First Industrial Realty Trust - 10-Q quarterly report FY

      First Industrial Realty Trust, Inc. (the “Company”) was organized in the state of Maryland on August 10, 1993. The Company is a real estate investment trust as defined in the Internal Revenue Code. The Company’s operations are conducted primarily through First Industrial, L.P. (the “Operating Partnership”) of which the Company is the sole general partner with an approximate 86.8% and 86.4% ownership interest at September 30, 2005 and September 30, 2004, respectively. Minority interest at September 30, 2005 and September 30, 2004 of approximately 13.2% and 13.6%, respectively, represents the aggregate partnership interest in the Operating Partnership held by the limited partners thereof.

      As of September 30, 2005, the Company owned 908 industrial properties (inclusive of developments in process) located in 27 states, containing an aggregate of approximately 75.9 million square feet of gross leasable area (“GLA”). Of the 908 industrial properties owned by the Company, 559 are held by the Operating Partnership and limited liability companies of which the Operating Partnership is the sole member, 275 are held by limited partnerships in which the Operating Partnership is the limited partner and wholly-owned subsidiaries of the Company are the general partners and 74 are held by an entity wholly-owned by the Operating Partnership.

      On September 14, 2005 and March 21, 2005, the Company, through entities wholly-owned, directly or indirectly, by the Operating Partnership, entered into joint venture arrangements with an institutional investor to invest in industrial properties (the “September 2005 Joint Venture” and “March 2005 Joint Venture”). The Company, through entities wholly-owned, directly or indirectly, by the Operating Partnership, owns a ten percent equity interest in and provides property management, leasing, development, disposition and portfolio management services to the September 2005 Joint Venture and the March 2005 Joint Venture. In addition, the Company has the opportunity to earn performance-based incentives when industrial assets are sold and returns exceed certain thresholds.

      The Company, through separate, wholly-owned limited liability companies of which the Operating Partnership is the sole member, also owns minority equity interests in, and provides asset and property management services to, two other joint ventures which invest in industrial properties (the “September 1998 Joint Venture” and the “May 2003 Joint Venture”). The Company, through separate wholly-owned limited liability companies of which the Operating Partnership is also the sole member, also owned a minority interest in and provided property management services to another joint venture which invested in industrial properties (the “December 2001 Joint Venture”; together with the September 2005 Joint Venture, March 2005 Joint Venture, the September 1998 Joint Venture and the May 2003 Joint Venture, the “Joint Ventures”). During the year ended December 31, 2004, the December 2001 Joint Venture sold all of its industrial properties. The operating data of the Joint Ventures is not consolidated with that of the Company 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 the Company’s 2004 Form 10-K and should be read in conjunction with such financial statements and related notes. The following notes to these interim financial statements highlight significant changes to the notes included in the December 31, 2004 audited financial statements included in the Company’s 2004 Form 10-K and present interim disclosures as required by the Securities and Exchange Commission.

      In order to conform with generally accepted accounting principles, management, in preparation of the Company’s financial statements, is required to make estimates and assumptions that affect the reported

      During 2005 the Company entered into a contract with a third party to construct an industrial property. This build-to-suit for sale contract required an up front earnest money deposit and requires the remaining purchase price to be paid at closing. The Company uses the percentage-of-completion contract method of accounting in accordance with SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. During the period of performance, costs are accumulated on the balance sheet in Prepaid Expenses and Other Assets and revenues and expenses are recognized in continuing operations.

      The Company accounts for all acquisitions entered into subsequent to June 30, 2001 in accordance with Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard No. 141, “Business Combinations” (“FAS 141”). Upon acquisition of a property, the Company allocates the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, tenant improvements, leasing commissions and intangible assets including in-place leases and above market and below market leases. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term. Above market leases, Net of $6,666 are included in Deferred Leasing Intangibles, Net at September 30, 2005. Deferred Leasing Intangibles, Net, included in liabilities of $12,101 represents Below Market Leases, Net at September 30, 2005. Acquired above and below market leases are amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on the Company’s consolidated statements of operations and comprehensive income.

      The purchase price is further allocated to in-place lease values based on management’s evaluation of the specific characteristic of each tenant’s lease and the Company’s overall relationship with the respective tenant. The net value of in-place lease intangibles of $50,738 at September 30, 2005, which is included as a component of Deferred Leasing Intangibles, Net is amortized to expense over the remaining lease term and expected renewal periods of the respective lease. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions, above and below market leases and the in-place lease value is immediately charged to expense.

      In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments necessary for a fair statement of the financial position of the Company as of September 30, 2005 and December 31, 2004 and the results of its operations and comprehensive income for each of the nine and three months ended September 30, 2005 and September 30, 2004, and its cash flows for the nine months ended September 30, 2005 and September 30, 2004, and all adjustments are of a normal recurring nature.

      In the consolidated statement of operations for the three and nine months ended September 30, 2004 and cash flows for the nine months ended September 30, 2004 presented in its Form 10-Q filed November 9, 2004, the Company allocated its entire tax provision/benefit to income from discontinued operations. The Company has determined that its tax provision/benefit should be allocated between income from continuing operations, income from discontinued operations and gain on sale of real estate. The Company has restated its consolidated statement of operations for the nine and three months ended

      The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, the Company generally is not subject to federal income taxation to the extent of the income which it distributes if it satisfies the requirements set forth in Section 856 of the Code (pertaining to its organization and types of income and assets) necessary to maintain its status as a REIT, it distributes annually at least 90% of its REIT taxable income, as defined in the Code, to its stockholders and it satisfies certain other requirements. Accordingly, a provision has been made for federal income taxes in the accompanying consolidated financial statements only as it relates to the activities conducted in its taxable REIT subsidiary, First Industrial Development Services, Inc., which has been accounted for under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). Additionally, the Company and certain of its subsidiaries are subject to certain state and local income taxes; these taxes are included within the provision for income taxes in the accompanying consolidated financial statements. In accordance with FAS 109, the total benefit/expense has been separately allocated to income from continuing operations, income from discontinued operations and gain on sale of real estate.

      Prior to January 1, 2003, the Company accounted for its stock incentive plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, compensation expense is not recognized for options issued in which the strike price is equal to the fair value of the Company’s stock on the date of grant. On January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“FAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. The Company is applying the fair value recognition provisions of FAS 123 prospectively to all employee option awards granted after December 31, 2002. The Company has not awarded options to employees or directors of the Company subsequent to the adoption of FAS 123, and therefore no stock-based employee compensation expense is included in net income available to common stockholders related to the fair value recognition provisions of FAS 123.

      On January 1, 2002, the Company adopted the FASB Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 addresses financial accounting and reporting for the disposal of long-lived assets. FAS 144 requires that the results of operations and gains or losses on the sale of property be presented in discontinued operations if both of the following criteria are met: (a) the operations and cash flows of the property have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (b) the Company will not have any significant continuing involvement in the operations of the property after the disposal transaction. FAS 144 also requires prior period results of operations for these properties to be restated and presented in discontinued operations in prior consolidated statements of operations.

      Certain 2004 items have been reclassified to conform with 2005 presentation.

      In December, 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29” (“FAS 153”). The amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” FAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of FAS 153 will have a material effect on the Company’s consolidated financial statements.

      In May, 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“FAS 154”) which supersedes APB Opinion No. 20, “Accounting Changes” and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements”. FAS 154 changes the requirements for the accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. FAS 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

      In June, 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) regarding EITF 04-05, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights.” The conclusion provides a framework for addressing the question of when a sole general partner, as defined in EITF 04-05, should consolidate a limited partnership. The EITF has concluded that the general partner of a limited partnership should consolidate a limited partnership unless (1) the limited partners possess substantive kick-out rights as defined in paragraph B20 of FIN 46R, or (2) the limited partners possess substantive participating rights similar to the rights described in Issue 96-16, “Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest by the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.” In addition, the EITF concluded that the guidance should be expanded to include all limited partnerships, including those with multiple general partners. The adoption of EITF 04-05 did not effect the results of operations, financial position or liquidity of the Company.

      In June 2005, the FASB ratified the consensus reached by the EITF regarding EITF No. 05-6, “Determining the Amortization Period for Leasehold Improvements.” The guidance requires that leasehold improvements acquired in a business combination, or purchased subsequent to the inception of a lease, be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. EITF 05-6 does not impact the company’s results of operations, financial position, or liquidity.

      As of September 30, 2005, the September 1998 Joint Venture owned 41 industrial properties comprising approximately 1.3 million square feet of GLA, the May 2003 Joint Venture owned 11 industrial properties comprising approximately 4.7 million square feet of GLA, the March 2005 Joint Venture owned 28 industrial properties comprising approximately 3.4 million square feet of GLA and several land parcels and the September 2005 Joint Venture owned 218 industrial properties comprising approximately 14.1 million square feet of GLA and several land parcels. During the nine months ended September 30, 2005, the Company sold eight industrial properties and several land parcels to the March 2005 Joint Venture for a total sales price of $92,603.

      At September 30, 2005 and December 31, 2004, the Company has a receivable from the Joint Ventures of $4,764 and $1,261, respectively, which mainly relates to borrowings made, as allowed by the partnership agreement, by the September 1998 Joint Venture from the Company and a receivable from the March 2005 Joint Venture relating to proceeds from the sale of a land parcel.

      During the nine months ended September 30, 2005 and September 30, 2004, the Company invested the following amounts in the Joint Ventures as well as received distributions and recognized fees from acquisition, disposition, property management, development and asset management services in the following amounts:

      On January 12, 2005, in conjunction with the acquisition of a parcel of land, the seller provided the Company a mortgage loan in the amount of $1,167 (the “Acquisition Mortgage Loan XV”). The Acquisition Mortgage Loan XV is collateralized by a land parcel in Lebanon, TN, does not require principal payments prior to maturity on January 12, 2006 and has a 0% interest rate. Since the Acquisition Mortgage XV is non-interest bearing, a discount should be applied with an offsetting amount allocated to the basis of the land. The Company has concluded that the discount is not material and has not accounted for the discount or the land basis adjustment.

      On March 31, 2005, the Company assumed a mortgage loan in the amount of $1,977 (the “Acquisition Mortgage Loan XVI”). The Acquisition Mortgage Loan XVI is collateralized by one property in New Hope, MN, bears interest at a fixed rate of 5.50% and provides for monthly principal and interest payments based on a 20-year amortization schedule. The Acquisition Mortgage Loan XVI matures on September 30, 2024. In conjunction with the assumption of the Acquisition Mortgage Loan XVI, the Company recorded a premium in the amount of $32 which will be amortized as an adjustment to interest expense through March 31, 2009. Including the impact of the premium recorded, the Company’s effective interest rate on the Acquisition Mortgage Loan XVI is 5.30%. The Acquisition Mortgage Loan XVI may be prepaid on April 1, 2009 without incurring a prepayment fee.

      On June 27, 2005, the Company assumed a mortgage loan in the amount of $3,056 (the “Acquisition Mortgage Loan XVII”). The Acquisition Mortgage Loan XVII is collateralized by one property in Villa Rica, GA, bears interest at a fixed rate of 7.38% and provides for monthly principal and interest payments

      On June 30, 2005, the Company assumed a mortgage loan in the amount of $6,513 (the “Acquisition Mortgage Loan XVIII”). The Acquisition Mortgage Loan XVIII is collateralized by one property in Hammonton, NJ, bears interest at a fixed rate of 7.58% and provides for monthly principal and interest payments based on a 20-year amortization schedule. The Acquisition Mortgage Loan XVIII matures on March 1, 2011. In conjunction with the assumption of the Acquisition Mortgage Loan XVIII, the Company recorded a premium in the amount of $749 which will be amortized as an adjustment to interest expense through November 30, 2010. Including the impact of the premium recorded, the Company’s effective interest rate on the Acquisition Mortgage Loan XVIII is 4.93%. The Acquisition Mortgage Loan XVIII may be prepaid on December 1, 2010 without incurring a prepayment fee.

      On September 30, 2004, the Company assumed a mortgage loan in the amount of $12,057 and borrowed an additional $1,400 (collectively referred to as the “Acquisition Mortgage Loan XIII”). The Acquisition Mortgage Loan XIII was collateralized by three properties in Phoenix, Arizona, bore interest at a fixed rate of 5.60% and provided for monthly principal and interest payments based on a 30-year amortization schedule. The Acquisition Mortgage Loan XIII matures on November 10, 2012. In conjunction with the assumption of the Acquisition Mortgage Loan XIII, the Company recorded a premium in the amount of $467 which was being amortized over the remaining life of the Acquisition Mortgage Loan XIII as an adjustment to interest expense. On July 13, 2005, the Company sold the properties that collateralized the Acquisition Mortgage Loan XIII. In conjunction with the sale, the buyer assumed the Acquisition Mortgage Loan XIII and the Company paid $291 in fees related to the assignment of the Acquisition Mortgage Loan XIII. Consequently, the Company wrote-off the remaining premium on the note of $424. Both the $291 of financing fees and $424 premium write-off are included in the Gain on Early Retirement of Debt on the Company’s Statement of Operations.

      On August 23, 2005, the Company, through the Operating Partnership, amended and restated its $300,000 unsecured line of credit (the “Unsecured Line of Credit”), which was due September 28, 2007, and bore interest at a floating rate of LIBOR plus .7%, or the Prime Rate, at the Company’s election. The amended and restated unsecured line of credit (the “2005 Unsecured Line of Credit”) will mature on September 28, 2008, has a borrowing capacity of $500,000, with the right, subject to certain conditions, to increase the borrowing capacity up to $600,000 and bears interest at a floating rate of LIBOR plus .625%, or the Prime Rate, at the Company’s election. The net unamortized deferred financing fees related to the Unsecured Line of Credit and any additional deferred financing fees incurred related to the 2005 Unsecured Line of Credit are being amortized over the life of the 2005 Unsecured Line of Credit in accordance with Emerging Issues Task Force Issue 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”, except for $51, which represents the write off of deferred financing costs and is included in the gain from early retirement of debt.

      The following is a schedule of the stated maturities and scheduled principal payments of the mortgage loans, senior unsecured debt and unsecured line of credit, exclusive of premiums and discounts, for the next five years ending December 31, and thereafter:

      In conjunction with the prior issuances of senior unsecured debt, the Company entered into interest rate protection agreements to fix the interest rate on anticipated offerings of senior unsecured debt. In the next 12 months, the Company will amortize approximately $1,059 into net income by reducing interest expense.

      On January 13, 2005, the Company, through First Industrial Development Services, Inc., entered into an interest rate protection agreement which hedged the change in value of a build to suit development project the Company is in the process of constructing. This interest rate protection agreement has a notional value of $50,000, is based on the five year treasury, has a strike rate of 3.936% and settles on October 4, 2005. Per FASB Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), fair value and cash flow hedge accounting for hedges of non-financial assets and liabilities is limited to hedges of the risk of changes in the market price of the entire hedged item because changes in the price of an ingredient or component of a non-financial item generally do not have a predictable, separately measurable effect on the price of the item. Since the interest rate protection agreement is hedging a component of the change in value of the build to suit development, the interest rate protection agreement does not qualify for hedge accounting and the change in value of the interest rate protection agreement will be recognized immediately in net income as opposed to other comprehensive income. Included in mark-to-market/gain on settlement of interest rate protection agreement for the three and nine months ended September 30, 2005 is the mark-to-market/gain on settlement of the IRPA as well as a deferred gain of $159 that was reclassed out of OCI relating to a settled interest rate protection agreement that no longer qualifies for hedge accounting under FAS 133. Accordingly, the Company recognized $1,212 and $749 in net gain from the mark-to-market of the interest rate protection agreement for the three and nine months ended September 30, 2005, respectively.

      The following table summarizes dividends/distributions accrued during the nine months ended September 30, 2005.

      During the nine months ended September 30, 2005, certain employees of the Company exercised 247,764 non-qualified employee stock options. Net proceeds to the Company were approximately $6,664.

      During the nine months ended September 30, 2005, the Company awarded 189,878 shares of restricted common stock to certain employees of the Company and 9,135 shares of restricted common stock to certain Directors of the Company. These shares of restricted common stock had a fair value of approximately $8,340 on the date of grant. The restricted common stock vests over periods from one to ten years. Compensation expense will be charged to earnings over the respective vesting period.

      During the nine months ended September 30, 2005, the Operating Partnership issued 220,745 Units having an aggregate market value of approximately $8,875 in exchange for three properties.

      During the nine months ended September 30, 2005, the Company acquired 86 industrial properties comprising approximately 12.0 million square feet of GLA and several land parcels. The gross purchase price for 85 industrial properties and several land parcels totaled approximately $415,915. Additionally, one industrial property was acquired through foreclosure due to a default on a mortgage loan receivable.

      During the nine months ended September 30, 2005, the Company sold 66 industrial properties comprising approximately 9.0 million square feet of GLA and several land parcels. Gross proceeds from the sales of the 66 industrial properties and several land parcels were approximately $472,608. The gain on sale of real estate, net of income taxes was approximately $90,729. Fifty-six of the sixty-six sold industrial properties meet the criteria established by FAS 144 to be included in discontinued operations. Therefore, in accordance with FAS 144, the results of operations and gain on sale of real estate, net of income taxes for the 56 sold industrial properties that meet the criteria established by FAS 144 are included in discontinued operations. The results of operations and gain on sale of real estate, net of income taxes for

      At September 30, 2005, the Company classified four industrial properties comprising approximately .09 million square feet of GLA as held for sale. In accordance with FAS 144, the results of operations of the four industrial properties held for sale at September 30, 2005 are included in discontinued operations. There can be no assurance that such industrial properties held for sale will be sold.

      Income from discontinued operations for the nine months ended September 30, 2005 reflects the results of operations and gain on sale of real estate, net of income taxes of 56 industrial properties that were sold during the nine months ended September 30, 2005 as well as the results of operations of four industrial properties held for sale at September 30, 2005.

      Income from discontinued operations for the nine months ended September 30, 2004, reflects the results of operations of 56 industrial properties that were sold during the nine months ended September 30, 2005, 92 industrial properties that were sold during the year ended December 31, 2004, four industrial properties identified as held for sale at September 30, 2005, as well as the gain on sale of real estate from 66 industrial properties which were sold during the nine months ended September 30, 2004.

      The following table discloses certain information regarding the industrial properties included in discontinued operations by the Company for the three and nine months ended September 30, 2005 and September 30, 2004.

      Supplemental disclosure of cash flow information:

      The computation of basic and diluted EPS is presented below:

      For 2005, weighted average shares — diluted are the same as weighted average shares — basic as the dilutive effect of stock options and restricted stock was excluded as its inclusion would have been anti-dilutive to the loss from continuing operations available to common stockholders, net of minority interest. The dilutive stock options excluded from the computation are 114,573 for the three months ended September 30, 2005 and 149,311 for the nine months ended September 30, 2005. The dilutive restricted stock excluded from the computation are 90,781 for the three months ended September 30, 2005 and 91,765 for the nine months ended September 30, 2005.

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

      The Company has committed to the construction of certain industrial properties totaling approximately 4.1 million square feet of GLA. The estimated total construction costs are approximately $206.6 million. Of this amount, approximately $107.1 million remains to be funded. There can be no assurance the actual completion cost will not exceed the estimated completion cost stated above.

      At September 30, 2005, the Company had 16 letters of credit outstanding in the aggregate amount of $7,396. These letters of credit expire between March 2006 and April 2007.

      In the consolidated statement of operations for the three and nine months ended September 30, 2004 and cash flows for the nine months ended September 30, 2004 presented in its Form 10-Q filed November 9, 2004, the Company allocated its entire tax provision/benefit to income from discontinued operations. The Company has determined that its tax provision/benefit should be allocated between income from continuing operations, income from discontinued operations and gain on sale of real estate. The Company has restated its consolidated statement of operations for the three and nine months ended