Business Context and Reporting Period
Industrial Logistics Properties Trust is a Maryland real estate investment trust that owns and leases industrial and logistics properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
At June 30, 2019, the company owned 298 properties comprising approximately 42.4 million rentable square feet, was 99.3% leased to 265 tenants, and had a weighted average remaining lease term of approximately 9.8 years. Hawaii properties represented approximately 41.0% of annualized rental revenues. Amazon.com Services represented 14.6% of annualized rental revenues.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Rental income | $60.1 million | $39.4 million | $106.1 million | $80.0 million |
| Net operating income | $48.4 million | $32.0 million | $85.4 million | $64.5 million |
| Net income | $13.1 million | $18.7 million | $29.9 million | $38.0 million |
| Net income per diluted share | $0.20 | $0.29 | $0.46 | $0.60 |
| FFO and Normalized FFO | $29.8 million | $25.6 million | $56.2 million | $51.7 million |
| FFO and Normalized FFO per diluted share | $0.46 | $0.39 | $0.86 | $0.82 |
Q2 NOI margin was approximately 80.5%, compared with approximately 81.2% in the prior-year quarter. Six-month NOI margin was approximately 80.5%, broadly comparable with the prior-year period. Net income margin declined to approximately 21.8% in Q2 2019 from 47.5% in Q2 2018 and to approximately 28.2% for the first six months from 47.4%, primarily because of higher depreciation, interest expense and general and administrative costs.
Operating cash flow for the first six months was $64.5 million, compared with $45.8 million in 2018. Investing cash flow was an outflow of $855.3 million, primarily for property acquisitions, while financing cash flow was $796.5 million. Cash and cash equivalents were $15.4 million at June 30, 2019.
Balance Sheet, Debt and Liquidity
- Total assets were $2.43 billion at June 30, 2019, compared with $1.53 billion at December 31, 2018.
- Debt consisted principally of $608.0 million outstanding under a $750.0 million unsecured revolving credit facility and $755.7 million of mortgage principal, for total principal debt of approximately $1.36 billion.
- The revolving facility had $142.0 million of remaining availability at June 30, 2019 and $147.0 million at July 29, 2019. Its stated interest rate was 3.71% at June 30, 2019, based on LIBOR plus 130 basis points.
- The company obtained a $650.0 million, 4.31% fixed-rate, interest-only mortgage loan maturing in 2029 and assumed $57.0 million of mortgage debt bearing interest at 3.60% and maturing in 2023. Aggregate mortgage principal maturities are scheduled in 2020, 2023 and 2029.
- Management stated that the company was in compliance with its credit facility and mortgage covenants at June 30, 2019. The $650.0 million mortgage agreement requires minimum consolidated net worth of $250.0 million and liquidity of $15.0 million.
- The company paid $42.9 million of distributions during the first six months and declared a $0.33 per share quarterly distribution payable in August 2019.
Material Changes Versus the Prior Comparable Period
- Rental income increased 52.4% in Q2 and 32.6% for the first six months, primarily due to acquisitions and comparable-property leasing activity and rent resets.
- The company acquired 28 properties containing approximately 12.9 million rentable square feet for an aggregate purchase price of $909.1 million, including acquisition costs, during the first six months.
- Q2 net income declined 30.0% and six-month net income declined 21.2%, despite higher rental income and NOI. Interest expense increased to $13.9 million in Q2 from $3.6 million and to $21.5 million for the first six months from $7.4 million.
- Depreciation and amortization increased 142.5% in Q2 and 91.2% for the first six months due primarily to acquisitions and property improvements.
- FFO increased 16.4% in Q2 and 8.7% for the first six months, reflecting the add-back of higher real estate depreciation and amortization.
- Comparable-property rental income increased 4.9% in Q2 and 3.5% for the first six months. Comparable-property occupancy was 99.0% at June 30, 2019, versus 99.1% a year earlier.
- New leases and renewals covering approximately 359,000 square feet were executed in Q2 at weighted average rental rates approximately 27.5% above prior rates for the same space.
Outlook, Risks, Contingencies and Unusual Items
Management believes operating cash flows, cash balances and revolving credit availability will be sufficient for operating and capital expenses, debt service and distributions for the next 12 months and the foreseeable future. Management expects recent acquisitions and leasing activity may increase future cash flows, but may use any additional cash to reduce debt rather than increase distributions.
- Management expects the company’s leverage ratio to increase because of the 2019 acquisitions, resulting in an anticipated 25-basis-point increase in the revolving credit facility spread after second-quarter results are reported.
- The company has approximately $12.8 million of remaining estimated costs for an expansion project and $662,000 of unspent leasing-related obligations at June 30, 2019.
- Interest-rate risk is significant: a one-percentage-point increase in rates would increase annual interest expense on the outstanding revolving facility by approximately $6.1 million. A similar refinancing-rate change for fixed-rate mortgage debt would change annual interest cost by approximately $7.6 million.
- Key risks include tenant credit and concentration, lease expirations and renewals, market-driven rent resets at Hawaii properties, access to capital, debt maturities and covenants, competition, economic conditions, environmental remediation, REIT qualification and related-party conflicts involving RMR LLC and affiliated entities.
- Accrued environmental remediation costs were $6.9 million. The company stated that certain Hawaii properties may require additional remediation if their use changes, although it has no present plans to change those uses.
- The company has no employees; business and property management services are provided by RMR LLC. No material changes to previously disclosed risk factors were reported.
- The company adopted the new lease standard on January 1, 2019 without a material impact on its financial statements. The filing states that it is assessing the future credit-loss standard.
Important Facts for Investors to Verify
- Whether acquisition-driven NOI and FFO growth offsets higher interest expense, leverage and refinancing exposure.
- The company’s ability to maintain approximately 99% occupancy and renew or replace leases representing 24.5% of annualized rental revenues expiring through 2023.
- Tenant concentration, particularly Amazon.com Services’ approximately 14.6% share of annualized rental revenues.
- Available borrowing capacity, covenant compliance and the anticipated 25-basis-point increase in the revolving facility spread.
- Funding requirements for the $12.8 million expansion commitment, leasing obligations and future acquisitions while maintaining the $0.33 per share distribution.
- Future Hawaii rent resets, environmental remediation exposure and the effect of market conditions on rents and property values.
- Terms, costs and potential conflicts associated with the company’s continuing management and property management agreements with RMR LLC.