UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

 

 

 

 

 

Commission file number 333-21873

 

 

 

 

First Industrial, L.P.
(Exact Name of Registrant as Specified in its Charter)

 

 

 

311 S. Wacker Drive, Suite 3900, Chicago, Illinois 60606

(Address of Principal Executive Offices)

 

(312) 344-4300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

 

FIRST INDUSTRIAL, L.P.

 

Form 10-Q

 

For the Period Ended March 31, 2011

 

INDEX

 

 

 

FIRST INDUSTRIAL, L.P.

 

CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of the consolidated financial statements.

FIRST INDUSTRIAL, L.P.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of the consolidated financial statements.

FIRST INDUSTRIAL, L.P.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

The accompanying notes are an integral part of the consolidated financial statements.

FIRST INDUSTRIAL, L.P.

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

 

 

The accompanying notes are an integral part of the consolidated financial statements.

FIRST INDUSTRIAL, L.P.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

The accompanying notes are an integral part of the consolidated financial statements.

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except Unit and per Unit data)

 

 

First Industrial, L.P. (the “Operating Partnership”) was organized as a limited partnership in the state of Delaware on November 23, 1993. The sole general partner is First Industrial Realty Trust, Inc. (the “Company”) which owns common units in the Operating Partnership (“Units”) representing an approximate 93.6% common ownership interest at March 31, 2011. The Company also owns a preferred general partnership interest in the Operating Partnership represented by preferred Units (“Preferred Units”) with an aggregate liquidation priority of $275,000 at March 31, 2011. The Company is a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986 (the “Code”). The Company’s operations are conducted primarily through the Operating Partnership. The limited partners of the Operating Partnership owned, in the aggregate, approximately a 6.4% interest in the Operating Partnership at March 31, 2011. Unless the context otherwise requires, the term “Operating Partnership” refers to First Industrial, L.P. and the terms “we,” “us,” and “our” refer to First Industrial, L.P. and its controlled subsidiaries.

 

We also own noncontrolling equity interests in, and provide various services to, two joint ventures (the “2003 Net Lease Joint Venture” and the “2007 Europe Joint Venture”). During 2010, we provided various services to, and ultimately disposed of our equity interests in, five joint ventures (the “2005 Development/Repositioning Joint Venture,” the “2005 Core Joint Venture,” the “2006 Net Lease Co-Investment Program,” the “2006 Land/Development Joint Venture,” and the “2007 Canada Joint Venture;” together with the 2003 Net Lease Joint Venture and the 2007 Europe Joint Venture, the “Joint Ventures”). The 2007 Europe Joint Venture does not own any properties. See Note 5 for more information on the Joint Ventures.

 

The Operating Partnership is the sole member of several limited liability companies (the “L.L.C.s”). The Operating Partnership, the L.L.C.s, FRIP and the taxable REIT subsidiaries are referred to as the “Consolidated Operating Partnership.” The operating data of the L.L.C.s, FRIP and the taxable REIT subsidiaries are consolidated with that of the Operating Partnership as presented herein. The Operating Partnership also holds at least a 99% limited partnership interest in each of eight limited partnerships (together, the “Other Real Estate Partnerships”).

 

The general partners of the Other Real Estate Partnerships are separate corporations, each with at least a .01% general partnership interest in the Other Real Estate Partnership for which it acts as a general partner. Each general partner of the Other Real Estate Partnerships is a wholly-owned subsidiary of the Company.

 

As of March 31, 2011, we owned 694 industrial properties located in 27 states in the United States and one province in Canada, containing an aggregate of approximately 60.2 million square feet of gross leasable area (“GLA”). On a combined basis, as of March 31, 2011, the Other Real Estate Partnerships owned 68 industrial properties containing an aggregate of approximately 7.7 million square feet of GLA.

 

The Other Real Estate Partnerships and the Joint Ventures are accounted for under the equity method of accounting. Accordingly, the operating data of the Other Real Estate Partnerships and the Joint Ventures are not consolidated with that of the Consolidated Operating Partnership as presented herein.

 

 

The accompanying unaudited interim financial statements have been prepared in accordance with the accounting policies described in the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”) and should be read in conjunction with such financial statements and related notes. The 2010 year end consolidated balance sheet data included in this Form 10-Q filing was derived from the audited financial statements in our 2010 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The following notes to these interim financial statements highlight significant changes to the notes included in the December 31, 2010 audited financial statements included in our 2010 Form 10-K and present interim disclosures as

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

required by the Securities and Exchange Commission. In order to conform with GAAP, we, in preparation of our financial statements, are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of March 31, 2011 and December 31, 2010, and the reported amounts of revenues and expenses for the three months ended March 31, 2011 and March 31, 2010. Actual results could differ from those estimates. In our opinion, the accompanying unaudited interim financial statements reflect all adjustments necessary for a fair statement of our financial position as of March 31, 2011 and December 31, 2010, and the results of our operations and comprehensive income for each of the three months ended March 31, 2011 and March 31, 2010, and our cash flows for each of the three months ended March 31, 2011 and March 31, 2010, and all adjustments are of a normal recurring nature.

 

 

Sales and Discontinued Operations

 

During the three months ended March 31, 2011, we sold 12 industrial properties comprising approximately 0.6 million square feet of GLA. Gross proceeds from the sales of the 12 industrial properties were approximately $14,817. The gain on sale of real estate was approximately $2,742, all of which is shown in discontinued operations. The 12 sold industrial properties meet the criteria to be included in discontinued operations. Therefore the results of operations and gain on sale of real estate for the 12 sold industrial properties are included in discontinued operations.

 

At March 31, 2011, we had 161 industrial properties comprising approximately 13.8 million square feet of GLA and several land parcels held for sale. The results of operations of the 161 industrial properties held for sale at March 31, 2011 are included in discontinued operations. There can be no assurance that such industrial properties or land parcels held for sale will be sold.

 

Income from discontinued operations, net of income taxes, for the three months ended March 31, 2010 reflects the results of operations of the 12 industrial properties that were sold during the three months ended March 31, 2011, the results of operations of 10 industrial properties and one land parcel that received ground rental revenues that were sold during the year ended December 31, 2010, the results of operations of the 161 industrial properties identified as held for sale at March 31, 2011 and the gain on sale of real estate relating to three industrial properties and one land parcel that received ground rental revenues that were sold during the three months ended March 31, 2010.

 

The following table discloses certain information regarding the industrial properties included in our discontinued operations for the three months ended March 31, 2011 and March 31, 2010:

 

 

At March 31, 2011 and December 31, 2010, we had notes receivables outstanding of approximately $51,109 and $58,803, net of a discount of $367 and $383, respectively, which are included as a component of Prepaid

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Expenses and Other Assets, Net. At March 31, 2011 and December 31, 2010, the fair values of the notes receivables were $53,590 and $60,944, respectively. The fair values of our notes receivables were determined by discounting the future cash flows using the current rates at which similar loans with similar remaining maturities would be made to other borrowers.

 

Impairment Charges

 

On October 22, 2010, we amended our unsecured revolving credit facility (as amended, the “Unsecured Credit Facility”). In conjunction with the amendment, management identified a pool of real estate assets (the “Non-Strategic Assets”) that it intends to market and sell.

 

At March 31, 2011, the Non-Strategic Assets consisted of 166 industrial properties comprising approximately 14.6 million square feet of GLA and land parcels comprising approximately 598 gross acres. The Non-Strategic Assets (except six industrial properties comprising approximately 0.8 million square feet of GLA) were classified as held for sale as of March 31, 2011. During the three months ended March 31, 2011, we recorded a net non-cash impairment charge of $1,147 relating to certain of the Non-Strategic Assets held for sale. The $1,147 net impairment charge was calculated as the difference of the carrying value of the properties over the fair value less costs to sell due to their classification as held for sale at March 31, 2011. The net impairment charge of $1,147 is due to updated fair market values for certain of the Non-Strategic Assets whose estimated fair market values have changed since December 31, 2010. The fair market values were determined using widely accepted valuation techniques including discounted cash flow analyses on expected cash flows, internal valuations of real estate and third party offers.

 

The net impairment charge of $1,147 relating to the Non-Strategic Assets held for sale is offset by $318 of reversal of impairment charges related to certain industrial properties and land parcels that were classified as held for sale at December 31, 2010 but no longer qualify to be classified as held for sale at March 31, 2011. If an asset no longer qualifies to be classified as held for sale, the carrying value must be reestablished at the lower of the estimated fair market value of the asset or the carrying value of the asset prior to held for sale classification, adjusted for any depreciation and amortization that would have been recorded if the asset had not been classified as held for sale. There are seven industrial properties comprising approximately 0.5 million square feet of GLA and one land parcel comprising approximately 38 acres that were previously classified as held for sale but no longer meet the criteria for held for sale classification at March 31, 2011. We recorded catch-up depreciation and amortization on the seven industrial properties as that resulted in a lower value than the fair market value of these assets at March 31, 2011. We reversed impairment of $318 that was previously recorded while we held for sale six industrial properties comprising approximately 0.3 million square feet of GLA. While the assets were classified as held for sale, we had recorded impairment in order to adjust the carrying value of the assets to fair market value less costs to sell. We reversed impairment previously recorded because the carrying value of each asset, adjusted for depreciation and amortization, was greater than the fair market value less costs to sell.

 

During the three months ended March 31, 2010, we recorded an impairment charge in the amount of $9,155 related to a certain property comprised of 0.3 million square feet of GLA located in Grand Rapids, Michigan (“Grand Rapids Property”) in connection with the negotiation of a new lease. The non-cash impairment charge related to the Grand Rapids Property was based upon the difference between the fair value of the property and its carrying value. The valuation of the Grand Rapids Property was determined based upon a discounted cash flow analysis on expected cash flows and the income capitalization approach considering prevailing market capitalization rates. The $9,155 impairment loss is included in discontinued operations for the three months ended March 31, 2010.

 

The guidance for the fair value measurement provisions for the impairment of long lived assets recorded at fair value establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following tables present information about our assets that were measured at fair value on a non-recurring basis during the three months ended March 31, 2011 and 2010. The tables indicate the fair value hierarchy of the valuation techniques we utilized to determine fair value.

 

 

 

 

The investments in and advances to Other Real Estate Partnerships reflect our limited partnership equity interests in the entities referred to in Note 1 to these consolidated financial statements.

 

Summarized condensed financial information as derived from the financial statements of the Other Real Estate Partnerships is presented below:

 

Condensed Combined Balance Sheets:

 

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Combined Statements of Operations:

 

 

 

At March 31, 2011, the 2003 Net Lease Joint Venture owned nine industrial properties comprising approximately 4.9 million square feet of GLA. The 2003 Net Lease Joint Venture is considered a variable interest entity in accordance with the Financial Accounting Standards Board’s (the “FASB”) guidance on the consolidation of variable interest entities. However, we continue conclude that we are not the primary beneficiary of this venture. As of March 31, 2011, our investment in the 2003 Net Lease Joint Venture is $2,494. Our maximum exposure to loss is equal to our investment plus any future contributions we make to the venture. We continue to hold our 10% equity interest in the 2007 Europe Joint Venture. As of March 31, 2011, the 2007 Europe Joint Venture did not own any properties.

 

At March 31, 2011 and December 31, 2010, we have receivables from the Joint Ventures (and/or our former Joint Venture partners) in the aggregate amount of $3,033 and $2,857, respectively. These receivable amounts are included in Prepaid Expenses and Other Assets, Net. During the three months ended March 31, 2011 and March 31, 2010, we invested the following amounts in, as well as received distributions from, our Joint Ventures and recognized fees from our Joint Ventures (and/or our former Joint Venture partners) in the following amounts:

 

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table discloses certain information regarding our indebtedness:

 

 

 

 

On February 10, 2011, we paid off and retired prior to maturity our secured mortgage loan originally maturing in September 2012 in the amount of $14,520. On March 9, 2011, we paid off and retired prior to maturity our secured mortgage loan originally maturing in December 2014 in the amount of $14,980. In connection with the early payoffs, we recorded a loss on early retirement of debt of $866 related to prepayment premiums and the write-off of unamortized loan fees.

 

Included in Mortgage and Other Loans Payable is a $5,040 loan payable related to a non-recourse mortgage loan that matured on March 1, 2011. We are currently working with the lender to transfer title of the industrial building that serves as collateral in satisfaction of the loan. However, there can be no assurance that we will be successful in these efforts.

 

As of March 31, 2011, Mortgage and Other Loans Payable are collateralized by, and in some instances cross-collateralized by, industrial properties with a net carrying value of $557,560 and one letter of credit in the amount of $889.

 

The following is a schedule of the stated maturities and scheduled principal payments as of March 31, 2011 of our indebtedness, inclusive of maturities and scheduled principal payments of Mortgage Loan Payable on Real

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Estate Held for Sale and exclusive of premiums and discounts, for the next five years ending December 31, and thereafter:

 

 

The Unsecured Credit Facility and the indentures under which our senior unsecured indebtedness is, or may be, issued contain certain financial covenants, including, among other things, coverage ratios and limitations on our ability to incur total indebtedness and secured and unsecured indebtedness. Consistent with our prior practice, we will, in the future, continue to interpret and certify our performance under these covenants in a good faith manner that we deem reasonable and appropriate. However, these financial covenants are complex and there can be no assurance that these provisions would not be interpreted by our noteholders or lenders in a manner that could impose and cause us to incur material costs. Any violation of these covenants would subject us to higher finance costs and fees, or accelerated maturities. In addition, our credit facilities and senior debt securities contain certain cross-default provisions, which are triggered in the event that our other material indebtedness is in default. Under the Unsecured Credit Facility, an event of default can also occur if the lenders, in their good faith judgment, determine that a material adverse change has occurred which could prevent timely repayment or materially impair our ability to perform our obligations under the loan agreement. We believe that we were in compliance with our financial covenants as of March 31, 2011, and we anticipate that we will be able to operate in compliance with our financial covenants throughout 2011.

 

Fair Value

 

At March 31, 2011 and December 31, 2010, the fair values of our indebtedness were as follows:

 

 

The fair values of our mortgage and other loans payable were determined by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of the senior unsecured notes was determined by quoted market prices for the same or similar issuances. The fair value of the Unsecured Credit Facility was determined by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term, assuming no repayment until maturity.

 

 

On March 3, 2011, the Company sold in an underwritten public offering 8,900,000 shares of the Company’s common stock at a price of $11.40 per share to the public. Gross offering proceeds from the issuance were $101,460

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

in the aggregate. Proceeds to the Company, net of underwriters’ discount of $890 and total expenses of $166, were approximately $100,404. These proceeds were contributed to us in exchange for Units and are reflected in our financial statements as a general partner contribution.

 

On February 28, 2011, the Company entered into distribution agreements with sales agents to sell up to 10,000,000 shares of the Company’s common stock, for up to $100,000 aggregate gross sale proceeds, from time to time in “at-the-market” offerings (the “ATM”). During the three months ended March 31, 2011, the Company did not issue any shares under the ATM. Under the terms of the ATM, sales are to be made primarily in transactions that are deemed to be “at-the-market” offerings, including sales made directly on the New York Stock Exchange or sales made through a market maker other than on an exchange or by privately negotiated transactions.

 

During the three months ended March 31, 2011 and March 31, 2010, the Company awarded 292,339 and 573,198 shares, respectively, of restricted common stock to certain employees. We issued Units to the Company in the same amounts. The restricted common stock had a fair value of approximately $3,248 and $3,336, respectively, on the date of approval by the Compensation Committee of the Board of Directors. The restricted common stock vests over a three year period. Compensation expense will be charged to earnings over the vesting period for the shares expected to vest.

 

We recognized $645 and $1,499 for the three months ended March 31, 2011 and March 31, 2010, respectively, in compensation expense related to restricted stock/unit awards. At March 31, 2011, we have $8,439 in unrecognized compensation related to unvested restricted stock/unit awards. The weighted average period that the unrecognized compensation is expected to be recognized is 1.11 years.

 

Distributions:

 

The coupon rate of our Series F Preferred Stock resets every quarter at 2.375% plus the greater of (i) the 30 year U.S. Treasury rate, (ii) the 10 year U.S. Treasury rate or (iii) 3-month LIBOR. For the first quarter of 2011, the new coupon rate was 6.795%. See Note 11 for additional derivative information related to the Series F Preferred Stock coupon rate reset.

 

The following table summarizes distributions accrued during the three months ended March 31, 2011:

 

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Supplemental disclosure of cash flow information:

 

 

 

The computation of basic and diluted EPU is presented below:

 

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Participating securities include Units that correspond to the Company’s unvested restricted stock awards outstanding that participate in non-forfeitable distributions of the Operating Partnership.

 

 

Participating security holders are not obligated to share in losses. Therefore, none of the loss was allocated to participating securities for the three months ended March 31, 2011 and March 31, 2010.

 

The number of weighted average units — diluted is the same as the number of weighted average units — basic for the three months ended March 31, 2011 and March 31, 2010, as the effect of Units corresponding to the Company’s stock options and restricted stock unit awards (that do not participate in non-forfeitable dividends of the Company) was excluded as its inclusion would have been antidilutive to the loss from continuing operations available to Unitholders. Unit corresponding to the following awards of the Company were anti-dilutive and could be dilutive in future periods:

 

 

The 2011 Exchangeable Notes are convertible into shares of common stock of the Company at a price of $50.93 per share and the Units corresponding to the shares issuable upon conversion were not included in the computation of diluted EPU as the Company’s average stock price did not exceed the strike price of the conversion feature.

 

 

We committed the Operating Partnership to a plan to reduce organizational and overhead costs in October 2008 and have subsequently modified that plan with the goal of further reducing these costs. For the three months ended March 31, 2011, we recorded as restructuring costs a pre-tax charge of $1,160 to provide for costs associated with the termination of certain office leases ($1,044) and other costs ($116) associated with implementing the restructuring plan. For the three months ended March 31, 2010, we recorded as restructuring costs a pre-tax charge of $264 to provide for costs associated with the termination of certain office leases ($75) and other costs ($189) associated with implementing the restructuring plan.

 

At March 31, 2011 and December 31, 2010, we have $2,830 and $1,574, respectively, included in Accounts Payable, Accrued Expenses and Other Liabilities, Net primarily related to remaining lease payments under certain lease obligations.

 

 

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our cash flow volatility and exposure to interest rate movements. To accomplish this objective, we primarily use interest rate

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

Our Series F Preferred Stock is subject to a coupon rate reset. The coupon rate resets every quarter at 2.375% plus the greater of i) the 30 year U.S. Treasury rate, ii) the 10 year U.S. Treasury rate or iii) 3-month LIBOR. For the first quarter of 2011 the new coupon rate was 6.795%. In October 2008, we entered into an interest rate swap agreement with a notional value of $50,000 to mitigate our exposure to floating interest rates related to the forecasted reset rate of the coupon rate of our Series F Preferred Stock (the “Series F Agreement”). The Series F Agreement fixes the 30-year U.S. Treasury rate at 5.2175%. Accounting guidance for derivatives does not permit hedge accounting treatment related to equity instruments and therefore the mark to market gains or losses related to this agreement are recorded in the statement of operations. For the three months ended March 31, 2011 and March 31, 2010, $44 and $(134), respectively, is recognized as Mark-to-Market Gain (Loss) on Interest Rate Protection Agreements. Quarterly payments or receipts are treated as a component of the mark to market gains or losses and for the three months ended March 31, 2011 and March 31, 2010, totaled $99 and $76, respectively.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Other Comprehensive Income (“OCI”) is subsequently reclassified to earnings through interest expense over the life of the derivative or over the life of the debt. In the next 12 months, we will amortize approximately $2,313 into net income by increasing interest expense for interest rate protection agreements we settled in previous periods.

 

The following is a summary of the terms of our derivatives and their fair values, which are included in Accounts Payable, Accrued Expenses or Other Liabilities, Net on the accompanying consolidated balance sheets:

 

 

 

 

The following is a summary of the impact of the derivatives in cash flow hedging relationships on the statement of operations and the statement of OCI for the three months ended March 31, 2011 and March 31, 2010:

 

 

Our agreements with our derivative counterparties contain provisions where if we default on any of our indebtedness, then we could also be declared in default on our derivative obligations subject to certain thresholds.

 

The guidance for fair value measurement of financial instruments includes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table sets forth our financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 2011 and December 31, 2010:

 

 

 

The valuation of the Series F Agreement is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the instrument. This analysis reflects the contractual terms of the agreements including the period to maturity. In adjusting the fair value of the interest rate protection agreements for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements. To comply with the provisions of fair value measurement, we incorporated a credit valuation adjustment (“CVA”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. However, assessing significance of inputs is a matter of judgment that should consider a variety of factors. One factor we consider is the CVA and its materiality to the overall valuation of the derivatives on the balance sheet and to their related changes in fair value. We consider the Series F Agreement to be classified as Level 3 in the fair value hierarchy due to a significant number of unobservable inputs. The Series F Agreement swaps a fixed rate 5.2175% for floating rate payments based on 30-year Treasury. No market observable prices exist for long-dated Treasuries past 30 years. Therefore, we have classified the Series F Agreement in its entirety as a Level 3.

 

The following table presents a reconciliation of our assets classified as Level 3 at March 31, 2011:

 

 

 

In the normal course of business, we are involved in legal actions arising from the ownership of our industrial properties. In our opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on our consolidated financial position, operations or liquidity.

FIRST INDUSTRIAL, L.P.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

From April 1, 2011 to April 29, 2011, we sold three industrial properties for approximately $11,616. There were no industrial properties acquired during this period.

 

On April 1, 2011, we paid off and retired a secured mortgage loan originally maturing in October 2014 in the amount of $27,389.

 

On May 2, 2011, the Operating Partnership obtained four secured mortgage loans aggregating to $132,463. The mortgage loans are cross-collateralized by 22 industrial properties totaling approximately 4.4 million square feet of GLA. The mortgage loans bear interest at a fixed rate of 4.45%, are amortized over 30 years and mature in June 2018. Prepayments are prohibited for twelve months after loan origination, after which prepayment premiums are calculated at the greater of yield maintenance or 1% of the outstanding loan balance.

 

On May 2, 2011, the Other Real Estate Partnerships obtained four secured mortgage loans aggregating to $45,837. The mortgage loans are cross-collateralized by ten industrial properties totaling approximately 1.5 million square feet of GLA. The mortgage loans bear interest at a fixed rate of 4.45%, are amortized over 30 years and mature in June 2018. Prepayments are prohibited for twelve months after loan origination, after which prepayment premiums are calculated at the greater of yield maintenance or 1% of the outstanding loan balance.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Form 10-Q.

 

This report contains certain 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 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 and are including this statement for purposes of complying with those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “seek,” “target,” “potential,” “focus,” “may,” “should,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a materially adverse effect on our operations and future prospects include, but are not limited to: changes in national, international, regional and local economic conditions generally and real estate markets specifically; changes in legislation/regulation (including changes to laws governing the taxation of real estate investment trusts) and actions of regulatory authorities (including the Internal Revenue Service); our ability to qualify and maintain our status as a real estate investment trust; the availability and attractiveness of financing (including both public and private capital) to us and to our potential counterparties; the availability and attractiveness of terms of additional debt repurchases; interest rates; our credit agency ratings; our ability to comply with applicable financial covenants; competition; changes in supply and demand for industrial properties (including land, the supply and demand for which is inherently more volatile than other types of industrial property) in the Company’s current and proposed market areas; difficulties in consummating acquisitions and dispositions; risks related to our investments in properties through joint ventures; environmental liabilities; slippages in development or lease-up schedules; tenant creditworthiness; higher-than-expected costs; changes in asset valuations and related impairment charges; changes in general accounting principles, policies and guidelines applicable to real estate investment trusts; international business risks and those additional factors described under the heading “Risk Factors” and elsewhere in the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”) and in this quarterly report. We caution you not to place undue reliance on forward looking statements, which reflect our analysis only and speak only as of the date of this report or the dates indicated in the statements. We assume no obligation to update or supplement forward-looking statements. Unless the context otherwise requires, the term “Operating Partnership” refers to First Industrial, L.P. and the terms “we,” “us,” and “our” refer to First Industrial, L.P. and its controlled subsidiaries.

 

GENERAL

 

First Industrial, L.P. (the “Operating Partnership”) was organized as a limited partnership in the state of Delaware on November 23, 1993. The sole general partner is First Industrial Realty Trust, Inc. (the “Company”) which owns common units in the Operating Partnership (“Units”) representing an approximate 93.6% ownership interest at March 31, 2011. The Company also owns a preferred general partnership interest in the Operating Partnership represented by preferred units (“Preferred Units”) with an aggregate liquidation priority of $275 million. The Company is a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986 (the “Code”). The Company’s operations are conducted primarily through the Operating Partnership. The limited partners of the Operating Partnership own, in the aggregate, an approximate 6.4% interest in the Operating Partnership at March 31, 2011.

 

The Operating Partnership is the sole member of several limited liability companies (the “L.L.C.s”) and the sole shareholder of the new taxable REIT subsidiaries, (together with the Operating Partnership and the L.L.C.s, the “Consolidated Operating Partnership”), the operating data of which is consolidated with that of the Operating Partnership as presented herein. We also hold at least a 99% limited partnership interest in each of eight limited partnerships (together, the “Other Real Estate Partnerships”).

 

The general partners of the Other Real Estate Partnerships are separate corporations, each with at least a .01% general partnership interest in the Other Real Estate Partnership for which it acts as a general partner. Each general partner of the Other Real Estate Partnerships is a wholly-owned subsidiary of the Company.

As of March 31, 2011, we owned 694 industrial properties located in 27 states in the United States and one province in Canada, containing an aggregate of approximately 60.2 million square feet of gross leasable area (“GLA”).

 

We also own noncontrolling equity interests in, and provide services to, two joint ventures (the 2003 Net Lease Joint Venture” and the “2007 Europe Joint Venture”). During 2010, we provided various services to, and ultimately disposed of our equity interests in, five joint ventures (the “2005Development/Repositioning Joint Venture,” the “2005 Core Joint Venture,” the “2006 Net Lease Co-Investment Program,” the “2006 Land/Development Joint Venture,” and the “2007 Canada Joint Venture;” together with the 2003 Net Lease Joint Venture and the 2007 Europe Joint Venture, the “Joint Ventures”). The 2007 Europe Joint Venture does not own any properties. See Note 5 to the Consolidated Financial Statements for more information on the Joint Ventures.

 

The Other Real Estate Partnerships and the Joint Ventures are accounted for under the equity method of accounting. Accordingly, the operating data of the Other Real Estate Partnerships and the Joint Ventures are not consolidated with that of the Consolidated Operating Partnership as presented herein.

 

We maintain a website at www.firstindustrial.com. Information on this website shall not constitute part of this Form 10-Q. Copies of our annual report 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 Securities and Exchange Commission. In addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter, along with supplemental financial and operating information prepared by us, are all available without charge on our website or upon request to us. 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, Suite 3900

Chicago, IL 60606

Attn: 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, debt reduction and access to external capital.

 

We generate revenue primarily from rental income and tenant recoveries from long-term (generally three to six years) 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/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 the Company’s ability to pay dividends on, and the market price of, the Company’s common stock would be adversely affected.

 

Our revenue growth is also dependent, in part, on our ability to acquire existing, and acquire and develop new, additional industrial properties on favorable terms. The Consolidated Operating Partnership seeks to identify opportunities to acquire existing industrial properties on favorable terms, and, when conditions permit, also seeks to identify opportunities 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. 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 both 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 the Company’s ability to pay dividends on, and the market price of, the Company’s common stock 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/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, for our operations. Currently, a significant portion of our proceeds from sales are being used to repay outstanding debt. Market conditions permitting, however, a portion of our proceeds from such sales may also 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 were unable to sell properties on favorable terms, our income growth would be limited and our financial condition, results of operations, cash flow and the Company’s ability to pay dividends on, and the market price of, the Company’s common stock would 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, 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 or through the issuance, when and as warranted, of additional equity securities. Our ability to access external capital on favorable terms is dependent on various factors, including general market conditions, interest rates, credit ratings on our capital stock and 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 capital stock. If we were unable to access external capital on favorable terms, our financial condition, results of operations, cash flow and the Company’s ability to pay dividends on, and the market price of, the Company’s common stock would be adversely affected.

RESULTS OF OPERATIONS

 

Comparison of Three Months Ended March 31, 2011 to Three Months Ended March 31, 2010

 

Our net loss available to unitholders and participating securities was $9.3 million and $23.8 million for the three months ended March 31, 2011 and March 31, 2010, respectively. Basic and diluted net loss available to unitholders were $0.12 per Unit for the three months ended March 31, 2011 and $0.35 per Unit for the three months ended March 31, 2010.

 

The tables below summarize our revenues, property expenses and depreciation and other amortization by various categories for the three months ended March 31, 2011 and March 31, 2010. Same store properties are properties owned prior to January 1, 2010 and held as an operating property through March 31, 2011, and developments and redevelopments that were placed in service prior to January 1, 2010 or were substantially completed for 12 months prior to January 1, 2010. Properties which are at least 75% occupied at acquisition are placed in service. All other properties 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 completion. Acquired properties are properties that were acquired subsequent to December 31, 2009 and held as an operating property through March 31, 2011. Sold properties are properties that were sold subsequent to December 31, 2009. (Re)Developments and land are land parcels and developments and redevelopments that were not a) substantially complete 12 months prior to January 1, 2010 or b) placed in service prior to January 1, 2010. Other revenues are derived from the operations of our maintenance company, fees earned from our Joint Ventures and other miscellaneous revenues. Construction revenues and expenses represent revenues earned and expenses incurred in connection with certain subsidiaries of the Operating Partnership acting as development manager to construct industrial properties. Other expenses are derived from the operations of our maintenance company and other miscellaneous regional expenses.

 

Our future financial condition and results of operations, including rental revenues, may be impacted by the future acquisition and sale of properties. Our future revenues and expenses may vary materially from historical rates.

 

For the three months ended March 31, 2011 and March 31, 2010, the occupancy rates of our same store properties were 83.5% and 79.8%, respectively.

 

 

Revenues from same store properties remained relatively unchanged. Revenues from acquired properties increased $0.5 million due to the three industrial properties acquired subsequent to December 31, 2009 totaling approximately 0.5 million square feet of GLA. Revenues from sold properties decreased $0.8 million due to the 22 industrial properties and one leased land parcel sold subsequent to December 31, 2009 totaling approximately 1.6 million square feet of GLA. Revenues from (re)developments and land remained relatively unchanged. Other

revenues decreased $2.0 million due primarily to a decrease in asset management and property management fees earned from our Joint Ventures due to the disposition of our equity interests in five of our Joint Ventures. Construction revenues decreased $0.3 million primarily due to the substantial completion prior to March 31, 2010 of certain development projects for which we were acting in the capacity of development manager.

 

 

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 $0.1 million due to properties acquired subsequent to December 31, 2009. Property expenses from sold properties decreased $0.4 million due to properties sold subsequent to December 31, 2009. Property expenses from (re)developments and land remained relatively unchanged. The $1.0 million decrease in other expense is primarily attributable to decrease in compensation resulting from a reduction in employee headcount. Construction expenses decreased $0.2 million primarily due to the substantial completion prior to March 31, 2010 of certain development projects for which we were acting in the capacity of development manager.

 

General and administrative expense decreased $3.6 million, or 40.9%, due primarily to a decrease in lawsuit settlement expense and a decrease in compensation expense resulting from the reduction in employee headcount that occurred during 2010.

 

For the three months ended March 31, 2011, we incurred $1.2 million in restructuring charges to provide for costs associated with the termination of a certain office lease ($1.1 million) and other costs ($0.1 million) associated with implementing our restructuring plan. Due to the timing of certain related expenses, we expect to record a total of approximately $0.3 million of additional restructuring charges in subsequent quarters.

 

For the three months ended March 31, 2010, we incurred $0.3 million in restructuring charges to provide for costs associated with the termination of certain office leases ($0.1 million) and other costs ($0.2 million) associated with implementing our restructuring plan.

 

On October 22, 2010, we amended our Unsecured Credit Facility. In conjunction with the amendment, management identified a pool of real estate assets (the “Non-Strategic Assets”) that it intends to market and sell. During the three months ended March 31, 2011, we recorded a net non-cash impairment charge of $1.1 million relating to certain of the Non-Strategic Assets held for sale. The net impairment charge is due to updated fair market values based upon recent market information, including receipt of third party offers. The net impairment charge of $1.1 million relating to the Non-Strategic Assets held for sale is offset by $0.3 million of reversal of impairment related to six industrial properties comprising approximately 0.3 million square feet of GLA that no longer qualify to be classified as for held for sale. While the assets were classified as held for sale, we had recorded impairment in order to adjust the carrying value of the assets to fair market value less costs to sell. We reversed impairment

previously recorded because the carrying value of each asset, adjusted for depreciation and amortization, was greater than the fair market value less costs to sell.

 

In connection with our periodic review of the carrying values of our properties and the negotiation of a new lease, we determined in the first quarter of 2010 that an impairment loss in the amount of $9.2 million should be recorded on one property in Grand Rapids, Michigan. The $9.2 million impairment loss is included in discontinued operations for the three months ended March 31, 2010.