Industrial Logistics Properties Trust — Q2 2022 Form 10-Q
Business context and reporting period
ILPT is a Maryland REIT that owns and leases industrial and logistics properties. This unaudited report covers the three and six months ended June 30, 2022. On February 25, 2022, ILPT completed its acquisition of Monmouth Real Estate Investment Corporation (MNR), materially expanding its portfolio and leverage.
- Portfolio at June 30, 2022: 412 consolidated properties, approximately 59.7 million rentable square feet, located in 39 states.
- Consolidated properties were 98.9% leased to 305 tenants, with a weighted average remaining lease term of approximately 9.2 years.
- ILPT owns 61% of a consolidated joint venture holding 93 properties and 22% of an unconsolidated joint venture holding 18 properties.
- Major tenant concentrations included FedEx at 21.8% of rentable square feet and 29.2% of annualized rental revenues, Amazon at 7.7% and 6.8%, and Home Depot at 5.7% and 4.4%, respectively.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Rental income | $107.2 million, versus $54.2 million | $178.6 million, versus $108.4 million |
| Net operating income | $86.9 million, versus $42.4 million | $142.1 million, versus $84.3 million |
| Net income attributable to common shareholders | $(143.5) million, versus $18.8 million | $(150.1) million, versus $38.2 million |
| Net loss per diluted share | $(2.20), versus $0.29 income | $(2.30), versus $0.58 income |
| Normalized FFO attributable to common shareholders | $28.3 million, or $0.43 per share | $55.9 million, or $0.86 per share |
| Net cash provided by operating activities | Not separately presented | $80.9 million, versus $62.6 million |
- Consolidated NOI margin, calculated as NOI divided by rental income, was approximately 81.0% for the quarter and 79.6% for the six months.
- Cash, cash equivalents and restricted cash totaled $436.9 million at June 30, 2022, including $291.9 million of unrestricted cash and $145.1 million of restricted cash.
- Total assets were $6.0 billion and total liabilities were $4.5 billion at June 30, 2022.
- Debt carrying value was $4.41 billion, compared with $828.1 million at December 31, 2021. Principal debt outstanding was approximately $4.45 billion.
- Floating-rate debt totaled approximately $2.79 billion. Interest-rate caps covered the $1.4 billion Floating Rate Loan and the $1.385 billion Bridge Loan.
- Capital expenditures and leasing-related investments totaled $13.8 million for the first six months, including $7.4 million for development, redevelopment and other activities.
Material changes versus the prior comparable period
- Rental income increased 97.9% for the quarter and 64.8% for the six months, primarily because of the MNR acquisition and, to a lesser extent, comparable-property leasing activity and Hawaii rent resets.
- Comparable-property rental income increased 8.6% for the quarter and 4.0% for the six months; comparable-property NOI increased 10.8% and 4.7%, respectively.
- Net results shifted from profitability to substantial losses because of a $100.7 million impairment charge, significantly higher depreciation and amortization, materially higher interest expense, and losses on equity securities.
- Interest expense increased to $77.5 million for the quarter and $118.5 million for the six months, compared with $8.6 million and $17.4 million, respectively, in 2021.
- The MNR transaction added 124 properties at closing, with aggregate consideration of $3.734 billion. ILPT sold a 39% interest in a consolidated joint venture to an institutional investor for $587.4 million and retained a 61% interest.
- During the quarter, ILPT reclassified 30 MNR properties from held for sale to held and used and recorded a $100.7 million impairment loss on 25 of those properties because of market conditions and a change in sale plans.
- ILPT replaced its former revolving credit facility with acquisition-related financing and issued $1.385 billion of bridge debt, $1.4 billion of floating-rate joint venture debt and $700 million of fixed-rate debt, among other assumed or existing mortgage debt.
- Quarterly common distributions were $0.33 per share during the first half of 2022. On July 14, 2022, the company reduced the quarterly distribution to $0.01 per share to preserve liquidity.
Guidance, outlook, risks and unusual items
- Management stated that cash on hand, operating cash flow and rent collections were expected to fund operating expenses, debt service and distributions for the next 12 months; however, the company also highlighted significant refinancing and leverage risks.
- The $1.385 billion Bridge Loan matures in February 2023. The $1.4 billion Floating Rate Loan matures in March 2024, subject to extension options. Management’s long-term financing plan contemplates refinancing the bridge debt, property sales and additional sales of equity interests in the consolidated joint venture.
- Management reported that rising interest rates and weaker real estate market conditions were delaying the long-term financing plan and could prevent property or joint venture interest sales, or result in sales below carrying value.
- Management believed it was in compliance with applicable debt covenants at June 30, 2022. The filing does not provide a completed refinancing commitment for the Bridge Loan.
- A one-percentage-point increase in floating interest rates was estimated to increase annual interest expense by approximately $27.9 million, or approximately $0.43 per diluted share based on the filing’s sensitivity methodology.
- Key risks include higher interest rates, inflation, a potential recession, tenant credit and renewal risk, tenant concentration, declining property values, limited access to capital, environmental liabilities and related-party conflicts involving RMR.
- Environmental remediation accruals were $6.9 million at June 30, 2022. Management stated that known conditions were not expected to have a material adverse effect, but the ultimate costs remain uncertain.
- In July 2022, the consolidated joint venture acquired a 226,000-square-foot, fully leased property in Augusta, Georgia for approximately $38.0 million.
Most important facts for investors to verify
- Whether ILPT can refinance or otherwise repay the February 2023 Bridge Loan on acceptable terms.
- Whether planned property sales and additional sales of consolidated joint venture interests can be completed at expected values.
- The sustainability of the sharply reduced $0.01 quarterly distribution and the potential for further reductions or elimination.
- The effect of SOFR increases and refinancing spreads on interest expense, liquidity and normalized FFO.
- Tenant exposure to FedEx, Amazon, Home Depot and other concentrated counterparties, including renewal and credit trends.
- The valuation and potential further impairment of the former MNR properties and the assumptions underlying the $100.7 million impairment charge.
- The distinction between GAAP losses and recurring operating performance, including the reliability of Normalized FFO as leverage and financing costs increase.