First Industrial Realty Trust, Inc. — Q2 2018 Form 10-Q
Business context and period: Industrial-property REIT reporting for the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. At quarter-end, the company owned 471 industrial properties across 21 states, totaling approximately 61.1 million square feet. First Industrial Realty Trust owned approximately 97.7% of the operating partnership.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $98.8 million | $97.6 million | $198.6 million | $195.0 million |
| Net income | $46.4 million | $38.9 million | $83.9 million | $62.3 million |
| Net income available to common stockholders | $45.2 million | $37.6 million | $81.5 million | $60.3 million |
| EPS, basic and diluted | $0.36 | $0.32 | $0.67 | $0.51 |
| Operating cash flow | Not presented separately for quarter | Not presented separately for quarter | $93.8 million | $93.9 million |
| FFO available to common stockholders and participating securities | $48.5 million | $45.3 million | $94.9 million | $87.7 million |
Q2 same-store occupancy averaged 96.9%, versus 95.3% a year earlier. Same-store NOI increased 4.5% in Q2 and 5.4% for the first half. First-half total revenue rose 1.9%; net income growth was aided by higher real-estate sale gains. Q2 and first-half gains on sale were $25.1 million and $45.2 million, respectively. These gains are important context when assessing reported earnings.
At June 30, 2018, total assets were $3.11 billion and total liabilities were $1.45 billion. Debt, excluding unamortized issuance costs, totaled approximately $1.31 billion; all reported debt was fixed-rate or effectively fixed through interest-rate swaps. Cash and cash equivalents were $61.8 million, restricted cash was $15.7 million, and available borrowing capacity under the unsecured credit facility was $720.8 million. The company reported $93.8 million of operating cash flow and $139.5 million of cash used in investing activities in the first half. Dividends/distributions declared were $0.2175 per share or unit per quarter, up 3.6% from the 2017 quarterly rate.
Material changes versus prior comparable periods
- First-half same-store revenue increased 4.9%, while same-store property expenses rose 9.8%; management attributed expense growth mainly to snow removal, real estate taxes, and insurance. Same-store NOI nevertheless increased 5.4%.
- Interest expense declined 13.3% for the first half, to $25.4 million, reflecting a lower average interest rate, lower average debt outstanding, and increased capitalized interest.
- Property sales increased: 30 properties and one land parcel were sold for gross proceeds of approximately $98.0 million in the first half, versus 20 properties sold in the 2017 period. Gains on sale rose to $45.2 million from $28.9 million.
- The company acquired six industrial properties totaling approximately 0.5 million square feet and 242.4 acres of land for development. It also entered a 49%-owned Phoenix-area joint venture to develop, sell, lease, and operate approximately 532 net developable acres.
- Financing included $300 million of new private-placement notes, a $145.6 million net common-stock offering, and repayment of $157.8 million of mortgage loans. The unsecured credit facility balance was zero at quarter-end, compared with $144.5 million at year-end 2017.
- First-half results included a $2.8 million real-estate impairment charge and $1.3 million of severance expense.
Outlook, risks, and contingencies
No specific earnings or operating guidance was provided. Management expected to meet near-term needs through operating cash flow, asset dispositions, and, where appropriate, borrowing or securities issuance. It anticipated prepaying $73.2 million of mortgage debt before June 30, 2019, principally using the credit facility, and expected to remain compliant with financial covenants through the remainder of 2018. Management stated it believed liquidity would be adequate for short- and long-term needs, subject to market conditions and contractual restrictions.
Five industrial properties totaling approximately 2.9 million square feet were under construction. Estimated total investment was $186 million, with approximately $79.1 million remaining to fund; actual costs could exceed estimates. The company cited risks including economic and industrial-property market conditions, tenant defaults or non-renewals, vacancy and rent changes, interest rates and access to capital, covenant compliance, acquisition and disposition execution, construction cost overruns or delays, and environmental liabilities. It reported compliance with debt covenants at June 30, 2018. No material legal proceedings were reported, and management said risk factors had not materially changed from prior filings.
After quarter-end through July 26, the company sold one building and one land parcel for approximately $3.4 million. The company adopted new revenue and cash-flow accounting standards in 2018 without a material impact on financial position or results. It expected the 2019 lease-accounting standard to reduce EPS/EPU by approximately $0.01 in the year of adoption.
Investor facts to verify
- How much of the earnings and FFO improvement reflects recurring leasing and operating performance versus property-sale gains?
- Can same-store NOI growth continue as property expenses increase faster than same-store revenue?
- What are the expected timing, leasing, and returns for the development pipeline, including the Phoenix joint venture, and could costs exceed estimates?
- How will the company fund the $73.2 million of anticipated mortgage prepayments and future maturities while maintaining covenant compliance and its credit ratings?
- What are the occupancy, rent-roll, tenant-retention, and leasing-cost trends behind the reported 96.9% same-store occupancy and leasing activity?