First Industrial Realty Trust, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing combines the Company and its operating partnership, which are managed as one enterprise. The Company is a REIT focused on owning, leasing, acquiring, developing and selling U.S. industrial real estate.
Business and portfolio
- At year-end, the in-service portfolio comprised 484 properties and approximately 59.3 million square feet across 21 states; occupancy was 97.3% and average annual base rent was $5.08 per square foot.
- The portfolio had approximately 1,350 tenants; no tenant or related group represented more than 2.6% of rent revenue. Weighted-average lease term was 6.6 years.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $396.4 million | $378.0 million | +4.9% |
| Net income | $208.3 million | $125.7 million | +65.7% |
| Net income available to common stockholders and participating securities | $201.5 million | $121.2 million | +66.2% |
| Diluted earnings per share | $1.69 | $1.05 | +$0.64 |
| FFO available to common stockholders and participating securities | $186.5 million | $167.8 million | +11.1% |
| Same-store NOI | $248.5 million | $238.0 million | +4.4% |
| Cash from operating activities | $191.1 million | $173.3 million | +$17.8 million |
Revenue growth reflected higher same-store rents and tenant recoveries, acquisitions and increased occupancy in redevelopments, partly offset by properties sold. Same-store average occupancy was 96.2%, versus 96.4% in 2016. FFO and same-store NOI are non-GAAP measures and are not substitutes for net income or operating cash flow.
- Profit and unusual items: The year included a $131.3 million gain on real estate sales, compared with $68.2 million in 2016; a $1.9 million settlement gain on interest-rate protection agreements; and a $1.8 million loss from retirement of debt. The large increase in reported net income therefore substantially reflects property-sale gains. No real estate impairment charge was recorded in 2017.
- Cash flow: Investing activities used $96.2 million and financing activities used $83.6 million. Cash and cash equivalents were $21.1 million at year-end; restricted cash was $25.3 million, primarily sale proceeds held for Section 1031 exchanges.
- Debt and liquidity: Indebtedness was approximately $1.297 billion, down from $1.347 billion. Total assets were $2.941 billion and total equity was $1.476 billion. The $725 million unsecured revolver had $575.7 million available at year-end and approximately $720.8 million available as of February 23, 2018. The weighted-average rate on revolver borrowings at year-end was 2.46%; 88.9% of debt was fixed-rate, including $460 million of variable-rate debt swapped to fixed.
- Distribution: 2017 dividends/distributions were $0.84 per share or unit, up 10.5% from 2016. The Company stated it met its minimum REIT distribution requirements.
Material changes and transactions
- Acquired eight industrial properties and land parcels for approximately $174.2 million; the properties were acquired at an expected stabilized capitalization rate of approximately 5.8%.
- Completed and placed in service a 0.6-million-square-foot development costing approximately $45.4 million, with 100% occupancy at year-end. Six projects totaling approximately 4.2 million square feet were under construction; estimated total investment was $291.0 million, with $175.8 million remaining to fund.
- Sold 60 properties totaling approximately 4.6 million square feet and one land parcel for gross proceeds of approximately $236.1 million.
- Issued $200 million of private-placement notes at fixed rates of 4.30% and 4.40%; retired notes and mortgages, and issued 2.56 million common shares for net proceeds of approximately $74.9 million. The revolving facility was increased from $625 million to $725 million, extended to October 2021, and its interest spread was reduced.
- Interest expense declined to $57.2 million from $59.4 million, as lower average debt and rates and increased capitalized interest more than offset other effects.
Outlook, risks and contingencies
- Management cited favorable industrial-market conditions in 2017 and expected average cash rents on 2018 renewal and new leases to exceed comparable expiring rents. This is an expectation, not a quantified earnings or FFO forecast.
- Management expected short-term liquidity needs to be met primarily by operating cash flow and selected asset sales, with external debt or equity and revolver borrowings also available subject to market conditions. It anticipated repaying approximately $158.5 million of mortgage loans before year-end 2018; subsequent to year-end, it issued $300 million of notes and expected to repay approximately $157.8 million of mortgages in March 2018.
- Key exposures include economic and industrial-property market weakness, tenant defaults or non-renewals, vacancies and rent declines, development cost overruns or delays, access to financing, interest-rate changes, debt covenants and maturities, environmental liabilities, casualty losses, and maintaining REIT status. The filing discusses potential tax effects and interpretive uncertainty under the Tax Cuts and Jobs Act.
- Two properties sustained fire damage; the Company received $10.1 million of insurance proceeds in 2017. It estimated approximately $0.3 million of environmental spending in 2018 and no more than approximately $1.0 million in aggregate spending in 2018 and beyond for identified issues. Ordinary-course legal proceedings were not expected to have a material effect.
- Subsequent events included a January 2018 staffing restructuring with approximately $1.0 million of severance and related costs, and renewal of a lease for a 1.3-million-square-foot Eastern Pennsylvania facility.
Important facts for investors to verify
- How much of earnings growth and quarterly results is attributable to property-sale gains versus recurring rental operations; compare GAAP results with FFO and same-store NOI.
- Whether expected rent increases, high occupancy and tenant retention persist as leases expire; 9% of in-service GLA and annualized base rent was scheduled to expire in 2018.
- Development leasing, completion timing and final costs, particularly the $175.8 million of estimated remaining project funding.
- Liquidity and refinancing plans for 2018 maturities, covenant headroom, and the effect of interest-rate changes on floating-rate debt and future refinancing.
- Effects of tax-law changes on REIT distributions and taxable subsidiaries, and any emerging environmental, casualty or other contingencies.