Business Context and Reporting Period
Industrial Logistics Properties Trust, a Maryland REIT, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company owns and leases industrial and logistics properties in one operating segment. At quarter end, it owned 300 properties totaling approximately 42.7 million rentable square feet, was 99.5% leased to 270 tenants, and had a weighted average remaining lease term of approximately 9.6 years.
The portfolio comprised 226 Hawaii properties and 74 Mainland properties in 29 other states. Hawaii represented approximately 41.5% of annualized rental revenues. Amazon accounted for 14.2% of annualized rental revenues and 13.5% of nine-month rental income.
Financial Performance and Key Metrics
Amounts below are in thousands, except per-share data.
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Rental income | $60,958 | $40,431 | 50.8% |
| Net operating income | $47,551 | $32,208 | 47.6% |
| NOI margin | 78.0% | 79.7% | Down 1.7 percentage points |
| Net income | $10,922 | $18,142 | (39.8%) |
| Net income per diluted share | $0.17 | $0.28 | (39.3%) |
| FFO and Normalized FFO | $28,490 | $25,294 | 12.6% |
| FFO and Normalized FFO per diluted share | $0.44 | $0.39 | 12.8% |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Rental income | $167,035 | $120,456 | 38.7% |
| Net operating income | $132,984 | $96,697 | 37.5% |
| NOI margin | 79.6% | 80.3% | Down 0.7 percentage points |
| Net income | $40,824 | $56,100 | (27.2%) |
| Net income per diluted share | $0.63 | $0.88 | (28.4%) |
| FFO and Normalized FFO | $84,712 | $77,015 | 10.0% |
| FFO and Normalized FFO per diluted share | $1.30 | $1.21 | 7.4% |
Net income declined despite higher rental income and NOI because depreciation and amortization increased to $43,888 from $20,915 for the nine-month period, while interest expense increased to $36,207 from $11,406. The company attributes the increases primarily to acquisitions and new debt financing.
Operating cash flow was $89,158 for the nine months ended September 30, 2019, compared with $70,228 in the prior-year period. Investing cash flow was negative $892,234, primarily reflecting property acquisitions, while financing cash flow was $816,804.
Balance Sheet, Debt and Liquidity
- Total assets were $2.468 billion at September 30, 2019, compared with $1.535 billion at December 31, 2018.
- Cash and cash equivalents were $23.3 million.
- Debt consisted principally of $650.0 million outstanding under a $750.0 million unsecured revolving credit facility and $755.7 million of mortgage principal. Reported mortgage notes payable, net, were $749.6 million.
- The revolving facility bore interest at 3.59% at quarter end, based on LIBOR plus 155 basis points. The company reported $100.0 million of borrowing availability at September 30, 2019 and $440.0 million at October 28, 2019, when outstanding borrowings had declined to $310.0 million.
- Mortgage debt included a $650.0 million fixed-rate loan at 4.31% maturing in 2029, a $57.0 million assumed loan maturing in 2023, and a $48.75 million loan maturing in 2020.
- In October 2019, the company obtained an additional $350.0 million fixed-rate mortgage loan at 3.33%, maturing in 2029, and used the proceeds to reduce revolving credit borrowings.
- Management stated that it expected operating sources and available financing to fund operating and capital expenses, debt service and distributions for the next 12 months and the foreseeable future, and that it was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- During the nine months, the company acquired 30 industrial properties totaling approximately 13.3 million rentable square feet for an aggregate purchase price of $941.4 million, including acquisition costs.
- Acquisitions increased rental income and NOI but also increased depreciation, amortization, interest expense, real estate taxes and management expenses.
- Comparable-property rental income increased 2.9% and comparable-property NOI increased 2.2% for the nine-month period.
- Occupancy increased to 99.5% from 99.3% for all properties. Average effective rental rates increased to $5.82 per square foot from $5.65 for the nine-month period.
- New leases and renewals covering approximately 99,000 square feet during the third quarter were executed at weighted average rental rates approximately 13.4% above prior rates for the same space.
- Quarterly distributions remained $0.33 per share. The company declared another $0.33 per share distribution in October 2019, expected to total approximately $21.5 million.
- The company adopted the new lease accounting standard effective January 1, 2019 without a material financial statement impact. Certain prior-period amounts were reclassified to rental income.
Guidance, Outlook, Risks and Unusual Items
No quantitative earnings or distribution growth guidance was provided. Management stated that recent acquisitions and leasing activity may increase future cash flows and support higher distributions, but also noted that cash may instead be used to reduce debt.
- Lease expirations are limited in the near term: 0.1% of rented square feet and 0.1% of annualized rental revenues expire by December 31, 2019; 1.2% of annualized rental revenues expire in 2020.
- Hawaii properties have periodic market-based rent resets. Future rent increases are dependent on market conditions and may be lower than historical increases.
- Tenant concentration, particularly Amazon, and the financial condition or lease-renewal decisions of major tenants could affect results.
- The revolving facility is floating-rate debt tied to LIBOR. A one-percentage-point increase in rates would increase annual interest expense by approximately $6.5 million on the September 30 balance, before other effects.
- The company must maintain REIT qualification and generally distribute at least 90% of REIT taxable income, limiting retained cash for acquisitions and operations.
- Known environmental remediation costs of $6.9 million were accrued. Certain Hawaii lands may require additional remediation if their use changes.
- The company has no employees and relies on RMR LLC for business and property management. Related-party relationships and management fees create governance and potential conflict-of-interest risks.
- AIC, an affiliated insurance company in which the company holds an interest, is being dissolved. The company expects a capital distribution in the fourth quarter of 2019, but timing and receipt are not assured.
- An expansion project had an estimated remaining cost of approximately $9.0 million at September 30, 2019. No material off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Reconcile acquisition-driven NOI growth with the increase in leverage, interest expense and fixed-rate mortgage obligations.
- Confirm the post-October financing debt balance, available revolver capacity and compliance with all debt covenants.
- Monitor tenant concentration and lease expirations, including Amazon exposure and the larger 2021–2024 expiration periods.
- Evaluate the sustainability of the $0.33 per-share distribution against Normalized FFO, cash flow, required REIT distributions and debt-reduction priorities.
- Assess future Hawaii rent resets, environmental remediation exposure and the company’s ability to renew or re-lease Mainland properties.
- Review the terms, fees and termination provisions of the RMR LLC management agreements and other related-party arrangements.