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FR > SEC Filings for FR > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for FIRST INDUSTRIAL REALTY TRUST INC

Form 10-K for FIRST INDUSTRIAL REALTY TRUST INC


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with "Selected Financial Data" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K.
In addition, the following discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and
Section 21E of 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 REITs) and actions of regulatory authorities (including the IRS); our ability to qualify and maintain our status as a REIT; 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 REITs; international business risks and those additional factors described in Item 1A, "Risk Factors" and in our other filings with the SEC. 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.
The Company was organized in the state of Maryland on August 10, 1993. We are a REIT, as defined in 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 us, including the Operating Partnership, of which we are the sole general partner, and through our taxable REIT subsidiaries. The Company also owns a preferred partnership interest in the Operating Partnership represented by preferred units with an aggregate liquidation priority of $75.0 million at December 31, 2013. 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.
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). 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 5 to the Consolidated Financial Statements for more information on the Joint Ventures. 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


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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, may be 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 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, 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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in more detail in Note 3 to the Consolidated Financial Statements. We believe the following critical accounting policies relate to the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Accounts Receivable: We are subject to tenant defaults and bankruptcies that could affect the collection of rent due under our outstanding accounts receivable, include straight-line rent. In order to mitigate these risks, we perform credit reviews and analyses on our major existing tenants and all prospective tenants meeting certain financial thresholds before leases are executed. We maintain an allowance for doubtful accounts which is an estimate that is based on our assessment of various factors including the accounts receivable aging, customer credit-worthiness and historical bad debts.


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         Notes Receivable: Notes receivable are included in prepaid expenses and
          other assets, net and are loans that are generally collateralized by
          real estate. Notes receivable are considered past due when a
          contractual payment is not remitted in accordance with the terms of the
          note agreement. We evaluate the collectability of each note receivable
          on an individual basis based on various factors which may include
          payment history, expected fair value of the collateral on the loan and
          internal and external credit information. A loan is considered to be
          impaired when, based upon current information and events, it is
          probable that we will be unable to collect all amounts due according to
          the existing contractual terms. When a loan is considered impaired, the
          amount of the loss accrual is calculated by comparing the carrying
          amount of the note receivable to the present value of expected future
          cash flows. Since the majority of our notes receivable are
          collateralized by a first mortgage, the loans have risk characteristics
          similar to the risks in owning commercial real estate. Interest income
          on performing loans is accrued as earned. A loan is placed on
          non-accrual status when, based upon current information and events, it
          is probable that we will not be able to collect all amounts due
          according to the existing contractual terms. Recognition of interest
          income on non-performing loans on an accrual basis is resumed when it
          is probable that we will be able to collect amounts due according to
          the contractual terms.


         Investment in Real Estate: We are engaged in the acquisition of
          individual properties as well as multi-property portfolios. We are
          required to allocate purchase price between land, building, tenant
          improvements, leasing commissions, in-place leases, tenant
          relationships and above and below market leases. Above-market and
          below-market lease values for acquired properties are recorded based on
          the present value (using a discount rate which reflects the risks
          associated with the leases acquired) of the difference between (i) the
          contractual amounts to be paid pursuant to each in-place lease and
          (ii) our estimate of fair market lease rents for each corresponding
          in-place lease. Acquired above market leases are amortized as a
          reduction of rental revenue over the remaining non-cancelable terms of
          the respective leases and acquired below market leases are amortized as
          an increase to rental income over the remaining initial terms plus the
          terms of any below market fixed rate renewal options of the respective
          leases. In-place lease and tenant relationship values for acquired
          properties are recorded based on our evaluation of the specific
          characteristics of each tenant's lease and our overall relationship
          with the respective tenant. The value allocated to in-place lease
          intangible assets is amortized to depreciation and amortization expense
          over the remaining lease term of the respective lease. The value
          allocated to tenant relationships is amortized to depreciation and
          amortization expense over the expected term of the relationship, which
          includes an estimate of the probability of lease renewal and its
          estimated term. We also must allocate purchase price on multi-property
          portfolios to individual properties. The allocation of purchase price
          is based on our assessment of various characteristics of the markets
          where the property is located and the expected cash flows of the
          property.

We review our held-for-use properties on a continuous basis for possible impairment and provide a provision if impairments are determined. We utilize the guidelines established under the Financial Accounting Standards Board's (the "FASB") guidance for accounting for the impairment of long lived assets to determine if impairment conditions exist. We review the expected undiscounted cash flows of the property to determine if there are any indications of impairment. If the expected undiscounted cash flows of a particular property are less than the net book basis of the property, we will recognize an impairment charge equal to the amount of carrying value of the property that exceeds the fair value of the property. Fair value is generally determined by discounting the future expected cash flows of the property. The preparation of the undiscounted cash flows and the calculation of fair value involve subjective assumptions such as estimated occupancy, rental rates, ultimate residual value and hold period. The discount rate used to present value the cash flows for determining fair value is also subjective.

         Real Estate Held for Sale: Properties are classified as held for sale
          when all criteria within the FASB's guidance relating to the disposal
          of long lived assets are met for such properties. When properties are
          classified as held for sale, we cease depreciating the properties and
          estimate the values of such properties and record them at the lower of
          depreciated cost or fair value, less costs to dispose. If circumstances
          arise that were previously considered unlikely, and, as a result, we
          decide not to sell a property previously classified as held for sale,
          we will reclassify such property as held and used. We estimate the
          value of such property and measure it at the lower of its carrying
          amount (adjusted for any depreciation and amortization expense that
          would have been recognized had the property been continuously
          classified as held and used) or fair value at the date of the
          subsequent decision not to sell. Fair value of operational industrial
          properties is generally determined either by discounting the future
          expected cash flows of the property, third party contract prices or
          quotes from local brokers. The preparation of the discounted cash flows
          and the calculation of fair value involve subjective assumptions such
          as estimated occupancy, rental rates, ultimate residual value, hold
          period and discount rate. Fair value of land is primarily determined by
          members of management who are responsible for the individual markets
          where the land parcels are located, quotes from local brokers or by
          third party contract prices. The determination of the fair value of
          real estate assets is also highly subjective, especially in markets
          where there is a lack of recent comparable transactions.


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         Accounting for Joint Ventures: We analyze our investments in Joint
          Ventures to determine whether the joint ventures should be accounted
          for under the equity method of accounting or consolidated into our
          financial statements based on standards set forth under the FASB's
          guidance relating to the consolidation of variable interest entities.
          Based on the guidance set forth in these pronouncements, we do not
          consolidate any of our joint venture investments because either the
          joint venture has been determined to be a variable interest entity but
          we are not the primary beneficiary or the joint venture has been
          determined not to be a variable interest entity and we lack control of
          the joint venture. Our assessment of whether we are the primary
          beneficiary of a variable interest entity involves the consideration of
          various factors including the form of our ownership interest, our
          representation on the entity's governing body, the size of our
          investment and future cash flows of the entity.


         Capitalization of Costs: We capitalize (direct and certain indirect)
          costs incurred in developing and expanding real estate assets as part
          of the investment basis. Costs incurred in making repairs and
          maintaining real estate assets are expensed as incurred. During the
          land development and construction periods, we capitalize interest
          costs, real estate taxes and certain general and administrative costs
          of the personnel performing development up to the time the property is
          substantially complete. The interest rate used to capitalize interest
          is based upon our average borrowing rate on existing debt. We also
          capitalize internal and external costs incurred to successfully
          originate a lease that result directly from, and are essential to, the
          acquisition of that lease. Leasing costs that meet the requirements for
          capitalization are presented as a component of prepaid expenses and
          other assets, net. The determination and calculation of certain costs
          requires estimates by us.


         Deferred Tax Assets and Liabilities: In the preparation of our
          consolidated financial statements, significant management judgment is
          required to estimate our current and deferred income tax liabilities.
          Our estimates are based on our interpretation of tax laws. These
          estimates may have an impact on the income tax expense recognized.
          Adjustments may be required by a change in assessment of our deferred
          income tax assets and liabilities, changes due to audit adjustments by
          federal and state tax authorities, our inability to qualify as a REIT,
          and changes in tax laws. Adjustments required in any given period are
          included within the income tax provision. In assessing the need for a
          valuation allowance against our deferred tax assets, we estimate future
          taxable income, considering the feasibility of ongoing tax planning
          strategies and the realizability of tax loss carryforwards. In the
          event we were to determine that we would not be able to realize all or
          a portion of our deferred tax assets in the future, we would reduce
          such amounts through a charge to income in the period in which that
          determination is made. Conversely, if we were to determine that we
          would be able to realize our deferred tax assets in the future in
          excess of the net carrying amounts, we would decrease the recorded
          valuation allowance through an increase to income in the period in
          which that determination is made.

RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012 Our net income (loss) available to First Industrial Realty Trust, Inc.'s common stockholders and participating securities was $25.9 million and $(22.1) million for the years ended December 31, 2013 and 2012, respectively. Basic and diluted net income (loss) available to First Industrial Realty Trust, Inc.'s common stockholders was $0.24 per share and $(0.24) per share for the years ended December 31, 2013 and 2012, respectively.
The tables below summarize our revenues, property expenses and depreciation and other amortization by various categories for the years ended December 31, 2013 and 2012. Same store properties are properties owned prior to January 1, 2012 and held as an operating property through December 31, 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 December 31, 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.


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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. For the years ended December 31, 2013 and 2012, the average occupancy rates of our same store properties were 90.1% and 88.3%, respectively.

2013 2012 $ Change % Change
($ in 000's)

REVENUES
Same Store Properties                          $ 317,460     $ 309,051     $  8,409         2.7  %
Acquired Properties                                2,729         1,954          775        39.7  %
Sold Properties                                   10,892        21,618      (10,726 )     (49.6 )%
(Re) Developments and Land, Not Included Above     6,641           716        5,925       827.5  %
Other                                              1,459         2,635       (1,176 )     (44.6 )%
                                               $ 339,181     $ 335,974     $  3,207         1.0  %
Discontinued Operations                          (10,955 )     (21,649 )     10,694       (49.4 )%
Total Revenues                                 $ 328,226     $ 314,325     $ 13,901         4.4  %

Revenues from same store properties increased $8.4 million primarily due to increases in occupancy and tenant recoveries, partially offset by a decrease in lease cancellation fees. Revenues from acquired properties increased $0.8 million due to the two leased industrial properties acquired subsequent to December 31, 2011 totaling approximately 1.0 million square feet of GLA. Revenues from sold properties decreased $10.7 million due to the 95 industrial properties sold subsequent to December 31, 2011 totaling approximately 7.2 million square feet of GLA. Revenues from (re)developments and land increased $5.9 million due to an increase in occupancy. Other revenues decreased $1.2 million primarily due to certain one-time revenue transactions during the year ended December 31, 2012, as well as a decrease in leasing fees earned from our Joint Ventures and a decrease in revenues from the operations of our maintenance company for the year ended December 31, 2013, as compared to the year ended December 31, 2012.

                                                  2013          2012        $ Change      % Change
                                                                   ($ in 000's)
. . .
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