Industrial Logistics Properties Trust 2018 Form 10-K Summary
Business Context and Reporting Period
Industrial Logistics Properties Trust is a Maryland REIT that owns and leases industrial and logistics properties in the United States. This Form 10-K covers the fiscal year ended December 31, 2018, including fourth-quarter results. The company completed its initial public offering on January 17, 2018 and elected to qualify as a REIT beginning with the 2018 tax year.
- Portfolio at December 31, 2018: 270 properties, approximately 29.5 million rentable square feet, 248 tenants and 99.3% leased occupancy.
- Hawaii properties represented 58.1% of annualized rental revenues; mainland properties represented 41.9%.
- Weighted average remaining lease term was approximately 11 years.
- SIR distributed its 45 million ILPT shares to SIR shareholders on December 27, 2018, ending SIR’s ownership of ILPT.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $162.5 million | $156.5 million | +3.8% |
| Net operating income | $130.2 million | $127.7 million | +1.9% |
| Net income | $74.4 million | $80.1 million | -7.1% |
| Net income per diluted share | $1.16 | $1.78 | -34.8% |
| FFO | $103.0 million | $107.4 million | -4.1% |
| Normalized FFO | $103.0 million | $108.4 million | -5.1% |
| Normalized FFO per share | $1.61 | $2.41 | -33.2% |
| Operating cash flow | $96.8 million | $103.5 million | -6.5% |
NOI margin was approximately 80.1% of revenue, compared with approximately 81.6% in 2017. Net income and per-share results declined primarily because interest expense increased to $16.1 million from $2.4 million, while weighted average shares increased 42.5% following the IPO.
- Rental income increased 3.3% to $139.3 million, and tenant reimbursements and other income increased 7.1% to $23.2 million.
- Comparable-property revenue increased 2.2%, while comparable-property NOI increased 0.3%; acquired properties contributed $2.1 million of NOI.
- Average effective rental rates increased to $5.68 per leased square foot from $5.52.
- Leasing and rent-reset activity was favorable: 2.6 million square feet was renewed or newly leased at rates approximately 27.3% above prior rates, and 630,000 square feet of Hawaii land had rent resets approximately 19.9% above prior rates.
- Capital expenditures and related activity totaled $6.1 million in 2018. The company also committed approximately $14.2 million for an expansion at an Ankeny, Iowa property.
Balance Sheet, Debt and Liquidity
- Total assets were $1.535 billion and shareholders’ equity was $1.028 billion at December 31, 2018.
- Total indebtedness, net, was $462.2 million, compared with $799.4 million at December 31, 2017. Consolidated net debt to total gross assets was 28.4%.
- Debt consisted primarily of $413.0 million outstanding under the $750.0 million unsecured revolving credit facility and a $48.8 million mortgage note maturing in 2020.
- Available capacity under the revolving facility was $337.0 million at year-end, and cash and cash equivalents were $9.6 million.
- The revolving facility matured in December 2021, with two six-month extension options, and bore interest at 3.81% at year-end, based on LIBOR plus a leverage-based premium.
- Operating, investing and financing cash flows were $96.8 million, $(135.5) million and $48.4 million, respectively.
- The company paid $60.5 million of 2018 distributions, or $0.93 per share. The January 2019 quarterly distribution was declared at $0.33 per share.
Material Changes Versus the Prior Comparable Period
- The company became a standalone public company, issued 20 million shares in the IPO for net proceeds of approximately $444.3 million and reduced revolving debt with substantially all IPO proceeds.
- Four properties totaling approximately 985,000 rentable square feet were acquired for approximately $121.4 million, including acquisition costs.
- Occupancy declined modestly to 99.3% from 99.9%, while the portfolio expanded from 266 to 270 properties.
- Interest expense increased by $13.6 million because of the post-IPO capital structure and acquisition-related borrowings.
- General and administrative expense declined 32.7% to $11.3 million, primarily because 2017 included IPO-related costs and allocated incentive management fees.
- American Tire Distributors, representing approximately 3.0% of annualized rental revenues, filed for Chapter 11 bankruptcy but assumed all ILPT leases under its confirmed reorganization plan and had paid rent through February 2019.
Outlook, Commentary, Risks and Unusual Items
- Management expects rents, tenant reimbursements and borrowings under the revolving facility to fund operating expenses, debt service, distributions and foreseeable capital needs. Management stated that liquidity should be sufficient for the next 12 months and the foreseeable future.
- The growth strategy emphasizes acquisitions of occupied industrial and logistics properties benefiting from e-commerce demand, with target capitalization rates generally between 5% and 7%.
- In January 2019, ILPT obtained a $650.0 million, fixed-rate, non-amortizing mortgage loan at 4.31%, secured by 186 Hawaii properties and maturing in February 2029. Proceeds were used to repay revolving borrowings and fund acquisitions.
- In February 2019, the company completed or agreed to acquire two portfolios totaling up to 26 properties for approximately $905.3 million, including assumed mortgage debt in one transaction. These transactions were expected to close in part by April 15, 2019.
- Approximately 1.3% of annualized rental revenues and 1.7% of rented square feet were scheduled to expire by December 31, 2019. However, approximately $29.4 million of Hawaii annualized rental revenue was scheduled for future rent resets.
- Key risks include concentration in Hawaii and industrial/logistics properties, single-tenant exposure, tenant bankruptcies, rent declines at renewals or Hawaii resets, competition, interest-rate and LIBOR-transition risk, environmental liabilities, severe weather, access to capital and dependence on RMR LLC.
- Amazon subsidiaries contributed approximately 9.5% of annualized rental revenues. The company had an approximately $6.9 million environmental reserve and no insurance specifically covering known or unknown environmental conditions.
- RMR LLC provides all management services; the agreements have rolling 20-year terms and may require a substantial termination fee. The company also has related-party relationships with RMR LLC, RMR Inc. and Affiliates Insurance Company.
- Management reported effective disclosure controls and internal control over financial reporting. The company did not provide an auditor attestation because it qualified as an emerging growth company.
Important Facts for Investors to Verify
- Whether the January and February 2019 acquisitions closed as expected, their financing, and their contribution to NOI and leverage.
- Tenant credit performance, especially American Tire Distributors, Amazon-related tenants and other single-tenant properties.
- Outcomes of scheduled Hawaii rent resets and lease expirations, including whether historical rent growth continues.
- Compliance with revolving-credit and January 2019 mortgage covenants, liquidity requirements and refinancing plans for debt maturing in 2020 and 2021.
- The sustainability of the $0.33 quarterly distribution relative to Normalized FFO, capital needs and required REIT distributions.
- Environmental reserve adequacy, remediation obligations and potential exposure from Hawaii properties and severe weather events.
- Management fees, termination-fee exposure and potential conflicts arising from the company’s external management and related-party structure.