First Industrial Realty Trust, Inc.
First Industrial Realty Trust, Inc.
Sales: $359.9 million (2003)
Stock Exchanges: New York
Ticker Symbol: FR
NAIC: 525930 Real Estate Investment Trust
First Industrial Realty Trust, Inc. (FIRT) is a real estate investment trust (REIT) based in Chicago, Illinois, focusing on the acquisition, development, and management of industrial properties in the top 25 industrial markets in the United States. At the close of 2003, FIRT's portfolio included 423 light industrial properties, 163 research and development or flex properties, 123 bulk warehouse properties, 92 regional warehouse properties, and 33 manufacturing properties. All told, FIRT controlled 57.9 million square feet of gross leasable area located in 22 states. The REIT's shares are traded on the New York Stock Exchange.
Forming the REIT in 1993
FIRT was established as a REIT in 1993, growing out of the real estate holdings of Jay H. Shidler, FIRT's chairman of the board. After earning a degree from the University of Hawaii, Shidler launched a real estate business in 1970, opening an office in Honolulu. He expanded his interests to the mainland and through his company, The Shidler Group, acquired property in 39 other states and Canada. In 1986 he hired Michael T. Tomasz, who would serve as FIRT's first chief executive officer, as the managing partner of his Chicago office. Tomasz, who grew up in Illinois, had spent a decade working as an industrial real estate broker before going to work for Shidler. He proved to be aggressive, quickly snapping up $100 million worth of Chicago buildings. But then the stock market crashed, followed by a savings and loan scandal and a recession, all of which combined to dry up the capital that Shidler, Tomasz, and others needed to continue building their real estate portfolios. In the early 1990s property buyers rediscovered the REIT structure as a way to raise funds from the public markets, as well as to gain the use of shares as a currency in making acquisitions.
REITs had been created by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock, and they also were subject to regulation by the Securities and Exchange Commission. Unlike traditional stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that severely limited the ability of REITs to retain internally generated funds for expansion. During the first 25 years of existence, REITs were allowed only to own real estate, a situation which hindered their growth. Third parties had to be contracted to manage the properties. Not until the Tax Reform Act of 1986 changed the nature of real estate investment did REITs begin to become truly viable. Limited partnership tax shelter schemes that had competed for potential investments were shut down by the Act. Separately, the Act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, the REIT was still not a fully utilized structure. In the latter half of the 1980s the banks, insurance companies, pension funds, and foreign investors (in particular, the Japanese) provided the lion's share of real estate investment funds. The resulting glutted marketplace led to a shakeout that hampered many real estate firms. With real estate available at distressed prices in the early 1990s, REITs finally became an attractive mainstream investment option and many real estate firms went public starting in 1993.
Shidler split his real estate holdings, creating two REITs. In 1993 he took the first public, San Francisco-based TriNet Corporate Realty Trust, Inc., which focused on specialty commercial properties and would make its mark in corporate leaseback arrangements. The second would be FIRT, headed by Tomasz, which packaged Shidler's midwestern industrial holdings as well as the holdings of three other developers, whose properties were either recently purchased or would be purchased through the proceeds of the initial public offering (IPO). The other components of the REIT were the industrial properties of Troy, Michigan-based Damone/Andrew Associates Inc., Minnesota-based developer Steven Hoyt, and Pennsylvania-based developer Anthony Muscatello. Management of the three developers would stay on to run the properties. When FIRT completed its IPO in June 1994 it owned 226 industrial properties containing 17.4 million square feet of gross leasable area located in nine cities.
Growing Pains in the Mid-1990s
Envisioned as a national REIT focusing on predictable manufacturing, distribution, and warehouse properties, FIRT expanded quickly, but in the drive to achieve scale it bought some second-tier properties—older buildings with less-creditworthy tenants, located in less desirable markets. During good times, these assets were not a problem, but later in the 1990s they came back to trouble FIRT. The REIT also quickly accumulated a lot of secured debt, which prevented it from selling properties and adjusting its asset mix. That situation was rectified in 1996 when FIRT took steps to shift its capital structure to unsecured debt. According to National Real Estate Investor, "The company deleveraged itself by lowering its debt-to-market cap, and it did two equity offerings . . . which together raised $250 million of common equity. Once this was completed, First Industrial went to the rating agencies and received a BBB rating from all. . . . This enabled the company to pay off the secured debt and replace it with long-term, fixed-rate debt, which in return freed up the company's assets." As a result, FIRT was able to sell assets as needed, and with the increased flexibility it could follow an even more aggressive acquisition strategy.
FIRT preferred to acquire entire portfolios using stock in a process known as the UPREIT transaction. The company used its size to its advantage by convincing acquisition targets to sell out for stock. In essence, sellers traded their stock for a higher market cap company, the stock of which traded more freely and was safer and more likely to increase in value. Moreover, these were "entity deals," which left management teams in place. Not only was the retention of management an important selling point, it also served FIRT's effort to build up its management depth. Because the real estate industry had been devastated from the late 1980s to the early 1990s, there had been little opportunity to train new real estate talent. Entity deals provided a significant way for FIRT to recruit the people it needed to grow the business.
In the first three years, FIRT shied away from speculative development, but in 1996 it formed a Development Services Group, geared toward serving existing tenants who might be looking to move or expand. Although most of the construction projects would be build-to-suit projects, they still required the establishment of a dedicated unit to serve that function. For the time being, however, growth resulted solely from acquisitions. In 1996 FIRT expanded its portfolio by 45 percent and entered five new markets through five UPREIT transactions: Indianapolis, Cincinnati, Columbus, Dayton, and Cleveland. Revenues improved from $106.5 million in 1995 to more than $140 million in 1996. Net income grew from $12.3 million to $35.7 million.
FIRT grew at an even faster clip in 1997. It paid $862.3 million in eight UPREIT transactions, acquiring 389 properties, containing 22.9 million square feet. During the course of the year, it entered nine new markets. The company also added 1.7 million square feet through ten developments that were placed in service during the year, at a cost of $50.3 million. Another 12 projects were in progress. Revenues increased to $210.4 million in 1997, with net income approaching $52 million. FIRT was now the third largest REIT in the country.
REITs had enjoyed a strong run, but in 1998 the bubble burst and the price of REIT stocks plummeted. FIRT was hit harder than most, its shares losing 30 percent of their value from January to November, as some of the early, less desirable acquisitions now came back to hurt the company. The Wall Street Journal described the predicament that FIRT and other REITs experienced during this period: "With shares plunging, the dealmakers couldn't make acquisitions with stock. They didn't have much cash for deals because strict regulations require REITs to pass on most of their cash flow to investors. And forget about debt, one of the favorite tools of the private real-estate industry." Tomasz and other REIT executives were "stuck in dealmaking limbo—even as the property market itself, fueled by the long economic expansion sizzled."
Making Changes and Targeting the Top 25 Industrial Markets in the Late 1990s and Early 2000s
As the price of its stock fell, Tomasz saw deal after deal fall through. One FIRT executive told the Wall Street Journal that the period between May and September 1998 was "like the Bataan death march." Tomasz was forced to conduct constant road shows in order to convince analysts, rating agencies, and shareholders that FIRT had a bright future. But the REIT's problems began to take their toll on Tomasz, leading to high blood pressure and chest pains. Unable to make deals, FIRT had become little more than a property management company, which was not his strong suit. He was blamed when expenses got out of line and profits were not maximized on some properties. In November, Tomasz resigned in what was described by all parties as a mutual decision. He was replaced by his protégé, chief operating officer Michael W. Brennan, in November 1998. Brennan had started working with Tomasz in 1986, serving as an acquisition executive for The Shidler Group in the Chicago office.
Our mission is to create industrial real estate solutions that mutually benefit our customer and our company.
Brennan believed that most of FIRT's problems were more perception than reality. Nevertheless, he recognized that the REIT had to prove it could act as a sound real estate manager. He also looked to sell $150 million in properties, initiate cost-cutting measures, and develop other revenue streams, such as renting rooftops for telecommunication antennas, pursuing commissions on vending machines, payphones, and billboards, and selling insurance and recycling services to tenants. FIRT also developed a novel plan to, in effect, sell tax deferrals. Individuals who had just sold property and had a period of time to reinvest the money to avoid capital gains taxes could buy a FIRT property and lease it back to the REIT for less than the property's value. FIRT pocketed the difference and the individual could later sell the property back to FIRT. In this way, the investor deferred taxes and FIRT earned a fee.
In 1999 FIRT began adopting a strategy of concentrating on the top 25 industrial real estate markets in the United States in an effort to take advantage of the rising demand of the e-commerce and supply chain management industries. The goal was to become the "stockroom for e-commerce." After a year-long process completed in early 2000, FIRT researched and identified what it considered to be the top 25 markets for industrial real estate. The REIT was already involved in 21 of those markets and launched plans to enter the other four: Miami, San Diego, San Francisco, and Seattle. In addition, FIRT decided to exit eight markets: Cleveland, Columbus, Dayton, Des Moines, Grand Rapids, Hartford, Long Island, and New Orleans/Baton Rouge. FIRT began divesting properties to follow this plan, but with the collapse of many Internet start-ups, the demand for industrial properties by e-commerce companies failed to meet expectations and began to actually shrink. Because dot-coms never added much space, their loss had little impact on FIRT. Of more importance to the REIT was the supply-chain revolution, a move by companies to reorganize their facilities to improve the costs of labor, freight, and materials handling. As the economy began to falter, making such changes became even more important to companies, and FIRT became the beneficiary.
In 2002 FIRT began to rearrange its portfolio, exiting such second-tier markets as New Orleans, Des Moines, and Columbus, Ohio. At the same time, the REIT looked to increase its presence in Los Angeles, New Jersey, and at home in Chicago. FIRT also looked for new sources of income. In 2002 it established an Institutional Fund with the Kuwait Financial House, a global investor with more than $8 billion in assets, to acquire industrial properties in the United States. In 2003 FIRT expanded its relationship with the Kuwait Financial House, creating a $25 million fund to target the acquisition of net lease industrial properties in the United States. For the most part, however, during the early years of the new century, FIRT became more of a seller than a buyer. Analysts, according to press reports, grew concerned that the REIT was propping up its dividend through property sales, implying that FIRT was not as strong as it appeared. As a result, despite being the largest diversified industrial REIT in the country, FIRT saw its stock trading at a discount to its rivals. There was also concern about the company's large number of leases, some 60 percent, that would soon expire. FIRT's management downplayed these questions, and carried on with attempts to grow during difficult economic conditions in the real estate market. In the early months of 2004, the REIT entered the San Diego market and opened a regional office in Milwaukee.
First Industrial Finance Corporation; FI Development Services Corporation; FR Brokerage Services, Inc.; FR Management Services, Inc.
- The REIT is formed.
- An initial public offering is completed.
- The Development Services Group division is started.
- The CEO is replaced.
- The top 25 industrial markets are targeted.
CenterPoint Properties Trust; EastGroup Properties, Inc.; Highwoods Properties, Inc.
Andreoli, Tom, "Will This REIT Fly," Crain's Chicago Business, May 30, 1994, p. 4.
Avidon, Eric, "First Industrial to Focus on Top 25 Markets," National Mortgage News, February 7, 2000, p. 19.
Corfman, Thomas A., "Market's Message to Unsettled REIT: It's the Properties, Stupid," Crain's Chicago Business, November 23, 1998, p. 3.
Heath, Tracy, "First Industrial Continues Growing Talent Pool," National Real Estate Investor, August 1997, p. 34.
Martinez, Barbara, "Mike T Is Back!," Wall Street Journal, September 2, 1999, p. A1.