Business Context and Reporting Period
Company: First Industrial Realty Trust, Inc. (First Industrial)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: First Industrial is a real estate investment trust (REIT) owning and operating industrial properties. As of September 30, 2008, the portfolio consisted of 803 industrial properties (including developments) totaling approximately 71.4 million square feet of gross leaseable area (GLA) across 29 U.S. states and one Canadian province. The company also manages several joint ventures investing in industrial properties.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $136.6 million | $375.2 million |
| Net Income Available to Common Stockholders | $4.0 million | $94.0 million |
| Diluted EPS (Common) | $0.09 | $2.18 |
| Dividends Declared per Common Share | $0.72 | $2.16 |
| Cash and Cash Equivalents | $6.9 million | $6.9 million (Ending Balance) |
| Restricted Cash | $26.0 million | $26.0 million (Ending Balance) |
| Total Debt (Mortgage + Senior Unsecured + Line of Credit) | $2.0 billion (approx.) | $2.0 billion (approx.) |
| Net Cash Provided by Operating Activities | N/A | $59.6 million |
Note: Total debt includes $78.5 million in mortgage loans, $1.52 billion in senior unsecured debt, and $396.3 million drawn on the unsecured line of credit.
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total revenues increased 50.9% for the three months and 36.4% for the nine months compared to the prior year. This growth was primarily driven by a significant increase in "Construction Revenues" ($45.2 million vs. $5.4 million for the quarter) due to the company acting as a general contractor/development manager for third-party projects.
- Net Income Decline (Quarterly): Net income available to common stockholders dropped significantly to $4.0 million for the quarter ended September 30, 2008, compared to $29.3 million in the same period in 2007. This was largely due to a decrease in "Income from Discontinued Operations" (gains on property sales) and a reduction in "Equity in Income of Joint Ventures."
- Net Income Increase (Year-to-Date): For the nine months, net income available to common stockholders rose to $94.0 million from $88.3 million in the prior year, driven by higher gains on the sale of real estate included in discontinued operations.
- Discontinued Operations: The company sold 108 industrial properties during the nine months ended September 30, 2008, generating gross proceeds of approximately $558.9 million and a gain on sale of $178.4 million. Most of these sales are classified as discontinued operations.
- Interest Expense: Interest expense decreased 11.8% for the quarter and 7.4% for the nine months, attributed to a lower weighted average interest rate and increased capitalization of interest on development projects.
Guidance, Outlook, Risks, and Unusual Items
- Capital Markets Risk: Management highlighted significant disruptions in capital and credit markets, noting that volatility could impact the ability to refinance debt, specifically the $125 million of 5.25% Notes due in June 2009. There is no assurance that refinancing can be achieved on reasonable terms.
- Cost Reduction Plan: In a subsequent event (October 24, 2008), the Compensation Committee committed to a plan to reduce organizational and overhead costs, with an estimated pre-tax expense ranging between $11.8 million and $12.4 million.
- Executive Departure: Michael Brennan resigned as President and CEO on October 22, 2008.
- Dividend Policy: The Board declared a dividend of $0.25 per share for the quarter ending December 31, 2008, payable in January 2009. This represents a reduction from the $0.72 per share paid in the third quarter of 2008.
- Unusual Items: The financial results are heavily influenced by the timing of property sales (discontinued operations) and construction management fees, which are not recurring in the same magnitude as core rental income.
Investor Verification Checklist
- Refinancing of 2009 Notes: Verify the company's progress in refinancing the $125 million debt maturing in June 2009 amidst tight credit markets.
- Sustainability of Construction Revenue: Assess the duration and profitability of the third-party construction management contracts driving the recent revenue spike.
- Dividend Coverage: Analyze the impact of the reduced Q4 dividend ($0.25) on future cash flow requirements and REIT qualification.
- Cost Reduction Execution: Monitor the implementation of the $11.8–$12.4 million cost-cutting plan and its effect on operating margins.
- Discontinued Operations: Distinguish between core operating performance (continuing operations) and one-time gains from property sales (discontinued operations) when evaluating long-term value.