Jul 24, 2008
Executives
Sean O'Neill – SVP, IR and Corporate Communications Mike Brennan – President and CEO Mike Havala – CFO Jojo Yap – Chief Investment Officer Rick Czerwinski – National Director of Leasing and Asset Management
Analysts
Lou Taylor – Deutsche Bank Stephanie Krewson – Janney Montgomery Scott Mitch Germain – Banc of America Michael Billerman – Citigroup Paul Adornato – BMO Capital Markets Jaime Feldman – UBS Anup Gupta [ph] – Sapphire Management [ph] Cedrik Lachance – Green Street Advisors
Operator
Good afternoon. My name is Donald and I will be your conference operator today.
At this time, I would like to welcome everyone to the First Industrial Realty Trust second quarter 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 First Industrial Realty Trust.
Sean O'Neill
Good morning, everyone. 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 press release that is available on our website at firstindustrial.com.
Now, let me turn the call over to Mike Brennan, our President and CEO.
Mike Brennan
Okay. Thank you very much, Sean, and welcome everyone to our second 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 my outlook for the balance of the year.
Mike Havala will then cover our operating results and capital position and he’ll update all of us on the guidance for 2008. While market conditions continue to be more challenging than last year, our FFO of $1.16 per share for the second quarter was at the higher end of our guidance range.
Portfolio results were solid. We have occupancy at 93.5%, retention of 81%, 5.8 million square feet of leasing and that’s a level that exceeded all four quarters of 2007 and same store revenues were up 2.3%.
As you may recall from our first quarter conference call, we made reference to a debt that we anticipated in our same store NOI in the second quarter from strong growth in the first quarter. This decline in second quarter same store NOI was projected and was due primarily to an increase in two expense items that we do not anticipate in the second half of the year.
For the balance of the year, we continue to anticipate same store NOI growth will be positive and for the full-year, to be between 0% and 2% positive. Moreover, let me mention that we expect total NOI to be up in the third and fourth quarter due to positive net investment on balance sheet in the second half as well as contributions from an increase in same store NOI together with improving occupancy from our out of service portfolio.
Now according to net economic gains, our profits from capital recycling continue to be very strong in the second quarter at $38 million up from $36 million a year ago. Margins and IRRs continue to be healthy as well.
Joint venture FFO was $9.4 million for the quarter which was down from last year. In the second half of 2008, however, we expect to monetize a significantly larger number of transactions with a resulting increase in second half JV income.
G&A expenses were essentially even with last year and given our expansion into Europe and Canada, I believe that we have managed our G&A costs prudently. By reallocating our resources from lower growth markets to ones with greater growth potential, we have contained our G&A costs without hindering the expansion of our platform.
Also, as you saw in our recent press releases, we opened new offices and hired new country directors for both France and Germany, adding to our offices in the Netherlands and Belgium. Our current investment pipeline in Europe is approximately $150 million which we expect to finance primarily through our $475 million European JV.
So overall, we had a good second quarter and as we look out for the full year, we are maintaining our FFO per share guidance range of $4.70 to $5 per share. In terms of the breakdown of FFO by quarter, you will note that we anticipate an acceleration in the fourth quarter.
The forecasted increase is primarily related to two areas and those are higher JV FFO from greater incentive payments and higher NOI from on balance sheet investment activity. On the investment side, we have adjusted our full-year balance sheet and joint venture investment target down slightly to $1.75 billion and our development starts down to $400 million for 2008 due to the postponement of some spec buildings.
Our investment activity is forecasted to be significantly greater in the second half and there are several reasons for this. Now, the first reason is the pipeline.
Now the majority of our $1.4 billion investment pipeline is expected to close by the end of the year and that includes more than $200 million of development expected to be placed in service. The second reason for the forecast of greater investment activity in the second half is the expectation that corporate real estate acquisition opportunities will increase.
Specifically over the past months, our accepted acquisition offers from corporate sellers have increased compared to earlier in 2008. Several of these acquisitions were accepted under terms that earlier in 2008 had not been acceptable to the sellers.
Further, we know of other corporate transactions being remarketed at new lower prices. Several motivations may explain this, for some it is operational, for others it is financial, or for many it may simply reflect their view of the real estate market.
The net effect in our view is more corporate sales volume. The third reason that our investment activity is forecasted to be significantly greater in the second half is purely FR organizational strengths.
Specifically, compared to one year ago, we now operate at seven new international markets, three cities in Canada and now four markets in Europe with the additions of France and Germany in the second quarter. In the second quarter, happy to say that Europe got on the board so to speak, contributing approximately $150 million to our pipeline.
Equally important, these new markets like our U.S. operations all have dedicated capital to move opportunistically, providing a material competitive advantage.
Also, as an overall reminder we have made sizable investments in our franchise over the past few years, including raising approximately $6 billion in new private capital, opening up new markets throughout Europe and North America, and also recruiting top professionals to better serve our customers. And let me also emphasize that the long-term drivers of demand for industrial space are still solidly in place, demand relating to rising international trade, demands relating to changing demographics and also demand from supply chain activity, especially given rising energy costs.
As in the past, our mission is to anticipate customers' evolving supply chain needs and to be fully prepared with the right spaces in the right markets to deliver timely solutions. So we think the current environment will provide ample opportunities to continue that mission.
And with that, let me turn the discussion over to Mike Havala.
Mike Havala
Well, thanks, Mike, and let me get right into our investments during the quarter. In total, for both our balance sheet and our joint ventures, we completed 19 investments totaling $244 million.
On the dispositions side, we completed 27 dispositions totaling $371 million. So although there’s been lower transaction volume overall in the real estate market, we continue to execute our capital recycling.
Moving specifically to joint venture investments, in the second quarter, the total investment activity was $119 million and that's comprised of $101 million in acquisitions and then the remainder coming from developments placed in service. Our largest investment in the second quarter for our JVs was a 286-acre land parcel at the Port of Houston and we acquired this from a corporate customer.
The site is located at the center of the Houston Energy Corridor along the Ship Channel. And as you might be aware, our interport project in this land-constrained market has been very successful due in parts to the Houston economy that is benefiting from a strong energy sector.
So we’re glad to add this large land parcel to our holdings. For this parcel, we are targeting build of suites and spec development for the site as well as land sales to customers.
Other investments in our joint ventures during the quarter included a sale leaseback and surplus acquisition with corporate customers in the Atlanta and the LA market. And these are both examples of value-add opportunities.
During the quarter, we also placed in service a 308,000-square foot project in the Chicago market, with a total investment of about $17 million and this was for our development and repositioning joint venture. And this is a very good example of an infill redevelopment project, whereby we acquired an obsolete manufacturing facility, we demolished it and then we constructed a multi-tenant distribution facility which was then leased to three tenants and then subsequently monetized.
JV dispositions during the quarter totaled $100 million with nearly all of these sales from our development repositioning joint venture. Our average holding period for the assets sold from joint ventures was about three years.
And then to update you on our JV development activity, we have about 4.5 million square feet of development in process and that's projected to total about $229 million of investment upon completion. Moving now to our balance sheet investments, we invested $125 million during the quarter and that’s comprised of $86 million in acquisitions and $39 million of development placed in service.
Among our balance sheet acquisitions, we added approximately 0.5 million square feet in Southern California, primarily in the South Bay market and this included a 184,000-square foot building leased to a leading biotech company as well as a 208,000-square foot facility that is in a short-term sale leaseback with a corporate customer and we will later reposition this in order to serve another customers' needs. Regarding dispositions on the balance sheet, we sold 53 properties in 21 transactions totaling $272 million and these were sold at an average cap rate of 7.6%.
The net economic gains on our balance sheet were $38 million and we had a margin on cost of 17%. And then on the properties that were sold, we achieved an internal rate of return of 12% and note that that's on an unleveraged basis.
And the average holding period for assets sold in the balance sheet in the quarter was 5.9 years. Turning now to our results from our balance sheet portfolio, occupancy was 93.5% at quarter end.
And then as we stated in our last earnings call, our second quarter same store NOI would dip and as expected, it did and it came at minus 0.9% excluding lease termination fees and on a cash basis, and the reason for the dip in the second quarter was due to charge offs for two tenants as well as a true up for real estate taxes in the second quarter in Indianapolis. Our rental rate growth on a cash basis for the quarter was 3%.
The average lease term is 6.1 years and then on average less than 15% of our leases expire annually through the next five years. Tenant retention was strong in the quarter at 81%, and our leasing costs were about average at $2.14 per square foot.
Next what we given update on our capital position. Our current capital base is nearly $10 billions and that include both our balance sheet and our joint ventures.
For just our joint ventures, we had about $4 billion of available capital capacity and then remember much of our joint venture equity capital is revolving. So we have substantial capital for investment opportunities here.
Regarding our balance sheet debt, as I’ve noted on our last few calls, our weighted average debt maturity is long at 7.7 years and we have no debt maturing in 2008 and less than $135 million maturing in total through the end of 2010. All of our long-term debt is fixed rate and our financial ratios are strong.
In the quarter, we had a fixed charged coverage of 2.7 times. And then our FFO and FAD payout ratios were 62% and 69% respectively for the quarter.
Moving on to our 2008 guidance, as Mike noted, we have reaffirmed our FFO guidance range of $4.70 to $5 per share. We have updated some of the components of our guidance as follows: Our unbalanced sheet investment are expected to be $800 million to $900 million and then dispositions are expected to be in the range of $1 billion to $1.1 billion, noting of course that there maybe volatility in transaction volume given the state of the capital markets.
We now expect development starts for 2008 to be about $400 million and this includes our fee development activity. And then as I previously noted, our average occupancy for the year is expected to be about 93% and on same property NOI is estimated to be flat to 2% positive for the year.
We also now expect a lower G&A expense than previously forecasted as we now estimate the percentage increase in 2008 to be about even to slightly up from 2007. Our guidance for the third quarter FFO per share is $1.08 to $1.18 and we expect the second half JV FFO to be largely weighted towards the fourth quarter and that’s due to the timing of anticipated JV property sales and the associated fees and (inaudible) payments.
These dispositions will be primarily from properties which we have either already completed or shortly going to complete or expect complete our asset management plans and note that these are spread out over a number of transitions in a number of different markets. So, with that, let me turn it back over to Mike Brennan.
Mike?
Mike Brennan
Thank you, Mike. Before we open it up for questions, let me reiterate that while market conditions have become more challenging, the fundamental long-term drivers of growth are very much intact.
Also as we noted before, there are still considerable investor demand for industrial properties and the liquidity for industrial real estate, above and beyond the institutional investor, is further enhanced by its other natural buyers, the user buyer, the passive buyer, and the local buyer. On the new investment front, we have the distinct competitive advantage with a deep capital base and of course the on-the-ground expertise to identifying and create value.
Strategically, we are well positioned I think to serve the supply chain needs of our corporate customers, which are going to require increasing industrial real estate solutions, whether their businesses are expanding or whether they're contracting, we believe we are well positioned to capitalize on these opportunities. And so now, operator, can we please open it up for questions?
Thank you.
Operator
Thank you. (Operator instructions) Our first question is coming from Lou Taylor with Deutsche Bank.
Please go ahead.
Lou Taylor – Deutsche Bank
Hi, thanks. Good morning guys.
Lets see Mike, or Mike or Mike can you just a sense of the buyer or seller profiles of your 2Q acquisitions and of your pipeline in terms of who’s buying properties from you in terms of where you see both the best opportunities to buy.
Mike Havala
Yes. Lou, this is Mike, I will ask Jojo to give the detail on that.
Jojo Yap
Yes Lou, hi Jojo here.
Mike Havala
Okay.
Jojo Yap
Less than 5% of the buyers for our 2Q properties were private investors, over 90% came from almost an equal split between institutional capital, which is primarily through advisers, and the rest came from users and then there was a also a small market for 1031 particularly for 2Q. Going forward, the most active part of market is going to be really three out of the four which is meaning institutional capital primarily to advisers which includes pension funds and insurance companies, part of that three would be the users who continue to be active and 1031 exchange investors.
And some of the 1031 exchange investors, you may already know, are represented by ticks [ph] we call in the industry which is tenant income and investors or group of limited partnerships, and finally the least active of all are the private one-off leverage investors.
Mike Havala
Now in terms of sellers, Jojo – I think that precludes other questions.
Jojo Yap
In terms of sellers, just like Mike alluded to – there has been a continued increase in terms of corporate sellers. So going forward, if you look at our pipeline and the source of that, the majority is coming from corporate sellers and the rest is really kind of equally spilt between institutional and private investors.
Lou Taylor – Deutsche Bank
Okay, and then in terms of the corporate sellers, are they selling single assets or are they more selling in portfolios?
Mike Brennan
Okay. Let me just start, maybe Jojo (inaudible).
It’s both where it’s operational, they tend to be the one-off assets; where it is financial, they tend to be the larger packages and sometimes we get a combination where CFO and COO work together to help both the financial and operational side. Now, sort of the ones that I was alluding to are going to be larger packages.
We always get sort of the one-off transactions; Mike mentioned a few that both bought and sold in the quarter, but sort of the ones that we are sort of thinking about are going to be large packages, multi-property, multi-location and I think – Jojo, any color on that?
Jojo Yap
Yes, not exactly – I mean, the only thing I would add there, as the company grows, the larger the company is in terms of asset size, the more we will find multiple type transactions and the only thing I would like to add there is that there are some requirements that are both operational and financial and those are the midterm leasebacks. For our company, it has a plan for the next two to three years, but then operationally, we need to reconfigure our supply chain.
So, that’s sort of like in the middle of the pooler transaction that Mike just mentioned.
Lou Taylor – Deutsche Bank
Okay and the last question is, it looks like some of your dispositions in the quarter were a little skewed toward the Philadelphia, Southern Jersey area? Was just that the mix of deals that quarter or is that a market you’re looking to just reduce exposure in?
Jojo Yap
It’s really, Lou, it’s really the completion of the asset management plans. When we looked at each asset, we have approved asset management plans and usually they include repositioning, redevelopment and the leasing, and in this case we completed those and we’ve maximized that we believe we have maximized the value already.
We’ve leased it to maximum market occupancy. So, we decided to harvest that value and continue to reinvest in higher-returning investments.
Mike Brennan
Yes, Lou, we’re not getting out of the Philly market and the Southern Jersey which specifically, that was one – I don’t think that it is called Cherry Hill that we’ve been re-developing over the past several years. That was the biggest one, but we’ll certainly entertain investments.
Yes, as Jojo mentioned, we’re done with our plan but we see some other things in that area. There’s nothing wrong with the market.
Lou Taylor – Deutsche Bank
Great. Thank you.
Operator
The next question is coming from Stephanie Krewson with Janney Montgomery. Please go ahead.
Stephanie Krewson – Janney Montgomery
Hey guys, two quick questions. The first revolves around the debt that you bought back in the quarter, it represents the $0.03 of your FFO.
A couple of questions there, number one, that’s non-recurring but that is part of FFO?
Mike Brennan
Yes, yes, certainly it is.
Stephanie Krewson – Janney Montgomery
Okay, but I mean, obviously, it’s non-recurring thing. Secondly, why did you choose to buyback debt rather than stock and I know the answer is because that was a better return, but can you shed a little light on how you calculated that?
Mike Brennan
Let me address the first part with respect to why we bought back some debt. If you remember towards the end of last year, we bought back some stock and typically when we do a stock buyback, we do it in a leverage neutral way which means that we will reduce both stock and then debt as well, and so when reducing our debt, we of course want to reduce the most expensive debt that we have which is what we bought back in the marketplace for the most part.
Obviously, you got to consider what’s available as well too. So, that’s what we do with respect to buying back the debt with respect to here in the second quarter.
Mike Havala
I would just want to mention, now with respect to let's suppose that debt was purchased as a standalone investment, remember that while it is correct to say it’s non-recurring, on the other hand, that money could have been deployed into an investment, a piece of real estate. So, in that sense, it isn’t really.
So, it’s just a redeployment into debt, this time for the specific purpose of balancing the stock repurchase to make it leverage neutral, but you got to remember that if we were to do that in the future, it’s an alternate investment.
Stephanie Krewson – Janney Montgomery
Right. How much of your stock buyback is still outstanding?
How much can you buy back and when does that expire?
Mike Brennan
A $16 million is outstanding and – good question with respect to the explanation. I guess I don’t know that there is one.
It’s an open ended authorization – is that?
Mike Havala
Yes,
Mike Brennan
We believe that’s the case.
Stephanie Krewson – Janney Montgomery
Okay, and then second and final question is we were seeing address is somewhat in your opening comments, your occupancy is declining but it's in line with your guidance. Is it safe to say that this is because you’re selling stabilized properties more quickly than your leasing things that you’ve bought opportunistically or your developments and specifically looking at footnote M like Mary, should we be concerned about the leasing levels?
Rick Czerwinski
This is Rick Czerwinski, I’ll answer that. Your first part of your question regarding what we’ve sold.
What we sold quarter to quarter, can either help us or hurt us. It really has not had a large impact on overall occupancy.
In looking forward from a leasing perspective, what we see is really what we’ve seen in the first half of the year. We’ve incurred leasing activity, new leasing activity.
We’ll continue to be at its current pace. Renewals, we have a very good vision for the remainder of the year.
We know whose going to renew, who is back. So, we feel very comfortable with our guidance as a result to that.
Stephanie Krewson – Janney Montgomery
Right. But the development and the acquisitions that are not in your active portfolio and footnote, Mike.
Rick Czerwinski
Yes.
Stephanie Krewson – Janney Montgomery
Could you please address those?
Rick Czerwinski
Sure. Sure.
Stephanie Krewson – Janney Montgomery
The number, the occupancy levels increased from the first quarter but not by as much as I had hoped.
Rick Czerwinski
Yes. Well, you have to keep in mind that those properties were completing the acts management plans and some, those will be sold, we’re adding to it.
So, it’s dynamic number, it’s not static number but from our leasing standpoint, what we see for the remainder of the year, we see that occupancy level increasing. Yes, approximately, yes, a substantial amount.
Mike Havala
Yes, I think on that part that’s in redevelopment or developments step, you just realized that, let’s say, quite simply empty buildings come in and they get leased and then for once get sold and so it’s never, I mean, by definition, it’s not a stabilized pool. So, there always an active pre-development leasing or development, so that’s the nature of that grouping and it will be – bottom line kind of always that way.
Rick Czerwinski
And the reason why I hesitant to give a number was because if new developments enter that population or we buy a value at property, you might not see an increase in that percentage a quarter-end but into the quarter, we are leasing those properties and we’re creating a value in continuing cycle.
Stephanie Krewson – Janney Montgomery
Okay, and I apologize I just thought of one another follow-up that’s somewhat related. You mentioned that you’ve decreased your development pipeline somewhat just about some of the specialized developments.
Could you just add a little color on where you are still starting speculative developments or are you like many rich who are the majority of that out of your development pipeline?
Jojo Yap
Yes, Stephanie, hi. It’s Jojo.
In terms of going forward where we see immediate starts, we’re looking at really quite a bit of markets in the U.S. It's spread, it’s diversified, it’s not any particular market, but a couple of top markets we’re looking at, Houston is one market, LA in terms of infill development and Seattle and then we have a number of multi-tenant development as well in the Florida area, but those are what I would say our top markets.
Stephanie Krewson – Janney Montgomery
Okay, thanks, guys.
Mike Havala
Thank you.
Mike Brennan
Thank you.
Operator
Thank you. Our next question is coming from Mitch Germaine of Banc of America.
Please go ahead.
Mitch Germain – Banc of America
Good afternoon, everyone. Mike Havala, you said $400 million in developments for the year, for starts?
Mike Havala
Yes, we expect about $400 million, the developments starts for 2008.
Mitch Germain – Banc of America
And where your year to date on that number?
Jojo Yap
Okay, year to date starts that – Mitch, hi, it’s Jojo.
Mitch Germain – Banc of America
Hey, Jojo.
Jojo Yap
A $150 million.
Mitch Germain – Banc of America
Okay, I appreciate it and Mike Brennan, I’d really just like to flash out your comments regarding the transaction markets and if you can just elaborate a little further, it kind of appears that you’re talking about somewhat of a recovery relative to where we were “90 days ago”?
Mike Brennan
Yes, okay. Yes, that’s a great question.
In a way, yes – just try to give you at least some sense I think you were referring to my comment on our expectation to corporate real estate activity
Mitch Germain – Banc of America
Yes.
Mike Brennan
That it’s going to increase, yes. Well, let’s just start with the empirical evidence.
Our pipeline is significantly increased due primarily, due to among other things but importantly the corporate real estate transactions and again, what’s interesting about it and I’ll come to the punch line in a bit was that – I mentioned that at one point, we made author acts and that was not accepted but three or four months on, it was and then I mentioned that we’re seeing some other packages that were once marketed in a higher number that are now being remarketed in a lower number. And then I said we can sort of speculate as to the reasons for this.
Some may feel that it’s – financially, some will need these real estate transactions to be completed not unlike in prior years. Some of it may be a reflection of just normal lock and tackling on the operational side.
Some may think that this is the right time now to sell real estate. I think though that maybe, maybe the reason that we’re seeing it, if it’s not – but I think our evidence is pretty good.
I don’t think it’s – we see a trend in it. Instead maybe, corporate real estate people, if not being in their core business are not going to necessarily take a property for operational reasons and that not to sell it simply because the real estate market isn’t to where it needs to be.
So, maybe they'd brought the properties out into the market hoping that the picture would get better but the credit picture did not get better and at the same time, there’s a specter of a slowdown in the United States economy. So, maybe for some they said, “We’ve waited long enough and now, we need to go”.
We don’t know exactly what the causes are but we’re just – again, it’s just speculation on our part but those are the reasons that we perhaps have seen the comeback in that.
Mitch Germain – Banc of America
I appreciate those comments and can you, Jojo, specifically, how much of your acquisitions year to date have been value-add as a percentage to stable?
Jojo Yap
Couple of things – definitely, the acquisitions for the second quarter was primarily value-add and the markets were – one of the strongest markets in the U.S. which is the LA county and let me just look back at the list of acquisitions for the first quarter here.
I just want to peruse that–
Mike Havala
Hey, Mitch, while Jojo is looking through for that, I just wanted to bring up something. I don’t know whoever had a chance to bring it up in Q&A.
Steph, she saw that cap rate disposition number was 7.6.
Mitch Germain – Banc of America
Yes.
Mike Havala
And you saw the acquisition cap rate was about 7.6 as well but about 82% of our total acquisitions were in Southern California markets in Riverside and in the South Bay market. So, that’s a world of difference.
It might not look like you’re spread investing there but obviously properties in the South Bay market are selling in the 6 cap rate range.
Mitch Germain – Banc of America
I appreciate the commentary.
Mike Havala
Okay. I point that out for everyone.
Jojo Yap
So I just looked at – in terms of all of the building acquisitions in the second quarter, I stay with that comment, over 80% were value-added. When I look at the first quarter, I would say, approximately half of that was value-added and the rest was (inaudible) core plus thing.
Mitch Germain – Banc of America
And just last question, Jojo. Have you seen an increase of portfolios for sale or are larger portfolios still kind of on the sidelines at this point?
Jojo Yap
No, I don’t see that, Mitch. Actually, that has, they had experienced the biggest decrease packages over $50 million in industrial real estate in the U.S.
has experienced the biggest decrease of all when you compare it year-over-year and the one-off transactions as a component has decreased as well but not as much.
Mitch Germain – Banc of America
All right. Thanks a lot, guys.
I appreciate it.
Jojo Yap
Okay, thank you.
Mike Brennan
Thank you, Mitch.
Operator
Thank you. Our next question is coming from Michael Billerman with Citi.
Please go ahead.
Michael Billerman – Citigroup
Hi, guys, just a few questions. How much debt was actually repurchased to generate the gain this quarter?
Mike Brennan
Approximately $20 million.
Michael Billerman – Citigroup
Is your guidance – actually that wasn’t in guidance in terms of the gain. Does your guidance have any more of this income?
Mike Brennan
We’re not going to provide information on any kind of buyback with respect to either debt or stock on a going forward basis. Yes, I think you would understand why we wouldn’t want to comment on that one way or another but yes, we wouldn’t want to comment on that.
Michael Billerman – Citigroup
I’m just trying to understand. I guess you bought back almost $70 million of stock last year.
The capital environment has certainly become more constrained. Your line balance, 350/500 [ph].
Why use any capacity when you have such a big development pipeline to buyback $20 million of debt where your reissue probably would be at the same sort of rate if not higher today?
Mike Brennan
Remember, when we bought it back, we bought it back significant discounts to the phase, if you will. In addition, we have ongoing savings as well because that debt is more expensive than line-of-credit debt.
In today’s market, debt that’s five, six, seven, eight years, there’s a significant spread on that debt in today’s market. Four hundred basis points plus or minus and that tends to be pretty volatile in the market.
Michael Billerman – Citigroup
But that’s to your line of credit cost. I think about it more so if you had to go out and raise some secured or secured financing, it’s probably going to be around a yield that which you have bought back the debt, so why chew up capacity to generate a $3 million gain.
Mike Brennan
Sure. We have capacity on our line of credit.
We have accordion feature on our line of credits. So, we have – we’re solid with respect to all the liquidity that we need for our business and we have a lot of capital capacity.
Remember on our joint ventures, we have about $4 billion of capital capacity on our joint ventures adding up equity and then any debt components on there as well. So, we have plenty of capacity for future investment.
Mike Havala
Yes, this is Mike. Just to add on to that, now remember that a substantial portion of the investment activity is taking place in the ventures and they we are providing 10% of the equity and our partner’s 90% and so forth.
So, that large number doesn’t maybe need quite as much equity as it might be and as one might think, maybe just looking at the numbers
Michael Billerman – Citigroup
You said you want to do things on a leverage mutual basis. Buying back stock increases the leverage and just swapping the debt for debt really doesn’t do much.
It’s just puzzling you bought back stock at $39. You have a $60 million authorization.
Your stock's been in the mid to high 20s. Why not just continue to buyback stock?
Mike Havala
This is Mike. Well, that’s obviously an option that we certainly have and every single day actually, we look at the different investment options that we have.
So, that’s not one that we are forgetting anytime soon.
Michael Billerman – Citigroup
Okay. Can you just reconcile, at the end of the first quarter, you had a pipeline of acquisitions under contract or letter of intent of about $716 million.
You closed on about $120 million in the core and $50 million in JV and the pipeline is up…
Operator
His line seems to have disconnected. Our next question is coming from Paul Adornato from BMO Capital Markets.
Jojo Yap
Yes, just to be clear on our last question, the pipeline is $1.4 billion as of the end of the second quarter, the basis has been spelled out in our press release.
Operator
Thank you. Our next question is coming from Michael Billerman with Citigroup.
Please go ahead.
Michael Billerman – Citigroup
Am I magically back on the queue now?
Mike Havala
Yes, exactly right.
Michael Billerman – Citigroup
I was just trying to figure out on the acquisition side, was there something didn't close coming out of the first quarter or did you push back on pricing? What sort of happened?
The pipeline was very big. I would have expected a lot of it to close in the second quarter.
So, just give a little bit of color to what’s happening.
Jojo Yap
Yes, the primary reason for the non-closure rate on what’s on the agreement and letter of intent was we dropped a lot of land transactions. We felt that given the economic slowdown that the pricing that we were at were not appropriate for future underwriting.
So, there was a significant amount of land assets under letter of intent that we did not want to close on.
Michael Billerman – Citigroup
And did you have money hard on any of that?
Jojo Yap
None.
Michael Billerman – Citigroup
And what sort of volume are we talking about? $300 million, $400 million?
Jojo Yap
Yes, there was one big pipeline asset, there was a large transaction. That’s a very large transaction.
Michael Billerman – Citigroup
Okay, but you didn’t have to write off any costs?
Jojo Yap
No, it was all under – and that is something, if we do, we reflect that in our earnings we just want to point out. But no, we did not.
Mike Brennan
There might have been a few pursuit costs but–
Jojo Yap
Very little.
Mike Brennan
Very little, but no earnings money.
Michael Billerman – Citigroup
Okay. And Mike Brennan just to clarify, you talked about how your sales and the acquisitions were both done on a 7.6 yield.
My understanding was that you quote those yields differently where the acquisitions are a forward-expected yield. And the sales are current in place, but I just want to make sure that I am understanding what is going on.
Mike Brennan
That’s essentially, your current understanding is essentially correct. Jojo, any clarification needed for that or…
Jojo Yap
No. That is exactly we see.
You are correct and I did want to add a little bit of color to that. Over 80% of our acquisitions on balance sheet is in the markets of Southern California and a big part of that is the LA County, which is one of the – and continues to be, which includes South Bay, which continues to be one of the tightest submarket in the U.S., including when you factor in positive net absorption.
So, if you look at it seven, this additional color is that if you look at it seven fixed yield, as we did today, were stabilized functional difficult assets. In LA County, those trade anywhere from 5.5 to 6.5, but the midpoint is somewhere at six.
So, we really are excited about those value-added investments because we are performing about a seven fixed cap.
Michael Billerman – Citigroup
But that 7 fixed cap is what you expect it to be. What is currently?
You went into this day?
Mike Brennan
You know, we would not like to comment on the in-place yield but let me just say that there is redevelopment and repositioning that we have to do with those assets.
Michael Billerman – Citigroup
So, it would probably be in line of where market capital as you just quote it?
Mike Brennan
No.
Michael Billerman – Citigroup
You’re saying lower?
Mike Brennan
Basically, much lower because if you take on, for example, in LA County, if you take on an under leased asset and you do your proper approvals and proper transfer repositioning immediately, you can create value already. And then, that value increases all the way down to a 5.5 to 6.5 once you get it leased.
Michael Billerman – Citigroup
And in your dispositions, that is a cash in-placed cap rate?
Mike Brennan
Yes, in-place first year.
Michael Billerman – Citigroup
And how are you guys dealing with sort of transaction costs in both the acquisitions and the dispositions in terms of the cap rates are quoting?
Mike Brennan
All the transaction costs in our investments are put as part of our total investment.
Michael Billerman – Citigroup
Okay.
Mike Brennan
Baked in into the basis.
Michael Billerman – Citigroup
Okay. Thank you.
Mike Brennan
Thank you.
Operator
Thank you. Our next question is coming from Paul Adornato with BMO Capital Markets.
Please go ahead.
Paul Adornato – BMO Capital Markets
Hi. I was wondering if we could switch to your new European markets.
First of all, what type of due diligence did you do prior to entering those markets and could you characterize the nature of those markets? That is, just the makeup of the players and the level with real estate that is owned by corporate users.
Some code like that.
Mike Brennan
Sure. Paul, this is Mike Brennan.
I will start on the due diligence kind of the overall preparation to enter, and then Jojo can talk about some of the markets and the composition of the ownership there. Not to get long-winded on you – but you started probably about two years ago.
And the type of due diligence that we did involved types of financing, the competition, the level of talent, the ownership, where the cities were that would provide the engines of growth, specifically supply chain, or pockets of consumption or port activity. And that was followed up with field visits and so forth, speaking to any number of brokers and owners, etc.
Again, this took place- it started a couple of years ago. We clearly understood the benefits of Germany and France but we like as starting point, Belgium and Amsterdam.
Mike Havala
One of the most important things for us was the identification of talent. And so, we hired and interviewed a number of headhunters and people that were really well-acquainted with the talent there.
And so, we went first to find our leader in Yonsheers [ph]and of course, I think I have mentioned this in the past, that leader, Yonsheers, of our European operations, was formerly the Chief Operating Officer of Euro-Pros [ph] North Europe operations. So, well, we came well-equipped and well-credentialed to handle it.
And then, after that, we hired a number of people from Jones Lane [ph] in South, from Seagrove, etc., that had great, great experience. And so, I mean obviously, this has gone through board levels and discussions but it was – this Paul took place, again, beginning on that last couple of years.
So, and then with that, some of our findings, maybe we will stick with France and Germany. What was it and why did we open an office and do so to our comparison and then maybe Jojo can talk a little bit about the composition of ownership there as well.
Jojo Yap
Sir, Mike already alluded to one of the major driver of investor realty absorption [ph] there, which is supply chain with configuration due to long-term increased in their national trade. So, just to add color there, remember that Netherlands, Belgium, and France and Germany are all close to the three largest ports in Europe, which is Hamburg, and toward Rotterdam.
And overall, they are projected to receive continued increase international trade. In terms of supply chain reconfiguration that again, pushes industrial so I just want to add one more thing.
So, the port activity is similar to what the U.S. is going through but there is one more dynamic that is happening in the EU that is not happening in the U.S., and that is the intra-EU outsourcing where the Western European countries are outsourcing inside the EU through Central Eastern Europe.
What is happening in that because of the shifting of manufacturing within EU, that is creating a different kind of supply chain dynamic. So, they yield a force happening wherein the supply chains are becoming more and more Pan-European.
So, that is driving a lot of the activity. One more thing, just want to add to that.
In terms of a driver, it is the corporate real estate ownership via large. When you look at the EU, there is a higher, even higher level of corporate ownership there versus the U.S., and that is something that we find exciting because we’ve got our teams there in the U.S.
in terms of corporate ownership. In terms of competitors, you really have a lot of investors than compared to us out there.
You have the U.S. Reeds [ph].
You know who they are. I will name some large publicly traded and institutions who invest there.
Seagrove, for example, is a large investor, AFSA [ph] and probably are major investors there, too. And you have actually heard of Goodman.
So, they are large investors and developers. Gazeley also is one who has been recently acquired.
But overall, you also would have private leverage, private investors and developers. So, via large, we see no difference in terms of makeup of the type of investors but of course, a lot more European-based.
A lot of UK, French, German investors out there because that is where quite a bit of capitals is coming in and also going into Europe. I hope that answers your question.
Paul Adornato – BMO Capital Markets
Yes, sure. And secondly, I was wondering if you could talk about how many people you have on the ground in both Germany and France?
And how many you would expect to have when you are fully staffed, and what the quarterly G&A implications are for that staff up?
Mike Havala
This is Mike again. In Germany and France, we have one person in Germany and one person in France.
I think your overall – Obviously they are going to add to that with an analyst and so forth and administrative and development assistants as the time went as appropriate. Overall, we have about 16 people in our European operation.
And what they are going to do and the gentlemen that have joined us in Germany and in France have both extensive development and redevelopment and acquisition background as well as a strong operational background as well. And so, they will be I think well-equipped to run the First Industrial model and to be able to utilize the $0.5 billion of joint venture capital and we have to assist them in that.
With respect to, I don’t have it in my fingertips the precise numbers on G&A in Europe. That’s going to be a function of the activity that we have, so I’m not sure that the number that I can give you would be a necessarily, totally reliable.
It’s going to depend a little bit on the value. But it’s not materially different from any of the projections we’ve given in the past.
Paul Adornato – BMO Capital Markets
Okay. Thank you.
Mike Havala
Yes.
Operator
Thank you. Our next question is coming from Jaime Feldman of UBS Investment Bank.
Please go ahead.
Jaime Feldman – UBS
Hello. Thank you very much.
Can we just talk about there’s a big increase of the expense side in the same store. Can we talk about what the drivers within are and how much of that will be reimbursed and how we should think about that going forward.
Mike Havala
Yes, Hey Jimmy. This is Mike Havala.
As I’ve mentioned in my opening remarks that the biggest element of the expense increase in same store related two tenants where we had some bad debt charge offs and then I related to Indianapolis where we had some real estate tax. (inaudible) in the second quarter so those two items where the update keys of that increase in expense.
Without those two items which we look at it as being more specific to the quarter not on going, of course. After those, our same store actually would have been positive for the quarter.
Jaime Feldman – UBS
Okay. And then I’m reminding before your guidance on same store?
Mike Havala
Our guidance on same store for the year is 0% to 2% positive.
Jaime Feldman – UBS
Okay and then in terms of guidance so you guys grant down your balance sheet several time but I think you’ve kept your men on economic gain the same. Can you just rectify that for me?
Mike Havala
Yes. We just said we have better visibility in terms of our projected sales to the second half of ‘08.
Basically, that’s why we provided you that guidance. We’ve looked at each and every asset we have estimated our economy gains and that’s the range we came up with.
Jaime Feldman – UBS
And now as the margins have been a little bit higher than originally expected in the first half as well. So it has to do with margins being old and higher.
Okay, and then finally the follow up on that European discussions. I mean you guys are definitely, I kind of hear of ramping up the expansion.
How do you think the world, I mean the world has changed a little bit since you guys started and if we are standing today, would you still be expanding in to Europe and that is how you think about how the opportunity that exchange and the timing.
Mike Havala
Well, maybe changes might – we actually would. Jojo just mentioned the opportunities that we saw there.
Think about where we decided to go in Amsterdam, in Brussels where we’re going to have both the benefits and the pocket of consumption. The two big ports, our ports one and two, and now with our German addition, three – serving three of the largest ports, especially in Amsterdam and Brussels, we’re on sort of the edge and where supply chain reconfiguration activity taking place.
Last of corporate ownership, 75% versus 65% here. And you know what, we come to Europe, not only have we put together a great team but we come fully finance if you will and at time when people are not.
So I’d love that if you could describe a circumstance or a time in which you would want to open up an office, I think it would be a time when we have a material competitive advantage. So yes, absolutely we would, this is actually a very, very good time to launch it, may be as opposed to a couple of years ago.
So, yes, obviously we must be careful we’re incurring an overhead that is not small and we need to make sure that we have execute on our plan. But, again, when we take a look at the type of activity that we could potentially do in the market and we see some of the competitors, we don’t see too many people that have model like ours and we don’t see any people that I know of that has a model like ours with the capitalization that we have.
So I feel very good about our chances of continuing to do well there and I’m happy to say that Europe, as I mentioned in my remarks, got on the board with a pipeline of about $150 million. So yes, I think it’s a good time to be there and most importantly it’s the leadership and the people that we have in the cities that gives me great comfort.
That’s all.
Jaime Feldman – UBS
All right. Thank you for that.
Operator
Thank you. Our next question is coming from Anup Gupta [ph] with Sapphire Management [ph], Please go ahead.
Anup Gupta – Sapphire Management
Good morning or good afternoon. Two questions ready.
The first one on the composition of the dividend and second one regarding the sustainability of it. After the composition of the dividend, if you could break down in some property level NOI against capital recycling and when go to the dividend sustainability in an environment where we might expect to slow down in transaction activity.
Could you provide all over those callers to how you see the make up of the dividend changing and also over the clarity on the transactions? I mean, are these developments built to and then sold at all these land parcels which have inherently no risk?
Mike Havala
This is Mike Havala. Let me answer your first question there about the composition of your dividend and I think really the best way to answer that is look at the composition of our earnings or our composition of our FFO.
Last quarter and we’ve continued that of course this quarter, we introduced some new disclosure and specifically that’s on page six and then page 11 and then there’s some additional footnotes but it breaks down that the composition of FFO into three category portfolio operations, joint venture operations and then capital recycling activities. I guess I should refer you to those pages because there’s a lot of information that I think will be very helpful to your analysis.
Anup Gupta – Sapphire Management
I see that. Thank you.
Mike Havala
Regarding the second part of the question.
Jojo Yap
Yes, this is Jojo. I got to mention to you this again.
Our sales are for me very diversified, set of investments, there’s one thing with First Industrial over the past, it seems our reception we’ve met it quarter by quarter. We’ve not really been large portfolios so there’s it’s really by one of sale transactions and if you look at those transactions primarily in the last year and or forward, we’ve been as about in the 50% to 55% level merchant transactions and by that I mean all of that we sell development that we built, speculative or build to suits.
We also sell land and we also sell assets that we’ve stabilized at closing which we could immediately resell. Those are at full of assets and addition to that about 50% to 55% are assets that we owned on balance sheet and so in addition to that we have our joint venture assets, of course that in various cases of as mentioned plan.
It’s really a wide pull and the only thing I would add to that is the across every market in the United States plus now we would expect that our sales would also come from Canada and in Europe. It’s basically both wide and deep and we like that in terms of our ability to be able to harvest value that way.
Operator
Thank you. (Operator instructions) Our last question in queue is coming from Cedrik Lachance with Green Street Advisors.
Please go ahead.
Cedrik Lachance – Green Street Advisors
Thank you. Regarding the press release and the timing priority expansion from Germany that you could invest both in the JV as well as directly on balance sheet and can you give us a census as to how you will decide which property go to the balance sheet versus going into the JV?
Mike Havala
Yes, Cedrik. Basically our joint ventures that we have set up for Europe.
The focus of it is for developments and repositioning or redevelopment type of assets and so those investments we will focus those investments in our joint venture and another type of investments, we will invest on using our balance sheet. So that’s basically, in the simplest form, I guess where you’ll see we also that’s current ventures versus balance sheet at least as we start our investments in Europe.
Cedrik Lachance – Green Street Advisors
There’s something that’s in reference with your balance sheet.
Mike Havala
That would be something that would be outside the venture and if we did it today, it would be all likely on balance sheet, yes.
Cedrik Lachance – Green Street Advisors
Okay. We still and then the property sold in this quarter where on average , are has been on an average by 5.9 years.
Last year, if I recall well, usually our average was less than two years of ownership. What exactly is the difference this year?
Jojo Yap
Cedrik, hi, this is Jojo. It’s really the age of meeting the holding periods of our sales would change a quarter of 4 year over year and if we really look at, because we really look at each property, we look at where we are progressing in terms of added management plan and then once we feel that we maximize the value because of occupancy and achieving top of the market rents, we will position it but we will only sell property if we can find the ability, if we can find the opportunities to reinvent at a higher return so that the capital will recycle model.
Mike Brennan
Cedrik, this is Mike Brennan. One thing that gives some specifics, I mean there was a couple of properties.
I think there was a property in Minnesota, there is a property in Tampa and there’s a couple of properties in the Philly area at. We got the one that re-development.
It took us a little bit longer and we are ten and intensive. Those are judges I think some of the things that cause ethical walk.
Those are ones that we’ve done with our plan and maybe those weren’t the best to fit for us and then we ended up selling. We did it quite well but those we have a little bit longer as well.
Cedrik Lachance – Green Street Advisors
And in regards to margin achieved, we’re achieving roughly different margins that we have last year except that if I look at probably the current security bill, I would expect that most probably, it will require and the drop rate somewhere in excess of 9%. Why isn’t the margin greater in this quarter?
Mike Brennan
Depends on the mix of properties, I don’t think it occurs the statement that fails, they should be better because they were bought earlier than later. This just all depends upon the plan and all depends upon the property in the market.
Cedrik Lachance – Green Street Advisors
Okay. Do you think you can give me a five more land acquired?
Can you give us the – changer than land prices that you’ve seen and explain your strategy at this point of or focus in acquiring a land?
Mike Brennan
Yes, okay. In terms of changes in the pricing, it really varies.
The more land constrained, the locations are the less pricing differential, you’ll see. The more Greenfield your sites are, the larger it may that price decreases.
One thing that we’ve done when we bought assets, we under rolled all the assets we acquired at well below market. A lot of times when we’ve acquired these assets, the JVs are highly selective acquisitions wherein there was a situation where we can acquire the little fair market value so that’s what we were focusing and even today, that is what we are focused on.
Just specifically on less strategy today. Over-all, in terms of cut along location where we still feel that going forward the Eastern Seaboard of the United States clearly requires a little bit more focus from us so we look forward to some strategic positions there just like we have strategic positions that you already know.
In terms of just pricing, we will use and capitalize the benefit compare and invest we have today. In fact, we really think it’s compare to the best we can use to get discounts so that’s basically we are going to look for.
Cedrik Lachance – Green Street Advisors
Perhaps one follow-up question on the allocation that you make in an economic gain in an example from JV from another putting income on third streak. When I look at the allocation of interest income, you allocated about 45% of your experimental kind of interest expense.
He answered about 35% of your interest expense to capitalize – and your manner of perforation yet what you saw you’ve given your, it’s probably 25-30% at a return last of May. I don’t understand why there’s disproportion of the allocation of interest in this particular portfolio?
Mike Brennan
Sure. We remember that a number of properties have multi-year asset management plan so you got to look at things from a multi-year perspective and in considering that, and basically, we describe to you some of the supplemental as well but we look at the contribution of our assets that we’ve sold the IRR.
How much of the IRR was achieved through gaining an economic gain versus operations in our NOI and at that’s how we’ve made our allocation which obviously with properties that we’re acquiring and value and so forth. You have forth NOI and gains associated with those properties with those economics in the IRR.
So that’s fast how we’ve done that again which describes that in the supplemental.
Operator
Yes. I will return the call to First for closing comment.
Mike Brennan
Thank you very much. Thank you.
I just wanted to say thanks for people that called in and listened to the call and taking interest in the company and we look forward to updating you in another 90 days. Thank you very much.
Operator
Thank you. This does conclude today’s conference call.
You may now disconnect.