Ticker: FR
Sector: Financials
Industry: Industrial Real
Estate
FIRST INDUSTRIAL REALTY
“A REIT ON THE CHEAP”
By: Tyler Peglow
Recommendation: ADD
Recommendation: ADD
Pricing
Closing Price
52-wk High
52-wk Low
Market Data
Market Cap
Enterprise
Value
Total Debt
LTD to Cap
Trading vol
avg)
Valuation
FFO (ttm)
P/FFO(ttm)
10K invested
5 yrs ago
2009 Rev
Beta
$7.04
(03/12/10)
$7.54
$1.90
(03/08/09)
$390.35M
$2.6B
$2.1B
70.2%
576,012 (3month
$1.68
4.0
$1,823
$480M
2.37
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 under 40%
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 has rebounded to near $6 but still goes widely
uncovered and unnoticed by institutional investors because it
currently pays no dividend (FR is working on paying down debt)
and is positioned in an industry that is still suffering and getting
bad press (commercial real estate). Looking past those variables
First Industrial appears to be an intriguing buy for value investors.
FR appears to be trading at a significant discount to its intrinsic
valuation according to these valuation metrics:
o
o
o
o
o
Trading a significant discount to Net Asset Value
Cheap relative to industry peers (AMB, ProLogis)
Trading at a low multiple of FFO or FCF
Undervalued comparative to book value basis
Undervalued on a per sq. foot basis
“I get greedy when others are fearful and fearful when others are
greedy”
- “Our mentor” – 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
Analyst: Tyler Peglow
Email: tcp9p9@missouri.edu
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.
First Industrial Realty
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 currently under 40% making shares much cheaper and more widely available on the
market.
Which leaves FR in the situation it is today, with a market cap of just over $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).
First Industrial Overview
First Industrial Realty Trust is a REIT that owns, manages, and develops industrial space.
As of December 31, 2009, FR owned approximately 783 in-service industrial properties
containing an aggregate of approximately 69.2 million square feet of GLA in 28 states
and one province in Canada. Their portfolio has a diverse base of approximately 2,000
tenants engaged in a wide variety of businesses, including manufacturing, retail,
wholesale trade, distribution and professional services. They classify their properties into
5 industrial categories:
Property Type
Bulk Warehouse
Light Industrial
R&D/Flex Space
Regional Warehouse
Manufacturing
% of Portfolio
42%
33%
12%
10%
3%
First Industrial generates revenue primarily from rental income and tenant recoveries
from long-term (generally three to six years) operating leases of industrial properties and
Joint Venture agreements in 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 (which is a non-cash charge) and
general and administrative and interest expenses. First Industrial’s revenue growth is
dependent, in part, on its ability to (1) increase rental income, through increasing either or
both occupancy rates and rental rates at their properties and Joint Ventures’ properties,
(2) maximize tenant recoveries and (3) minimize operating and certain other expenses.
First Industrial Realty
First Industrial Valuations
First Industrial appears to be undervalued by analyzing several different metrics, FR is:
1.
2.
3.
4.
5.
Trading at significant discount to net asset value
Very cheap relative to industry peer valuations
Trading at very low historical multiple of P/FFO or FCF
Trades below value using a theoretical dividend discount model
Trades at a discount to “Warren Buffet’s FCF Owner Earnings Model”
Condensed Balance Sheet
Total Assets:
Total Liabilities:
Preferred Equity:
$3,204,586
$2,130,339
$275,000
BV Common Equity:
$799,247
MV Common Equity:
$390,000
Book Value of Common Equity/Share = $12.97
Current Market Price = $6.20
FR’S Current Capitalization Structure
Book Value of Preferred Stock
Market Value of Common Equity
Market Capitalization
Total Debt
Total Market Cap (debt + equity)
$275,0000
$382,000
$657,000
$1,998,332
$2,624,976
Debt Maturity Schedule
Debt Maturity by Year as of 12/31/09 (excludes any premiums/discounts)
2010
18,650
2011
301,691 (FR’s FCF is going to pay down these maturities)
2012
622,463
2013
6,912
2014
228,440
2015
29,544
2016
243,816
2017
207,989
2018
5,854
2019
70,615
2020
239,175
Total Debt
$2,008,498
NOTE: 1Q 2009 FR bought back $160 million of 2011 & 2012 maturities (not accounted
for on the debt maturity schedule)
First Industrial Realty
1. Trading at significant discount to net asset value
First Industrial appears to be trading at a significant discount to net asset value following
two different metrics.
 Projecting cap rates from recent asset sales to whole portfolio’s NOI
 Using gains/losses from recent asset sales on a book value basis to extrapolate
a whole portfolio valuation
(Statistics from 4th Quarter ’09 Supplemental on FR’s website)
2009 Net Operating Income = $234,364
Cap rate = .078
NOI/Cap rate = Core In-Service Portfolio Value
234,364/.078= $2,929,550 Portfolio Value
NOTE: Portfolio Value of $2,929,550 equates to common share price = $11.87
2009 Asset Sales
Square Feet
Land Acreage
1,934,164
13.9
Sale Price
(millions)
$101.5
Weighted Avg.
Cap rate
7.8%
Price per sq.
ft.
$52.48
NOTE: Asset Sales for 2009 = $101.5 million proceeds
Gain = $24 million over Book Value
Total 2009 asset sales recorded a gain over their book values—meanwhile stock price
trades near $6 with a book value near $13 (trading at a discount to net asset value)
2009 Asset sales price per square foot = $52.48 (extrapolate figure to whole portfolio)
FR’s Portfolio = 69,200,000 sq./ft * $52.48 = $3,631,616 Portfolio Value
Common share price = $20.27
First Industrial Realty
2. Trading at a very low historical multiple of FFO or FCF
FFO – “Funds from Operation” - equal to a REIT’s net income, excluding
gains or losses from sales of property, plus real estate depreciation
YEAR
2005
2006
2007
2008
2009
2010
2011
FFO (similar to
EPS for REITS)
$3.61
$4.13
$4.64
$4.20
$1.65
$1.10 (guidance)
$1.50 (estimation)
Avg. trading
ranges
$38-$40
$40-$50
$45-$36
$35-$9
$2-$8
$5.50
???
Avg. P/FFO
multiple
11.08
10.89
9.05
8.5
3.9
(est.) 5.0
???
FFO: estimated to bottom out in 2010
P/FFO Multiple Discrepancy – Has the economy turned sour institutions underwent a
massive sell-off campaign—many REIT’s that suspended their dividends are trading at
(hypothesis) artificially low valuations relative to their dividend paying peers. A more
normal P/FFO ratio would put First Industrial’s stock price in the $10-$15 dollar range
which is based off of a depressed FFO figure for 2010 ($1.10). Third party research
suggests operating fundamentals and valuations will bottom out in 2010 for large
industrial properties and by 2011 industrial CRE will see rising rents and falling
vacancies which will bode well for First Industrial’s portfolio value.
P/FFO Valuation
2010 FFO Guidance = $1.10
P/FFO 5 year historical average = 9.5
P/FFO Value = $11.50
First Industrial Realty
3. Very Cheap Relative to Industry Peer Evaluation
Comparing First Industrial to two Industrial REIT peers (AMB & PLD) FR looks
extraordinarily cheap. This could potentially be explained because unlike FR—AMB and
PLD are much larger companies (market caps of $3 billion and $6 billion respectively)
and were not quite as leveraged when the credit crisis struck (both kept paying
dividends—albeit less dividends). This allowed many institutional investors to hold their
shares (of AMB and PLD) while many institutions may have been forced to dump FR
because of investment constraints (many pension/retirement funds are prohibited from
owning non-dividend paying stock). This has artificially forced FR’s stock price down in
the near term while keeping AMB and PLD stock price up on a relative basis.
AMB – AMB Property
PLD – ProLogis
AMB
1.35
32
21.71
PLD
.80
9.3
19.72
FR – First
Industrial
Ticker Symbol
P/B
P/FFO (FY 2009)
Enterprise
Value/EBITDA
FR
.30
5
14.11
Price to Book - A ratio used to compare a stock's market value to its book value. It is calculated
by dividing the current closing price of the stock by the latest quarter's book value per share
Price to FFO – Same as a price/earnings ratio of a non-REIT stock
Enterprise Value/EBITDA - A ratio used to determine the value of a company. The enterprise
multiple takes debt into account - an item which other multiples like the P/E ratio do not include
Industry Peer Valuation
P/B = .9
P/FFO = 12
FR’s value based off peer valuation = $12.92
First Industrial Realty
4. Theoretical Dividend Discount Model Evaluation
During 2009 FR used all their “free cash flow” to pay down 2011 and 2012 debt
maturities. Had FR instead decided to pay dividends with their “free cash flow” instead
of paying down debt FR would have been able to pay a $1.31 per common share dividend
(statistic taken from FR’s 4Q ’09 supplemental investment information).
2009 Funds Available for Distribution - $1.31



At a generous 10% dividend yield stock would theoretically trade at
$13.10
Just because they are not paying a dividend doesn’t mean they aren’t
building equity in book value
Q1 ’09 bought back approx. $160 million of unsecured notes due 2011,
2012, and 2014—creating approx. $2 a share more in BV equity
Dividend Discount Model
Assumptions
 $1.30 dividend
 12% required rate of return
 5% growth rate
1.30/(.12-.05) = $18.57 Intrinsic Value
First Industrial Realty
5. Trading at a discount to "Warren Buffet’s Owner Earnings Model”
Note: see attached Excel spreadsheet for Model
Assumptions:
Discount rate = 12% -- conservative rate
Funds Available for Distribution (2009) = $80,696,000
FAD - defined as EBITDA minus GAAP interest expense, minus restructuring costs,
minus preferred stock dividends, minus straight-line rental income, minus provision for
income taxes, minus or plus mark to market gain or loss on interest rate protection
agreements, plus restricted stock amortization, minus non-incremental capital
expenditures (Non-incremental capital expenditures are building improvements and
leasing costs required to maintain current revenues).
Growth Rates:
2010 - No growth - increased occupancy rate is offset by decreased rental rates
2011 - 5% growth has global economy recovers (rents rise, higher occupancy)
2012 - 13% FR enters high FCF growth has portfolio gets “re-leased up”
2013 - 13% FR is still in high FCF growth has portfolio gets “re-leased up”
2014 – 5.0% long term growth thru 2019
Second Stage Growth Rate:
2019 & beyond – 2.50%, conservative rate
Capitalization Rate (k-g) – 9.5%, conservative rate
Shares outstanding assuming dilution: 67.23 million
Intrinsic Value per share = $16.96
First Industrial Realty
Industrial Real Estate Sector Outlook
CB Richard Ellis (CBRE) has published its Industrial Leading Indicator Report for the
first quarter of 2010 which has a favorable outlook for the industrial real estate market in
the US.
To summarize briefly: The sector was not hit with the problems of the office and retail
markets. Demand for space has continued and they expect the vacancies to peak at 15%
and then drop to around 10%. Another reason is that industrial property owners tend not
to leverage as much as owners in the other sectors. They expect that the industrial market
will start to recover as we come out of the recession in 2012 and that the next three years
will be years of high demand for industrial space as businesses gear up again. An excerpt
from the report:
“With increasing consumer spending, firms will begin hiring again in 2010 and
continue to rebuild their inventories. The demand for industrial space will
rebound, it is expected to turn slightly positive by year-end 2010 but the average
quarterly pace of demand will be lower than that seen during the housing boom
with quarterly net absorption averaging only 30 million square feet through the
end of 2011. Over the following three years however as consumers and firms
make up for consumption deferred throughout the downturn, demand for
industrial space will match the pace set in the boom period from 2004 through
2007 before settling into a more stable pattern in the years beyond 2015.”
-CB Richard Ellis Industrial Leading Indicator Report
First Industrial Realty
Historical Performance
Lehman goes bankrupt –
market panics
FR suspends dividend—
CRE values start falling—
investors worry about
ability to re-fi 2011 and
2012 debt maturities


FR continues to pay down debt—buys back $160 million of
’11 and ’12 debt maturities—easing debt/re-financing
burden
Stock price still lags with no dividend (even though buying
back debt is creating more equity value)
Analyst Projections
Analysts polled from yahoo finance apparently are still bearish on the stock—a good
thing for those who wish to build fundamental positions. Most of these analysts are
analyzing securities from the perspective of the risk-averse institutional clients—keeping
them away from non-dividend paying equities—especially REIT’s.
RECOMMENDATION TRENDS
Current Month
Last Month
Two Months Ago
Three Months Ago
Strong Buy
0
0
0
0
Buy
0
0
0
0
Hold
3
3
4
4
Underperform
2
2
1
1
Sell
1
1
1
1
First Industrial Realty
NOTE: Standard & Poor’s has a buy recommendation (4/5 stars) citing:
 Economy gathering momentum—FR’s business starting to rebound
 Shares trading at significant discount to peers
 Looks for management to continue taking steps to enhance liquidity in order
to de-lever FR’s balance sheet
First Industrial Highlights
 Significantly undervalued net asset value, recent asset sales have been above book
value (BV = $14 share) suggesting a net asset value of at least $14
 Extremely cheap compared to industry peer valuations
 Trading at very low P/FFO multiple—even based off of low FFO figure
 Appears to be paying down debt maturities relatively well with large debt buybacks
of the 2011 and 2012 maturities creating equity—even though paying no dividend
 Trades far below “Buffet’s Owner Earnings DCF Model” even with conservative
inputs
Investment Risks and Concerns
 Economic activity slumps and again leading to occupancy and rental rates continuing
to decline significantly further. 2010 FFO guidance ($1.10) FR gave out already
assumes a 10% decrease in rental rates and NOI
 Capital markets re-lock through 2011, FR is unable to rollover 2011 debt—right now
not looking likely
 US Dollar strengthens making US manufacturing and exporting less competitive.
 Distressed industrial real estate asset sales pressure property values further
Keys to Higher Stock Price in 2010 and Beyond
 Interest rates need to remain low through 2010 (FR currently paying 4.5% on debt)
o FED seems intent on leaving interest rates low
 Industrial real estate sector needs to see decreasing vacancies and increased rental
rates by the end of 2010 (CBRE 1Q ’10 Industrial report – projected)
 Keep buying down (re-finance) 2011 and 2012 debt maturities (FR already in the
process)
First Industrial Realty
Conclusion
First Industrial appears to be trading at a discount to its fair valuation using the five
metrics outlined this report:
1.
2.
3.
4.
5.
Trading at significant discount to net asset value
Very cheap relative to industry peer valuations
Trading at very low historical multiple of P/FFO or FCF
Trades below value using a theoretical dividend discount model
Trades at a discount to “Warren Buffet’s FCF Owner Earnings Model”
According to the principles of Benjamin Graham (one of the great “value” investors) now
appears to be a great time to buy First Industrial (while it is out of favor with in the
investment community and trades at a very low historical multiple of earnings).
Secondly, the investment fund as no exposure to “real estate” and would most likely
benefit by diversifying into another asset class—reducing risk. Institutional buyers have
left this stock for now while it pays no dividend (80% institutionally owned at peak, 50%
now) but will undoubtedly be back when FR re-finances their 2011 and 2012 debt
maturities and re-instates a dividend (most likely 2011). These measures will pump up
the stock price and should leave investors with a very healthy return in due time.
My Projected end of 2011 Value = $13.00
Disclosure:
 I own underlying stock and call options on FR
Sources








10-k report (2009, 2008, 2007)
10-q report (3Q, 2009)
First Industrial Supplemental Information – 4th quarter ‘09
Standard & Poors Stock Report – First Industrial
Seeking Alpha
Yahoo! Finance
Google Finance
Bigcharts.com
First Industrial Realty