Equity Infusion to Turnaround Situation (First Industrial Realty Trust)
The Fund initiated its investment in First Industrial Common (FR, Financial) during 2010. At the time, the U.S.-based REIT owned a diversified portfolio of industrial properties across the country, but it was priced as a high-probability reorganization candidate. Acknowledging the substantial headwinds facing the company, we took a view that its primary obstacles (too much debt and sub-optimal occupancy) were temporary and surmountable. Our initial business plan involved taking a position in the common stock and then offering to make an equity infusion (direct investment) at a discounted price (significantly below net asset value) to quickly remediate the high debt levels that restricted management's ability to execute on an occupancy recovery that would boost cash flows and create a virtuous value enhancement cycle. Management was against issuing highly-dilutive equity, choosing instead to reduce leverage gradually through diligent organic growth and by selling non-core assets. Management believed that a combination of postponing new developments, discontinuing common dividend payments, and a gradual economic recovery, would help the company steadily rebuild its cash flow over time, allowing for gradual debt reduction and value recovery in the shares. After detailed discussions with management, we supported the plan and adjusted our investment thesis to a more pedestrian-type turnaround. We scaled back our targeted position sizing based on the risk-adjusted return prospects. After two years in this investment we have substantial unrealized gains from our very attractive entry price. Management's path turned out to be successful. Leverage has declined, overall borrowing costs were reduced and occupancy gains have been impressive. The company has completed two equity offerings at prices substantially higher than our entry price. We anticipate the final milestones - reinstatement of the common dividend and resumption of value-enhancing development activity - will occur in the near future, which should be the catalyst for First Industrial Common to trade in-line with net asset value and its REIT peers.
From Third Avenue's third-quarter letter, Michael H. Winer Co-Portfolio Manager of Third Avenue Real Estate Value Fund and Jason Wolf, Co-Portfolio Manager of Third Avenue Real Estate Value Fund.
The Fund initiated its investment in First Industrial Common (FR, Financial) during 2010. At the time, the U.S.-based REIT owned a diversified portfolio of industrial properties across the country, but it was priced as a high-probability reorganization candidate. Acknowledging the substantial headwinds facing the company, we took a view that its primary obstacles (too much debt and sub-optimal occupancy) were temporary and surmountable. Our initial business plan involved taking a position in the common stock and then offering to make an equity infusion (direct investment) at a discounted price (significantly below net asset value) to quickly remediate the high debt levels that restricted management's ability to execute on an occupancy recovery that would boost cash flows and create a virtuous value enhancement cycle. Management was against issuing highly-dilutive equity, choosing instead to reduce leverage gradually through diligent organic growth and by selling non-core assets. Management believed that a combination of postponing new developments, discontinuing common dividend payments, and a gradual economic recovery, would help the company steadily rebuild its cash flow over time, allowing for gradual debt reduction and value recovery in the shares. After detailed discussions with management, we supported the plan and adjusted our investment thesis to a more pedestrian-type turnaround. We scaled back our targeted position sizing based on the risk-adjusted return prospects. After two years in this investment we have substantial unrealized gains from our very attractive entry price. Management's path turned out to be successful. Leverage has declined, overall borrowing costs were reduced and occupancy gains have been impressive. The company has completed two equity offerings at prices substantially higher than our entry price. We anticipate the final milestones - reinstatement of the common dividend and resumption of value-enhancing development activity - will occur in the near future, which should be the catalyst for First Industrial Common to trade in-line with net asset value and its REIT peers.
From Third Avenue's third-quarter letter, Michael H. Winer Co-Portfolio Manager of Third Avenue Real Estate Value Fund and Jason Wolf, Co-Portfolio Manager of Third Avenue Real Estate Value Fund.
