Business context and reporting period
First Industrial Realty Trust, Inc. is a REIT focused on industrial properties. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. At quarter-end, it owned 716 properties across 26 U.S. states and one Canadian province, totaling approximately 62.7 million square feet.
Financial and operating results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $81.0 million | $79.3 million | $246.4 million | $239.8 million |
| Net income (loss) attributable to common stockholders and participating securities | $4.2 million | $(8.9) million | $(13.6) million | $(22.3) million |
| Basic and diluted EPS | $0.04 | $(0.10) | $(0.15) | $(0.28) |
| FFO available to common stockholders and participating securities | $27.9 million | $18.7 million | $62.9 million | $52.4 million |
Continuing-operations EPS attributable to common stockholders was $(0.01) for Q3 and $(0.30) year to date. Reported Q3 earnings included $5.4 million of discontinued-operations income, including property-sale gains; year-to-date discontinued-operations income was $13.6 million. FFO is a non-GAAP supplemental measure, not a substitute for GAAP earnings or cash flow.
- Revenue rose 2.2% in Q3 and 2.7% year to date. Same-store average occupancy was 86.7% in Q3 (86.8% in 2011) and 87.3% year to date (86.2% in 2011).
- Property expenses fell 2.7% in Q3 and 2.6% year to date. Revenue less property expenses—a simple spread, not a company-reported margin—was approximately 67.9% of revenue in Q3 and 67.5% year to date.
- Year-to-date leasing activity showed 1.4% GAAP-basis rent growth, 66.5% weighted average tenant retention, and a 3.6-year weighted average lease term. Q3 rent growth was 0.8%.
- Net cash provided by operating activities was $90.8 million for the first nine months, versus $64.1 million in 2011. Investing activities used $21.0 million (compared with $19.7 million provided in 2011); financing activities used $77.1 million (versus $61.7 million used). Cash and cash equivalents were $2.8 million at period-end.
- Total debt carrying value was approximately $1.297 billion, down from $1.479 billion at December 31, 2011. This comprised $781.4 million of mortgage and other loans, $488.5 million of senior unsecured notes, and $27.0 million drawn on the credit facility. Approximately 97.9% of debt was fixed-rate. The filing reported $422.4 million of facility capacity available at September 30 and $403.0 million as of November 2.
- Total assets were $2.611 billion, total liabilities $1.412 billion, and total equity $1.200 billion at September 30.
Material changes and notable transactions
- Q3 net income improved from a loss in 2011, while year-to-date common-stockholder losses narrowed. Lower interest expense and property expenses contributed; Q3 results also benefited from property-sale gains and a reversal of a deferred-rent allowance.
- The company sold 25 industrial properties totaling approximately 4.1 million square feet and one land parcel during the first nine months. Gross sale proceeds were approximately $80.4 million; reported real-estate gains were $15.8 million, including $12.0 million in discontinued operations. Four properties totaling approximately 0.2 million square feet were held for sale at quarter-end.
- It issued 9.4 million common shares in a public offering and 1.53 million shares through at-the-market offerings during the nine months, generating approximately $134.8 million in net proceeds in total. Shares outstanding increased materially.
- The company repurchased $91.6 million principal amount of senior notes for $94.0 million and recorded $6.6 million of year-to-date debt-retirement loss. It also repaid $61.8 million of notes at maturity. In Q3 it originated $100.6 million of secured mortgage loans at a fixed 4.03% rate, maturing in 2022.
- Development commitments covered approximately 2.3 million square feet, with estimated total costs of $99.5 million and $68.4 million remaining to fund.
Outlook, risks and contingencies
The filing provides no quantified earnings or FFO guidance. Management said it expected short-term liquidity needs to be met through operating and investing cash flows, including selected asset dispositions; longer-term needs may be funded by dispositions, secured or unsecured debt, and equity issuance, subject to market conditions. Management expected to remain in compliance with financial covenants for the remainder of 2012 and stated that covenants were met at September 30.
- The IRS proposed an adjustment to a previously received tax refund: approximately $4.8 million of taxes plus about $0.5 million of accrued interest. The company recorded a $5.3 million charge in the first nine months. Final review and approval by the Joint Committee on Taxation remained pending, and timing and final amount were uncertain.
- A tenant in a property securing a mortgage receivable filed for Chapter 7 bankruptcy in July 2012. The borrower was current on payments at the filing date; the company said it was not aware of information indicating amounts due would not be paid.
- Management cited risks from economic and industrial-property market conditions, tenant creditworthiness, financing access and cost, interest rates, covenant compliance, competition, property valuations and impairment, and development costs or delays. The company reported no material adverse effect expected from ordinary-course legal actions.
- Management identified disclosure controls as effective at September 30 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the IRS settlement receives final approval, its ultimate cost, and any effects on partners’ or stockholders’ tax liabilities.
- Occupancy, same-store rent trends, lease renewals, concessions, and tenant credit quality, particularly given modest Q3 same-store occupancy decline and reported leasing retention.
- Liquidity and refinancing needs, including the scheduled $175.9 million of debt maturities in 2014 and $295.5 million in 2016, and continued covenant compliance.
- Whether planned dispositions and development spending proceed on expected terms, and whether the $68.4 million remaining development commitment can be funded without undue financing or cost risk.
- The contribution of property-sale gains, discontinued operations, and other unusual items to reported earnings, and the effects of additional equity issuance on per-share results.