Intent on growing its national presence, First Industrial focuses on investments that extend its geographical reach.
Making one large acquisition after another can only lead to one thing for Chicago's First Industrial Realty Trust: an incredible amount of management depth.
After each of First Industrial's acquisitions, no matter the size, the company has assimilated the management teams that came with those acquisitions into its own. This has given the company depth of management that few others can rival. And these acquisitions have not only provided a quantity of people, but a quality of people too.
"What is interesting to me is that if you look back at what I would call the minor leagues and the major leagues of real estate, the minor leagues kind of got wiped out in 1989 to 1994, so the training ground for all the real estate folks that operate these businesses was nonexistent for about five years," says Michael T. Tomasz, president and CEO of the company. "The biggest challenge for us -- and the reason why we like these entity deals -- is that we get people that have been in the business for a long time."
First Industrial has been able to make these acquisitions through a process in which it has become an industry specialist: the UPREIT transaction. These kinds of transactions allow First Industrial to trade out limited partnership interests in exchange for the properties and entities involved in the acquisitions.
"What they try to use to their advantage is their UPREIT structure, and they try to use their size to their advantage," says Jay Leupp, an analyst at Robertson Stephens & Co., San Francisco. "In other words, they're a higher market cap company so their stock is more liquid; it trades easier. That's what they try to convince potential sellers of -- that theirs is a better stock to own and a safer stock to own in the long term."
These UPREIT transactions have given First Industrial the boost it needs to grow both in geographic reach and in total capitalization. After going public in 1994, First Industrial had a portfolio in nine cities, representing about 17 million sq. ft. of space and about 226 buildings. Today, First Industrial's portfolio is around 40 million sq. ft. and approaching 500 buildings in 17 different markets, says Tomasz.
So far this year, First Industrial has done $330 million in transactions, of which approximately $250 million has been done through UPREIT transactions, says Tomasz. That $250 million was represented in two large portfolio transactions in New Jersey and Long Island.
"I do like the fact they can acquire and continue to acquire in portfolio format," says Leupp. "It's less costly and a lot of times they can buy real estate at a portfolio discount to some of their competitors, so it could be less expensive from both an asset and pricing standpoint as well as just the cost of making acquisitions."
One of those portfolio acquisitions occurred in February of this year when First Industrial purchased a 39-property portfolio, comprising 2.7 million sq. ft. in Long Island and New Jersey, from Syosset, N.Y.-based Lazarus Burman for $138.8 million, establishing a new regional operation for the company. Of that $138 million, First Industrial paid $86.4 million in cash, assumed $4.5 million in permanent fixed-rate debt and issued 1.6 million limited partnership units.
Keeping with First Industrial's acquisition tradition and adding to its depth, the acquisition, development and management staffs of Lazarus Burman were retained to manage the portfolio and maintain current tenant relationships. Jan Burman, former CEO of Lazarus Burman and a 20-year real estate veteran, was named senior regional director of the operation.
And in July, First Industrial also acquired a 48-property, 1.75 million sq. ft. portfolio in central and northern New Jersey from the Punia Organization for $105 million. The $105 million was split into $90.9 million in cash and 472,321 limited partnership units.
The Punia staff was also retained, and First Industrial appointed Jeff Punia and Hayden Tiger regional directors.
"In terms of what makes them different from some of the other, more geographically focused REITs, like CenterPoint and Weeks Corp., is that they are a national company," adds Leupp. "They operate basically from coast to coast and are really focused on growing the national presence to be almost a proxy for an investment in industrial real estate."
Acquiring these large portfolios is part of First Industrial's plan to consolidate the industrial real estate industry. However, before First Industrial was able to begin this process, there had to be some changes made in the company structure.
So in 1996, First Industrial began to restructure its capital structure from one based almost totally on secured debt to one based primarily on unsecured debt. The company deleveraged itself by lowering its debt-to-market cap, and it did two equity offerings -- one in February and one in October -- 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 -- the first of the entire REIT industry (approximately 200 REITS) to do this, says Tomasz. 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.
"When you've got a $300 million secured debt portfolio, you can't sell the assets," says Tomasz. "When we unencumbered all those assets, we could then sell off all the assets that we deem appropriate to be sold."
With this flexibility, First Industrial has become a much more aggressive seller of assets. It has sold $22 million worth of properties so far this year, and it plans to sell another $30 million by year's end, Tomasz says.
Looking ahead, Tomasz says that First Industrial is approaching a $2 billion company in total capitalization. By 2000, he expects First Industrial to be a $3 billion company.
To do this, the company plans to continue to maintain its level of management and expertise in its markets, to consolidate the industry through the use of UPREIT transactions and to continue to buy the one-off transactions. But the most significant growth accelerations for the company will be through development, says Tomasz.
"Last year, we did about $30 million of starts; this year, we will do somewhere between $75 million and $100 million of new development starts," he adds. "Really the way you get your development starts is you farm your portfolio. We have a portfolio that is approaching 2,000 tenants. The better you serve those tenants and the better you manage your portfolio, the more opportunities that will come from your existing tenant base."
One of First Industrial's plans to better serve its clients was the decision to form its Development Services Group last year. With approximately 80% of the new development projects coming from the existing tenant base, First Industrial hopes that this new group will provide the needed services for those clients looking to move or expand.
"We market our development services to our existing client base," says Tomasz. "Most of our transactions that we do will be build-to-suit, and you need a special function to do that."
During the first quarter of this year, First Industrial grew its in-service portfolio 15% through the acquisition and development of 51 properties, totaling 4.7 million sq. ft., for a composite investment of $190.8 million.
Year-end 1996 results for First Industrial showed that its FFO per share was up by 11% and provided 46% total return to shareholders for the year, compared to the REIT industry's average of 36%. First Industrial's debt-to-market capitalization was lowered to 28%, and the company entered five new markets: Indianapolis, and Cincinnati, Columbus, Dayton and Cleveland, Ohio.
This sort of growth could have only occurred through well-thought-out acquisitions and the help that comes from the market knowledge these acquisitions bring.
"So when you look at why are we successful and why have we been able to do what we've been able to do, it's because our strategy is to consolidate an industry that is very much a disjointed, fragmented business and bring to bear the strength of a public company which has a superior management depth and superior people to run these portfolios," says Tomasz.