REIT Focus: Strong Buy on First Industrial Realty Trust
- By Joseph Ori
First Industrial Realty Trust Inc. (FR) is a publicly traded REIT that is engaged in the ownership, acquisition, development, leasing and management of industrial properties located in the U.S. First Industrial Realty owns 545 industrial properties containing 62.4 million rentable square feet.
Property information
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The intrinsic value of FR
First Industrial Realty 's industrial properties are located in 24 states and include bulk warehouse (68% of rentable square feet ), light industrial (16% of rentable square feet ), regional warehouse (12% of rentable square feet ) and R&D Flex Space (4% of rentable square feet ). As of third-quarter 2016, portfolio occupancy was 95.4%, the same-store year-over-year NOI increase was 6.7%, and year-over-year cash rental rates were up 6.4%.
Major event
As of third-quarter 2016, First Industrial Realty had five developments in process with 2.5 million square feet , a total cost of $157.8 million and at an average cap rate of 7.2%.
Corporate data
First Industrial Realty began as a public company in 1994. It is traded on the New York Stock Exchange and is located in Chicago. First Industrial Realty 's debt is rated BBB- by Fitch, Baa3 by Moody's and BBB- by Standard & Poor's. It has 116.9 million common shares outstanding and a market capitalization of approximately $3.39 billion. First Industrial Realty is the sole general partner and owns a 96.5% partnership interest in its UpReit general partnership, First Industrial LP.
Management
Peter Baccile, president and CEO: Baccile joined First Industrial as president in September 2016 and assumed the CEO position in December 2016. He brings more than 30 years of management, real estate and financial expertise to the role. He also serves as a member of the company's board of directors. Baccile joined First Industrial from UBS Securities LLC where he served as joint global head of the Real Estate, Lodging and Leisure Group within the firm's investment banking division since June 2012. He holds an M.B.A. from the Fuqua School of Business at Duke University where he was a Fuqua Scholar and earned his Bachelor of Science degree from Cornell University.
Johannson Yap, 53, chief investment officer: Yap is a co-founder of First Industrial Realty Trust. He directs the company's overall investment and disposition strategy including the approval process for both on-balance sheet and joint venture transactions. During Yap's career with First Industrial, he has overseen the underwriting and execution of more than $12 billion of industrial real estate transactions. Yap earned his M.B.A. and Masters of Architecture from the University of Illinois Champaign-Urbana and his Bachelor of Science in architecture from the University of the Philippines.
Scott Musil, 48, chief financial officer: Bringing more than 20 years of experience to the position of First Industrial Realty Trust's chief financial officer, Musil leads all aspects of the company's finance function including capital markets, treasury, financial planning and reporting, tax, risk management, investor relations and internal audit. Musil previously held the roles of chief accounting officer, treasurer and assistant secretary with the company. Musil is a certified public accountant and earned his Bachelor of Science in accounting from DePaul University and his M.B.A. from the University of Chicago's Graduate School of Business.
Ownership
Top Institutional Holders | Shares | % |
The Vanguard Group Inc. | 18,170,000 | 15.54 |
Blackrock Fund Advisors | 6,929,000 | 5.93 |
The London Co. of VA | 6,298,000 | 5.39 |
State Street Corp. | 5,376,000 | 4.60 |
Invesco Ltd. | 5,364,000 | 4.59 |
Ownership Breakdown | |
% of Shares Held by All Insiders and 5% Owners | 1.71% |
% of Shares Held by Institutional and Mutual Fund Owners | 98.6% |
Number of Institutions Holding Shares | 223 |
All amounts above per Yahoo Finance
Financial Analysis and Valuation Select financial data for First Industrial Realty as of the Q3-16 10Q and supplemental information (in millions where applicable) |
Financial Data | Amounts |
Real Estate Assets, Gross | $3,363 |
Total Assets | $2,767 |
Property Debt (at a weighted average interest rate of approximately 4.5%) | $1,323 |
Common Stockholders' Equity | $1,218 |
Revenue | $280 |
Net Income | $97 |
Net Income Per Share | 85 cents |
Cash Flow from Operations | $127 |
Unsecured Credit Facility ($163.5 million with $0.0 million used) | $163 |
Market Capitalization | $3,390 |
Property Debt to: | |
Gross Real Estate Assets | 39% |
Market Capitalization | 39% |
Enterprise Value | 28% |
Dividend and Yield (76 cents per share) | 2.74% |
Valuation Methodology | |
Third-quarter 2016 Real Estate Revenue | $93 |
Less: Third-quarter 2016 Real Estate Operating Expenses (excluding depreciation, amortization, interest expense and plus G&A expenses) | 32 |
Third-quarter 2016 Net Operating Income | $61 |
Projected Inflation Rate at 3.5% | x1.035 |
Projected Third-quarter 2016 NOI | $63 |
Projected Forward Annualized NOI | $252 |
Projected Average Cap Rate | 6% |
Projected Value of Real Estate Assets | $4,200 |
Add: Net Operating Working Capital (at book value) | 22 |
Construction in Progress (at book value) | 68 |
Total Projected Asset Value of Company | $4,290 |
Less: Total Debt Per Above | (1,323) |
Projected Net Asset Value of the Company | $2,967 |
Common Shares Outstanding - 116.9 million | |
Projected NAV Per Share | 25 |
Market Price Per Share on Jan. 15 | 27 |
Premium (Discount) to NAV | 8% |
Financial metrics
The gross real estate assets, property debt, revenues, net income, funds from operations, return on invested capital and dividends per share for the years 2011 through third-quarter 2016 are shown in the table below:
(millions except per share amounts) | 2011 | 2012 | 2013 | 2014 | 2015 | Q3 2016 Q3 2015 2015 |
Gross Real Estate Assets | $2,991 | $3,120 | $3,119 | $3,182 | $3,293 | $3,363 |
Property Debt | $1,479 | $1,335 | $1,295 | $1,348 | $1,440 | $1,323 |
Revenues | $315 | $327 | $318 | $344 | $365 | $280 |
Net Income (Loss) | ($27) | ($22) | $25 | $46 | $73 | $97 |
Funds from Operations (FFO) | $72 | $80 | $105 | $127 | $140 | $123 |
Return on Invested Capital (1) | 7.5% | 8.9% | 8.2% | 8.7% | 9.1% | NA |
Dividends Paid Per Share | 0 | 0 | 34 cents | 41 cents | 51 cents | 57 cents(2) |
(1) This is the ratio of cash provided by operations plus interest expense divided by stockholder's equity plus property debt, less cash and measures the return the REIT is earning on its invested capital.
(2) Dividend is currently 19 cents per quarter.
The total return of First Industrial Realty year to date and through five years is shown in the chart below per NAREIT:
First Industrial Realty Total Return | YTD (November 2016) | 1 year | 3 years | 5 years |
22.16% | 18.99% | 17.66% | 24.91% |
As shown above, our net asset value per share for First Industrial Realty is $25 per share compared to a market price of $27 per share. Current average cap rates for industrial properties per our industry experience and CBRE's Cap Rate Survey are in the 5% to 8% range, depending on the location, quality of the property and credit of the tenant. We have used an average cap rate of 6% due to First Industrial Realty's portfolio being well diversified in key logistics markets.
Valuation analysis
First Industrial Realty 's strengths, concerns and recommendations are as follows:
Strengths
Diversified national portfolio of industrial properties.
Investment grade credit rating.
Low leverage at 28% of enterprise value.
High return on invested capital.
Experienced management team.
Concerns
Low dividend yield of 2.74%.
Stock price volatility due to projected interest rate increases.
Gross real estate assets have increased only 12% since 2011.
Recommendations
First Industrial Realty has a solid and diversified portfolio of net lease properties and our recommendations are as follows:
This is an update to our valuation analysis of First Industrial Realty completed in December 2014, in which we had a strong buy recommendation when the stock was $19 per share and has since increased to $27 per share.
We still like First Industrial Realty even though the NAV is at an 8% premium. The growth drivers in the industrial market are still positive, and we are recommending that investors buy and hold the stock.
First Industrial Realty should further increase its dividend. The cash flow from operations for third-quarter 2016 was $127 million and the total common and unit dividend payment was $59 million or a difference of $68 million, which provides ample cash for an increased payout and to fund any capital improvements.
A five-year price chart of First Industrial Realty is shown below.
Disclosure: The author owns shares in the stock analyzed in this article in an ETF.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 6 Warning Signs with FR. Click here to check it out.
The intrinsic value of FR
