First Industrial Realty Trust, Inc. — Q3 2014 Form 10-Q
Business and reporting period. Industrial-property REIT reporting for the three and nine months ended September 30, 2014; balance-sheet comparisons are against December 31, 2013. The company owned 638 properties across 25 states, totaling approximately 63.3 million square feet. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Revenue: Q3 revenue was $87.1 million, up 9.2% from $79.7 million. Nine-month revenue was $256.3 million, up 7.4% from $238.7 million.
- Profit and EPS: Q3 net income attributable to the company was $21.3 million ($0.19 per diluted share), versus $8.5 million ($0.05 per share) a year earlier. Nine-month amounts were $30.3 million ($0.25 per share), versus $18.8 million ($0.05 per share). Common-stockholder income available for EPS was $21.3 million and $27.8 million, respectively, in 2014. Continuing-operations income was $8.5 million for Q3 and $15.9 million year to date.
- Cash flow: Nine-month operating cash flow was $95.9 million, compared with $85.6 million. Investing used $28.7 million and financing used $60.4 million; cash increased $6.7 million to $14.3 million.
- Property operations: Same-store occupancy averaged 92.8% in Q3 and 92.3% year to date, versus 90.8% and 90.4% in 2013. Same-store NOI was $57.9 million for Q3 (up 4.9%) and $169.6 million year to date (up 3.6%). Management reported GAAP-basis rent growth of 9.4% on Q3 lease signings and 8.5% year to date; renewal retention was 78.9% and 71.2%, respectively.
- Assets, debt and equity: Total assets were $2.577 billion and total equity $1.093 billion at September 30. Debt carrying value totaled approximately $1.344 billion: $602.9 million mortgage loans, $364.8 million senior notes, $200.0 million term loan and $176.0 million credit-facility borrowings. Cash was $14.3 million. The filing reports $441.9 million of additional credit-facility capacity at quarter-end.
- Debt profile: 86.9% of debt was fixed rate, including $200 million of term debt hedged to fixed rates; 13.1% was variable rate. The weighted average rate on credit-facility borrowings was 1.656%. Scheduled principal payments were $251.9 million in 2016 and $344.7 million in 2017. The company redeemed all outstanding Series F and Series G preferred shares during the period.
Changes versus comparable periods
- Revenue growth reflected higher same-store occupancy, tenant recoveries and restoration fees, plus acquired-property and development contributions; revenue from sold properties declined.
- Same-store property expenses rose 6.6% year to date, principally due to unusually high snow-removal costs from the harsh winter and higher bad-debt expense. Total property expenses increased 10.2%.
- Interest expense was nearly flat year to date, down 0.2%, as lower weighted-average interest rates were largely offset by higher average debt and lower capitalized interest. Q3 interest expense declined 3.8%.
- Net income growth was significantly affected by property-sale gains and the prior-year comparison, which included preferred dividends and preferred-stock redemption costs. Q3 2014 discontinued operations included $13.4 million of property-sale gains; year-to-date discontinued operations included $14.5 million of gains.
- The company sold 20 industrial properties totaling approximately 1.0 million square feet during the first nine months, for gross proceeds of approximately $59.0 million. It acquired three industrial properties totaling approximately 0.5 million square feet, as well as land parcels.
Outlook, risks and notable items
- Outlook and liquidity: No specific earnings or operating guidance was provided. Management expected short-term needs to be met through operating cash flow and selected asset sales, with credit-facility borrowings or capital issuance also possible subject to market conditions and restrictions. It planned to continue selectively marketing properties for sale.
- Development commitments: Five buildings totaling approximately 1.2 million square feet were under construction. Estimated total costs were $64.7 million, of which approximately $24.9 million remained to be funded; actual completion costs may be higher.
- Interest-rate risk: Management estimated that a 10% increase in relevant LIBOR rates would have increased nine-month interest expense by approximately $0.02 million, based on average floating-rate debt. A 10% increase in rates on fixed-rate debt upon refinancing would have increased nine-month interest expense by approximately $5.5 million. The company had $420 million of interest-rate protection agreements.
- Other risks: The filing identifies economic and industrial-property market conditions, tenant creditworthiness, leasing and occupancy, acquisition and disposition execution, development delays or cost overruns, financing availability and rates, covenant compliance, REIT qualification, competition, environmental liabilities and asset valuation as risks. Management stated the company was in compliance with debt covenants at September 30 and expected to remain compliant for the rest of 2014. Debt ratings were BBB-/Baa3/BBB- from S&P, Moody’s and Fitch.
- Subsequent events and contingencies: From October 1 through October 30, the company sold two properties and a land parcel for approximately $3.3 million; the land parcel was its last Canadian real estate asset. No legal proceedings were reported. Management said ordinary-course legal matters were not expected to materially affect financial position, operations or liquidity.
- Reporting change: The company anticipated that adoption of the new discontinued-operations standard would generally result in property dispositions and held-for-sale classifications no longer qualifying as discontinued operations.
Important facts for investors to verify
- How much reported earnings and EPS depend on property-sale gains and discontinued operations, versus recurring property operations.
- Whether same-store occupancy, rent growth and NOI trends continue, and whether property-expense increases normalize after the severe winter.
- Funding needs and completion costs for the construction pipeline, and the timing and proceeds of planned property sales.
- Debt maturities, available revolving capacity, covenant headroom and refinancing exposure, particularly the 2016–2017 maturities.
- The effect of preferred-stock redemption, distributions and future capital needs on liquidity and per-share results.