Leasing Focus In Volatile Markets And Speculative Developments May Stifle Growth Prospects

Key Takeaways

• Focusing on leasing in improving markets with rising vacancies risks occupancy rates and revenue growth if demand doesn't match new supply.
  
• Heavy investment in speculative development projects in regions like Southern California poses risks to anticipated cash flows and rental prices.
  
• Success in leasing and strategic expansions in a favorable industrial market with strong financials suggest robust growth and stability for First Industrial Realty Trust.

Catalysts

First Industrial Realty Trust, Inc. (NYSE: FR) is a leading U.S.-only owner, operator, developer and acquirer of logistics properties.

• The company's focus on leasing in markets with improving fundamentals but still experiencing an uptick in vacancy could pressure occupancy rates, potentially impacting revenue growth if demand does not keep pace with new supply.
  
• The industrial market's slow but improving demand may not fully absorb the increasing supply, particularly as U.S. industrial market vacancy rates have risen, which could lead to pressure on leasing rates and occupancy levels, affecting revenue and net margins.
  
• Heavy investment in development projects with speculative development leases, especially in markets like Southern California, carries the risk of not achieving anticipated lease-up rates or rental prices, impacting expected cash flow from these investments.
  
• Dependence on large tenants for significant lease renewals (e.g., the 1.3 million square feet lease in Pennsylvania) introduces tenant concentration risk, which could affect revenue stability and growth if renewals are not secured or conditions are less favorable than expected.
  
• The stated increase in cash rental rates on new and renewal leasing while positive, suggests a reliance on significant rental rate hikes to drive revenue growth. If market conditions shift or competition intensifies, maintaining these increases could become challenging, potentially affecting earnings growth.

Assumptions

• Analysts are assuming First Industrial Realty Trust's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.1% today to 31.0% in 3 years time.
• Analysts expect earnings to reach $256.3 million (and earnings per share of $1.93) by about September 2027, down from $283.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $300.3 million in earnings, and the most bearish expecting $226 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.4x on those 2027 earnings, up from 26.1x today. This future PE is lower than the current PE for the US Industrial REITs industry at 40.8x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

Risks

• The company's successful leasing activity, particularly with big wins in both its core portfolio and within development projects, indicates strong execution and demand for its properties, which can enhance revenue growth.
  
• First Industrial Realty Trust's initiation of new development projects, coupled with disciplined investment, reflects a strategic expansion that could lead to increased net operating income and asset value.
  
• The industrial market's improving fundamentals, with slowing vacancy rates and disciplined new starts, suggest a favorable environment for First Industrial Realty Trust, potentially supporting stronger rental income.
  
• The significant increase in cash rental rates on new and renewal leasing for 2024 implies robust pricing power and could lead to higher earnings.
  
• With no debt maturities until 2026 and a strong capital position that covers upcoming development projects, the company exhibits financial stability that could mitigate risks related to interest rate fluctuations and support sustained earnings growth.

Valuation

• The analysts have a consensus price target of $57.81 for First Industrial Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $826.1 million, earnings will come to $256.3 million, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of $55.91, the analyst's price target of $57.81 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.