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FR > SEC Filings for FR > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for FIRST INDUSTRIAL REALTY TRUST INC


5-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "plan," "anticipate," "estimate," "project," "seek," "target," "potential," "focus," "may," "should," or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a materially adverse effect on our operations and future prospects include, but are not limited to: changes in national, international, regional and local economic conditions generally and real estate markets specifically; changes in legislation/regulation (including changes to laws governing the taxation of real estate investment trusts) and actions of regulatory authorities (including the Internal Revenue Service); our ability to qualify and maintain our status as a real estate investment trust; the availability and attractiveness of financing (including both public and private capital) to us and to our potential counterparties; the availability and attractiveness of terms of additional debt repurchases; interest rates; our credit agency ratings; our ability to comply with applicable financial covenants; competition; changes in supply and demand for industrial properties (including land, the supply and demand for which is inherently more volatile than other types of industrial property) in the Company's current and proposed market areas; difficulties in consummating acquisitions and dispositions; risks related to our investments in properties through joint ventures; environmental liabilities; slippages in development or lease-up schedules; tenant creditworthiness; higher-than-expected costs; changes in asset valuations and related impairment charges; changes in general accounting principles, policies and guidelines applicable to real estate investment trusts; international business risks and those additional factors described under the heading "Risk Factors" and elsewhere in the Company's annual report on Form 10-K for the year ended December 31, 2012, and in this quarterly report. We caution you not to place undue reliance on forward looking statements, which reflect our analysis only and speak only as of the date of this report or the dates indicated in the statements. We assume no obligation to update or supplement forward-looking statements. Unless the context otherwise requires, the terms "Company," "we," "us," and "our" refer to First Industrial Realty Trust, Inc., First Industrial, L.P. and their respective controlled subsidiaries. We refer to our operating partnership, First Industrial, L.P., as the "Operating Partnership."
GENERAL
The Company was organized in the state of Maryland on August 10, 1993. We are a real estate investment trust ("REIT") as defined in the Internal Revenue Code of 1986 (the "Code"). We began operations on July 1, 1994. Our interests in our properties and land parcels are held through partnerships, corporations, and limited liability companies controlled, directly or indirectly, by the Company, including the Operating Partnership, of which we are the sole general partner with an approximate 96.0% ownership interest at June 30, 2013, and through our taxable REIT subsidiaries. We also conduct operations through other partnerships and limited liability companies, the operating data of which, together with that of the Operating Partnership and the taxable REIT subsidiaries, is consolidated with that of the Company as presented herein. Noncontrolling interest of approximately 4.0% at June 30, 2013 represents the aggregate partnership interest in the Operating Partnership held by the limited partners thereof. We also own noncontrolling equity interests in, and provide various services to, two joint ventures (the "2003 Net Lease Joint Venture" and the "2007 Europe Joint Venture" and, collectively, the "Joint Ventures"). The Joint Ventures are accounted for under the equity method of accounting. Accordingly, the operating data of our Joint Ventures is not consolidated with that of the Company as presented herein. See Note 4 to the Consolidated Financial Statements for more information on the Joint Ventures.
As of June 30, 2013, we owned 704 industrial properties located in 25 states, containing an aggregate of approximately 62.9 million square feet of gross leasable area ("GLA").

We maintain a website at www.firstindustrial.com. Information on this website shall not constitute part of this Form 10-Q. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available without charge on our website as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission ("SEC"). You may also read and copy any document filed at the public reference facilities of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC's Interactive


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Data Electronic Application via the SEC's home page on the Internet (http://www.sec.gov). In addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter and Nominating/Corporate Governance Committee Charter, along with supplemental financial and operating information prepared by us, are all available without charge on our website or upon request to us. Amendments to, or waivers from, our Code of Business Conduct and Ethics that apply to our executive officers or directors will also be posted to our website. We also post or otherwise make available on our website from time to time other information that may be of interest to our investors. Please direct requests as follows:

First Industrial Realty Trust, Inc.
311 S. Wacker Drive, Suite 3900
Chicago, IL 60606
Attn: Investor Relations
MANAGEMENT'S OVERVIEW
We believe our financial condition and results of operations are, primarily, a function of our performance in four key areas: leasing of industrial properties, acquisition and development of additional industrial properties, disposition of industrial properties and access to external capital.
We generate revenue primarily from rental income and tenant recoveries from long-term (generally three to six years) operating leases of our industrial properties. Such revenue is offset by certain property specific operating expenses, such as real estate taxes, repairs and maintenance, property management, utilities and insurance expenses, along with certain other costs and expenses, such as depreciation and amortization costs and general and administrative and interest expenses. Our revenue growth is dependent, in part, on our ability to (i) increase rental income, through increasing either or both occupancy rates and rental rates at our properties, (ii) maximize tenant recoveries and (iii) minimize operating and certain other expenses. Revenues generated from rental income and tenant recoveries are a significant source of funds, in addition to income generated from gains/losses on the sale of our properties (as discussed below), for our liquidity. The leasing of property, in general, and occupancy rates, rental rates, operating expenses and certain non-operating expenses, in particular, are impacted, variously, by property specific, market specific, general economic and other conditions, many of which are beyond our control. The leasing of property also entails various risks, including the risk of tenant default. If we were unable to maintain or increase occupancy rates and rental rates at our properties or to maintain tenant recoveries and operating and certain other expenses consistent with historical levels and proportions, our revenue would decline. Further, if a significant number of our tenants were unable to pay rent (including tenant recoveries) or if we were unable to rent our properties on favorable terms, our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our common stock would be adversely affected. Our revenue growth is also dependent, in part, on our ability to acquire existing, and acquire and develop new, additional industrial properties on favorable terms. The Company seeks to identify opportunities to acquire existing industrial properties on favorable terms, and, when conditions permit, also seeks to identify opportunities to acquire and develop new industrial properties on favorable terms. Existing properties, as they are acquired, and acquired and developed properties, as they are leased, generate revenue from rental income, tenant recoveries and fees, income from which, as discussed above, is a source of funds for our distributions. The acquisition and development of properties is impacted, variously, by property specific, market specific, general economic and other conditions, many of which are beyond our control. The acquisition and development of properties also entails various risks, including the risk that our investments may not perform as expected. For example, acquired existing and acquired and developed new properties may not sustain and/or achieve anticipated occupancy and rental rate levels. With respect to acquired and developed new properties, we may not be able to complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties. Also, we face significant competition for attractive acquisition and development opportunities from other well-capitalized real estate investors, including publicly-traded REITs and private investors. Further, as discussed below, we may not be able to finance the acquisition and development opportunities we identify. If we were unable to acquire and develop sufficient additional properties on favorable terms, or if such investments did not perform as expected, our revenue growth would be limited and our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our common stock would be adversely affected. We also generate income from the sale of our properties (including existing buildings, buildings which we have developed or re-developed on a merchant basis and land). The gain/loss on, and fees from, the sale of such properties are included in our income and can be a significant source of funds, in addition to revenues generated from rental income and tenant recoveries. Proceeds from sales are being used to repay outstanding debt, and market conditions permitting, are being used to fund the acquisition of existing, and the acquisition and development of new, industrial properties. The sale of properties is impacted, variously, by property specific, market specific, general economic and other conditions, many of which


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are beyond our control. The sale of properties also entails various risks, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. Further, our ability to sell properties is limited by safe harbor rules applying to REITs under the Code which relate to the number of properties that may be disposed of in a year, their tax bases and the cost of improvements made to the properties, along with other tests which enable a REIT to avoid punitive taxation on the sale of assets. If we are unable to sell properties on favorable terms, our income growth would be limited and our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our common stock could be adversely affected.
We utilize a portion of the net sales proceeds from property sales, borrowings under our unsecured credit facility (the "Unsecured Credit Facility") and proceeds from the issuance, when and as warranted, of additional debt and equity securities to refinance debt and finance future acquisitions and developments. Access to external capital on favorable terms plays a key role in our financial condition and results of operations, as it impacts our cost of capital and our ability and cost to refinance existing indebtedness as it matures and to fund acquisitions and developments or through the issuance, when and as warranted, of additional equity securities. Our ability to access external capital on favorable terms is dependent on various factors, including general market conditions, interest rates, credit ratings on our preferred stock and debt, the market's perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our capital stock. If we were unable to access external capital on favorable terms, our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our common stock could be adversely affected.
RESULTS OF OPERATIONS The tables below summarize our operating results for the three and six months ended June 30, 2013 and 2012. The operating results include a break out of our revenues, property expenses and depreciation and other amortization by various categories for the three and six months ended June 30, 2013 and 2012. Same store properties are properties owned prior to January 1, 2012 and held as an operating property through June 30, 2013 and developments and redevelopments that were placed in service prior to January 1, 2012 or were substantially completed for the 12 months prior to January 1, 2012. Properties which are at least 75% occupied at acquisition are placed in service. Acquisitions that are less than 75% occupied at the date of acquisition, developments and redevelopments are placed in service as they reach the earlier of a) stabilized occupancy (generally defined as 90% occupied), or b) one year subsequent to acquisition or development/redevelopment construction completion. Properties are moved from the same store classification to the redevelopment classification when capital expenditures for a project are estimated to exceed 25% of the undepreciated gross book value of the property. Acquired properties are properties that were acquired subsequent to December 31, 2011 and held as an operating property through June 30, 2013. Sold properties are properties that were sold subsequent to December 31, 2011. (Re)Developments and land are land parcels and developments and redevelopments that were not: a) substantially complete 12 months prior to January 1, 2012 or b) stabilized prior to January 1, 2012. Other revenues are derived from the operations of our maintenance company, fees earned from our Joint Ventures and other miscellaneous revenues. Other expenses are derived from the operations of our maintenance company and other miscellaneous regional expenses.

Our future financial condition and results of operations, including rental revenues, may be impacted by the future acquisition and sale of properties. Our future revenues and expenses may vary materially from historical rates. Comparison of Six Months Ended June 30, 2013 to Six Months Ended June 30, 2012 Our net income (loss) available to First Industrial Realty Trust, Inc.'s common stockholders and participating securities was $0.6 million and $(17.8) million for the six months ended June 30, 2013 and 2012, respectively. Basic and diluted net income (loss) available to First Industrial Realty Trust, Inc.'s common stockholders was $0.01 per share and $(0.20) per share for the six months ended June 30, 2013 and 2012, respectively.

For the six months ended June 30, 2013 and 2012, the average occupancy rates of our same store properties were 89.2% and 88.1%, respectively.


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                                                   Six Months Ended
                                                       June 30,
                                                  2013          2012        $ Change      % Change
                                                                   ($ in 000's)
REVENUES
Same Store Properties                          $ 163,188     $ 159,471     $   3,717         2.3  %
Acquired Properties                                1,126           832           294        35.3  %
Sold Properties                                    1,560         7,438        (5,878 )     (79.0 )%
(Re) Developments and Land, Not Included Above     2,989           125         2,864     2,291.2  %
Other                                                696         1,377          (681 )     (49.5 )%
                                               $ 169,559     $ 169,243     $     316         0.2  %
Discontinued Operations                           (1,637 )      (7,540 )       5,903       (78.3 )%
Total Revenues                                 $ 167,922     $ 161,703     $   6,219         3.8  %

Revenues from same store properties increased $3.7 million primarily due to increases in occupancy and tenant recoveries. Revenues from acquired properties increased $0.3 million due to one, 0.4 million square foot property acquired in February 2012 in our Central Pennsylvania market. Revenues from sold properties decreased $5.9 million due to the 40 industrial properties sold subsequent to December 31, 2011 totaling approximately 5.5 million square feet of GLA. Revenues from (re)developments and land increased $2.9 million due to an increase in occupancy. Other revenues decreased $0.7 million primarily due to certain one-time revenue transactions during the six months ended June 30, 2012.

                                                  Six Months Ended
                                                      June 30,
                                                  2013         2012       $ Change      % Change
                                                                  ($ in 000's)
PROPERTY EXPENSES
Same Store Properties                          $ 50,353     $ 47,421     $   2,932         6.2  %
Acquired Properties                                 298          176           122        69.3  %
Sold Properties                                     654        3,257        (2,603 )     (79.9 )%
(Re) Developments and Land, Not Included Above      835          315           520       165.1  %
Other                                             4,090        3,779           311         8.2  %
                                               $ 56,230     $ 54,948     $   1,282         2.3  %
Discontinued Operations                            (703 )     (3,315 )       2,612       (78.8 )%
Total Property Expenses                        $ 55,527     $ 51,633     $   3,894         7.5  %

Property expenses include real estate taxes, repairs and maintenance, property management, utilities, insurance and other property related expenses. Property expenses from same store properties increased $2.9 million primarily due to an increase in repairs and maintenance expense due to the higher snow removal costs incurred during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 due to the mild 2012 winter. Property expenses from acquired properties increased $0.1 million due to properties acquired subsequent to December 31, 2011. Property expenses from sold properties decreased $2.6 million due to properties sold subsequent to December 31, 2011. Property expenses from
(re)developments and land increased $0.5 million due to an increase in real estate tax expense. Other expenses remained relatively unchanged. General and administrative expense remained relatively unchanged. The impairment charges included in continuing operations for the six months ended June 30, 2013 of $1.4 million is primarily due to marketing certain properties for sale and our assessment of the likelihood of a potential sale transaction. The impairment reversal included in continuing operations for the six months ended June 30, 2012 of $0.2 million is primarily comprised of a reversal of impairment relating to certain industrial properties that no longer qualified for held for sale classification.


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                                                  Six Months Ended
                                                      June 30,
                                                  2013         2012       $ Change     % Change
                                                                 ($ in 000's)
DEPRECIATION AND OTHER AMORTIZATION
Same Store Properties                          $ 54,942     $ 60,341     $ (5,399 )      (8.9 )%
Acquired Properties                                 485          367          118        32.2  %
Sold Properties                                     465        2,100       (1,635 )     (77.9 )%
(Re) Developments and Land, Not Included Above      680          117          563       481.2  %
Corporate Furniture, Fixtures and Equipment         372          578         (206 )     (35.6 )%
                                               $ 56,944     $ 63,503     $ (6,559 )     (10.3 )%
Discontinued Operations                            (528 )     (2,328 )      1,800       (77.3 )%
Total Depreciation and Other Amortization      $ 56,416     $ 61,175     $ (4,759 )      (7.8 )%

Depreciation and other amortization for same store properties decreased $5.4 million due to a decrease in catch-up depreciation taken for properties that were classified as held for sale in 2011 but no longer classified as held for sale during the six months ended June 30, 2012 as well as an adjustment recorded during the six months ended June 30, 2013 to decrease depreciation and amortization expense which should have been recorded in previous periods. Depreciation and other amortization from acquired properties increased $0.1 million due to properties acquired subsequent to December 31, 2011. Depreciation and other amortization from sold properties decreased $1.6 million due to properties sold subsequent to December 31, 2011. Depreciation and other amortization for (re)developments and land increased $0.6 million primarily due to an increase in substantial completion of developments. Corporate furniture, fixtures and equipment depreciation expense decreased $0.2 million due to assets becoming fully depreciated.
Interest income decreased $0.4 million, or 27.5%, primarily due to a decrease in the weighted average note receivable balance outstanding for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. Interest expense for the six months ended June 30, 2013 and 2012, respectively, decreased $6.5 million, or 14.8%, primarily due to a decrease in the weighted average debt balance outstanding for the six months ended June 30, 2013 ($1,318.7 million) as compared to the six months ended June 30, 2012 ($1,485.3 million), and an increase in capitalized interest of $1.5 million for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 due to an increase in development activities, partially offset by an increase in the weighted average interest rate for the six months ended June 30, 2013 (6.02%), as compared to the six months ended June 30, 2012 (6.00%). Amortization of deferred financing costs remained relatively unchanged. In October 2008, we entered into an interest rate swap agreement (the "Series F Agreement") to mitigate our exposure to floating interest rates related to the coupon reset of our Series F Preferred Stock. The Series F Agreement has a notional value of $50.0 million and is effective from April 1, 2009 through October 1, 2013. The Series F Agreement fixes the 30 year Treasury constant maturity treasury rate at 5.2175%. We recorded $0.05 million in mark-to-market gain, inclusive of $0.6 million in swap payments, for the six months ended June 30, 2013, as compared to $0.3 million in mark-to-market loss, inclusive of $0.5 million in swap payments, for the six months ended June 30, 2012.
For the six months ended June 30, 2013, we recognized a net loss from retirement of debt of $5.6 million due to the partial repurchase of certain series of our senior unsecured notes and the early payoff of certain mortgage loans. For the six months ended June 30, 2012, we recognized a net loss from retirement of debt of $6.2 million due to the partial repurchase of certain series of our senior unsecured notes.
Equity in income of joint ventures remained relatively unchanged.

For the six months ended June 30, 2012, we recognized $0.8 million of gain on change in control of interests related to the acquisition of the 85% equity interest in one property from the institutional investor in the 2003 Net Lease Joint Venture. The $0.8 million of gain represents the difference between our carrying value and fair value of our equity interest on the acquisition date.

The income tax provision decreased $5.3 million or 101.1% during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily due to a one-time IRS audit adjustment related to the 2009 liquidation of a former taxable REIT subsidiary that was recorded during the six months ended June 30, 2012.


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The following table summarizes certain information regarding the industrial properties included in discontinued operations for the six months ended June 30, 2013 and 2012.

                                       Six Months Ended
                                           June 30,
                                       2013        2012
                                         ($ in 000's)
Total Revenues                      $  1,637     $ 7,540
Property Expenses                       (703 )    (3,315 )
Impairment of Real Estate               (176 )    (1,399 )
Depreciation and Amortization           (528 )    (2,328 )
Gain on Sale of Real Estate           10,407       7,585
Income from Discontinued Operations $ 10,637     $ 8,083

Income from discontinued operations for the six months ended June 30, 2013 reflects the results of operations and gain on sale of real estate relating to 12 industrial properties that were sold during the six months ended June 30, 2013 and the results of operations of two industrial properties that were identified as held for sale at June 30, 2013. The impairment loss for the six months ended June 30, 2013 of $0.2 million primarily relates to an impairment charge recorded due to carrying values of certain properties exceeding the estimated fair value based upon a third party purchase contract for properties held for sale during 2013.
Income from discontinued operations for the six months ended June 30, 2012 reflects the gain on sale of real estate relating to seven industrial properties . . .

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