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  • First Industrial--An Unloved REIT Value (Part 1 of a 5 Part Series) 0 comments
    Jun 19, 2010 4:36 PM | about stocks: FR
    It is possible the general macro-economy is heading for a period of debt deflation (like Paul Krugman explained in his Op-Ed piece in the New York Times a week ago). Under this scenario my investment idea would not yield very good results. In a debt deflation scenario commercial real estate values would continue to decline in a self-reinforcing downward spiral as tenants would keep prying for rent concessions that owner/operators would comply with or stand to lose occupancy and income(like the situation CRE is in now but for more of a prolonged length of period).    

    However, I am confident our economy and markets will eventually prevail. Our economy is growing (albeit at a slow pace) and the private sector is starting to create jobs. My view is that policy makers will always err on the side of caution—which is why I think they will continue to print more money short term via quantitative easing to put the recovery on a better track. Debasing the currency by printing money hurts prudent savers who hoard cash and rewards hard asset holders which is why I like hard assets long term (i.e. commercial real estate—especially at the right prices).

    Part 1 of a 5 Part Analysis

    First Industrial (ticker symbol: FR) is a REIT that owns, manages, and develops industrial real estate. Its stock price has plummeted since the start of the credit crisis and ensuing recession. Many institutional investors dumped the stock at the start of the credit crisis (80% institutionally owned in ’07—now about 50% institutionally owned) making its shares much cheaper and more widely available on the financial markets. First Industrial traded at an all-time high near $54 in ’06 before plummeting to $1.76 by early ’09 in what was the middle of the credit crisis. Since that time the stock price rebounded to over $9 a share but has recently fallen with the broad market (currently trades below $5 a share) due to jitters over the European debt crisis, global economic growth, and unemployment figures.
    First Industrial still goes widely uncovered and unnoticed by institutional investors for three main reasons
    1. Pays no dividend (FR is working on paying down debt)
    2. Is in an industry that is still suffering and getting bad press (commercial real estate)
    3. Too small of a market cap (around $300 million) for many large institutional investors
    Looking past those variables First Industrial appears to be an intriguing buy for value investors. FR appears to be trading at a discount to its intrinsic valuation according to these valuation metrics: (I will outline FR’s value using each metric in following articles)
    o   Trading at a discount to Net Asset Value
    o   Cheap relative to industry peers (AMB, ProLogis)
    o   Trading at a low multiple of FFO or FCF
    o   Undervalued comparative to book value basis
    o   Undervalued on a per sq. foot basis
    “I get greedy when others are fearful and fearful when others are greedy”
     – Warren Buffet
    To understand why First Industrial is trading at such a significant discount it is imperative to understand its recent history leading up to and during this financial crisis. Traditionally REIT’s have been an excellent cash flowing investment that provided stability with relatively little capital appreciation for large institutional type investors. First Industrial got stuck during the credit crisis with a bit of an overleveraged position within its capital structure (70% debt, 30% equity on a BV basis in late ’07 when the crisis took hold). With large looming debt maturities in 2011 and 2012 and nobody seeing or calling a bottom for commercial real estate values FR had no choice but to cut their dividend (to both the preferred and common) and start paying down debt with any free CF they had.
    At the same time the economy went into recession and tenants started vacating properties leaving net income and FCF on the decline (FR’s portfolio was 95% leased in ’07, current occupancy stands at 81%). The stock went from 80% institutional owned in ’07 to under 40% institutionally owned during the peak of the credit crisis making shares much cheaper and more widely available on the market. 
    Which leaves FR in the situation it is today, with a market cap near $300 million (it’s so small nobody cares about it on Wall Street) and no dividend to speak of (any FCF the company earns is still going to pay down 2011 and 2012 debt maturities), few if any institutional investor cares about this stock currently while it pays down debt and kicks off no cash flow to the common (the PFD’s dividend was recently re-instated). According to the principles of “Benjamin Graham” (Buffet’s mentor) it would appear an excellent time to buy while the commercial real estate sector is largely out of favor with the investment community and while FR is trading at a very low multiple of earnings (P/FFO).

    Disclosure: Long FR

    Disclosure: Long FR
    Stocks: FR
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