FIRST INDUSTRIAL REALTY TRUST INC annual report, FY2018

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First Industrial Realty Trust, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. The Company is a REIT whose industrial property operations are conducted primarily through First Industrial, L.P.

Business context and portfolio

  • Owned 447 in-service industrial properties totaling approximately 60.7 million square feet across 21 states; occupancy was 98.5% at year-end. Average annual base rent was $5.22 per square foot, and weighted-average lease term was 6.8 years.
  • More than 1,150 tenants; no tenant or related group contributed more than 2.6% of rent revenues.
  • Business centers on leasing, acquisitions, development, dispositions and redevelopment. Management cited favorable 2018 industrial-market conditions, including demand growth associated with e-commerce and low national vacancy.

Financial and operating results

  • Revenue: $404.0 million, up 1.9% from $396.4 million in 2017. Same-store revenue rose 4.8%; rental income was $306.4 million and tenant recoveries and other income were $97.5 million.
  • Profit: Net income attributable to common stockholders and participating securities was $163.2 million, down from $201.5 million. Basic and diluted EPS were both $1.31 versus $1.70 and $1.69, respectively. Lower real estate sale gains ($81.6 million versus $131.3 million) were a major factor in the year-over-year earnings decline.
  • Fourth quarter: Revenue was $105.1 million and net income available to common stockholders and participating securities was $50.8 million; basic and diluted EPS were $0.40. Fourth-quarter 2017 comparatives were $102.1 million, $98.0 million and $0.82/$0.81 per share, respectively.
  • Operating measures: FFO available to common stockholders and participating securities, a non-GAAP measure, increased 6.9% to $199.4 million from $186.5 million. Same-store NOI increased 5.8% to $267.8 million from $253.0 million. Average same-store occupancy improved to 97.5% from 96.2%.
  • Cash flow: Operating cash flow was $210.5 million, up from $192.6 million. Investing activities used $223.4 million, versus $82.5 million used in 2017; financing activities provided $16.8 million, compared with $85.0 million used in 2017. Cash and cash equivalents were $43.1 million at year-end, with $7.3 million of restricted cash.
  • Debt and liquidity: Indebtedness was approximately $1.30 billion at year-end. The Company had no revolver borrowings and $720.6 million of additional borrowing capacity at December 31, 2018; availability was approximately $713.4 million on February 15, 2019. Management reported covenant compliance. All debt was fixed-rate at year-end, including $460 million of variable-rate term loans fixed through swaps. Senior unsecured ratings were BBB/Stable, Baa2/Stable and BBB/Stable from S&P, Moody’s and Fitch, respectively.
  • Distributions: Annual dividend/distribution was $0.87 per share or Unit, up 3.6% from 2017. The Company stated it met its minimum REIT distribution requirements.

Material changes and notable transactions

  • Acquired 10 industrial properties and land parcels for approximately $167.5 million; sold 53 properties and land parcels for gross proceeds of approximately $192.0 million.
  • Completed and placed in service eight developments totaling approximately 3.5 million square feet at an estimated cost of $226.6 million; these were 100% occupied at year-end. Six substantially completed projects totaling 1.8 million square feet were vacant at year-end, and seven projects totaling 2.8 million square feet were under construction.
  • Entered a 49%-owned Phoenix land joint venture involving approximately 532 net developable acres; the land purchase price was $49.0 million.
  • Issued $300 million of private placement notes: $150 million at 3.86% due 2028 and $150 million at 3.96% due 2030. Also issued 4.8 million common shares in a public offering, generating approximately $145.6 million net proceeds, and repaid $157.8 million of mortgage loans.
  • Property expenses increased 3.0%, compared with 1.9% revenue growth. Interest expense declined 11.2% to $50.8 million, reflecting lower average debt and rates and increased capitalized interest.

Outlook, risks and unusual items

  • Management expected average cash-basis rental rates on both renewal and new leases in 2019 to exceed comparable expiring rates, based on recent leasing results and market forecasts. This is an expectation, not a quantified earnings or FFO forecast.
  • Management anticipated prepaying $107.9 million of mortgage loans before year-end 2019 and expected to fund liquidity needs with operating cash flow, asset sales and, as needed, debt or equity financing. Approximately $140.3 million of estimated development costs remained to be funded.
  • Key risks include economic or industrial-market weakening, tenant defaults or nonrenewals, rent and occupancy pressure, development delays or cost overruns, financing availability and interest rates, debt covenant compliance, REIT qualification and tax-law changes, environmental liabilities, casualty losses, cybersecurity and joint-venture risks.
  • The Company recorded a $2.8 million real estate impairment on a property and land parcel marketed for sale; both were sold during 2018. It also recognized $1.3 million of insurance proceeds, including business-interruption proceeds, related to a prior fire. Routine legal proceedings were not expected to materially affect results, financial position or liquidity.
  • For 2019 adoption of the new lease accounting standard, management estimated recognition of approximately $12.5 million in right-of-use assets and lease liabilities and an annual EPS/EPU reduction of approximately $0.01. Identified environmental expenditures were estimated not to exceed approximately $0.9 million in 2019 and beyond.
  • Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

  • Whether rent growth and high occupancy persist, particularly as leases covering 60% of in-service GLA and 62% of annualized base rent were scheduled to expire during 2019–2023.
  • Lease-up timing and final costs for the 1.8 million square feet of substantially completed projects and the 2.8 million square feet under construction.
  • Funding and refinancing plans for 2019 debt payments and development commitments, including actual revolver availability and covenant headroom.
  • How recurring operating performance compares with reported earnings, given the substantial contribution of property-sale gains and the use of non-GAAP FFO and NOI measures.
  • Effects of share issuance and limited-partner Unit redemptions on per-share results, and the sustainability of the dividend relative to recurring cash generation.