Industrial Logistics Properties Trust — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Industrial Logistics Properties Trust is a real estate investment trust focused on industrial and logistics properties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the same periods in 2020.
At September 30, 2021, the company owned 294 properties totaling approximately 36.5 million rentable square feet and held a 22% interest in an unconsolidated joint venture owning 12 properties totaling approximately 9.2 million square feet. Consolidated properties were 99.0% leased to 261 tenants, with an approximately 9.0-year weighted average remaining lease term.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Rental income | $55.0 million | $65.1 million | (15.6%) |
| Net operating income | $42.9 million | $50.6 million | (15.1%) |
| Net income attributable to common shareholders | $18.3 million | $14.1 million | 29.9% |
| EPS, basic and diluted | $0.28 | $0.22 | 27.3% |
| FFO attributable to common shareholders | $30.3 million | $29.9 million | 1.1% |
| Normalized FFO attributable to common shareholders | $30.3 million | $30.1 million | 0.5% |
| Normalized FFO per diluted share | $0.46 | $0.46 | Flat |
| Metric | Nine Months 2021 | Nine Months 2020 | Change |
|---|---|---|---|
| Rental income | $163.4 million | $194.5 million | (16.0%) |
| Net operating income | $127.3 million | $152.0 million | (16.2%) |
| Net income attributable to common shareholders | $56.5 million | $41.8 million | 35.3% |
| EPS, basic and diluted | $0.86 | $0.64 | 34.4% |
| FFO attributable to common shareholders | $90.9 million | $90.8 million | 0.1% |
| Normalized FFO attributable to common shareholders | $91.5 million | $90.8 million | 0.8% |
| Normalized FFO per diluted share | $1.40 | $1.40 | Flat |
Q3 NOI margin was approximately 78.1%, compared with 77.7% in the prior-year quarter. Nine-month NOI margin was approximately 77.9%, compared with 78.1% in the prior-year period. Comparable-property rental income increased 2.7% in Q3 and 3.1% for the first nine months, while consolidated revenue declined primarily because 12 properties were contributed to and subsequently deconsolidated from the joint venture in 2020.
Cash and cash equivalents were $44.1 million at September 30, 2021, compared with $22.8 million at December 31, 2020. Net cash provided by operating activities was $88.9 million for the first nine months, versus $92.9 million in 2020. Investing activities used $135.1 million, primarily for property acquisitions, while financing activities provided $67.4 million.
- Acquisitions: four industrial properties and one developable land parcel for $134.7 million.
- Capital expenditures: $5.6 million for tenant improvements, leasing costs, building improvements and development activities during the first nine months.
- Dividends: $0.99 per share, or $64.7 million, paid during the first nine months.
- Common distribution declared after quarter-end: $0.33 per share, approximately $21.6 million, expected to be paid in November 2021.
Debt, Liquidity and Capital Structure
| Item | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Revolving credit facility outstanding | $354.0 million | $221.0 million |
| Mortgage notes principal | $650.0 million | $650.0 million |
| Total principal debt | $1.004 billion | $871.0 million |
| Cash and cash equivalents | $44.1 million | $22.8 million |
| Total shareholders’ equity | $996.0 million | $1.003 billion |
The $750 million unsecured revolving facility had $396 million available at September 30, 2021 and $423 million available on October 25, 2021. Its stated maturity was December 29, 2021, with two six-month extension options subject to fees and other conditions. The facility bore interest at 1.39% at September 30, 2021. The $650 million mortgage debt is secured by 186 Hawaii properties, bears fixed interest at 4.31% and matures in 2029.
Management stated that the company was in compliance with its debt covenants at September 30, 2021 and believed available liquidity, operating cash flow and borrowing capacity would be sufficient for operating expenses, debt service, distributions and other requirements for the next 12 months. A one-percentage-point increase in rates on the $354 million of floating-rate debt would increase annual interest expense by approximately $3.5 million, or reduce annualized earnings by approximately $0.05 per diluted share based on the filing’s sensitivity data.
Material Changes, Outlook and Unusual Items
- Comparable-property performance improved, including higher rental rates and leasing spreads. Q3 new and renewal leases covered 771,000 square feet at a weighted average rental-rate increase of 19.5%; the nine-month increase was 17.0% on 1.876 million square feet.
- Management attributed the consolidated revenue decline primarily to the 2020 joint venture contribution and deconsolidation, partially offset by acquisitions, leasing activity and Hawaii rent resets.
- Equity in earnings of the unconsolidated joint venture contributed $1.0 million in Q3 and $5.5 million for the first nine months, reflecting an increase in the reported fair value of the investment.
- A $0.9 million gain resulted from an eminent-domain sale of part of a South Carolina land parcel.
- In October 2021, the company agreed to acquire a recently built, approximately 1.0 million-square-foot Detroit-area property leased to a single e-commerce tenant for $120.0 million. Closing was expected in Q4 2021 but remained subject to conditions and was not assured.
- The company expects to spend approximately $16.6 million to construct a building on the developable land acquired in Dallas.
- COVID-19 had not caused a significant adverse impact through the filing date, but certain tenants had received rent deferrals. As of October 25, 2021, aggregate deferred rent requests totaled $3.8 million, representing approximately 1.7% of annualized rental revenues; $1.2 million remained in receivables at September 30.
- Environmental remediation liabilities of $6.9 million were accrued for certain Hawaii lands. Management did not believe existing conditions would have a material adverse effect, but noted that actual costs could differ.
- The company has no employees and relies on RMR LLC for business and property management. Q3 business management fees were $2.7 million and property management and construction supervision fees were $1.7 million. Related-party conflicts and the continuing management arrangements remain relevant investor considerations.
Principal Risks and Contingencies
- Refinancing or extending the revolving credit facility before or after its December 2021 maturity may be more costly or may not be available on acceptable terms.
- Floating-rate debt exposes results to higher short-term interest rates, and the phaseout of LIBOR may require changes to the facility’s interest-rate calculation.
- Tenant defaults, bankruptcies, lease expirations or lower renewal rents could reduce cash flow; 6.6% of annualized rental revenues were scheduled to expire in 2022 and 9.5% in 2023.
- Amazon-related tenants represented approximately 9.5% of Q3 rental income and 9.9% of nine-month rental income, creating tenant concentration exposure.
- Hawaii properties represented approximately 49.3% of annualized rental revenues and include leases subject to periodic market-based rent resets, which may not produce historical increases.
- Acquisitions, development projects and leasing expenditures may be delayed, cost more than expected or fail to achieve expected returns.
- Future distributions depend on rent collections, operating results, capital requirements, debt covenants and access to capital markets; future distributions may be reduced or eliminated.
Important Facts for Investors to Verify
- Whether the revolving credit facility was extended or refinanced when its December 29, 2021 maturity approached, and at what pricing.
- Completion, financing and tenant concentration associated with the proposed $120 million Detroit-area acquisition.
- Collections of deferred COVID-19 rent and any subsequent tenant defaults or lease concessions.
- Comparable-property NOI and rental-rate trends versus the effects of the 2020 joint venture deconsolidation.
- Progress and expected cost of the approximately $16.6 million development project.
- Future Hawaii rent resets, lease expirations and renewal spreads.
- Exposure to RMR LLC management fees, related-party transactions and any incentive management fee payable after the 2021 measurement period.