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First Industrial Realty Trust, Inc. (FR)

First Industrial Realty Trust, Inc. (FR). Ross Pevitz Matt Storkman Dave Wetherell RCMP Presentation 3.15.2007. Position. Purchased on Dec 10, 1999 500 shares at $24.625 and 500 shares for $24.75 Original Book Value of $24,687.50. Current Stock Price = $45.37

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First Industrial Realty Trust, Inc. (FR)

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  1. First IndustrialRealty Trust, Inc. (FR) Ross Pevitz Matt Storkman Dave Wetherell RCMP Presentation 3.15.2007

  2. Position • Purchased on Dec 10, 1999 • 500 shares at $24.625 and 500 shares for $24.75 • Original Book Value of $24,687.50 • Current Stock Price = $45.37 • $20,682.5 unrealized gain (84%) • 14.17% of portfolio market value

  3. REIT Portfolio Advantages • Diversification • Low correlation with Market • Dividends • High Yields • Stability • Rents Market Analysis, Research and Education group of Fidelity Management & Research Co., Do REITs Still Provide Diversification?, (Nov. 22, 2006), available at <http://personal.fidelity.com/myfidelity/email.html?http://myfidelity.members.fidelity.com/investorsWeekly/cms/FEA0611reits.dyn;mfSessionId=BSH3N2TVEIWUECQEFEPCFEY?keyword=interviews&sourcecd=FEA> (last visited Mar. 5, 2007).

  4. Company Profile

  5. Company History • First Industrial was organized in 1993, IPO 1994 • Michael Brennan (CEO), Michael Havala (CFO), Johannson Yap (CIO) • Chicago, Illinois based Industrial Real Estate Investment Trust (REIT) • Eliminates corporate income tax • Distribute 90% of taxable income to shareholders

  6. Company Info • Mission is to create Industrial RE solutions • Lease, develop, redevelop, buy, sell, and manage industrial facilities in the top 25 industrial markets • #1 investor in US industrial real estate, “Big Player” • More than 100 mil square feet of industrial space • 1200 buildings

  7. Strategy • I-N-D-L Platform • Industry Focus • National Scope • Diverse Facility Types • Local Management & Expertise • Disciplined Investing • Diversified

  8. Competitive Advantage • Leading Customer Service • Rated 4.35 on 5 point scale, Kingsley Index is 3.85 • 9/10 customers would recommend First Industrial First Industrial Realty Trust Inc., First Industrial at the NYSSA 17th Annual REIT Conference, (Mar. 1, 2007), available at <http://phx.corporate-ir.net/phoenix.zhtml?c=69181&p=IROL-presentations> (last visited Mar. 5, 2007).

  9. Competitive Advantages • Local Market Expertise • Average 20 years of experience, specialists • Speed, Service & Responsiveness • 2 hour rule • Due-diligence and closings in 10 days • Flexibility • Strong Financial Standing • No financial contingencies

  10. Economic Future Performance • Mixed Reviews • Flat or slight downward trend in GDP • Forecast flat interest rates First Industrial Realty Trust Inc., First Industrial at the NYSSA 17th Annual REIT Conference, (Mar. 1, 2007), available at <http://phx.corporate-ir.net/phoenix.zhtml?c=69181&p=IROL-presentations> (last visited Mar. 5, 2007).

  11. Negative Economic Factors • Energy, Construction, and Land Costs on Rise • Weaker housing market • Manufacturing Output • Rebounded • Experience growth with Economy • New Development Limited *(2007 US Econ Analysis) Philip Kibel, Industrial Stability Faces Challenges, Real Estate Portfolio®, Mar.-Apr. 2003, available at <http://www.nareit.com/portfoliomag/03marapr/sector.shtml> (last visited Mar. 5, 2007).

  12. Positive Economic Factors • Falling Cap Rates (NOI/ Property Value) • Heavy Inflows of Institutional Money • Tightening of the Leasing Market • Raise in Inventories • Decline in Vacancy Rates • At 7.5% from 8.1% last year • Strong Global Trade • Imports increased 9%, Exports increased • Greater demand for industrial property Philip Kibel, Industrial Stability Faces Challenges, Real Estate Portfolio®, Mar.-Apr. 2003, available at <http://www.nareit.com/portfoliomag/03marapr/sector.shtml> (last visited Mar. 5, 2007).

  13. Geographic Status • Coastal Markets - high demand • Midwest Markets - less demand • International Markets- high demand • Asian countries - better growth prospects Philip Kibel, Industrial Stability Faces Challenges, Real Estate Portfolio®, Mar.-Apr. 2003, available at <http://www.nareit.com/portfoliomag/03marapr/sector.shtml> (last visited Mar. 5, 2007).

  14. Growth Drivers • Corporate Customer Focus • 2/3 of Industrial RE in US • 7% expected increase in business spending ’07 • Supply Chain Reconfiguration • Increase in Supply Chain Complexity • Retooling of Industrial Supply Chain Trend • Demographic Trend • International Trade

  15. Company Trends • Enhanced Acquisition, Development & Net-lease • Joint Venture • Capital Raising- $4.5 billion past 2 years • JV Income-Tripled in ’06 from ‘05 • Fees earned developing properties for 3rd parties

  16. Relation to Portfolio

  17. Five Year Portfolio Performance

  18. Portfolio Correlation & Covariance

  19. Total Portfolio Perspective • Low risk contribution : σ= 5.5% • Low correlation : ~ .2 • Solid performance : μ=1.5% Approx. 14% of holdings

  20. Valuation

  21. Discounted Cash Flow Model • Revenues were modeled as a percentage of the value of FR’s Net Investment in Real Estate • Costs were also modeled as a percentage of this figure • Net Investment in Real Estate was driven by Total Asset Growth rate • Change in “Assets Held for Sale” account also adds to annual FCF • This signifies that property intended to be sold has been sold, creating liquidity for the REIT

  22. Discounted Cash Flow Valuation • WACC = 8.06% • Current Capital Structure is 50/50 debt-to-equity • 2006 Company held $115M in Assets held for sale • Large NWC investment, to create liquidity during 2007

  23. Discounted Cash Flow Valuation • DCF Analysis yields a share price of $45.10 • 10% Range of value falling anywhere from $40 - 50 • This value is very close to its current market share price • Stock has traded in this range for 9 months • Relative to other valuation methods, the DCF valuation forms a mid-range estimate • DuPont Analysis

  24. Capitalization Rate Valuation • Capitalization Rate explanation • Ratio of property value to net income that can be derived from a property • Capitalization Rates change by type of property (warehouses vs retail vs rental housing) • Capitalization rates also change over time depending on demand for the market • After calculating net revenues and expenses directly attributable to real estate (no depreciation, financing, or “other” expense), an industry cap rate was applied to find the value of FR’s real estate portfolio • Assumes value of real estate to be the value of the firm

  25. Capitalization Rate Valuation • Study of capitalization rates of different property types across 20 different greater metropolitan areas • University of Southern California • Range from 8.74% - 9.62% for the warehouse category • Average of 9.16% • Due to current economic expectations, projected a 2007 decrease in cap rate, and increased it in 2009 • Capitalization rate valuations yields a per share value of $35.41 • Valuation forms a low-end estimate, and does not consider growth prospects for FR or any held companies/properties Rena C. Sivitandou & Petros S. Sivitanides, Exploring Capitalization Rate Differentials Across Property Types, 22(3) Real Estate Issues, 47-54, (1997), available at http://www.usc.edu/schools/sppd/lusk/research/pdf/exploring_cap.pdf (last visited Mar. 13, 2007).

  26. Comparables • Who • Highwoods Properties, Inc (HIW) • AMB Property Corp. (AMB) • Prologis (PLD) • Bloomberg Industrial Warehouse REIT Index • Why • Industry specific • Strong/Solid performers • Multiples in line with Industry

  27. Multiples • FFO • P/Revenue • P/EBITDA • Dividend Yield

  28. Bloomberg L.P. (2007) REIT Metrics and equity descriptions for FR US, AMB US, PLD US, HIW US. Retrieved Mar. 14, 2007 from Bloomberg database.

  29. Performance Vs. Competitors http://moneycentral.msn.com/home.asp

  30. Overall Recommendation Valuation Summary: Hold • First Industrial’s fundamentals do not support their current valuation vs. competitors & the industry • Stock price is expected to be brought more in line with its peers, yielding positive price performance • Long term investment perspective • Good diversification for the Portfolio

  31. References Bloomberg L.P. (2007) REIT Metrics and equity descriptions for FR US, AMB US, PLD US, HIW US. Retrieved Mar. 14, 2007 from Bloomberg database. First Industrial Realty Trust Inc., First Industrial at the NYSSA 17th Annual REIT Conference, (Mar. 1, 2007), available at <http://phx.corporate-ir.net/phoenix.zhtml?c=69181&p=IROL-presentations> (last visited Mar. 5, 2007). Market Analysis, Research and Education group of Fidelity Management & Research Co., Do REITs Still Provide Diversification?, (Nov. 22, 2006), available at <http://personal.fidelity.com/myfidelity/email.html?http://myfidelity.members.fidelity.com/investorsWeekly/cms/FEA0611reits.dyn;mfSessionId=BSH3N2TVEIWUECQEFEPCFEY?keyword=interviews&sourcecd=FEA> (last visited Mar. 5, 2007). Mergent Online™, First Industrial Company Data, available at http://www.mergentonline.com.proxy2.library.uiuc.edu/ (last visited Mar. 9, 2007). Philip Kibel, Industrial Stability Faces Challenges, Real Estate Portfolio®, Mar.-Apr. 2003, available at <http://www.nareit.com/portfoliomag/03marapr/sector.shtml> (last visited Mar. 5, 2007). Rena C. Sivitandou & Petros S. Sivitanides, Exploring Capitalization Rate Differentials Across Property Types, 22(3) Real Estate Issues, 47-54, (1997), available at http://www.usc.edu/schools/sppd/lusk/research/pdf/exploring_cap.pdf (last visited Mar. 13, 2007).

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