Industrial Logistics Properties Trust: 2020 Form 10-K Summary
Business context and reporting period
Industrial Logistics Properties Trust is a Maryland-organized REIT that owns and leases industrial and logistics properties in the United States. This filing covers the fiscal year ended December 31, 2020; it is an annual report rather than a standalone fourth-quarter filing.
- At year-end, the wholly owned portfolio included 289 properties, approximately 34.9 million rentable square feet, 253 tenants, 98.5% leased occupancy and a 9.5-year weighted average remaining lease term.
- Hawaii Properties represented 50.7% of annualized rental revenues; Mainland Properties represented 49.3%.
- The Company also owned a 22% interest in an unconsolidated joint venture containing 12 properties, approximately 9.2 million square feet and 100% leased occupancy.
- The Company has no employees and relies on The RMR Group LLC for business and property management services.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Rental income | $254.6 million | $229.2 million | +11.1% |
| Net operating income | $198.6 million | $181.2 million | +9.6% |
| Net income | $81.2 million | $52.5 million | +54.7% |
| Net income attributable to common shareholders | $82.1 million | $52.5 million | +56.3% |
| EPS, basic and diluted | $1.26 | $0.81 | +55.6% |
| FFO attributable to common shareholders | $121.0 million | $114.4 million | +5.7% |
| Normalized FFO attributable to common shareholders | $121.0 million | $114.4 million | +5.8% |
| Normalized FFO per share | $1.86 | $1.76 | +5.7% |
| Net cash provided by operating activities | $114.6 million | $116.3 million | -$1.7 million |
| Cash, cash equivalents and restricted cash | $22.8 million | $34.6 million | -$11.7 million |
Rental income and NOI benefited from acquisitions, leasing activity and Hawaii rent resets. Net income also benefited from a $24.0 million aggregate gain on real estate sales, including the deconsolidation and sale of an interest in the joint venture. The NOI margin was approximately 78.0% in 2020, compared with approximately 79.1% in 2019.
- Comparable-property average effective rental rates increased to $6.23 per square foot from $5.92.
- New and renewal leases covering approximately 1.1 million square feet were signed at weighted average rates 14.7% above prior rates.
- Hawaii rent resets covering approximately 1.9 million square feet were completed at rates approximately 20.1% above prior rates.
- Capital expenditures totaled $7.0 million, down from $20.0 million in 2019.
- Quarterly distributions totaled $1.32 per share, or $86.1 million, unchanged on a per-share basis from 2019. Approximately 29.0% of 2020 distributions were characterized as return of capital.
Debt and liquidity
- Consolidated debt principal at December 31, 2020 was $871.0 million, consisting of $221.0 million drawn on the revolving credit facility and a $650.0 million fixed-rate mortgage loan.
- The Company had $529.0 million of borrowing availability under its $750.0 million unsecured revolving credit facility and $22.8 million of cash.
- The revolving facility carried a 1.70% rate at year-end, matures December 29, 2021 and may be extended for two six-month periods, subject to conditions and fees.
- The $650.0 million mortgage loan is interest-only, fixed at 4.31%, and matures in February 2029.
- Management reported compliance with applicable debt covenants at December 31, 2020. Consolidated net debt to total gross assets was 41.2%.
- The Company paid $86.1 million of common distributions during 2020 versus $114.6 million of operating cash flow.
Material changes versus the prior comparable period
- The Company acquired two properties for approximately $115.8 million in 2020, compared with 30 properties for approximately $941.6 million in 2019.
- The Company sold one Virginia property for $10.8 million and recorded a $0.6 million gain on that sale.
- The Company contributed 12 properties to a joint venture, sold interests to institutional investors and reduced its ownership to 22%. The transaction generated approximately $216.8 million of proceeds in aggregate and resulted in deconsolidation of the joint venture in November 2020.
- Joint venture deconsolidation reduced consolidated assets and debt, while the Company retained a $60.6 million equity-method investment and received $8.6 million of joint venture distributions during the year.
- The Company prepaid a $48.8 million mortgage note and recorded a $0.1 million gain on early extinguishment of debt.
- Year-end wholly owned rentable square footage decreased to 34.9 million from 42.9 million, primarily reflecting the joint venture deconsolidation and portfolio activity.
Outlook, risks, contingencies and unusual items
Management stated that the industrial and logistics sector had performed better than many other real estate sectors during the COVID-19 pandemic, supported by e-commerce and supply-chain demand. Management believes current resources are sufficient to fund operations, debt service and distributions for the next 12 months and the foreseeable future, but did not provide formal earnings guidance.
- As of February 15, 2021, the Company had granted $3.2 million of rent deferrals relating to leases representing approximately 9.6% of year-end annualized rental revenues. Of this amount, $2.6 million remained in accounts receivable at December 31, 2020.
- The Company collected approximately 97.6% of contractual rents due for 2020 after giving effect to rent deferrals.
- Only 1.4% of annualized rental revenues and approximately 1.2% of rented square feet were scheduled to expire in 2021.
- Key risks include tenant defaults or bankruptcies, single-tenant concentration, geographic concentration in Hawaii, declining rents at Hawaii rent resets, economic effects of COVID-19, competition for properties and tenants, interest-rate and LIBOR transition risk, refinancing risk, environmental liabilities, natural disasters and climate-related events.
- The Company had approximately $6.9 million reserved for potential environmental liabilities.
- Management agreements with RMR LLC have continuing 20-year terms and may require a substantial termination fee if ended without cause. Related-party relationships may create conflicts of interest.
- The filing identifies impairment of real estate properties as a critical audit matter because valuations depend on assumptions regarding occupancy, rents, holding periods, sale proceeds and capitalization rates. No property impairments were recorded at year-end.
- Deloitte & Touche LLP issued unqualified opinions on the 2020 financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Timing and terms of refinancing or extension of the $221.0 million revolving facility maturing in December 2021.
- Tenant credit quality, rent collections and repayment of the $3.2 million of deferred rent.
- Exposure to major tenants, particularly Amazon, which accounted for $38.2 million of 2020 rental income and approximately 10.0% of year-end annualized rental revenues.
- Future Hawaii rent resets, including approximately $29.3 million of annualized rental revenues scheduled to reset in 2021 and thereafter.
- Sustainability of the $1.32 per-share annual distribution relative to normalized FFO, operating cash flow, debt covenants and capital requirements.
- Valuation assumptions supporting the $60.6 million joint venture investment and the carrying values of the real estate portfolio.
- Economic and governance implications of the long-term RMR LLC management agreements, related-party fees and termination provisions.