended at a 400 million, that’s 300 million left to sell, correct?

Bruce Duncan

Yes.

Michael Muller – JP Morgan

Okay. And then second question on G&A, with the G&A guidance down a little bit lower. Could you just talk about where some of the savings are coming from and is it something that is a little more 2011 specific where it’s going to be sticky and move into 2012 and beyond?

Scott Musil

Mike, this is Scott Musil. So, we had a $2 million decline in the midpoint of our guidance and G&A. About $1 million of that is due to less projected expenses than anticipated. There’s not one category that that relates to. There’s a lot of different categories whether it’s salaries and wages or travel and entertainment or professional costs.

So, at this point in time, since we’re at the end of third quarter, we feel that those savings for this year is going to be permanent. Then the other $1 million of reduction in G&A is really what I called non-cash related. In accordance with GAAP, we’re allowed to capitalize the compensation and overhead costs of our leasing function, and that capitalization is coming in a little bit higher by about $1 million. As a result, we’re able to reduce G&A by that. But one million of it – I’m sorry?

Michael Muller – JP Morgan

Yes, I got it. I got.

Scott Musil

Okay.

Michael Muller – JP Morgan

Okay. Great. Thank you.

Operator

(Operator instruction) And your next question comes from the line of Dan Donlan from Janney Capital Market, your line is open.

Dan Donlan – Janney Capital Market

Thanks. Two quick ones. The $300 million of the non-strategic plan portfolio, how much NOI would you guess that generates?

Scott Musil

Right now, you’re probably in the mid-20s in terms of NOI.

Dan Donlan – Janney Capital Market

Okay.

Scott Musil

20 million.

Dan Donlan – Janney Capital Market

And then, lastly, if you could potentially classify what you have in terms of your vacancy, could you maybe give what portion, I mean, what the average age is of some of those properties?

Scott Musil

That’s a good segue. When you come to investor day, we’re going to be going through and focusing on all the vacancies so that we have a lot of details there. So, whether you come in person or you access us via the webcast, that would be a good time to go through that.

Dan Donlan – Janney Capital Market

Okay. You said it the last time. There must be something good coming down in investor day. Thank you.

Scott Musil

Thanks, Dan.

Operator

Your next question comes from the line Chris Caton from Morgan Stanley, your line is open.

Chris Caton – Morgan Stanley

Thanks. Hi. My question is on lease structuring. Bruce talked about 4.2% annual rent bumps. I think you had something similar last quarter. Are you doing anything differently now in terms of restructuring here versus your existing portfolio and also versus what’s typical in the market? And so where are you making concessions to achieve what is optimal in your view?

Bruce Duncan

So this is one of the strategies we’ve been employed for the last few years. We may start out with a lower rate, but we have certainly deep bumps in our portfolio. Do you want to add anything?

Scott Musil

Yes. The strategy with the bumps is that we’re looking forward to where we think market rents is going to be in one, two and three years. So, consistent with that, if it feels rebound we also want to have the rent steps built into leaps that we’re setting today. So we’re trying to be consistent with that. But what you’re seeing in – you’ve probably seen a little bit higher rent steps overall compared to our historical average.

Chris Caton - Morgan Stanley

And then two…

Chris Schneider

We’re also expecting further rent growth. So that’s why you’re seeing us not tying up the spaces for a long time. That’s why our durations are short in average.

Chris Caton – Morgan Stanley

Yes. And so your initial rate in the market place is a little bit lower than? And do you believe you continue to need – excuse me, continue to need to do that to lease the space? Is that reading between the lines, what I hear?

Scott Musil

I think it depends if market by market in terms of space by space, but on average, what we’ve been able to achieve a pretty decent increase in the places that we do it and we made conscious efforts in trying the shorter maturities that have been typical.

Chris Caton – Morgan Stanley

Thanks. And then just a last question.

Bruce Duncan

I don’t think we’re going to turn down a 10-year lease on somebody.

Chris Caton – Morgan Stanley

Yes, absolutely. And then as a follow-up, just how do you think that will affect your rental renewal spreads on a cash basis over the course of the next few years? And you reported 10.8% down, how do you think that will trend over the next few years?

Chris Schneider

Obviously, it’s going to get better, especially as you have rents or leases that were old, from say, 2007 and 2008. As you get further along those starting – or the expiring rents go down. And we also have the dynamic where (inaudible) rents are certain to go up. So, we’ll definitely see those spreads decrease over time.

Chris Caton – Morgan Stanley

And some of your peers have said they think by the end of ’12 that they could even see positive numbers. Do you think it could happen that quickly for your portfolio?

Bruce Duncan

Again, we’ll get down to it next quarter call, but our view point is, there is going to be an inflection points some point either during 2012 or the first part of ’13 where it should happen, but we’re not giving guidance to it.

Chris Caton – Morgan Stanley

Thanks very much. I appreciate it.

Bruce Duncan

Okay. Thank you, Chris.

Operator

Your next question comes from the line of Dave Rodgers from RBC Capital Markets. Your line is open.

Dave Rodgers – RBC Capital Markets

Hey, guys. From a leasing perspective, what are you seeing on the small blocks of space out there? Clearly, it’s been a weak part of the market I think throughout much of the year. Curious to know if you’re seeing any type of runaway growth or stabilization there in the demand for that type of space in the last quarter or two.

Scott Musil

One of the areas or one of markets where we have some of those tenants is Denver. And this past quarter, from 2Q to 3Q, we actually started – I can see an increase of about 3.7% in Denver. So, we’re starting to see a little bit more movement with those smaller tenants or smaller spaces that it certainly get a little bit more confident as far as the economy. But it’s still rough going forward, but we’re starting to see a little bit movement (inaudible) Denver, for instance, where we saw some occupancy increase.

Dave Rodgers – RBC Capital Markets

You think that those tenants are just price sensitive or is it really economic driven at this point?

Bruce Duncan

I think it’s both. I think it’s price sensitive and just the confidence.

Dave Rodgers – RBC Capital Markets

Okay. And then following up, I guess, on your comments earlier and some other questions. How many single tenant or user sales do you think you have left of that or maybe what percentage of the 300 million that you quantified might go that route. And I guess another way to think, have you considered that you want to sort of want to do this, but doing some equity at the same time in selling some incremental assets. I think like there’s a bid for (inaudible) with deals out there, these user sales that are kind of accelerating down the pipeline as the demand for assets seems to be outweighing the demand for fundamentals at this point in time?

Bruce Duncan

Well, we definitely think the market is pretty good and we’re working on that in terms of – for these non-strategic assets. But again, it’s hard to sort of plan or the timing of that because they come around. They use their own pace in terms of what they want to do. It’s not like you put a package on the market and all the users come that they couldn’t say they’re trying to do something and they end up doing it. Or we do think it’s a great execution that may pay much more than the income buyers.

Dave Rodgers – RBC Capital Markets

Any interest in accelerating asset sales program? Or are we going to continue on this solid pace that you’ve set?

Bruce Duncan

I think we’re going to continue on a solid pace, but to the extent – there’s an opportunity that we think to do it at good pricing. Again, the key is pricing. We want to make sure we get good execution on these dispositions. But so far, we’ve been very happy with it as evidenced by the – we’re selling 20% over what we’ve written down book value and we’re making progress on selling of assets that really are worst performing asset.

Dave Rodgers – RBC Capital Markets

Thank you.

Scott Musil

Thanks, Dave.

Operator

Your next question comes from the line of John Stewart from Green Street Advisors. Your line is open.

John Stewart – Green Street Advisors

Thank you. Just a couple of follow-up housekeeping items, if I may. Scott, first of all, can you share with us the LPD [ph] on the mortgage that you did?

Scott Musil

Yes, it was 70%.

John Stewart – Green Street Advisors

70%? Okay. And you referenced, I think, specifically that your guidance for the fourth quarter excludes restructuring cost. Was that basically referring to what you had incurred earlier this year? Do you expect to incur any charges in the fourth quarter?

Scott Musil

It was what we incurred in the first two quarters of the year. We don’t anticipate incurring any of those types of cost in the fourth quarter.

John Stewart – Green Street Advisors

Okay. Thank you. And then what’s your forecast for taxable income for the year?

Scott Musil

Well, I can tell you at the rate level for the first nine months of the year, our preferred dividend did exceed our taxable results. And when you look out for all of 2011, what we’re forecasting now is that our preferred dividends will exceed our taxable results as well. So we’re not going to be required to pay a distribution under the REIT rules based on what we’re seeing for 2011.

John Stewart – Green Street Advisors

Okay. And Bruce, do you have anything to add in terms of the dividend policy going forward?

Bruce Duncan

As a shareholder, I look forward to the day we reinstate it. But again, as we said before, our focus is – there’s some steps we have to achieve before we do that. And one of them – a big one is getting the line of credit redone. And again, our goal is to get that done by the end of the first quarter and continue to make progress on linking up the portfolio. So our goal is to return (inaudible) stock and we want to do that as soon as we can. So it’s the focus.

John Stewart - Green Street Advisors

All right. Thank you.

Operator

And your last question comes from the line of Ki Bin Kim from Macquarie. Your line is open.

Ki Bin Kim - Macquarie Research Equities

Thanks. Just a couple of quick follow-ups. First, could you comment on how much of the 2012 lease expirations you’ve been working on? And how much would that expose? And if there are any trends that you can talk about from those activities?

Bruce Duncan

Ki Bin, as far as our lease explorations for 2012, I think we’re sitting at about 19%, the rollover, so very similar to where we’ve been in past years. As always, we contact and it’s well in advance from their expirations and we’re going to have a lot of feedback where that is. But we’re locked again overall in the same position that we’ve been in past years. So, I feel comfortable with that.

Ki Bin Kim - Macquarie Research Equities

Can you talk about how much of that you’ve already done or is that (inaudible) couple of weeks from now?

Bruce Duncan

We want to say that make sure you’re in attendance.

Ki Bin Kim - Macquarie Research Equities

Right. And last question is a little bit fluffy, but I was wondering if – have you seen any movement from tunnels down (inaudible) from using, maybe, your smaller (inaudible) as to sell stories or anything like that?

Bruce Duncan

Not really. Not really. I would say if anything that’s trendy, if you look at it in terms of the state (inaudible) retention. I mean the amount of space being used that’s high and you see a lot of tenants talking about expansion, using them to sign a sign a document (inaudible). But we haven’t seen a move down self storage.

Ki Bin Kim - Macquarie Research Equities

Okay. Thank you.

Operator

And there are no further questions in queue.

Bruce Duncan. Great. Well, thank you, operator. And thank you all for participating in our call today. And please, if you any other questions, feel free to call us. We’re looking forward to those calls. And also, most importantly, we look forward to seeing some of you on investor day on November 9th in New York City, as well as for those of you we will see in (inaudible) Dallas in a few weeks.

Thanks, again. We appreciate it.

Bruce Duncan

Thank you, Sarah.

Operator

And this concludes today’s conference call, you may now disconnect.

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