Player Avatar quietstone (37.14) Submitted: 5/4/2009 4:45:25 PM : Underperform Start Price: $3.95 FR Score: -279.26

$119 million in debt coming due in June that has yet to be refinanced. I expect management to find a way to refinance that debt but the fundamentals beyond that are troubling.

Even under direct questioning during the recent conference call management was unwilling to give guidance or historic information in regards to taxable income which leads me to believe that they are losing money.

First Industrial sold off 4 revenue producing properties in an effort to meet looming debt obligations. With occupancy rates falling at a record pace and CRE valuations far below what they were a year ago I believe it is a poor time to be selling revenue producing assets. Those sales (and future sales of revenue producing property) will take a large chunk out of long-term FFO even if FR finds a way to remain solvent.

Management suggested that the total property portfolio would be valued at 8-9% cap rates which seems very unrealistic given the massive write downs on property value seen throughout the sector.

The problem here is simple. Occupancy is expected to continue falling and conservative estimates put the bottom at 80%. Rental rates are also falling. Property values are falling. FR is having difficulty meeting a $119 million debt obligation for June 2009 which makes it very unlikely that they will be able to roll over 2011 debt before that comes due in 2 years. Supposedly 96% of properties are unencumbered but that is not accurate at all if you factor in the
$2 billion in bond debt that looms over FR. Expect that 96% number to plummet as they sell off assets and secure loans with assets in an attempt to refinance debt.

Member Avatar aparker385 (< 20) Submitted: 5/9/2009 6:06:21 PM
Recs: 0

Good Post. Keep in mind several things:1) FR has been selling assets in the 8.5-9.5% cap rate range in 20092) New CEO Duncan has a strong track record as a RE investor and capital allocator3) The bond debt you referred to are publicly traded unsecured corporate notes, not mortgages. So it is quite true that 96% of the assets are unencumbered. 3) 75% of FR's debt is publicly traded - and trading at a steep discount, reflecting the disconcerting fundamentals you point out above and the still 'spooked' credit markets. This is good news for shareholders, however, as management is in a position to raise secured debt and sell assets in the 9% cap rate range to repurchase debt that has 20%+ yield to maturities, while also deleveraging the company. This is a fantastic proposition. Sell one asset for 9% to buy another at 20% while reducing the risk of your company and increasing cash flows to equity. The long case is more than a bet on a recovery. It is a bet that Duncan will effectively delever the company through asset sales and secured financings while repurchasing debt at steep discounts before being forced to do a dilutive equity raise. Once the stock price is high enough, however, Duncan will likely consider raising equity capital to further reduce risk, which will increase the stock multiple.

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