First Industrial Realty Trust: Strong Performance But No Dividend Yet

| About: First Industrial (FR)

First Industrial Realty Trust (NYSE:FR) like many other REITs showed favorable results in 1Q12. Much of the information reported in FR's first quarter results is largely due to the general market conditions.

  • Occupancy at 87.4% decreased 50 bps since last quarter but increased 270 bps since 1Q last year. Since occupancy can be seasonally affected, the difference from last year is perhaps the more important comparative.
  • Same store NOI increased 6.4% as measured after lease termination fees. The mild winter led to reduced operating cost.
  • Rental rates decreased 4.6% with leasing prices of $2.49 per square foot. FR announced guidance expecting rental rates to continue to decrease throughout the year.
  • FFO increased to $0.25 per share in 1Q12 up from $0.21 in 1Q11.

While these circumstantially influenced statistics are vital to the short term performance of FR, we can get a better idea of how the company is run by analyzing its financial maneuvers.

Tender Offer for Debt Securities

On March 29th FR began an offer to purchase their own senior notes back at a premium before their maturity date. The principal repurchased totaled $86.9mm as the offering concluded at the start of 4/26/12. These notes yielded 7.75%, 7.60%, and 6.4% with maturity dates of 2032, 2028, and 2014 respectively. A majority of the purchase amount was toward the longer term higher yield notes with only $9.0mm going to the 6.4%. As the purchase was at a premium to the principal the immediate cost to shareholders of this transaction was $0.07/share. As the purchase was financed using a credit line of lower interest rate than the repurchased notes (3.2% as compared to 7.75%, 7.60%, and 6.4%), FR will realize significant savings in interest expense. Savings in 2012 are projected to be $.03 per share. While the interest on the credit line is presently lower (based on LIBOR +2.1%), it carries risk associated with rising market rates.

At-the-market Equity Offering

FR issued 1.5mm shares of its common stock which sold for an average price of $12.03, creating total proceeds of approximately $18.0mm.

Both of these financial operations were intelligently executed and indicate the capabilities of the management team at FR. By slowly selling a limited number of shares directly into the market, First Industrial was able to forgo the costly underwriting fees associated with a secondary offering. Since the shares were sold at market price, FR successfully raised equity in a way that was not dilutive to its common. The tender offer to repurchase notes takes advantage of today's low interest rates in a way that will give FR significant financial advantage over companies that have not executed similar refinancing.

Despite the fairly strong performance in the first quarter and the intelligent financial maneuvers, shareholders may have to wait a bit longer for dividend reinstatement. As the only remaining REIT in the industrial sector without a dividend it comes as no surprise that shareholders are becoming impatient. In fact, during the first quarter conference call which took place on 4/27/12, several different analysts inquired about potential dividend reinstatement. In response, Bruce Duncan (CEO of FR) indicated that he would like to wait until leasing improves before reinstatement.

Another factor which may delay dividends is an IRS examination. In 2009 FR received a $40mm refund of which at least a portion is presently being contested by an IRS examination team. While nothing has been determined yet, the investigation has indicated preliminary disagreement with the former reports which generated the refund. Pending the results, FR may have to pay back some amount of money between $0.00 and $40.0mm plus potential penalties. Until this matter is settled, it seems reasonable that First Industrial will remain conservative by not yet announcing a dividend reinstatement.

I had previously elaborated on the plausibility of dividends from FR within 2012. While this remains a distinct possibility, the significant and unexpected potential expense with the IRS investigation along with the declining rental rates may delay the reinstatement. This being said, First Industrial Realty Trust continues to make sound financial decisions and has strong growth potential.

Disclosure: 2nd Market Capital and its affiliated accounts are long FR, FR-J and FR-K.