First Industrial Realty: A REIT with an Attractive Risk/Reward

I picked up a small starter position yesterday in First Industrial Realty (FR) and plan to accumulate more on further price dips. First Industrial develops and operates warehouses and light industrial buildings in the top industrial markets in the US and select industrial real estate markets in Canada, Belgium and the Netherlands. FR trades below its net asset value per share and yields a whopping 10.4% with more than enough cash flow to maintain the dividend.

FR has an interesting connection with Warren Buffett. On December 3, 1999, Buffett auctioned off his 20 year old wallet with a secret stock tip inside to benefit charity. John Morgan was the winner and paid $210,000 for the wallet. Some time later, Mr. Morgan announced that the stock Buffett had recommended was First Industrial Realty. At the time, REITs were very depressed. FR was trading a little below $25 and yielding around 10%. After this year's drop in financials, FR is trading around $27 which is close to the 1999 price level, and it is again yielding over 10%.

Buffett later sold FR from his personal holdings in 2004 when it traded above $40, and it later traded over $50 in 2006. If you add in the dividend yield, the total return on the charity wallet pick was quite impressive!

FR has more risk than some of the other warehouse REITs because it uses a significant amount of leverage. But at the current valuation level, I believe the risk/reward longer term is quite attractive.

Full Disclosure: I am long a starter position in FR.

Comments

[Wiskey]

Well, it is still may be too soon to enter. With commercial real estate vacancies on a rise.

[Whidbey]

There a number of beaten down stocks and this is just one of them. Calling a bottom? Why? Look where these folks operate and follow the commercial trends. The sum total says it is not ready to buy yet, not even close they are some markets that have a 50% probability of further serious adjustments. Poor post.

[pdub]

You neglect to highlight the major risk to FR's operating strategy, a heavy reliance on transactional volume to generate cash flow, evidenced by gains on sale ~14% of FFO in 1Q08. In an environment where transaction volume is slowing and development margins are tightening, this is a model I would prefer to avoid. Additionally FR owns arguably 2nd tier property entirely in the US (1 property in Canada, 0 in Europe at the moment), an industrial market looking susceptible to a slowdown. If you want to play in the industrial REIT space, look to AMB/PLD, global players with a stronger development pipeline & fund structure. (Full disclosure - I am long AMB/PLD).

[justacynic]

pdub, in case you return, what comment do you have (if any) re: today's announcements that FR is expanding into Germany and France? Too soon and overextending the company or a good move at a time for opportunistic buying overseas?