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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Unless stated otherwise or the context otherwise requires, the terms "we," "our" and "us" refer to First Industrial Realty Trust, Inc. (the "Company") and its subsidiaries, including First Industrial, L.P. (the "Operating Partnership") and its consolidated subsidiaries.
Forward-Looking Statements
The following discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend for such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on certain assumptions and describe our future plans, strategies and expectations, and are generally identifiable by use of the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "project," "seek," "target," "potential," "focus," "may," "will," "should" or similar words. Although we believe the expectations reflected in forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that results will not materially differ. Factors which could have a materially adverse effect on our operations and future prospects include, but are not limited to:
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•
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changes in national, international, regional and local economic conditions generally and real estate markets specifically;
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•
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changes in legislation/regulation (including changes to laws governing the taxation of real estate investment trusts) and actions of regulatory authorities;
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•
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our ability to qualify and maintain our status as a real estate investment trust;
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•
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the availability and attractiveness of financing (including both public and private capital) and changes in interest rates;
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•
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the availability and attractiveness of terms of additional debt repurchases;
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•
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changes in our credit agency ratings;
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•
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our ability to comply with applicable financial covenants;
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•
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our competitive environment;
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•
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changes in supply, demand and valuation of industrial properties and land in our current and potential market areas;
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•
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difficulties in identifying and consummating acquisitions and dispositions;
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•
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our ability to manage the integration of properties we acquire;
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•
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potential liability relating to environmental matters;
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•
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defaults on or non-renewal of leases by our tenants;
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•
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decreased rental rates or increased vacancy rates;
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•
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higher-than-expected real estate construction costs and delays in development or lease-up schedules;
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•
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changes in general accounting principles, policies and guidelines applicable to real estate investment trusts; and
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•
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other risks and uncertainties described in this report, in Item 1A, "Risk Factors" and elsewhere in our annual report on Form 10-K for the year ended December 31, 2015 as well as those risks and uncertainties discussed from time to time in our other Exchange Act reports and in our other public filings with the Securities and Exchange Commission (the “SEC”).
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We caution you not to place undue reliance on forward-looking statements, which reflect our outlook only and speak only as of the date of this report. We assume no obligation to update or supplement forward-looking statements.
General
The Company is a self-administered and fully integrated real estate company which owns, manages, acquires, sells, develops and redevelops industrial real estate. The Company is a Maryland corporation organized on August 10, 1993 and a real estate investment trust ("REIT") as defined in the Internal Revenue Code of 1986 (the "Code").
We began operations on July 1, 1994. The Company's operations are conducted primarily through the Operating Partnership, of which the Company is the sole general partner (the "General Partner"), with an approximate 96.5% ownership interest ("General Partner Units") at September 30, 2016. The Operating Partnership also conducts operations through eight other limited partnerships (the "Other Real Estate Partnerships"), numerous limited liability companies ("LLCs") and certain taxable REIT subsidiaries ("TRSs"), the operating data of which, together with that of the Operating Partnership, is consolidated with that of the Company as presented herein. The Operating Partnership holds at least a 99% limited partnership interest in each of Other Real Estate Partnerships. The general partners of the Other Real Estate Partnerships are separate corporations, wholly-owned by the Company, each with at least a .01% general partnership interest in the Other Real Estate Partnerships. The Company does not have any significant assets or liabilities other than its investment in the Operating Partnership and its 100% ownership interest in the general partners of the Other Real Estate Partnerships. Noncontrolling interest in the Operating Partnership of approximately 3.5% at September 30, 2016 represents the aggregate partnership interest held by the limited partners thereof ("Limited Partner Units" and together with the General Partner Units, the "Units").
Profits, losses and distributions of the Operating Partnership, the LLCs, the Other Real Estate Partnerships and the TRSs are allocated to the general partner and the limited partners, the members or the shareholders, as applicable, of such entities in accordance with the provisions contained within their respective organizational documents.
As of September 30, 2016, we owned 545 industrial properties located in 24 states, containing an aggregate of approximately 62.4 million square feet of gross leasable area ("GLA").
Of the 545 properties owned on a consolidated basis, none of them are directly owned by the Company.
Available Information
We maintain a website at www.firstindustrial.com. Information on this website shall not constitute part of this Form 10-Q. Copies of our respective annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available without charge on our website as soon as reasonably practicable after such reports are filed with or furnished to the SEC. You may also read and copy any document filed at the public reference facilities of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s Interactive Data Electronic Application via the SEC's home page on the Internet (www.sec.gov). In addition, the Company's Corporate Governance Guidelines, Code of Business Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter and Nominating/Corporate Governance Committee Charter, along with supplemental financial and operating information prepared by us, are all available without charge on the Company's website or upon request to the Company. Amendments to, or waivers from, our Code of Business Conduct and Ethics that apply to our executive officers or directors will also be posted to our website. We also post or otherwise make available on our website from time to time other information that may be of interest to our investors. Please direct requests as follows:
First Industrial Realty Trust, Inc.
311 S. Wacker Drive, Suite 3900
Chicago, IL 60606
Attention: Investor Relations
Management's Overview
We believe our financial condition and results of operations are, primarily, a function of our performance in four key areas: leasing of industrial properties, acquisition and development of additional industrial properties, disposition of industrial properties and access to external capital.
We generate revenue primarily from rental income and tenant recoveries from operating leases of our 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 costs and general and administrative and interest expenses. Our revenue growth is dependent, in part, on our ability to: (i) increase rental income, through increasing either or both occupancy rates and rental rates at our properties; (ii) maximize tenant recoveries; and (iii) minimize operating and certain other expenses. Revenues generated from rental income and tenant recoveries are a significant source of funds, in addition to income generated from gains or losses on the sale of our properties (as discussed below), for our liquidity. The leasing of property, in general, and occupancy rates, rental rates, operating expenses and certain non-operating expenses, in particular, are impacted, variously, by property specific, market specific, general economic and other conditions, many of which are beyond our control. The leasing of property also entails various risks, including the risk of tenant default. If we were unable to maintain or increase occupancy rates and rental rates at our properties or to maintain tenant recoveries and operating and certain other expenses consistent with historical levels and proportions, our revenue would decline. Further, if a significant number of our tenants were unable to pay rent (including tenant recoveries) or if we were unable to rent our properties on favorable terms, our financial condition, results of operations, cash flow and ability to make distributions to our stockholders and Unitholders, the market price of the Company's common stock and the market value of the Units would be adversely affected.
Our revenue growth is also dependent, in part, on our ability to acquire existing, and develop new industrial properties on favorable terms. We seek to identify opportunities to acquire existing industrial properties on favorable terms, and, when conditions permit, also seek to acquire and develop new industrial properties on favorable terms. Existing properties, as they are acquired, and acquired and developed properties, as they are leased, generate revenue from rental income, tenant recoveries and fees, income from which, as discussed above, is a source of funds for our distributions to our stockholders and Unitholders. The acquisition and development of properties is impacted, variously, by property specific, market specific, general economic and other conditions, many of which are beyond our control. The acquisition and development of properties also entails various risks, including the risk that our investments may not perform as expected. For example, acquired existing and acquired and developed new properties may not sustain and/or achieve anticipated occupancy and rental rate levels. With respect to acquired and developed new properties, we may not be able to complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties. Also, we face significant competition for attractive acquisition and development opportunities from other well-capitalized real estate investors, including publicly-traded REITs and private investors. Further, as discussed below, we may not be able to finance the acquisition and development opportunities we identify. If we were unable to acquire and develop sufficient additional properties on favorable terms, or if such investments did not perform as expected, our revenue growth would be limited and our financial condition, results of operations, cash flow and ability to make distributions to our stockholders and Unitholders, the market price of the Company's common stock and the market value of the Units would be adversely affected.
We also generate income from the sale of our properties (including existing buildings, buildings which we have developed or re-developed on a merchant basis and land). The gain or loss on, and fees from, the sale of such properties are included in our income and can be a significant source of funds, in addition to revenues generated from rental income and tenant recoveries. Proceeds from sales are being used to repay outstanding debt and, market conditions permitting, may be used to fund the acquisition of existing, and the acquisition and development of new, industrial properties. The sale of properties is impacted, variously, by property specific, market specific, general economic and other conditions, many of which are beyond our control. The sale of properties also entails various risks, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. Further, our ability to sell properties is limited by safe harbor rules applying to REITs under the Code which relate to the number of properties that may be disposed of in a year, their tax bases and the cost of improvements made to the properties, along with other tests which enable a REIT to avoid punitive taxation on the sale of assets. If we are unable to sell properties on favorable terms, our income growth would be limited and our financial condition, results of operations, cash flow and ability to make distributions to our stockholders and Unitholders, the market price of the Company's common stock and the market value of the Units could be adversely affected.
We utilize a portion of the net sales proceeds from property sales, borrowings under our unsecured credit facility (the "Unsecured Credit Facility") and proceeds from the issuance, when and as warranted, of additional debt and equity securities to refinance debt and finance future acquisitions and developments. Access to external capital on favorable terms plays a key role in our financial condition and results of operations, as it impacts our cost of capital and our ability and cost to refinance existing indebtedness as it matures and to fund acquisitions and developments. Our ability to access external capital on favorable terms is dependent on various factors, including general market conditions, interest rates, credit ratings on our debt, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of the Company's common stock. If we were unable to access external capital on favorable terms, our financial condition, results of operations, cash flow and ability to make distributions to our stockholders and Unitholders, the market price of the Company's common stock and the market value of the Units could be adversely affected.
Summary of Significant Transactions During the Nine Months Ended September 30, 2016
During the nine months ended September 30, 2016, we completed the following significant transactions and financing activities:
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•
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We acquired four industrial properties comprising approximately 0.5 million square feet of GLA and several land parcels for an aggregate purchase price of approximately $98.6 million, excluding costs incurred in conjunction with the acquisitions.
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•
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We placed in-service six developments totaling approximately 1.6 million square feet of GLA at a total cost of approximately $99.7 million. These developments are 100% leased at September 30, 2016.
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•
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We sold 50 industrial properties comprising approximately 2.6 million square feet of GLA for total gross sales proceeds of approximately $139.0 million.
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•
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We paid off and retired our 2016 Notes, at maturity, in the amount of $159.7 million.
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•
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We paid off a mortgage loan in the amount of $57.9 million.
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•
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We declared quarterly first, second and third quarter cash dividends of $0.19 per common share/Unit each, an increase of 49% from the respective 2015 quarterly rate.
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•
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The Company issued 5,600,000 shares of the Company's common stock in an underwritten public offering. Proceeds to the Company, net of the underwriter's discount, were approximately $124.9 million.
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Results of Operations
The tables below summarize our revenues, property expenses and depreciation and other amortization by various categories for the three and nine months ended September 30, 2016 and 2015. Same store properties are properties owned prior to January 1, 2015 and held as an in-service property through September 30, 2016 and developments and redevelopments that were placed in service prior to January 1, 2015 or were substantially completed for the 12 months prior to January 1, 2015. Properties which are at least 75% occupied at acquisition are placed in service. Acquisitions that are less than 75% occupied at the date of acquisition, developments and redevelopments are placed in service as they reach the earlier of a) stabilized occupancy (generally defined as 90% occupied), or b) one year subsequent to acquisition or development/redevelopment construction completion. Properties are moved from the same store classification to the redevelopment classification when capital expenditures for a project are estimated to exceed 25% of the undepreciated gross book value of the property. Acquired properties are properties that were acquired subsequent to December 31, 2014 and held as an operating property through September 30, 2016. Sold properties are properties that were sold subsequent to December 31, 2014. (Re)Developments include developments and redevelopments that were not: a) substantially complete 12 months prior to January 1, 2015; or b) stabilized prior to January 1, 2015. Other revenues are derived from the operations of properties not placed in service under one of the categories discussed above, the operations of our maintenance company and other miscellaneous revenues. Other property expenses are derived from the operations of properties not placed in service under one of the categories discussed above, the operations of our maintenance company, vacant land expenses and other miscellaneous regional expenses.
During the period between January 1, 2015 and September 30, 2016, one industrial property, comprising approximately 0.2 million square feet of GLA, was taken out of service with the intention of demolishing the industrial property and developing a new industrial property. As a result of taking the industrial property out of service, the industrial property was reclassified from the same store classification to the other classification. During the first quarter of 2016, the industrial property was reclassified from the other classification to the (re) developments classification after the industrial property was demolished and we began developing the new industrial property. The newly developed industrial property is expected to be completed in the fourth quarter of 2016 and will return to the same store classification following a complete calendar year of in service classification.
Our future financial condition and results of operations, including rental revenues, may be impacted by the future acquisition, development and sale of properties. Our future revenues and expenses may vary materially from historical rates.
Comparison of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2015
The Company's net income was $101.1 million and $31.5 million for the nine months ended September 30, 2016 and 2015, respectively. The Operating Partnership's net income was $101.1 million and $31.6 million for the nine months ended September 30, 2016 and 2015, respectively.
For the nine months ended September 30, 2016 and 2015, the average daily occupancy rates of our same store properties were 94.7% and 94.6%, respectively.
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Nine Months Ended September 30,
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2016
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2015
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$ Change
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% Change
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($ in 000’s)
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REVENUES
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|
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Same Store Properties
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$
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252,206
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$
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245,729
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$
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6,477
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2.6
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%
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Acquired Properties
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7,252
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473
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6,779
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1,433.2
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%
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Sold Properties
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6,183
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22,355
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(16,172
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)
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(72.3
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)%
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(Re) Developments
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12,836
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2,691
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10,145
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377.0
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%
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Other
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1,567
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1,366
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201
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14.7
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%
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Total Revenues
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$
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280,044
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$
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272,614
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$
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7,430
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2.7
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%
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Revenues from same store properties increased $6.5 million due primarily to an increase in rental rates and tenant recoveries. Revenues from acquired properties increased $6.8 million due to the 12 industrial properties acquired subsequent to December 31, 2014 totaling approximately 2.5 million square feet of GLA. Revenues from sold properties decreased $16.2 million due to the 116 industrial properties sold subsequent to December 31, 2014 totaling approximately 6.4 million square feet of GLA. Revenues from (re)developments increased $10.1 million due to an increase in occupancy. Other revenues
increased $0.2 million
primarily due to an increase in occupancy related to a property acquired in 2014 and placed in service during 2015.
.
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Nine Months Ended September 30,
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2016
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2015
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$ Change
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|
% Change
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|
($ in 000’s)
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PROPERTY EXPENSES
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Same Store Properties
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$
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68,528
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$
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69,196
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$
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(668
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)
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(1.0
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)%
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Acquired Properties
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2,135
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|
101
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2,034
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2,013.9
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%
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Sold Properties
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2,237
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|
8,761
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(6,524
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)
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(74.5
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)%
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(Re) Developments
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3,685
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|
|
1,469
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2,216
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|
150.9
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%
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Other
|
6,196
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|
6,135
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|
61
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|
1.0
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%
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Total Property Expenses
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$
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82,781
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$
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85,662
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$
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(2,881
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)
|
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(3.4
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)%
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Property expenses include real estate taxes, repairs and maintenance, property management, utilities, insurance and other property related expenses. Property expenses from same store properties remained relatively unchanged. Property expenses from acquired properties increased $2.0 million due to properties acquired subsequent to December 31, 2014. Property expenses from sold properties decreased $6.5 million due to properties sold subsequent to December 31, 2014. Property expenses from (re)developments increased $2.2 million primarily due to the substantial completion of developments. Other property expenses remained relatively unchanged.
General and administrative expense for the Company increased $1.1 million, or 5.6%, and for the Operating Partnership increased $1.2 million, or 6.2%, in each case primarily due to an increase in incentive compensation, partially offset by a decrease in professional service expense during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.
For the nine months ended September 30, 2016 and 2015, we recognized $0.3 million and $0.4 million, respectively, of expense related to costs associated with acquiring occupied industrial properties from third parties.
The impairment charge for the nine months ended September 30, 2015 of $0.6 million is due to marketing certain properties for sale and our assessment of the likelihood of a potential sale transaction.
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|
Nine Months Ended September 30,
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|
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|
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2016
|
|
2015
|
|
$ Change
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|
% Change
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|
($ in 000’s)
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DEPRECIATION AND OTHER AMORTIZATION
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|
|
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|
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|
Same Store Properties
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$
|
74,579
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|
$
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75,233
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|
$
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(654
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)
|
|
(0.9
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)%
|
Acquired Properties
|
5,076
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|
|
463
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|
|
4,613
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|
|
996.3
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%
|
Sold Properties
|
1,739
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|
|
7,087
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|
|
(5,348
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)
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(75.5
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)%
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(Re) Developments
|
6,476
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|
|
1,439
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|
|
5,037
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|
|
350.0
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%
|
Corporate Furniture, Fixtures and Equipment and Other
|
798
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|
|
717
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|
|
81
|
|
|
11.3
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%
|
Total Depreciation and Other Amortization
|
$
|
88,668
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|
|
$
|
84,939
|
|
|
$
|
3,729
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|
|
4.4
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%
|
Depreciation and other amortization from same store properties remained relatively unchanged. Depreciation and other amortization from acquired properties increased $4.6 million due to properties acquired subsequent to December 31, 2014. Depreciation and other amortization from sold properties decreased $5.3 million due to properties sold subsequent to December 31, 2014. Depreciation and other amortization from (re) developments increased $5.0 million primarily due to an increase in developments that were placed in service as well as accelerated depreciation on one property in Rancho Dominguez, CA that was razed during the first quarter of 2016. Depreciation from corporate furniture, fixtures and equipment and other remained relatively unchanged.
For the nine months ended September 30, 2016, we recognized $60.8 million of gain on sale of real estate related to the sale of 50 industrial properties comprising approximately 2.6 million square feet of GLA. For the nine months ended September 30, 2015, we recognized $13.1 million of gain on sale of real estate related to the sale of 15 industrial properties comprising approximately 1.0 million square feet of GLA and several land parcels.
Interest expense decreased $4.4 million, or 8.9%, primarily due to a decrease in the weighted average interest rate for the nine months ended September 30, 2016 (4.50%) as compared to the nine months ended September 30, 2015 (5.00%) and an increase in capitalized interest of $0.6 million for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 due to an increase in development activities, offset by an increase in the weighted average debt balance outstanding for the nine months ended September 30, 2016 ($1,411.4 million) as compared to the nine months ended September 30, 2015 ($1,372.9 million).
Amortization of deferred financing costs increased $0.1 million, or 6.4%, primarily due to the amortization of financing costs associated with the issuance of a $260.0 million unsecured term loan that we entered into with a syndicate of financial institutions during September 2015, partially offset by a decrease in the amortization of financing costs associated with the retirement of $159.7 million of senior unsecured notes in January 2016 and the payoff of a $57.9 million mortgage loan during the nine months ended September 30, 2016.
In August 2014, we entered into three interest rate protection agreements in order to maintain our flexibility to pursue an offering of unsecured debt. During the nine months ended September 30, 2015, we settled the interest rate protection agreements and reclassified the fair market value loss recorded in other comprehensive income relating to the three interest rate protection agreements to earnings as a result of determining the forecasted offering of unsecured debt was no longer probable to occur within the time period stated in the respective hedge designation memos. For the nine months ended September 30, 2015, we recorded $11.5 million in mark-to-market and settlement loss on the three interest rate protection agreements.
Equity in income of joint ventures and the income tax provision are not significant.
Comparison of Three Months Ended September 30, 2016 to Three Months Ended September 30, 2015
Our net income was $32.7 million and $14.5 million for the three months ended September 30, 2016 and 2015, respectively.
For the three months ended September 30, 2016 and 2015, the average daily occupancy rates of our same store properties were 94.3% and 95.3%, respectively.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
($ in 000’s)
|
REVENUES
|
|
|
|
|
|
|
|
Same Store Properties
|
$
|
84,346
|
|
|
$
|
82,278
|
|
|
$
|
2,068
|
|
|
2.5
|
%
|
Acquired Properties
|
2,791
|
|
|
433
|
|
|
2,358
|
|
|
544.6
|
%
|
Sold Properties
|
572
|
|
|
7,276
|
|
|
(6,704
|
)
|
|
(92.1
|
)%
|
(Re) Developments
|
5,331
|
|
|
1,728
|
|
|
3,603
|
|
|
208.5
|
%
|
Other
|
522
|
|
|
444
|
|
|
78
|
|
|
17.6
|
%
|
Total Revenues
|
$
|
93,562
|
|
|
$
|
92,159
|
|
|
$
|
1,403
|
|
|
1.5
|
%
|
Revenues from same store properties increased $2.1 million due primarily to an increase in rental rates and tenant recoveries. Revenues from acquired properties increased $2.4 million due to the 12 industrial properties acquired subsequent to December 31, 2014 totaling approximately 2.5 million square feet of GLA. Revenues from sold properties decreased $6.7 million due to the 116 industrial properties sold subsequent to December 31, 2014 totaling approximately 6.4 million square feet of GLA. Revenues from (re) developments increased $3.6 million due to an increase in occupancy. Other revenues
increased $0.1 million
primarily due to an increase in occupancy related to a property acquired in 2014 and placed in service during 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
($ in 000’s)
|
PROPERTY EXPENSES
|
|
|
|
|
|
|
|
Same Store Properties
|
$
|
23,098
|
|
|
$
|
22,573
|
|
|
$
|
525
|
|
|
2.3
|
%
|
Acquired Properties
|
798
|
|
|
87
|
|
|
711
|
|
|
817.2
|
%
|
Sold Properties
|
226
|
|
|
2,700
|
|
|
(2,474
|
)
|
|
(91.6
|
)%
|
(Re) Developments
|
1,257
|
|
|
631
|
|
|
626
|
|
|
99.2
|
%
|
Other
|
2,160
|
|
|
2,053
|
|
|
107
|
|
|
5.2
|
%
|
Total Property Expenses
|
$
|
27,539
|
|
|
$
|
28,044
|
|
|
$
|
(505
|
)
|
|
(1.8
|
)%
|
Property expenses include real estate taxes, repairs and maintenance, property management, utilities, insurance and other property related expenses. Property expenses from same store properties increased $0.5 million primarily due to an increase in real estate tax expense attributed to real estate tax refunds received during the three months ended September 30, 2015. Property expenses from acquired properties
increased $0.7 million due to properties acquired subsequent to December 31, 2014. Property expenses from sold properties decreased $2.5 mi
llion due to properties sold subsequent to December 31, 2014. Property expenses from (re)developmen
ts increased $0.6 million primarily due to
the substantial completion of developments
. Other property expenses remained relatively unchanged.
General and administrative expense remained relatively unchanged.
For the three months ended September 30, 2016 and 2015, we recognized $0.1 million and $0.05 million, respectively, of expense related to costs associated with acquiring occupied industrial properties from third parties.
The impairment charge for the three months ended September 30, 2015 of $0.6 million is due to marketing certain properties for sale and our assessment of the likelihood of a potential sale transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
($ in 000’s)
|
DEPRECIATION AND OTHER AMORTIZATION
|
|
|
|
|
|
|
|
Same Store Properties
|
$
|
24,748
|
|
|
$
|
25,077
|
|
|
$
|
(329
|
)
|
|
(1.3
|
)%
|
Acquired Properties
|
1,813
|
|
|
399
|
|
|
1,414
|
|
|
354.4
|
%
|
Sold Properties
|
181
|
|
|
2,251
|
|
|
(2,070
|
)
|
|
(92.0
|
)%
|
(Re) Developments
|
1,789
|
|
|
617
|
|
|
1,172
|
|
|
190.0
|
%
|
Corporate Furniture, Fixtures and Equipment and Other
|
284
|
|
|
245
|
|
|
39
|
|
|
15.9
|
%
|
Total Depreciation and Other Amortization
|
$
|
28,815
|
|
|
$
|
28,589
|
|
|
$
|
226
|
|
|
0.8
|
%
|
Depreciation and other amortization from same store properties remained relatively unchanged. Depreciation and other amortization from acquired properties increased $1.4 million due to properties acquired subsequent to December 31, 2014. Depreciation and other amortization from sold properties decreased $2.1 million due to properties sold subsequent to December 31, 2014. Depreciation and other amortization from (re) developments increased $1.2 million primarily due to an increase in developments that were placed in service. Depreciation from corporate furniture, fixtures and equipment and other remained relatively unchanged.
For the three months ended September 30, 2016, we recognized $16.8 million of gain on sale of real estate related to the sale of 19 industrial properties comprising approximately 0.7 million square feet of GLA. For the three months ended September 30, 2015, we recognized $3.0 million of gain on sale of real estate related to the sale of three industrial properties comprising approximately 0.1 million square feet of GLA and one land parcel.
Interest expense decreased $2.3 million, or 13.6%, primarily due to a decrease in the weighted average interest rate for the three months ended September 30, 2016 (4.50%) as compared to the three months ended September 30, 2015 (4.94%) and an increase in capitalized interest of $0.3 million for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 due to an increase in development activities and a decrease in the weighted average debt balance outstanding for the three months ended September 30, 2016 ($1,357.5 million) as compared to the three months ended September 30, 2015 ($1,392.1 million).
Amortization of deferred financing costs remained relatively unchanged.
Equity in loss of joint ventures and the income tax benefit (provision) are not significant.
Leasing Activity
The following table provides a summary of our leasing activity for the three and nine months ended September 30, 2016. The table does not include month-to-month leases or leases with terms less than twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Leases
Commenced
|
|
Square Feet
Commenced
(in 000’s)
|
|
Net Rent Per
Square Foot (1)
|
|
GAAP Basis
Rent Growth (2)
|
|
Weighted
Average Lease
Term (3)
|
|
Lease Costs
Per Square
Foot (4)
|
|
Weighted
Average Tenant
Retention (5)
|
New Leases - Third Quarter
|
35
|
|
|
638
|
|
|
$
|
5.70
|
|
|
26.6
|
%
|
|
4.5
|
|
|
$
|
4.41
|
|
|
N/A
|
|
Renewal Leases - Third Quarter
|
55
|
|
|
1,434
|
|
|
$
|
4.95
|
|
|
17.4
|
%
|
|
3.6
|
|
|
$
|
0.92
|
|
|
63.4
|
%
|
Development / Not In Service Acquisition Leases - Third Quarter
|
4
|
|
|
934
|
|
|
$
|
4.66
|
|
|
N/A
|
|
|
9.2
|
|
|
N/A
|
|
|
N/A
|
|
Third Quarter - Total / Weighted Average
|
94
|
|
|
3,006
|
|
|
$
|
5.02
|
|
|
20.4
|
%
|
|
5.5
|
|
|
$
|
2.00
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases - Year to Date
|
117
|
|
|
1,775
|
|
|
$
|
5.58
|
|
|
20.3
|
%
|
|
5.1
|
|
|
$
|
5.26
|
|
|
N/A
|
|
Renewal Leases - Year to Date
|
227
|
|
|
7,304
|
|
|
$
|
4.94
|
|
|
14.2
|
%
|
|
3.6
|
|
|
$
|
1.10
|
|
|
73.1
|
%
|
Development / Not In Service Acquisition Leases - Year to Date
|
12
|
|
|
1,816
|
|
|
$
|
4.76
|
|
|
N/A
|
|
|
7.8
|
|
|
N/A
|
|
|
N/A
|
|
Year to Date - Total / Weighted Average
|
356
|
|
|
10,895
|
|
|
$
|
5.02
|
|
|
15.4
|
%
|
|
4.6
|
|
|
$
|
1.91
|
|
|
N/A
|
|
_______________
|
|
(1)
|
Net rent is the average base rent calculated in accordance with GAAP, over the term of the lease.
|
|
|
(2)
|
GAAP basis rent growth is a ratio of the change in net rent (on a GAAP basis, including straight-line rent adjustments as required by GAAP) compared to the net rent (on a GAAP basis) of the comparable lease. New leases where there were no prior comparable leases are excluded.
|
|
|
(3)
|
The lease term is expressed in years. Assumes no exercise of lease renewal options, if any.
|
|
|
(4)
|
Lease costs are comprised of the costs incurred or capitalized for improvements of vacant and renewal spaces, as well as the commissions paid and costs capitalized for leasing transactions. Lease costs per square foot represent the total turnover costs expected to be incurred on the leases signed during the period and do not reflect actual expenditures for the period.
|
|
|
(5)
|
Represents the weighted average square feet of tenants renewing their respective leases.
|
During the three and nine months ended September 30, 2016, 23 and 80 new leases commenced with free rent periods during the lease term with such leases constituting 0.4 million and 1.4 million square feet of GLA, respectively. Total free rent concessions of $0.6 million and $1.8 million, respectively, were associated with these new leases. During the three and nine months ended September 30, 2016, four and 21 renewal leases commenced with free rent periods during the lease term with such leases constituting 0.1 million and 0.7 million square feet of GLA, respectively. Total free rent concessions of $0.1 million and $0.6 million, respectively, were associated with these renewal leases. Additionally, during the three and nine months ended September 30, 2016, four and 11 development and not in service acquisition leases commenced with free rent periods during the lease term with such leases constituting 0.9 million and 1.8 million square feet of GLA, respectively. Total free rent concessions of $1.6 million and $3.1 million, respectively, were associated with these development and not in service acquisition leases.
Liquidity and Capital Resources
At September 30, 2016, our cash and cash equivalents and restricted cash were approximately $8.1 million and $13.4 million, respectively. Restricted cash is comprised of gross proceeds from the sales of certain industrial properties. These sale proceeds will be disbursed as we exchange industrial properties under Section 1031 of the Code. We also had $459.8 million available for additional borrowings under our Unsecured Credit Facility as of September 30, 2016.
We have considered our short-term (through September 30, 2017) liquidity needs and the adequacy of our estimated cash flow from operations and other expected liquidity sources to meet these needs. Our 5.95%, 2017 II Notes, in the aggregate principal amount of $101.9 million, are due May 15, 2017. We expect to satisfy this payment obligation on or prior to the maturity date with borrowings under our Unsecured Credit Facility, the issuance of unsecured indebtedness or the disposition of select assets. With the exception of this payment obligation, we believe that our principal short-term liquidity needs are to fund normal recurring expenses, property acquisitions, developments, renovations, expansions and other nonrecurring capital improvements, debt service requirements, the minimum distributions required to maintain the Company's REIT qualification under the Code and distributions approved by the Company's Board of Directors. We anticipate that these needs will be met with cash flows provided by operating activities as well as the disposition of select assets. These needs may also be met by the issuance of additional equity securities or long-term unsecured indebtedness, subject to market conditions and contractual restrictions or borrowings under our Unsecured Credit Facility.
We expect to meet long-term (after September 30, 2017) liquidity requirements such as property acquisitions, developments, scheduled debt maturities, major renovations, expansions and other nonrecurring capital improvements through the disposition of select assets, long-term unsecured and secured indebtedness and the issuance of additional equity securities, subject to market conditions.
At September 30, 2016, borrowings under our Unsecured Credit Facility bore interest at a weighted average interest rate of 1.67%. As of October 27, 2016, we had approximately $419.8 million available for additional borrowings under our Unsecured Credit Facility. Our Unsecured Credit Facility contains certain financial covenants including limitations on incurrence of debt and debt service coverage. Our access to borrowings may be limited if we fail to meet any of these covenants. We believe that we were in compliance with our financial covenants as of September 30, 2016, and we anticipate that we will be able to operate in compliance with our financial covenants for the remainder of 2016.
Our senior unsecured notes have been assigned credit ratings from Standard & Poor’s, Moody’s and Fitch Ratings of BBB-/Baa3/BBB-, respectively. In the event of a downgrade, we believe we would continue to have access to sufficient capital; however, our cost of borrowing would increase and our ability to access certain financial markets may be limited.
Nine Months Ended September 30, 2016
Net cash provided by operating activities for the Company of approximately $127.2 million (net cash provided by operating activities for the Operating Partnership of approximately $127.4 million) for the nine months ended September 30, 2016 was comprised primarily of the non-cash adjustments of approximately $31.1 million and net income of approximately $101.1 million, offset by the net change in the Company's operating assets and liabilities of approximately $4.4 million (net change in the Operating Partnership's operating assets and liabilities of approximately $4.2 million) and the payment of discounts associated with the retirement of debt of approximately $0.6 million. The adjustments for the non-cash items of approximately $31.1 million are primarily comprised of depreciation and amortization of approximately $96.4 million and the provision for bad debt of approximately $0.6 million, offset by the gain on sale of real estate of approximately $60.8 million and the effect of the straight-lining of rental income of approximately $5.1 million.
Net cash used in investing activities of approximately $68.1 million for the nine months ended September 30, 2016 was comprised primarily of the acquisition of land parcels and four industrial properties comprising approximately 0.5 million square feet of GLA, the development of real estate, capital expenditures related to the improvement of existing real estate, payments related to leasing activities, offset by repayments on our notes receivable, a decrease in escrows and the net proceeds from the sale of real estate.
During the nine months ended September 30, 2016, we sold 50 industrial properties comprising approximately 2.6 million square feet of GLA. Proceeds from the sales of these 50 industrial properties, net of closing costs, were approximately $133.6 million. We are in various stages of discussions with third parties for the sale of additional properties and plan to continue to selectively market other properties for sale for the remainder of 2016.
Net cash used in financing activities for the Company of approximately $55.0 million (net cash used in financing activities for the Operating Partnership of approximately $55.2 million) for the nine months ended September 30, 2016 was comprised primarily of the repayments on our senior unsecured notes and mortgage loans payable, common stock and Unit distributions, payments of financing and equity issuance costs, the repurchase and retirement of restricted stock and restricted Units and solely with respect to the Operating Partnership, the Operating Partnership's net distributions to noncontrolling interests, offset by the net proceeds from the issuance of common stock or General Partner Units and net proceeds from the Unsecured Credit Facility.
During the nine months ended September 30, 2016, we paid off a mortgage loan in the amount of $57.9 million. Additionally, we paid off and retired our 2016 Notes, at maturity, in the amount of $159.7 million. We may from time to time repay additional amounts of our outstanding debt. Any repayments would depend upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors we consider important. Future repayments may materially impact our liquidity, taxable income and results of operations.
During the nine months ended September 30, 2016, the Company issued 5,600,000 shares of the Company's common stock through a public offering, resulting in proceeds, net of the underwriter's discount, of approximately $124.9 million. The proceeds were contributed to the Operating Partnership in exchange for General Partner Units.
Market Risk
The following discussion about our risk-management activities includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. Our business subjects us to market risk from interest rates, as described below.
Interest Rate Risk
The following analysis presents the hypothetical gain or loss in earnings, cash flows or fair value of the financial instruments and derivative instruments which are held by us at September 30, 2016 that are sensitive to changes in interest rates. While this analysis may have some use as a benchmark, it should not be viewed as a forecast.
In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks principally include credit risk and legal risk and are not represented in the following analysis.
At September 30, 2016, $1,168.6 million or 87.7% of our total debt, excluding unamortized deferred financing costs, was fixed rate debt. This includes $460.0 million of variable-rate debt that has been effectively swapped to a fixed rate through the use of interest rate protection agreements. As of the same date, $163.5 million or 12.3% of our total debt, excluding unamortized deferred financing costs, was variable rate debt. At December 31, 2015, $1,389.9 million or 96.4% of our total debt, excluding unamortized deferred financing costs, was fixed rate debt. This includes $460.0 million of variable-rate debt that has been effectively swapped to a fixed rate through the use of interest rate protection agreements. As of the same date, $52.5 million or 3.6% of our total debt, excluding unamortized deferred financing costs, was variable rate debt.
For fixed rate debt, changes in interest rates generally affect the fair value of the debt, but not our earnings or cash flows. Conversely, for variable rate debt, changes in the base interest rate used to calculate the all-in interest rate generally do not impact the fair value of the debt, but would affect our future earnings and cash flows. The interest rate risk and changes in fair market value of fixed rate debt generally do not have a significant impact on us until we are required to refinance such debt. See Note 4 to the Consolidated Financial Statements for a discussion of the maturity dates of our various fixed rate debt.
Our variable rate debt is subject to risk based upon prevailing market interest rates. As of September 30, 2016, we had approximately $163.5 million of variable rate debt outstanding indexed to LIBOR rates (excluding the $460.0 million of variable-rate debt that has been effectively swapped to a fixed rate through the use of interest rate protection agreements). If the LIBOR rates relevant to our variable rate debt were to have increased 10%, we estimate that our interest expense during the nine months ended September 30, 2016 would have increased by approximately $0.09 million based on our average outstanding floating-rate debt during the nine months ended September 30, 2016. Additionally, if weighted average interest rates on our fixed rate debt were to have increased by 10% due to refinancing, interest expense would have increased by approximately $4.6 million during the nine months ended September 30, 2016.
As of September 30, 2016, the estimated fair value of our debt was approximately $1,381.8 million based on our estimate of the then-current market interest rates.
The use of derivative financial instruments allows us to manage risks of increases in interest rates with respect to the effect these fluctuations would have on our earnings and cash flows. As of September 30, 2016, we had interest rate protection agreements with a notional aggregate amount outstanding of $460.0 million, which mitigate our exposure to our unsecured term loans' variable interest rates, which are based upon LIBOR, as defined in the loan agreements. See Note 10 to the Consolidated Financial Statements for a more detailed discussion of these interest rate protection agreements. Currently, we do not enter into financial instruments for trading or other speculative purposes.
Supplemental Earnings Measure
Investors in and industry analysts following the real estate industry utilize funds from operations ("FFO") and net operating income ("NOI") as supplemental operating performance measures of an equity REIT. Historical cost accounting for real estate assets in accordance with accounting principles generally accepted in the United States of America ("GAAP") implicitly assumes that the value of real estate assets diminishes predictably over time through depreciation. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors prefer to supplement operating results that use historical cost accounting with measures such as FFO and NOI, among others. We provide information related to FFO and same store NOI ("SS NOI") both because such industry analysts are interested in such information, and because our management believes FFO and SS NOI are important performance measures. FFO and SS NOI are factors used by management in measuring our performance, including for purposes of determining the compensation of our executive officers under our 2016 incentive compensation plan.
Neither FFO nor SS NOI should be considered as a substitute for net income, or any other measures derived in accordance with GAAP. Neither FFO nor SS NOI represents cash generated from operating activities in accordance with GAAP and neither should be considered as an alternative to cash flow from operating activities as a measure of our liquidity, nor is either indicative of funds available for our cash needs, including our ability to make cash distributions.
Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT") has recognized and defined for the real estate industry a supplemental measure of REIT operating performance, FFO, that excludes historical cost depreciation, among other items, from net income determined in accordance with GAAP. FFO is a non-GAAP financial measure. FFO is calculated by us in accordance with the definition adopted by the Board of Governors of NAREIT and therefore may not be comparable to other similarly titled measures of other companies.
Management believes that the use of FFO available to common stockholders and participating securities, combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful. Management believes that, by excluding gains or losses related to sales of previously depreciated real estate assets, real estate asset depreciation and amortization and impairment of depreciable real estate, investors and analysts are able to identify the operating results of the long-term assets that form the core of a REIT’s activity and use these operating results for assistance in comparing these operating results between periods or to those of different companies.
The following table shows a reconciliation of net income available to common stockholders and participating securities to the calculation of FFO available to common stockholders and participating securities for the three and nine months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Net Income Available to First Industrial Realty Trust, Inc.’s Common Stockholders and Participating Securities
|
$
|
31,519
|
|
|
$
|
13,917
|
|
|
$
|
97,436
|
|
|
$
|
30,302
|
|
Adjustments:
|
|
|
|
|
|
|
|
Depreciation and Other Amortization of Real Estate
|
28,602
|
|
|
28,410
|
|
|
88,088
|
|
|
84,419
|
|
Equity in Depreciation and Other Amortization of Joint Ventures
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Impairment of Depreciable Real Estate
|
—
|
|
|
626
|
|
|
—
|
|
|
626
|
|
Gain on Sale of Depreciable Real Estate
|
(16,802
|
)
|
|
(2,883
|
)
|
|
(60,828
|
)
|
|
(13,010
|
)
|
Gain on Sale of Depreciable Real Estate from Joint Ventures
|
—
|
|
|
—
|
|
|
—
|
|
|
(63
|
)
|
Noncontrolling Interest Share of Adjustments
|
(421
|
)
|
|
(991
|
)
|
|
(985
|
)
|
|
(2,725
|
)
|
Funds from Operations Available to First Industrial Realty Trust, Inc.’s Common Stockholders and Participating Securities
|
$
|
42,898
|
|
|
$
|
39,079
|
|
|
$
|
123,711
|
|
|
$
|
99,566
|
|
Same Store Net Operating Income
SS NOI is a non-GAAP financial measure that provides a measure of rental operations and, as calculated by us, that does not factor in depreciation and amortization, general and administrative expense, acquisition costs, interest expense, impairment charges, equity in income and loss from joint ventures, income tax benefit and expense, sale of real estate and mark-to-market and settlement loss on interest rate protection agreements. We define SS NOI as revenues minus property expenses such as real estate taxes, repairs and maintenance, property management, utilities, insurance and other expenses, minus the NOI of properties that are not same store properties and minus the impact of straight-line rent, the amortization of lease inducements, the amortization of above/below market rent and lease termination fees. As so defined, SS NOI may not be comparable to same store net operating income or similar measures reported by other REITs that define same store properties or NOI differently. The major factors influencing SS NOI are occupancy levels, rental rate increases or decreases and tenant recoveries increases or decreases. Our success depends largely upon our ability to lease space and to recover the operating costs associated with those leases from our tenants.
The following table shows a reconciliation of the same store revenues and property expenses disclosed in the results of operations (and reconciled to revenues and expenses reflected on the statements of operations) to SS NOI for the three and nine months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Same Store Revenues
|
$
|
84,346
|
|
|
$
|
82,278
|
|
|
$
|
252,206
|
|
|
$
|
245,729
|
|
Same Store Property Expenses
|
23,098
|
|
|
22,573
|
|
|
68,528
|
|
|
69,196
|
|
Same Store Net Operating Income Before Same Store Adjustments
|
$
|
61,248
|
|
|
$
|
59,705
|
|
|
$
|
183,678
|
|
|
$
|
176,533
|
|
Same Store Adjustments:
|
|
|
|
|
|
|
|
Lease Inducement Amortization
|
230
|
|
|
193
|
|
|
683
|
|
|
587
|
|
Straight-line Rent
|
50
|
|
|
(497
|
)
|
|
(82
|
)
|
|
(4,322
|
)
|
Above / Below Market Rent Amortization
|
(242
|
)
|
|
(103
|
)
|
|
(700
|
)
|
|
(308
|
)
|
Lease Termination Fees
|
(11
|
)
|
|
(77
|
)
|
|
(208
|
)
|
|
(575
|
)
|
Same Store Net Operating Income
|
$
|
61,275
|
|
|
$
|
59,221
|
|
|
$
|
183,371
|
|
|
$
|
171,915
|
|
Recent Accounting Pronouncements
Refer to Note 2 to the Consolidated Financial Statements.
Subsequent Events
From October 1, 2016 to October 27, 2016, we acquired one industrial property for a purchase price of approximately $8.4 million, excluding costs incurred in conjunction with the acquisition of the industrial property.
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Response to this item is included in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.
|
|
|
Item 4.
|
Controls and Procedures
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First Industrial Realty Trust, Inc.
The Company's principal executive officer and principal financial officer, in evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, based on the evaluation of these controls and procedures required by Exchange Act Rules 13a-15(b) or 15d-15(b), have concluded that as of the end of such period the Company's disclosure controls and procedures were effective.
There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
First Industrial, L.P.
The Company's principal executive officer and principal financial officer, on behalf of the Company in its capacity as the general partner of the Operating Partnership, in evaluating the effectiveness of the Operating Partnership's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, based on the evaluation of these controls and procedures required by Exchange Act Rules 13a-15(b) or 15d-15(b), have concluded that as of the end of such period the Operating Partnership's disclosure controls and procedures were effective.
There has been no change in the Operating Partnership's internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Operating Partnership's internal control over financial reporting.