Business context and reporting period
First Industrial Realty Trust, Inc. is a REIT that owns, leases, develops, acquires and sells U.S. industrial real estate through First Industrial, L.P. This Form 10-K covers the fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Unless stated otherwise, financial amounts below are in U.S. dollars.
At year-end, the in-service portfolio comprised 535 properties, approximately 62.2 million square feet across 23 states, and was 96.0% occupied. The company had approximately 1,500 tenants; no tenant or related group represented more than 2.7% of rent revenue.
Financial and operating results
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $378.0 million | $365.8 million | +3.3% |
| Net income | $125.7 million | $76.7 million | +63.9% |
| Net income available to common stockholders | $121.2 million | $73.8 million | +64.3% |
| Diluted EPS | $1.05 | $0.66 | Up from $0.66 |
| FFO available to common stockholders and participating securities | $167.8 million | $140.8 million | +19.2% |
| Cash flow from operating activities | $173.3 million | $162.1 million | +6.9% |
| Same-store NOI | $244.1 million | $230.1 million | +6.1% |
Rental income was $289.9 million and tenant recoveries and other income were $88.2 million. Same-store occupancy averaged 95.9%, versus 95.2% in 2015. Same-store revenue rose 3.5%, principally from higher occupancy, rents and tenant recoveries. Fourth-quarter revenue was $98.0 million, versus $93.2 million a year earlier; common-stockholder net income was $23.7 million, versus $43.3 million.
Reported net income included a $68.2 million gain on real estate sales, compared with $48.9 million in 2015. Interest expense fell 11.9% to $59.4 million, primarily reflecting a lower weighted-average interest rate (4.50% versus 4.99%) and higher capitalized interest. Property expenses decreased 2.0% to $112.3 million. The filing does not provide a single GAAP operating-margin measure; FFO and NOI are non-GAAP measures and should not be treated as substitutes for net income or operating cash flow.
Balance sheet, cash flow and capital
- Year-end total assets were $2.79 billion, total equity was $1.28 billion, and indebtedness on the balance sheet was $1.35 billion, down from $1.43 billion in 2015.
- Cash and cash equivalents were $9.9 million, with $11.6 million of restricted cash. The restricted cash primarily comprised property-sale proceeds pending Section 1031 exchanges.
- The $625 million unsecured revolving credit facility had $433.8 million of additional capacity at year-end; reported availability was approximately $384 million on February 23, 2017. Year-end borrowings carried a 1.77% weighted-average rate.
- Approximately 86% of debt was fixed-rate, including $460 million of variable-rate term loans effectively fixed through swaps; 14% was variable-rate. Senior unsecured debt ratings were BBB-/Baa3/BBB- from S&P, Moody’s and Fitch, respectively.
- Operating cash flow was $173.3 million; investing cash flow was negative $111.0 million and financing cash flow was negative $56.5 million. The company paid off $159.7 million of notes at maturity and $59.4 million of mortgage loans, issued 5.6 million common shares for net proceeds of approximately $124.9 million, and paid $82.7 million in dividends and unit distributions.
- Annual dividends/distributions increased to $0.76 per share or unit from $0.51 in 2015. The company reported meeting its 2016 REIT minimum distribution requirement.
Material changes and portfolio activity
- Acquired six properties and land parcels for approximately $111.1 million; the acquired properties had an expected stabilized cap rate of approximately 6.7%.
- Placed 11 development projects totaling 3.3 million square feet in service at an estimated total cost of $210.1 million; year-end occupancy averaged 98%.
- Had approximately 2.4 million square feet under construction, with estimated total investment of $167.2 million and approximately $100.1 million remaining to fund. The company cautioned actual completion costs could exceed estimates.
- Sold 63 properties totaling 3.9 million square feet for gross proceeds of approximately $169.9 million. The sales generated the $68.2 million gain reflected in earnings.
- Leasing activity showed 15.9% GAAP-basis rent growth on new and renewal leases in aggregate; renewal leases recorded 15.1% growth and 74.3% tenant retention.
Outlook, risks and unusual items
Management described industrial market fundamentals as favorable in 2016, citing ongoing positive net absorption and demand growth, including e-commerce supply-chain activity. Based on market conditions and its research source’s forecast, management expected 2017 cash rents on renewal leases to exceed expiring rents and cash rents on new leases to be slightly higher on average. These are expectations, not guarantees.
For 2017 liquidity, the filing identifies $101.9 million of 5.95% notes due May 15 and $55.0 million of 7.50% notes due December 1, plus $36.1 million of mortgage loans the company anticipated prepaying before year-end. Management expected to meet these obligations through revolver borrowings and unsecured debt issuance. In February 2017, the company and Operating Partnership agreed to a private placement of up to $125 million of 4.30% notes due 2027 and up to $75 million of 4.40% notes due 2029, with issuance anticipated in April 2017.
- Key business risks include tenant defaults or non-renewals, vacancies and rent pressure, economic or industrial-market weakness, development cost overruns or delays, access to capital and refinancing, interest-rate exposure, debt covenant compliance, property valuation and impairment, environmental liability, casualty losses, cybersecurity, and maintaining REIT status.
- In the fourth quarter, a fire completely destroyed a 28,000-square-foot building; its results were reclassified to redevelopment. The filing does not identify a material financial impact from this event.
- Environmental spending was approximately $0.4 million in 2016; estimated 2017 spending was $0.3 million, with identified issues expected to require no more than approximately $1.2 million in 2017 and beyond.
- Ordinary-course legal proceedings were not expected to have a material effect. Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm the timing and funding of the 2017 note maturities, anticipated mortgage prepayments, and proposed 2027 and 2029 private-placement notes.
- Track occupancy, tenant retention, lease expirations and whether management achieves expected cash rent growth in 2017.
- Assess development completion costs, leasing progress and returns against estimated project costs and stabilized cap rates.
- Separate recurring operating performance from gains on property sales when evaluating earnings; review FFO and NOI reconciliations and their non-GAAP limitations.
- Monitor debt levels, variable-rate exposure, credit ratings, covenant headroom and revolver availability, as well as property-sale proceeds and restricted cash.