Business context and reporting period
First Industrial Realty Trust, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The REIT owns, leases, develops, acquires and sells U.S. industrial real estate. Its in-service portfolio comprised 634 properties totaling 62.4 million square feet across 25 states, with 94% occupancy and approximately 1,800 tenants.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $344.6 million | $318.5 million |
| Income from continuing operations | $23.3 million | $4.0 million |
| Continuing-operations EPS attributable to common stockholders | $0.18 | $(0.09) |
| Net income available to common stockholders and participating securities | $46.6 million | $25.9 million |
| Net income EPS attributable to common stockholders | $0.42 | $0.24 |
| Funds from operations (FFO), available to common stockholders and participating securities | $127.9 million | $105.0 million |
| Same-store net operating income (SS NOI) | $226.3 million | $217.2 million |
| Cash flow from operating activities | $137.2 million | $125.8 million |
Revenue increased 8.2%. Average same-store occupancy rose to 92.5% from 90.9%; same-store revenue increased 5.2%, while property expenses increased 7.4%. The company reported $25.988 million of gains on property sales in discontinued operations in 2014, a substantial contributor to reported net income. FFO and SS NOI are non-GAAP measures and are not substitutes for GAAP income or operating cash flow.
Balance sheet, debt and liquidity
- Total assets were $2.582 billion and total equity was $1.091 billion at year-end.
- Indebtedness was approximately $1.350 billion, up from $1.297 billion in 2013. Year-end cash and cash equivalents were $9.5 million; restricted cash was $1.8 million.
- Borrowings under the $625 million unsecured credit facility were $185 million; the company reported $433 million of additional availability at year-end and approximately $418 million on February 24, 2015.
- Debt was 86.3% fixed-rate, including $200 million of term-loan debt fixed through interest-rate protection agreements; 13.7% was variable-rate. Senior unsecured debt ratings were BBB-/Baa3/BBB-.
- 2014 financing actions included a seven-year $200 million unsecured term loan, repayment at maturity of $81.8 million of 2014 Notes, early repayment of $65.6 million of mortgage loans, and redemption of $75 million of Series F and G preferred stock. The company recorded a $0.7 million debt-retirement loss.
- Scheduled debt principal payments were $12.2 million in 2015, $251.9 million in 2016 and $353.7 million in 2017. Management expected to use credit-facility borrowings for $23.2 million of mortgage obligations maturing or expected to be prepaid in 2015.
Material changes versus the prior comparable period
- Common-stockholder net income rose to $46.6 million from $25.9 million, while continuing-operations income improved to $23.3 million from $4.0 million. Disposition gains were $26.0 million in discontinued operations, versus $34.3 million in 2013.
- FFO increased about 22%, and SS NOI increased about 4%. The company attributed same-store revenue gains chiefly to higher occupancy and tenant recoveries, partly offset by a larger straight-line rent reserve for doubtful accounts.
- Operating cash flow increased to $137.2 million from $125.8 million. Investing cash outflow was $69.1 million; financing cash outflow was $66.2 million.
- Acquisitions totaled $95.7 million for eight properties and land parcels; five developments totaling 1.6 million square feet entered service at a cost of $115.2 million. The company sold 29 properties totaling 2.0 million square feet for gross proceeds of $102.6 million.
- Common distributions increased to $0.41 per share from $0.34. No preferred shares remained outstanding at year-end.
Outlook, management commentary and risks
- Management described U.S. industrial fundamentals as improving, citing 18 consecutive quarters of positive net absorption through Q4 2014. For 2015, it expected average cash renewal rents to be slightly above expiring rents and cash new-lease rents to be slightly below comparable prior rents.
- Three developments totaling approximately 1.0 million square feet were substantially complete but not yet in service; four projects totaling 1.3 million square feet were under construction. Estimated remaining development costs were $50.6 million; actual completion costs could exceed estimates.
- Management expected short-term liquidity needs to be funded principally by operating cash flow, selective asset sales and available borrowing capacity; longer-term needs could also be funded with debt or equity issuance, subject to market conditions.
- Key risks include tenant defaults and lease rollover, economic and industrial-property market conditions, development costs and delays, refinancing and interest-rate exposure, debt covenants and credit ratings, property valuation and impairment, environmental liabilities, REIT qualification and access to capital. A significant portion of scheduled debt maturities falls in 2016–2017.
- Environmental expenditures were approximately $0.7 million in 2014; management estimated $0.5 million for 2015 and no more than $1.8 million in aggregate for currently identified issues in 2015 and beyond. Ordinary-course legal proceedings were not expected to have a material effect.
- Unusual items include a $2.6 million one-time restoration fee in same-store operations, harsh-winter snow-removal costs, and a $12.3 million mark-to-market loss on interest-rate protection agreements recorded in other comprehensive income. The company reported effective disclosure controls and internal control over financial reporting; its auditor issued an unqualified opinion.
Important facts for investors to verify
- How much 2014 earnings growth is supported by recurring property operations versus gains from property dispositions and other one-time items.
- Whether occupancy, leasing spreads, tenant recoveries and property expense growth sustain SS NOI improvement; review the 2015 lease expirations, including 11% of in-service GLA.
- The status, remaining cost, leasing and stabilization of developments under construction or not yet in service.
- The refinancing plan and covenant headroom for the 2016–2017 debt maturities, together with actual credit-facility availability and the effect of interest-rate changes.
- Actual asset-sale proceeds, reinvestment or debt-repayment uses, and whether the company maintains its distribution within cash-flow and REIT requirements.
- Any changes in environmental, tenant-credit, impairment or other contingencies, and the 2015 impact of the revised discontinued-operations accounting standard.