FR

Business Context and Reporting Period

Company: First Industrial Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: The Company is a real estate investment trust (REIT) owning 946 industrial properties (approx. 76.5 million sq. ft. GLA) across 27 U.S. states and one Canadian province. Operations are conducted primarily through First Industrial, L.P. (Operating Partnership), in which the Company holds an approximate 87.0% interest.

Key Financial Metrics (Nine Months Ended Sept 30, 2006)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22.4% ($54.1 million) primarily due to a 643.3% increase in revenue from acquired properties ($53.7 million) and an 89.5% increase in "Other" revenues (joint venture fees). This was partially offset by a 67.9% decrease in revenue from sold properties.
• Discontinued Operations: A significant driver of net income was income from discontinued operations ($177.9 million for 9 months 2006 vs. $99.8 million for 9 months 2005), largely due to gains on the sale of 93 industrial properties ($171.4 million gain).
• Continuing Operations Loss: The Company reported a loss from continuing operations of $36.0 million for the nine months ended Sept 30, 2006, compared to a loss of $27.9 million in the prior year period. This loss is primarily due to high interest expense and depreciation.
• Debt Structure: Senior unsecured debt increased significantly from $1.30 billion to $1.67 billion, driven by the issuance of $200 million in 2016 Notes and $175 million in 2011 Exchangeable Notes. Conversely, unsecured lines of credit decreased from $457.5 million to $64.0 million.
• Interest Expense: Interest expense rose 14.9% to $90.9 million due to a higher weighted average debt balance and interest rate.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Derivative Settlement Loss: The Company recognized a $2.9 million loss on the settlement of interest rate protection agreements in September 2006 because the agreements failed to qualify for hedge accounting.
  • Preferred Stock Redemption: The Company redeemed Series I Preferred Stock in January 2006, resulting in a $0.7 million charge deducted from net income available to common stockholders.
• Liquidity and Capital Resources:
  • The Company expects to refinance $150 million in 2006 Notes (due Dec 1, 2006) using its unsecured line of credit and $150 million in 2007 Notes (due May 15, 2007) via new debt issuance.
  • Approximately $399.6 million remained available under the 2005 Unsecured Line of Credit I as of late October 2006.
• Risk Factors:
  • REIT Qualification: Risks regarding the ability to maintain REIT status, specifically concerning gross income tests related to development agreements and service employee cost allocations.
  • Market Risk: 96.4% of debt is fixed-rate; 3.6% is variable-rate. The Company faces refinancing risk as significant debt maturities approach in 2006 and 2007.
• Subsequent Events (Oct 2006): Acquired 10 properties for ~$100.7 million; sold 3 properties for ~$42.2 million; exercised over-allotment on Exchangeable Notes increasing principal to $200 million.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Income excluding the $171.4 million gain on sale of real estate included in discontinued operations.
• Debt Maturity Wall: Confirm the Company's ability to refinance the $300 million in notes maturing in late 2006 and mid-2007 given current market conditions.
• Derivative Accounting: Review the $2.9 million loss on interest rate protection agreements and assess future exposure to similar hedge accounting failures.
• REIT Compliance: Monitor the status of the IRS review regarding gross income tests related to development agreements and service employee costs.
• Same-Store Performance: Analyze the slight decline (-0.5%) in same-store property revenues to gauge organic portfolio health independent of acquisitions.