Industrial Logistics Properties Trust: Q3 2020 Form 10-Q Summary
Business context and reporting period
Industrial Logistics Properties Trust (ILPT) is a Maryland real estate investment trust that owns and leases industrial and logistics properties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods.
At September 30, 2020, ILPT owned 301 properties totaling approximately 43.8 million rentable square feet, was 98.8% leased to 264 tenants, and had a weighted average remaining lease term of approximately 9.0 years. Hawaii Properties represented approximately 40.7% of annualized rental revenues, while Mainland Properties represented approximately 59.3%. Amazon.com Services, Inc. accounted for approximately 15.9% of annualized rental revenues.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Rental income | $65.1 million | $61.0 million | Up 6.8% |
| Net operating income | $50.6 million | $47.6 million | Up 6.3% |
| Net income | $13.8 million | $10.9 million | Up 26.5% |
| Net income attributable to common shareholders | $14.1 million | $10.9 million | Up 29.0% |
| Normalized FFO attributable to common shareholders | $30.1 million | $28.5 million | Up 5.7% |
| Normalized FFO per diluted share | $0.46 | $0.44 | Up $0.02 |
| Net income per diluted share | $0.22 | $0.17 | Up $0.05 |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Rental income | $194.5 million | $167.0 million | Up 16.4% |
| Net operating income | $152.0 million | $133.0 million | Up 14.3% |
| Net income attributable to common shareholders | $41.8 million | $40.8 million | Up 2.3% |
| Normalized FFO attributable to common shareholders | $90.8 million | $84.7 million | Up 7.2% |
| Normalized FFO per diluted share | $1.40 | $1.30 | Up $0.10 |
Q3 NOI margin, calculated as NOI divided by rental income, was approximately 77.7%, compared with approximately 78.0% in Q3 2019. Nine-month NOI margin was approximately 78.1%, compared with approximately 79.6% in the prior-year period.
Nine-month cash flow from operating activities was $92.9 million, compared with $89.2 million in 2019. Cash used in investing activities was $75.8 million, primarily reflecting a $71.6 million acquisition and $4.5 million of real estate improvements. Cash and restricted cash totaled $51.9 million at September 30, 2020, including $39.1 million of unrestricted cash.
Debt and liquidity
- Total principal debt was $1.377 billion at September 30, 2020, consisting of $320.0 million drawn on the revolving credit facility and $1.057 billion of mortgage debt.
- The revolving credit facility has a total capacity of $750.0 million, matures December 29, 2021, and may be extended for two six-month periods subject to conditions. Availability was $430.0 million at September 30 and $457.0 million at October 26, 2020.
- Mortgage maturities after September 30, 2020 were $57.0 million in 2023 and $1.0 billion in 2029. No debt was scheduled to mature during the remainder of 2020.
- Management stated that ILPT was in compliance with its debt covenants at September 30, 2020 and believed existing resources would fund operating needs, debt service and distributions for at least the next 12 months.
- Interest expense was $40.6 million for the first nine months, up from $36.2 million, primarily because of higher average debt balances, partly offset by lower borrowing rates.
Material changes versus the prior comparable period
- ILPT acquired one Phoenix, Arizona industrial property totaling approximately 820,000 rentable square feet for $71.6 million during the first quarter of 2020.
- ILPT formed a joint venture for 12 Mainland Properties with an institutional investor. The investor contributed approximately $108.7 million for a 39% interest; ILPT retained 61%. The joint venture assumed approximately $407.0 million of mortgage debt.
- Noncontrolling interest was $93.7 million at September 30, 2020, compared with none at year-end 2019, reflecting the joint venture.
- ILPT prepaid a $48.75 million mortgage in May 2020 and recorded a $120,000 gain on early extinguishment of debt.
- Occupancy declined to 98.8% from 99.5% at September 30, 2019. Average effective rental rates increased to $6.03 per leased square foot in Q3 from $5.76 and to $6.01 for the nine months from $5.82.
- Comparable-property NOI increased 3.8% in Q3 and 2.6% for the nine months, while non-comparable-property NOI increased 14.3% in Q3 and 52.7% for the nine months.
- Equity earnings from Affiliates Insurance Company ceased following its dissolution in February 2020; ILPT received a $287,000 liquidating distribution during the second quarter.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical earnings guidance. Management expects current liquidity, industrial and logistics demand, tenant credit quality and limited near-term lease expirations to support operations through the COVID-19 pandemic, but stated that the ultimate impact remains uncertain.
- COVID-19-related rent deferrals totaled $3.6 million as of October 23, 2020, relating to leases representing approximately 8.6% of annualized rental revenues. ILPT recognized $2.8 million in accounts receivable for deferred rent at September 30. Q3 collections were approximately 98.4% of contractual rents after giving effect to deferrals.
- Approximately 75.7% of annualized rental revenues came from investment-grade tenants, subsidiaries of investment-grade parent entities or Hawaii land leases. Approximately 3.3% of annualized rental revenues were scheduled to expire during the following 12 months.
- ILPT agreed to sell a Virginia property for approximately $11.0 million, excluding closing costs, expected in Q4 2020. Completion, timing and final terms were not assured.
- COVID-19 could reduce tenant rent payments, increase defaults and vacancies, reduce market rents and property values, impair leasing and construction activity, and restrict access to debt or equity capital.
- Tenant concentration is material: Amazon represented approximately 15.9% of annualized rental revenues, and the 24 largest tenants represented approximately 53.6%.
- Approximately 40.7% of annualized rental revenues came from Hawaii Properties, including land leases subject to periodic market-based rent resets. Future resets may not produce historical rent increases.
- The revolving credit facility bears floating-rate interest based on LIBOR. A one-percentage-point increase in rates would have increased annual interest expense by approximately $3.2 million on the September 30 balance, or approximately $7.5 million if the facility were fully drawn.
- ILPT has no employees and relies on RMR LLC for business and property management. Related-party management fees and potential conflicts of interest remain relevant investor considerations.
Facts investors should verify
- Whether deferred rents are collected as scheduled and whether additional COVID-19 concessions, defaults or bankruptcies arise.
- Lease renewal and rent-reset performance, particularly for Hawaii Properties and leases expiring in 2021 through 2024.
- Progress and final terms of the proposed Virginia property sale.
- Revolving credit facility availability, covenant compliance and refinancing plans ahead of the December 2021 maturity.
- Tenant concentration and credit exposure, especially to Amazon and other major tenants.
- The effect of the 39% joint venture ownership on consolidated results, distributions, debt and noncontrolling interest.
- Whether the $0.33 per-share quarterly distribution declared in October 2020 remains sustainable under changing operating and financing conditions.