Description

First Industrial is famous as the stock Warren Buffett recommended as part of a charity event in December 1999, then sold with much publicity in August 2001. The public’s fascination with Buffett raised the awareness of these two events; the serious investor may be interested in the value of the company, aside from the buy and sell decisions of any single shareholder.

Summary

A quick profile from Yahoo:

“First Industrial Realty Trust, Inc., organized in 1993, is a self-administered and fully integrated real estate company that owns, manages, acquires, sells and develops industrial real estate. As of December 31, 2000, the Company's portfolio consisted of 516 light industrial properties, 162 bulk warehouse properties, 164 R&D/flex properties, 85 regional warehouse properties and 42 manufacturing properties containing approximately 68.2 million square feet of GLA (gross leasable area) located in 25 states.”

Seventy percent of industrial real estate is owned by corporations, only two percent by REIT’s. FR expects corporations to move more and more of their real estate off balance sheet as they look to improve their supply chains, and as the nation’s largest provider of industrial real estate, with a sector leading ROIC, is positioned to capitalize on this trend. In the last few years FR has consolidated their operations into the 25 largest markets. They refer to their current strategy by the acronym INDL: industrial focus, national scope, a diversified portfolio and local management. They feel their ability to meet all of a customer’s real estate needs with local people gives them a competitive advantage.

By the Numbers: Dividend Growth

In 1996, First Industrial distributed a dividend of 1.97 on FFO of 2.26, or an 87% dividend to FFO ratio. In the next five years the dividend was increased at a compound annual rate of 6.11%. At the end of 2001 First Industrial will have distributed 2.65 in dividends on projected FFO of 3.95, for a 67% ratio. Despite the improvement in dividend coverage, the share price to dividend ratio remains at the low end of the historical range, currently 11.79 on a share price of 31.25. Occupancy is 91.5% at present, and would need to drop into the 70's before the dividend would come under pressure, according to statements made by the company on the third quarter conference call. Assuming dividend growth continues in the future and the share price to dividend ratio remains at 11.79, at a share price of 31.25 an investor in First Industrial shares would earn the current yield of 8.48% plus the growth rate of 6.11%, for a total return of 14.59%.

FFO Issues

The market is currently valuing FR at an FFO multiple of 7.91, down from an average of 11.87 in the 1995-1997 period. What happened? As reported in the Wall Street Journal, FR uses a different method of calculating FFO than the rest of the REIT industry. While the rest of the industry takes out gains from depreciated property sales, FR leaves them in, under the line “Integrated Industrial Solutions customer sales gain/fees.” According to the FR CEO, Mr. Brennan, quoted in the article, “Those activities are integral to the company’s operations,” and thus should be included in FFO. Beyond that, Mr. Brennan feels FR’s ability to develop real estate in their IIS division gives them a competitive advantage over other industrial REIT’s. Critics say the problem is the IIS income may be lumpy, as opposed to smooth rental rates. Analysts estimate 15% of FR’s FFO in 2001 will be from IIS. In response to complaints about their accounting, FR posts supplemental information packets on their web site for each quarter.

By the Numbers: FFO Growth and Multiple Expansion

FR’s projected FFO for 2002 is 4.10-4.20. Using the low end of that range, FR has grown FFO at a rate of 10.56% since 1995. If the FFO multiple does not expand but remains at 7.91, an investor could expect the following returns:

Ticker: FR
Date: 12/14/01
Current Share Price: $31.25
Current FFO: $3.95
FFO Growth Rate: 10.00%
Payout Ratio: 65.00%
Projected P/FFO: 7.91
Start Year: 2002
My Return on divs: 0.00%

Year FFO Dividend Basket Price Compound Return
2002 $4.35 $2.82 $2.82 $34.37 19.02%
2003 $4.78 $3.11 $5.93 $37.81 18.30%
2004 $5.26 $3.42 $9.35 $41.59 17.69%
2005 $5.78 $3.76 $13.11 $45.75 17.15%
2006 $6.36 $4.13 $17.24 $50.32 16.67%

It is my opinion that the multiple depression is some what over done. This may be due in part to the sale of Mr. Buffett, along with a bit of over reaction to the FFO issue. For instance, some commentators seemed to think FR was adding depreciation back twice in the IIS numbers, which is not the case. Mr. Brennan and FR have shown to be good deal makers in the past, and although IIS income may be lumpy, it will still exist. Assuming that the multiple is able to expand back half way to 1995-1997 levels, meaning 9.89, an investor could expect the following returns:

Ticker: FR
Date: 12/14/01
Current Share Price: $31.25
Current FFO: $3.95
FFO Growth Rate: 10.00%
Payout Ratio: 65.00%
Projected P/FFO: 9.89
Start Year: 2002
My Return on divs: 0.00%

Year FFO Dividend Basket Price Compound Return
2002 $4.35 $2.82 $2.82 $42.97 46.55%
2003 $4.78 $3.11 $5.93 $47.27 30.48%
2004 $5.26 $3.42 $9.35 $52.00 25.21%
2005 $5.78 $3.76 $13.11 $57.20 22.47%
2006 $6.36 $4.13 $17.24 $62.92 20.73%

For the sake of comparison, if the growth rate were to drop to seven percent, returns would look like this:

Ticker: FR
Date: 12/14/01
Current Share Price: $31.25
Current FFO: $3.95
FFO Growth Rate: 7.00%
Payout Ratio: 65.00%
Projected P/FFO: 9.89
Start Year: 2002
My Return on divs: 0.00%

Year FFO Dividend Basket Price Compound Return
2002 $4.23 $2.75 $2.75 $41.80 42.55%
2003 $4.52 $2.94 $5.69 $44.73 27.01%
2004 $4.84 $3.15 $8.83 $47.86 21.96%
2005 $5.18 $3.37 $12.20 $51.21 19.35%
2006 $5.54 $3.60 $15.80 $54.79 17.70%

Catalyst

Long term value play with a projected return of fourteen to twenty percent, much of it in reinvestable dividends.