Apr 24, 2008
First Industrial Realty Trust, Inc. (NYSE:FR) Q1 2008 Earnings Call Transcript April 24, 2008 12:00 pm ET
Executives
Sean O'Neill – SVP, IR and Corporate Communications Mike Brennan – President, CEO and Director Mike Havala – CFO Johannson Yap – Chief Investment Officer Rick Czerwinski – National Director of Leasing and Asset Management
Analysts
Christine Brown – Deutsche Bank Paul Adornato – BMO Capital Markets Robert Vermillion – Axial Capital Stephanie Krewson – Janney Montgomery Scott Cedrik Lachance – Green Street Advisors Jaime Feldman – UBS Mitch Germain – Banc of America
Operator
Good morning. My name is Rose and I will be your conference operator today.
At this time, I would like to welcome everyone to the first quarter 2008 results 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 period. (Operator instructions) It is now my pleasure to turn the floor over to your host, First Industrial Realty Trust.
Sean O'Neill
Good morning everyone. This is Sean O'Neill, Senior Vice President of Investor Relations and Corporate Communications.
Before we discuss our results for the quarter, let me remind everyone that this call contains forward-looking statements about First Industrial. A number of factors may cause the company's actual results to differ materially from those anticipated.
These factors can be found in our earnings release that is available on our Web site at firstindustrial.com. Now, let me turn the call over to Mike Brennan, our President and CEO.
Mike Brennan
Thank you very much, Sean, and welcome everybody to our first quarter 2008 earnings call. Before we begin, let me introduce the other members of senior management who are here with me today; Mike Havala, our Chief Financial Officer; Jojo Yap, our Chief Investment Officer; and Rick Czerwinski, our National Director of Leasing and Asset Management.
For our call today, I'm going to start by providing an overview of our results for the quarter as well as an outlook for the balance of the year. Mike Havala will then cover our operating results and capital position and will update our guidance for 2008.
On our last earnings call, we discussed our 2007 accomplishments. The growth of our development business and the increase in our strategic land holdings, the substantial growth of our joint ventures adding billions of dollars of new capital, our expansion into Europe and into Canada, the opening of U.S.
port markets such as Seattle Tacoma and our 12% FFO per share growth. In the first quarter of 2008, we've added to those accomplishments.
Utilizing our new $285 million Canadian joint venture, we made investments in all three targeted cities, in Toronto, in Calgary and in Edmonton. We announced a $475 million JV for investments in Belgium and the Netherlands.
Further expanding our strategic land investments in coastal and inland port markets, we increased our investments in the Inland Empire and in Chicago, and our bottom line results exceeded the top end of our FFO per share guidance range by $0.05 in the quarter. Now, despite a strong first quarter, the uncertainties in the market have made it prudent in our view to lower the bottom end of our 2008 FFO per share guidance range, which is now $4.70 to $5.
So, based on the midpoint of this new range, we anticipate FFO per share growth of approximately 5% this year. Before the revision, it was 5.6% which is of course more modest than double-digit growth that we achieved in 2006 and 2007.
And Mike Havala will provide greater details on the changes in the composition of guidance for 2008. As you know, we made sizable investments in our franchise over the past few years including opening new markets, raising approximately $6 billion in new private capital and recruiting world class professionals all designed to serve the supply chain needs of our customers.
And while market conditions are less favorable than they were last year, the structural drivers of demand for industrial space are still very much in place, namely international trade, demographic trends and supply chain reconfiguration, and we're well prepared to capitalize on those trends both in the long and short term. Because of those drivers of growth, our strategy remains squarely focused on creating industrial real estate solutions for every facet of our customers supply chains with a particular focus on the highest growth markets.
We further understand that our customers are confronting new challenges including higher transportation expenses, the challenge of attracting qualified labor and more complex logistics schemes due to longer supply chains. Our objective is to anticipate customers' evolving supply chain needs and to be fully prepared with the right space in the right market to deliver solutions.
Now, let me briefly touch on the quarter which again Mike Havala will discuss in greater detail. Portfolio results were very solid with year-over-year increases in same store NOI and occupancy and rental rates combined with decreases in leasing costs.
Of particular note, our total square footage leased in the first quarter of 2008 exceeded our first quarter 2007 level by 40% and that's on a fairly close amount of square footage and it also excludes awards of new build to suits. So that's not included in this number.
For our joint ventures, we previously mentioned that we and our partner, Kuwait Finance House, intended to sell our 2003 net lease portfolio. However, because the market is not as favorable today for large portfolio sales, we have taken this sale out of our guidance for the year.
Also with less absorption, we would expect fewer sales of select land parcels, so consequently we have lowered our JV FFO projections for the year. Net economic gains rose $5 million year to year to $39 million and we have increased our guidance for 2008 principally due to higher margin expectations.
Our disposition team did a great job in a challenging market. While some investors are in the sidelines, our disposition team continues to expand our database of industrial real estate buyers, including institutional investors, private firms and users.
Just as a reminder, beyond institutional buyers, our sector has several other natural investors, specifically the user buyer. Approximately 65% of the U.S.
industrial stock is owned by corporations. The passive buyer, the net lease quality of industrial appeals to investors seeking minimal management, especially 1031 buyers.
And also the lower buyer, with the average industrial building being approximately 55,000 square feet, this is therefore within the financial capacity of most local investors. On the expense side, we reduced our original 2008 G&A estimates in an amount commensurate with areas of our business where the activity is moderating.
As a reminder, we have made sizable investments in our franchise over the past few years in terms of new markets, capital sources and our workforce. And as a result, we are very well prepared to meet the needs of our customers as evidenced by a large investment pipeline, which now stands at $1.6 billion.
Before handing it over to Mike Havala, I wanted to mention that we have added new disclosure in our supplemental to provide you with greater visibility into both the composition and the contribution to our FFO from net operating income, joint ventures and from economic gains, and Mike will cover this in greater detail, but I think you'll find this new disclosure to be very helpful in understanding our company. And so, with that, let me turn the discussion over to Mike Havala.
Mike Havala
Well, thanks, Mike. Let me get right into our investments during the quarter.
In total, for both our balance sheet and our joint ventures, we completed 27 investments totaling $235 million and we completed 32 dispositions totaling $330 million. Despite the challenging environment, we continue to execute our value creation and capital recycling strategy and we are still seeing solid demand for high quality industrial assets in good locations.
Moving specifically to joint venture investments, in the first quarter, our total investment activity was $128 million and that's comprised of $102 million in acquisitions and then the remainder coming from developments placed in service. Key investments in our joint ventures during the quarter included our first investments in our recently formed FirstCal Canada joint venture.
And as we noted in our prior press release, we acquired approximately 60 acres in Edmonton for future development. We also acquired a 231,000 square foot portfolio through a sale leaseback in surplus asset transaction with a corporate customer in the Toronto area.
During the quarter, we placed in service two development projects in the central Florida market totaling $26 million and this included a 144,000 square foot build to suit. Our joint venture dispositions during the quarter totaled $105 million.
Now, these sales were from our core joint venture and our development and repositioning joint venture. The average holding period for assets sold from our joint ventures was about two years.
And to update you on our JV development activity, we have about 4.2 million square feet of development in process and that will total about 215 million of investment upon completion. Moving now to our balance sheet investments, we invested $107 million during the quarter and that's comprised of $93 million in acquisitions and $14 million of developments placed in service.
Our largest balance sheet acquisition during the quarter was in Phoenix and we acquired two buildings totaling 228,000 square feet. That was located on the Loop 101, a major artery for Phoenix.
Regarding dispositions on balance sheet, we sold 40 properties in 23 transactions and this totaled $226 million and the average cap rate was 7.6%. Our net economic gains from our balance sheet were $39 million and we had a margin on cost of 22%.
And then about 59% of our gains during the quarter were for merchant activity, primarily redevelopments. On the properties that we sold, we achieved an internal rate of return of 12% and note that that's on an unleveraged basis.
Turning now to the results for our balance sheet portfolio, we again delivered good results in the quarter. Our occupancy was 94.2% at quarter end.
Same store NOI on a cash basis was up 4.1%. Our rental rate growth on a cash basis for the quarter was 4.9% and we saw positive changes in most of our markets.
The average lease term has risen to 6.1 years, and on average less than 15% of our leases expire annually through the next five years. Our tenant retention was strong in the quarter at 75% and our leasing costs were lower than average at about $1.90 per square foot.
Looking out to the rest of the year as Mike mentioned, we are modifying some of the components of our portfolio guidance. We expect average occupancy to be in the range of 93% to 94% for the year.
We expect positive rental rate growth to continue throughout the year, and then with regard to same store NOI, we see growth being between 2% and 4% for the year factoring in the softer environment. Next, let me give you an update on our capital position.
Our current capital base is nearly $10 billion and that includes both our balance sheet and our joint ventures. For just our joint ventures, we had about $4 billion of available capital capacity, and remember, much of our joint venture equity capital is revolving, so we have substantial capital for investment opportunities.
Regarding our balance sheet debt, as I noted on our last call, our weighted average debt maturity is long at over seven years and we have no debt maturing in 2008 and then only about $150 million maturing in total over the next three calendar years. All of our long term debt is fixed rate and our financial ratios are strong and we had in the first quarter a fixed charge coverage at 2.6 times.
And then our FFO and FAD payout ratios were strong at 64% and 70% respectively for the quarter. Now, let me talk a bit about the new disclosure that we added in our supplemental and certainly, we hope and expect you'll find this helpful in understanding our business more.
The disclosure specifically can be found on page six of our supplemental and then on some related footnotes. For some time now, we've provided a breakdown of the direct G&A costs related to JV FFO and net economic gains.
In our new disclosure, we've now allocated all G&A costs both direct and indirect, and then we've also allocated capital costs, that is interest expense and preferred dividends and we've allocated these to each of the top line revenue categories. And we've done this in order to derive an estimated bottom line FFO for each category, that is portfolio operations, JV income and net income gain.
And then, maybe just to provide you a little more detail on the allocations, and by the way, we've noted this in a related footnote in the supplemental, but we've allocated G&A costs on a direct basis where possible. Indirect G&A costs have been allocated based on percent of revenues or headcount depending on the specific costs being allocated and what makes sense.
Interest expense and preferred dividends have been allocated based on a percent of realized return earned from portfolio cash flow versus net economic gains over the trailing five year period. And then FFO from our joint ventures, this has been allocated based on the relative investment in our joint ventures.
So, to summarize for the full year 2007, approximately 72% of our FFO came from portfolio operations, 12% came from joint ventures and then 16% came from net economic gains. Again, the detail is shown on page six in the supplemental along with the first quarter 2008 detail as well.
And then just to be clear, our company is managed and run as one business, but we wanted to provide this new disclosure because it fully allocates and better matches the expenses to our various revenue streams. Moving on to our 2008 guidance, as Mike noted, we have widened our FFO guidance range in the bottom as we now see FFO per share in the range of $4.70 to $5.
We've updated some of the components of our guidance as follows. Our dispositions from our joint ventures are forecasted to be about $500 million lower, and as Mike mentioned, that's due mostly to the postponement of the KFH joint venture portfolio sale.
We've also modified our JV investment guidance, which is now $100 million lower. These of course result in lower JV FFO.
On our portfolio side, our same property NOI is estimated to rise at a pace of about 2% to 4% with a dip in the second quarter before rising in the second half of 2008. And we also now expect a lower G&A expense than originally forecasted.
We now estimate the percentage increase in G&A in 2008 to be in the high single digits compared to the 20% estimate that we discussed on our last call. Now, the reduction in G&A expense forecast reflects the current environment as Mike mentioned.
And then finally, our net economic gain guidance is about $8 million higher. So, as I noted in my last quarter similar to prior years, we expect our 2008 FFO to trend upward throughout the year.
So, with that, let me turn it back over to Mike Brennan.
Mike Brennan
Thanks Mike. Before we open it up for questions, I want to reemphasize that I consider ourselves off to a very solid start in the first quarter.
Certainly, there are more challenges in the current economic environment. As a result, we took the prudent step of modifying our guidance range and reducing our G&A expense projections.
That said, the fundamentals in the marketplace are solid. National occupancy above 90% still favors the landlord.
The pipeline of new construction starts continues to fall and there is higher plant and warehouse utilization that was the case during our last downturn. On the transaction side, there is still considerable investor demand for industrial properties and the liquidity of industrial is further enhanced by its other natural buyers, the user buyer, the passive buyer and the local buyer.
On our own buying side, we have the distinct competitive advantage of a deep capital base as well as on-the-ground expertise to create value. Strategically, we are well positioned to serve the supply chain needs of our customers, which are going to require increasing industrial real estate solutions, whether their businesses are expanding or whether they're contracting.
The structural demands for applying our strategy, our growing international trade, demographic trends and supply chain reconfiguration are solidly in place and First Industrial is in a great position to capitalize on these opportunities. So with that, moderator, we would now like to open it up for any questions.
Operator
(Operator instructions) Your first question comes from Christine Brown of Deutsche Bank.
Christine Brown – Deutsche Bank
Good afternoon guys. I just wanted to ask about margins.
You'd mentioned they were 22% in the quarter and that your expectations were higher, and I just wanted to ask why that was and what they are exactly for the year.
Johannson Yap
Sure, Christine, hi, this is Jojo. Our expectations in the year are approximately 16%.
They actually are not higher than the 22%, but the 22% – we are pleased with the 22% for the quarter, but the expectations for 2008 is approximately 16%.
Christine Brown – Deutsche Bank
Okay.
Mike Havala
We thought that was a little bit higher than prior guidance. That's what I meant by my comment.
Christine Brown – Deutsche Bank
Okay, got you. And then I just wanted to talk about your leasing strategy.
How early are you looking to renew with tenants and are you having any – is it difficult with them sort of delaying decisions?
Rick Czerwinski
Sure. This is Rick Czerwinski.
As a rule, we're approaching tenants at a minimum of 10 to 12 months in advance of their expiration and as you can anticipate regarding the current economy that there is some hesitation, but the hesitation really that we've seen so far has been minimal. The tenants are pretty much by and large renewing at the same pace as they were in 2007 and 2006.
But, we are seeing some hesitation.
Christine Brown – Deutsche Bank
Okay, thank you.
Operator
Your next question is from the line of Paul Adornato of BMO Capital Markets.
Paul Adornato – BMO Capital Markets
Hi, good morning. Thanks, we do appreciate the detail on G&A.
Was wondering if you could give us your projections on G&A growth in each of the three categories.
Mike Havala
Paul, this is Mike. With respect to where we see that through the full year 2008, while we have not given you specific guidance on that in 2008, we would expect that the ratio or the relativity of the G&A in each of the three categories will remain pretty much the same.
Again, it might bounce around a little bit from quarter to quarter but on a relative basis, we expect it to remain pretty much the same for the year.
Paul Adornato – BMO Capital Markets
Okay. And looking at your non-U.S.
activities, now that you've had a couple of months to get your feet wet was wondering if you like what you are seeing so far in non-U.S. activities, is there more vibrancy in non-U.S.
markets at this time and what do you think we should expect in terms of non-U.S. activity in '09 and beyond?
Mike Brennan
Hey, Paul, it's Mike. I'm going to just start a little bit on the organizational side and turn it over to Jojo, who along with myself, more him, has been kind of managing our overall deal flow.
Europe is off – first of all, Canada is off to a great start, just before I get to Europe. I mentioned that we have made investments in all three cities.
We have some great people up there that are just doing a terrific job and we love all of those markets there and they are about 95% to 97% leased. Europe is also off to a great start.
We now have in place a transaction officer in Amsterdam. We have another transaction and development officer out of our Brussels office who will be working in Belgium.
Then we have an acquisition associate that's working along with our transaction officer in Brussels. We have analysts there, we have a running and established couples of offices.
And the quality of people, the gentleman that runs our Amsterdam office is about a 15 year veteran with Jones Lang LaSalle, headed up their industrial division. The person that is running our development and investments in Belgium was formerly of Seagrove, which is an excellent shop in Europe and England, in Continental Europe.
I think he's got about ten years of experience. I don't recall quite the specifics of his resume now, but very experienced and high quality group of people that we have there.
So, I'm very pleased with the shape in which that organization is developing and they really are people that are capable of running the model as we've run it here in the United States, so we're really glad to have them. Now, with respect to deal flow, that's going along very well, and Jojo, you want to make a few comments on that?
Johannson Yap
Sure, thank you. We are seeing good opportunities in Canada and in Belgium and Netherlands.
As we've explained before, we are seeing strong drivers in Canada really driven by international trade. In Western Canada, specifically Calgary, it is continuing to become the Western Canada distribution hub.
As you all know, the oil sands industry is also very strong making it very, very robust markets for both Edmonton and Calgary in terms of industrial absorption. In fact, in those two markets, the vacancy is under 1%.
Toronto remains to be a very tight market with the average occupancy of about 95% to 96%, and again, it's driven by the local economy and supply chain reconfiguration. In terms of Europe, cargo throughput overall through the port (inaudible) and port of Rotterdam continues to be robust.
So, Belgium and Netherlands are continuing to benefit from that. So overall, within Canada and Europe, we're looking at acquisition opportunities, development opportunities, redevelopment and speculative opportunities.
We expect in the future that both Canada and Europe will contribute more significantly to our pipeline. Does that answer your question, Paul?
Paul Adornato – BMO Capital Markets
Yes, sure. That's great.
Thank you.
Operator
(Operator instructions) Your next question comes from Robert Vermillion of Axial Capital.
Robert Vermillion – Axial Capital
Hi there, good morning or good afternoon.
Mike Brennan
Good afternoon.
Robert Vermillion – Axial Capital
A couple of questions, first was that I've noticed that for the last couple of quarters, you've benefited from a lower tax rate on, I guess, it's the line that says benefit or provision from income taxes and I was wondering what's been driving that for Q4 and then actually posted benefit for Q1.
Mike Havala
Sure. That's simply the mix of properties which we sell and the tax results from those.
There's different tax results depending on the nature of the property and so forth and also again that's a function of the taxes that are paid by our taxable REIT subsidiary, which of course has a number of items of income and expense. We have profits from sales located in there as well as some operating cash flow and of course capital costs and overhead costs and so forth.
So, it's really mostly just a mix in the assets sold, but also you got to look at the other factors that are in the taxable REIT subsidiary, including things like tax depreciation and so forth.
Robert Vermillion – Axial Capital
Okay. So going forward, should we assume that income taxes will continue to be a benefit to FFO and FAD?
Mike Havala
I don't know if I would make that assumption. Again, it depends on the mix and certainly while we have a strong pipeline, things come in and come out, and so that mix can change a little bit over time and so forth.
So, I would not necessarily make that assumption. Remember, when we provide you guidance, for example, in net economic gains, it's after taxes anyway and so I would focus more on that number meaning the net after-tax number.
Robert Vermillion – Axial Capital
Okay. And so the taxable REIT subsidiary, does that mean that the properties that you sell that are in your merchant building, those are the properties that you'll pay taxes on, but the ones that are core operating properties that you're selling you won't pay taxes on?
Mike Havala
Not necessarily. Again, it depends more entity rather than whether it was merchant or core and so forth, because you can have redevelopments and so forth that are owned by the operating partnership.
But certainly you have merchant activity going on in the taxable REIT subsidiary as well. So it's more correlated to the entity from which it was sold out of rather than the exact classification, whether it was merchant or land or existing and so forth.
Robert Vermillion – Axial Capital
Okay, got it. That's helpful.
Thank you. My other question was on footnote M of page 42 in the supplement.
I was just looking through and it looks like the completed developments not yet in service quadrupled in square footage year-over-year and went up about eight times sequentially and the occupancy fell to 8.9% from what was 65% last year. What's driving that situation and are there particular areas of the country that are not leasing up as well?
Mike Brennan
The developmental process increased because of the additional build to suit business that we've added to the pipeline and so – and then we are in various stages of leasing number of the assets. Rick, do you want to?
Rick Czerwinski
Yes. What happened is obviously we're delivering more developments that are entering that line item that you reference.
Just to give you some color on it, one 675,000 square foot building in Central Pennsylvania, we've leased that, that's 100% at this point. So, we see that number as potentially growing, but that's a good thing because that's part of our business model.
Robert Vermillion – Axial Capital
Okay, thank you.
Operator
Your next question is from Stephanie Krewson of Janney Montgomery Scott.
Stephanie Krewson – Janney Montgomery Scott
Hey, guys, good afternoon. A couple of small questions, forgive me if I missed this, but what was the square footage leased in the first quarter?
Mike Brennan
New or all total?
Stephanie Krewson – Janney Montgomery Scott
All please.
Mike Brennan
All was about 7.5 million square feet.
Stephanie Krewson – Janney Montgomery Scott
Okay. And can you give some guidance on your straight line rent adjustment for this year given the change in activity from a quarter ago?
Mike Havala
Our straight line rent, you saw what the first quarter number is, we wouldn't expect that to change too much during the course of the year. Again, it depends on the way a lease is structured in the rent and the bumps and so forth, but I would expect straight line rent to be for the rest of the year similar to where we are on a run rate basis in the first quarter.
Stephanie Krewson – Janney Montgomery Scott
Okay. Quick question for Jojo, was there any material movement of cap rates versus a quarter ago in any of your five categories?
Johannson Yap
No, there hasn't been material movement.
Stephanie Krewson – Janney Montgomery Scott
Okay. Second to last question back to Mike Havala, and you can have Scott call me on this afterwards if you don't want to torment people listening to the call.
I have an accounting question about your minority interest calculation. It used to just be simply operating partnership units but I realize that the calculation has changed.
Do you want to address that offline or …
Mike Havala
Sure. I will take your advice and have Scott give you a call after this.
Stephanie Krewson – Janney Montgomery Scott
We'll spare the other listening audience.
Mike Havala
Yes.
Stephanie Krewson – Janney Montgomery Scott
Good. Final question and this is more of a theoretical, I've covered you guys for a long time, so I know the answers to these, but just help me out in addressing the calls I'm getting.
Prior to your first quarter results, the phone calls I was getting were questions about your ability to sell assets and generate gains on sale in the current credit market and declining economic environments. Well, you proved that that was not a problem and you can address those reasons why if you want to.
Now, the question I get today is, and this just makes my head explode, is they simply must have gained their – they must have accelerated their sales to make numbers and beat numbers. Could you please address the internal controls that you have in place such as your compensation structure for your transaction officers and other things that explicitly discourage any gaming of quarterly results as it relates to economic gain.
Mike Brennan
Well, this is Mike Brennan. I'm not going to elaborate on that second question you mentioned.
That's – we've never done that. We never will do that.
Stephanie Krewson – Janney Montgomery Scott
I know, Mike. That's why it makes my head explode that I get these questions.
Mike Brennan
Well, we sell properties when they completed their asset management plan and if they're in the right environment. So, you can see that in this environment we have properties that met that test and we have some properties or portfolios that didn't meet that test as evidenced by KFH.
So, I guess that's all of it I'll say about that. In terms of selling assets in this environment, yes I think that Jojo and myself have laid that out pretty clearly.
You only need to be a buyer to realize how strong the liquidity is. If it was that easy, we'd win every single deal that we went after.
So, there's a significant amount of institutional demand for stabilized properties and strong markets and I think that anyone who follows the sector understands that and sees that, albeit some people are on the sidelines. And then I did want to – I thought it was appropriate that I remind people about the other natural buyers that industrial has that certain other sectors don't have.
Our sector is 65% owned by the user, so in this particular quarter, I don't have the statistics. About 15% I think was sold to users and then there's the 1031 buyers that are seeking certainty and so you also get that in the net lease and then there's the local buyers.
So there's a whole lot of liquidity in the market. There's a lot of liquidity in the marketplace, albeit it's not like it was in 2007.
And so, not that we're taking our buyers for granted, we're not. It just makes it a little bit more challenging, but hopefully people can understand why we feel confident in the guidance in the margins we get.
One other thing too just about cap rates and margins, people are surprised that you can have these kind of margins. Remember that margins are a function not only of cap rates, but of net operating income.
As a general rule of thumb, a 50 basis point increase in a cap rate can be overcome with about a 6% something increase in NOI. So, if you got a single tenant building Rick mentioned that just our rental rates alone went up 4.9% and then we have 2% escalations and we have a three or four year holding period for these assets before they meet their asset management plans, we don't have very many assets in our portfolio that can't go up 6% in NOI.
So, people are forgetting the strong rental rate increases and the contractual increases that are in place after we increase the rents. So, let me just stop there.
Hopefully that clarifies it.
Stephanie Krewson – Janney Montgomery Scott
Yes, that's great. Thanks for your patience.
Operator
(Operator instructions) You have a question from Cedrik Lachance from Green Street Advisors.
Cedrik Lachance – Green Street Advisors
Mike, you talked at length about the buyers that are still out there for the portfolio. How do they finance those transactions at this point?
Mike Brennan
Yes, this is Mike Brennan. I'll start and Jojo can finish.
Well, all over the place. Most of the people that we sold to in this quarter overwhelmingly are institutions.
Some of them employ leverage but it's modest. So – and just so everybody knows, if you want to go after a 65% loan to value or lower than that, you'll find that you'll be able to accomplish that.
So, most people are either buying all cash or employing a fairly low amount of leverage. So – and then if you want and then other people say local buyers are not finding it very difficult to procure financing from local banks provided that it's – the dollar amounts are not that high, but the dollar amounts are significantly – are very large, let's say $200 million and over, that's something that an insurance company do, but they have less capacity for it, so there you are running into trouble.
Jojo, that's kind of big picture but anything that …
Johannson Yap
Not much more to add. Overall, financing takes it a little bit longer to do just add a little bit of color.
Overall, I mean your large, large portfolio lenders are out of the market, you quite a bit of maybe Wall Street type firms are out, are reduced – reduced debt in the marketplace. What you have is that you have more at the 60% to 65% LTV like Mike mentioned, and so that's – but it does take a bit longer now to get the underwriting scrutiny that the lender has on the lending process has increased.
Does that, Cedrik, answer your question?
Cedrik Lachance – Green Street Advisors
Yes, it does. The Minneapolis Business Journal reported that the transactions you closed in the quarter in that area in Minnesota, on that transaction you provided financing for the buyer.
Is this something that you do on a regular basis?
Johannson Yap
No, Cedrik. This is Jojo.
Here in this situation, we had an investor that we have a long term relationship with. We know that they wanted to invest quite quickly because of some exchange requirements.
In those instances, what we find is that if you actually provide a bridge for that investor, you could actually get a higher price for your asset, because like I have said, a lot of lenders are although they will lend usually take a longer amount of time. In this situation, what we did was provide a bridge, a 90 day financing of which we started at an interest rate of 7% and increasing.
So, at the end of day, it was a good investment, it was a bridge and so we use (inaudible) financing opportunistically to sell our properties.
Mike Brennan
Hey, Cedrik, this is Mike Brennan, just to kind of add a little bit to what Jojo said, yes, it's a very – making accommodations like that are very de minimis. I think this is about $30 million, but it does happen fairly frequently, maybe twice – three or four times a year.
Most of the times that we do that, Jojo mentioned this to secure a 1031, or remember the LTVs averaged probably in the area of 60% to 80%. So, in most of the cases, they all get paid off and they're almost all below the original costs.
So therefore, we have never had a problem.
Cedrik Lachance – Green Street Advisors
So, in this case, the LTV was in that 60% to 80% range?
Mike Brennan
I think it was, yes, 70%, high 70s or something, yes.
Cedrik Lachance – Green Street Advisors
Okay. How does the accounting work for you to book the gain on sales in a case like that?
Do you book it at the time of the sale in March or do you book it once the bridge is repaid to you?
Mike Havala
Yes, you book the gain when you sell it, which is when we did.
Cedrik Lachance – Green Street Advisors
Okay.
Operator
Your next question comes from line of Jaime Feldman of UBS.
Jamie Feldman – UBS
Thank you very much. Unfortunately, I missed a bit of the call because I got pulled away.
I apologize if you answered this already, but when you're thinking about the North American business kind of through the end of year and maybe even '09, what do you see as like the worst-case scenario, how bad market conditions can get and what sign posts are you watching to kind of gauge that?
Mike Brennan
This is Mike Brennan. Let me start.
In our guidance, we're using a fairly conservative assumption, very conservative assumption to establish the lower end of our guidance range. Gee, there are so many components of, you're talking about leasing, you're talking about construction, you're talking about cap rates, you're talking about – it's, I suppose –
Jamie Feldman – UBS
I'm talking about occupancy, like market occupancy.
Mike Brennan
Okay. Market occupancy?
Rick Czerwinski
This is Rick Czerwinski. What we're seeing right now and if this doesn't answer your question, you'll certainly ask another one.
What we're seeing right now and what we're anticipating is, there's some slowness. All of our markets right now still have activity.
What I like to say is before we had four or five prospects for every space or most spaces. Now, it's one or two.
So we're in an environment where we need to close the deals that are out there in the marketplace and from a projections standpoint, as Mike said, Mike Havala said, we're anticipating potentially a dip in the second quarter, but then the third and fourth quarter having some fairly strong leasing activity.
Jamie Feldman – UBS
And what gives you comfort on the back half recovery and what will you foresee [ph] to get more negative on that?
Rick Czerwinski
What gives me comfort is, our in-service portfolio was over 95% occupied at Q4. We've dropped.
So what's happened is it's given us more product that we can lease. So I feel that the product that went vacant as well as some that was already vacant, the product that went vacant in the first quarter will lease up in the third and fourth quarter.
We have prospects for many of the spaces that we have budgeted for that to happen. So that's what's giving us the comfort from that standpoint.
Mike Brennan
Jamie, I'd say, if you want just a little bit more macro, having a drop below 90% would be, nationally would be a fairly rare occurrence in the market. As a general rule of thumb, above 90 we're in a landlords' market.
The second thing I'd say is that when there is a very low plant utilization or warehouse utilization, then you have a lot less renewals. So, you think back to 2001, 2002, the excess capacity brought on by a tech market and a roaring economy, people want to renew their leases and they weren't reusing 50% of the space, they didn't keep the building, or they took half of it.
Today, the plant utilization is over 80% wherein 2001 it was about 73% to 74% and the same with warehouse utilization. So, when people are using a lot of the space and even if they're using most of it, then they feel even if there's a downturn, they're going to keep most of it.
So, when you take a look at those particular statistics, just from a macro basis, it gives us a lot of comfort that this is a different environment. You also have very positive business spending that's forecasted about 4.8% versus about 4.7% from last year.
So, I guess businesses are using a lot. They're reasonably healthy, reasonably strong and it's probably the best I can – best explanation I can give you.
Jamie Feldman – UBS
And then, is that something you track in your portfolio in terms of utilization and if so, how has that trended down over the last couple of quarters?
Rick Czerwinski
It's something that we're tracking more from an anecdotal standpoint than from a specific scientific standpoint. What the regions are saying is they're not seeing a lot of sub leased space and they would certainly be aware if that was happening.
Has it trended up? Sure.
It's increased somewhat but it hasn't increased anywhere near to the levels that Mike was referencing in 2001.
Jamie Feldman – UBS
All right. Thanks a lot.
Mike Brennan
Thank you.
Operator
Gentlemen, you have a question from line of Mitch Germain of Banc of America.
Mitch Germain – Banc of America
Hey, Mike. Just wanted to just dive in a little deeper on that macro commentary you just provided in terms of what are you hearing specifically from your customers and in terms of their appetite and comparing that to kind of what you had seen previously back in 2000, 2001?
Mike Brennan
Well, I'm going to let Rick take most of it.
Mitch Germain – Banc of America
Okay, great.
Mike Brennan
If people didn't tell me there was a recession, we wouldn't know there was one just based on the build to suit activity, which between what we're starting right now and what we have commitments on, will be by a significant amount the largest we've ever had in the history of the company, combined with the fourth quarter and we're also seeing a lot of activity certainly on the East Coast big distribution markets and still in southern California. The question is not what we're seeing.
It's what we're hearing. The question isn't about the activity today.
The concerns are more about, what happens if, because we're reading the same newspapers everybody else is reading. So, that's kind of as a team kind of – as a team, kind of what we are – the quandary that we find ourselves in as we try to forecast what is the right guidance range and occupancy levels.
But, Rick maybe – why don't you give us some color?
Rick Czerwinski
Sure. What our customers are telling us – our customers, as we said, are still active.
You have a home product section, the consumer product section which, obviously from reading the papers, you would think would be the most hard hit. We still have activity in that sector, surprisingly so.
We also have activity in business to business distribution. We just did a deal in L.A.
with a satellite component company. We've done deals – a few deals with the government Defense Department, contractors, the Army.
What's happening, another trend, shifting to another topic or another idea, is that each market has their specific drivers as you know. Detroit has the automobile industry which obviously isn't doing so well, probably a bad example.
But, you have Minneapolis that has the biomedical. You have northern New Jersey that has biomedical, pharmaceutical.
You have Baltimore that has defense; you have Houston that has energy. You have Dallas that has inland port distribution and what I'm driving at is, those drivers are still active.
The local drivers within a market are still active, including the drivers that drive the local consumption, businesses that are supplying the local and regional needs of the population base. I hope I didn't ramble there.
Mitch Germain – Banc of America
No. You answered the question.
Thank you very much.
Operator
You have a question from the line of Cedrik Lachance from Green Street Advisors.
Cedrik Lachance – Green Street Advisors
I just wanted to follow up on the additional G&A and interest guidance this quarter that you provided. Are you able to reduce – let's assume you gains on sale diminish over time, how does that impact your G&A that's associated with the gains on sales?
Will it decline on a one-for-one basis or will it move in a different base? In addition to that, I'm interested in knowing the allocation of interest costs, should we understand from that that your total interest costs will greatly diminish in the next quarter, if you sold the properties that were associated to those and that you've repaid the debt?
Mike Havala
Sure. Cedrik, let me give you sort of a quick answer to that and we'd be happy to walk through this in great detail with you later on today as well.
But, on the G&A, there's a short-term element to the answer and a long-term element. If net economic gains went down, materially G&A would go down along with it.
That's because a lot of the incentive compensation for the employees who produce the net economic gain are tied to the gain level. So, yes, G&A would go down.
Would it go down proportionally? Maybe not in the short run, but certainly in the long run it would.
With respect to the capital cost allocation, again we kind of laid out how we allocated that and we think that allocation methodology makes sense because, certainly, we have assets that produce both net operating income and operating cash flow as well as net economic gain. And clearly, big picture you got the three revenue streams and they all have expenses.
Those expenses being G&A which is largely people and then, of course, capital costs. So anyway, that's kind of how I would look at it.
Again, if you'd like to go into some further detail, we'd be happy to do that. I want to make sure we have enough time for calls on this call – or questions as well, so –
Cedrik Lachance – Green Street Advisors
Okay. If you don't mind, one final question.
In regards to the JV, the net lease JV that you are interested in selling in '08 that you won't be selling, can you give us a sense of the early bids that you got on this portfolio in terms of the cap rates that were presented to you and how would that cap rate compare to what you might have received 12 months ago?
Johannson Yap
Cedrik, it's Jojo. We would not comment on the cap rate or the specifics of the market activity.
What I can tell you is that the dynamics for large portfolio sales in '07 and '08 has changed. In '07, typically for large portfolio sales, you could typically get a premium because there were significant amount of number of highly leveraged large buyers who were financed by large institutions.
Basically, that's gone today. And so in '08, it is not a good tactic to maximize a property through a large portfolio sale.
That I can share with you.
Cedrik Lachance – Green Street Advisors
Okay. Thank you.
Operator
There appear to be no further questions. I would now like to turn the floor back to Mr.
Brennan for any closing comments.
Mike Brennan
Okay. Well, thank you very much, really appreciate your interest, thought we had a good quarter and we'd be happy to elaborate on anything, but certainly look forward to seeing you in June at NAREIT in New York.
Thank you.
Operator
This concludes today's First Industrial Realty Trust conference call. You may now disconnect.