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FR > SEC Filings for FR > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for FIRST INDUSTRIAL REALTY TRUST INC

Form 10-Q for FIRST INDUSTRIAL REALTY TRUST INC


6-May-2014

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. 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 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 identifying and consummating acquisitions and dispositions; our ability to manage the integration of properties we acquire; 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, 2013, 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 operations are conducted primarily through the Operating Partnership, of which we are the sole general partner with an approximate 96.1% ownership interest at March 31, 2014, and through our taxable REIT subsidiaries. We also conduct operations through other partnerships (the "Other Real Estate 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. First Industrial Realty Trust, Inc. does not have any significant assets or liabilities other than its investment in the Operating Partnership and its 100% ownership interest in the general partner of the Other Real Estate Partnerships. Noncontrolling interest of approximately 3.9% at March 31, 2014 represents the aggregate partnership interest in the Operating Partnership held by the limited partners thereof.
We also own noncontrolling equity interests in, and provide services to, two joint ventures (the "2003 Net Lease Joint Venture" and the "2007 Europe Joint Venture"; collectively, the "Joint Ventures"). At March 31, 2014, the 2003 Net Lease Joint Venture owned two industrial properties comprising approximately 0.9 million square feet of gross leasable area ("GLA") and the 2007 Europe Joint Venture did not own any properties. 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. As of March 31, 2014, we owned 651 industrial properties located in 25 states, containing an aggregate of approximately 63.2 million square feet of 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


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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 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
Attention: 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, may be used


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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 (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
Comparison of Three Months Ended March 31, 2014 to Three Months Ended March 31, 2013
Our net income (loss) available to First Industrial Realty Trust, Inc.'s common stockholders and participating securities was $2.5 million and $(4.7) million for the three months ended March 31, 2014 and 2013, respectively. Basic and diluted net income (loss) available to First Industrial Realty Trust, Inc.'s common stockholders was $0.02 per share and $(0.05) per share for the three months ended March 31, 2014 and 2013, respectively.
The tables below summarize our revenues, property expenses and depreciation and other amortization by various categories for the three months ended March 31, 2014 and 2013. Same store properties are properties owned prior to January 1, 2013 and held as an operating property through March 31, 2014 and developments and redevelopments that were placed in service prior to January 1, 2013 or were substantially completed for the 12 months prior to January 1, 2013. 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, 2012 and held as an operating property through March 31, 2014. Sold properties are properties that were sold subsequent to December 31, 2012. (Re)Developments and land are land parcels and developments and redevelopments that were not: a) substantially complete 12 months prior to January 1, 2013 or b) stabilized prior to January 1, 2013. 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. For the three months ended March 31, 2014 and 2013, the average occupancy rates of our same store properties were 91.9% and 89.6%, respectively.


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                                                  Three Months Ended
                                                      March 31,
                                                  2014          2013       $ Change      % Change
                                                                  ($ in 000's)
REVENUES
Same Store Properties                          $  84,065     $ 80,237     $   3,828         4.8  %
Acquired Properties                                1,080            -         1,080           -
Sold Properties                                       53        3,653        (3,600 )     (98.5 )%
(Re) Developments and Land, Not Included Above       552           54           498       922.2  %
Other                                                471          333           138        41.4  %
                                               $  86,221     $ 84,277     $   1,944         2.3  %
Discontinued Operations                              (53 )     (3,653 )       3,600       (98.5 )%
Total Revenues                                 $  86,168     $ 80,624     $   5,544         6.9  %

Revenues from same store properties increased $3.8 million primarily due to increases in occupancy and tenant recoveries, partially offset by an increase in the straight-line rent reserve for doubtful accounts. Revenues from acquired properties increased $1.1 million due to the two leased industrial properties acquired subsequent to December 31, 2012 totaling approximately 0.9 million square feet of GLA. Revenues from sold properties decreased $3.6 million due to the 70 industrial properties sold subsequent to December 31, 2012 totaling approximately 3.1 million square feet of GLA. Revenues from (re)developments and land increased $0.5 million due to an increase in occupancy. Other revenues remained relatively unchanged.

                                                  Three Months Ended
                                                      March 31,
                                                  2014          2013       $ Change      % Change
                                                                  ($ in 000's)
PROPERTY EXPENSES
Same Store Properties                          $  28,257     $ 24,666     $   3,591        14.6  %
Acquired Properties                                  582            -           582           -
Sold Properties                                       40        1,516        (1,476 )     (97.4 )%
(Re) Developments and Land, Not Included Above       586           98           488       498.0  %
Other                                              1,889        1,894            (5 )      (0.3 )%
                                               $  31,354     $ 28,174     $   3,180        11.3  %
Discontinued Operations                              (40 )     (1,516 )       1,476       (97.4 )%
Total Property Expenses                        $  31,314     $ 26,658     $   4,656        17.5  %

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 $3.6 million primarily due to higher snow removal costs incurred during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to the mild 2013 winter as well an increase in bad debt expense. Property expenses from acquired properties increased $0.6 million due to properties acquired subsequent to December 31, 2012. Property expenses from sold properties decreased $1.5 million due to properties sold subsequent to December 31, 2012. Property expenses from
(re)developments and land increased $0.5 million primarily due to an increase in real estate tax expense related to the substantial completion of developments. Other expenses remained relatively unchanged. General and administrative expense decreased $0.9 million, or 14.0%, during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to the acceleration of expense recorded during 2013 related to restricted stock held by the Company's CEO in connection with the terms of his employment agreement that was entered into in December 2012 as well as a decrease in legal expense.


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                                                  Three Months Ended
                                                      March 31,
                                                  2014          2013       $ Change      % Change
                                                                  ($ in 000's)
DEPRECIATION AND OTHER AMORTIZATION
Same Store Properties                          $  27,279     $ 26,042     $   1,237         4.8  %
Acquired Properties                                  900            -           900           -
Sold Properties                                       15        1,321        (1,306 )     (98.9 )%
(Re) Developments and Land, Not Included Above       471           54           417       772.2  %
Corporate Furniture, Fixtures and Equipment          122          208           (86 )     (41.3 )%
                                               $  28,787     $ 27,625     $   1,162         4.2  %
Discontinued Operations                              (15 )     (1,321 )       1,306       (98.9 )%
Total Depreciation and Other Amortization      $  28,772     $ 26,304     $   2,468         9.4  %

Depreciation and other amortization for same store properties increased $1.2 million due to accelerated depreciation and amortization taken during the three months ended March 31, 2014, attributable to certain tenants who terminated their lease early. Depreciation and other amortization from acquired properties increased $0.9 million due to properties acquired subsequent to December 31, 2012. Depreciation and other amortization from sold properties decreased $1.3 million due to properties sold subsequent to December 31, 2012. Depreciation and other amortization for (re)developments and land increased $0.4 million primarily due to an increase in developments that were placed in service. Corporate furniture, fixtures and equipment depreciation expense decreased $0.1 million due to assets becoming fully depreciated.
Interest income increased $0.1 million, or 24.7%, primarily due to an increase in the weighted average note receivable balance outstanding for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Interest expense increased $0.1 million, or 0.4%, primarily due to an increase in the weighted average debt balance outstanding for the three months ended March 31, 2014 ($1,351.8 million) as compared to the three months ended March 31, 2013 ($1,324.0 million) and a decrease in capitalized interest of $0.6 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to a decrease in development activities, offset by a decrease in the weighted average interest rate for the three months ended March 31, 2014 (5.83%) as compared to the three months ended March 31, 2013 (6.09%).
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 Flexible Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock"). The Series F Agreement had a notional value of $50.0 million and fixed the 30 year Treasury constant maturity treasury rate at 5.2175%. We recorded $0.004 million in mark-to-market net loss, inclusive of $0.3 million in swap payments, for the three months ended March 31, 2013. The Series F Agreement matured on October 1, 2013.
For the three months ended March 31, 2013, we recognized a net loss from retirement of debt of $1.2 million due to the partial repurchase of a certain series of our senior unsecured notes and the early payoff of certain mortgage loans.
Equity in income of joint ventures increased $2.9 million during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to an increase in our pro rata share of gain on sale of real estate on property sales from the 2003 Net Lease Joint Venture. The income tax provision remained relatively unchanged.


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The following table summarizes certain information regarding the industrial properties included in discontinued operations for the three months ended March 31, 2014 and 2013.

                                              Three Months Ended
                                                  March 31,
                                              2014          2013
                                                 ($ in 000's)
Total Revenues                             $    53       $  3,653
Property Expenses                              (40 )       (1,516 )
Depreciation and Amortization                  (15 )       (1,321 )
Gain (Loss) on Sale of Real Estate             735         (3,074 )
Income (Loss) from Discontinued Operations $   733       $ (2,258 )

Income from discontinued operations for the three months ended March 31, 2014 reflects the results of operations and gain on sale of real estate relating to three industrial properties that were sold during the three months ended March 31, 2014.
Loss from discontinued operations for the three months ended March 31, 2013 reflects the net loss on sale of real estate relating to four industrial properties that were sold during the three months ended March 31, 2013, the results of operations of 67 industrial properties that were sold during the year ended December 31, 2013 and the results of operations of three industrial properties that were sold during the three months ended March 31, 2014. The $0.3 million gain on sale of real estate for the three months ended March 31, 2013 resulted from the sale of two land parcels that did not meet the criteria for inclusion in discontinued operations.

                                LEASING ACTIVITY
The following table provides a summary of our leasing activity for the three
months ended March 31, 2014. The table does not include month to month leases or
leases with terms less than twelve months.
                           Number of     Square  Feet       Average GAAP                               Weighted         Turnover Costs        Weighted
. . .
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