First Industrial Realty Trust, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2016, and combines the Company’s and First Industrial, L.P.’s reports. The Company is a REIT focused on owning, managing, acquiring, selling, developing and redeveloping industrial real estate. At quarter-end, it owned 562 properties in 24 states, totaling approximately 62.9 million square feet. The Company held an approximately 96.5% interest in the Operating Partnership.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $93.0 million | $90.5 million | $186.5 million | $180.5 million |
| Net income | $52.1 million | $14.6 million | $68.4 million | $17.0 million |
| Net income attributable to Company common stockholders | $50.2 million | $14.0 million | $65.9 million | $16.4 million |
| EPS | $0.43 | $0.13 | $0.58 | $0.15 |
| FFO available to common stockholders and participating securities | $42.3 million | $38.7 million | $80.8 million | $60.5 million |
Revenue rose 2.8% in Q2 and 3.3% for the half. Net income and EPS were boosted substantially by real estate sale gains: $36.8 million in Q2 and $44.0 million year to date, versus $2.2 million and $10.1 million in the comparable 2015 periods. FFO, a non-GAAP measure, increased 9.3% in Q2 and 33.6% for the half.
- Property operations and margins: Same-store occupancy averaged 94.8% in both Q2 periods and 94.8% for the first half of 2016 versus 94.1% a year earlier. Same-store NOI was $61.8 million in Q2, up from $58.1 million, and $123.3 million for the half, up from $113.9 million. Same-store revenue growth and lower property expenses supported the improvement.
- Costs and interest: First-half property expenses declined 4.1% to $55.2 million, while depreciation and other amortization increased 6.2% to $59.9 million. First-half interest expense declined 6.5% to $30.8 million; management cited lower average interest rates and higher capitalized interest, partly offset by higher average debt.
- Cash flow: First-half operating cash flow was $74.1 million, compared with $74.7 million in 2015. Investing activities used $29.1 million, including acquisitions and property investment, partly offset by sales proceeds. Financing activities used $44.6 million. Cash and cash equivalents were $4.4 million at June 30; restricted cash was $11.9 million.
- Debt and liquidity: Debt was approximately $1.32 billion. The balance included $502.8 million of net mortgage loans, $204.9 million of net senior notes, $456.3 million of net term loans and $148.0 million drawn on the unsecured credit facility. Approximately 88.8% of debt was fixed-rate, including $460.0 million of variable-rate term loans hedged to fixed rates. The Company reported $475.4 million available under its facility at June 30, and approximately $421.4 million on July 28.
- Capital and distributions: The Company issued 5.6 million shares in a public offering, generating $124.9 million net proceeds, contributed to the Operating Partnership. It declared quarterly dividends/distributions of $0.19 per share or unit, 49% above the 2015 quarterly rate.
Material changes and operating activity
- During the first half, the Company acquired two properties totaling approximately 0.3 million square feet and land parcels for about $74.8 million; placed four developments totaling approximately 0.7 million square feet in service, all 100% leased; and sold 31 properties totaling approximately 2.0 million square feet for gross proceeds of about $100.5 million.
- Same-store revenue rose 2.7% year to date, primarily from occupancy and rental-rate increases. Acquisitions and developments added revenue, while dispositions reduced revenue versus the prior year.
- Q2 leasing included 4.1 million square feet across 130 leases. Reported GAAP-basis rent growth was 12.8% for comparable new and renewal leases in the quarter; the year-to-date figure was 14.0%.
- The dividend/distribution increased, while the share offering expanded equity and the repayment of 2016 notes and a mortgage reduced certain debt balances. Drawings on the credit facility increased to $148.0 million from $52.5 million at year-end.
Outlook, risks and unusual items
- No specific earnings or operating guidance was provided. Management expected to meet ordinary short-term liquidity needs from operating cash flow and selected asset sales, with borrowing, debt issuance or equity issuance also available subject to market conditions and restrictions.
- $101.9 million of 5.95% notes mature May 15, 2017. Management expected to fund repayment through the credit facility, unsecured debt issuance or selected asset dispositions. It anticipated covenant compliance for the remainder of 2016 and reported compliance at June 30.
- Three properties totaling approximately 1.0 million square feet were under construction. Estimated total investment was $77.2 million, with approximately $51.2 million remaining to fund; actual costs could exceed estimates. After quarter-end through July 28, the Company acquired one property and one land parcel for approximately $14.9 million.
- Interest-rate swaps had a $26.1 million combined fair-value liability at June 30. The Company estimated that a 10% increase in relevant LIBOR rates would have increased first-half interest expense by approximately $0.05 million based on average floating-rate debt.
- Principal risks identified include economic and industrial-property market conditions, tenant defaults or nonrenewals, occupancy and rental-rate declines, financing availability and rates, covenant compliance, acquisition and disposition execution, development cost overruns and delays, environmental matters, and maintaining REIT status. The filing reported no material change to previously disclosed risk factors, no material legal proceedings, and no defaults on senior securities.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting. The filing also notes that estimates may differ from actual results.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus property-sale gains, and how FFO and same-store NOI reconcile to GAAP results.
- The refinancing or repayment plan for the $101.9 million 2017 notes, and actual availability and cost of credit-facility borrowings.
- Whether development projects finish within budget and schedule, including the $51.2 million remaining funding requirement.
- Whether leasing activity, occupancy, rent growth and tenant retention support continued same-store NOI growth, and the cash cost of lease incentives and tenant improvements.
- The sustainability of the increased dividend relative to operating cash flow, capital requirements and debt maturities.