Business Context and Reporting Period
Industrial Logistics Properties Trust, a Maryland REIT, filed its Form 10-K for the fiscal year ended December 31, 2019. The filing includes unaudited fourth-quarter data but is primarily an annual report rather than a standalone 2019 fourth-quarter filing.
ILPT owned 300 industrial and logistics properties totaling approximately 42.9 million rentable square feet in 30 states. The portfolio was 99.3% leased to 270 tenants, with a weighted average remaining lease term of approximately 9.6 years. Hawaii Properties represented 40.9% of annualized rental revenues and Mainland Properties 59.1%.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Rental income | $229.2 million | $162.5 million | +41.0% |
| Net operating income | $181.2 million | $130.2 million | +39.2% |
| Net income | $52.5 million | $74.4 million | -29.4% |
| Net income per diluted share | $0.81 | $1.16 | -30.2% |
| FFO and Normalized FFO | $114.4 million | $103.0 million | +11.1% |
| FFO and Normalized FFO per share | $1.76 | $1.61 | +9.3% |
| Cash flow from operations | $116.3 million | $96.8 million | +20.2% |
| Capital expenditures and leasing-related investments | $19.97 million | $6.09 million | Increase |
Rental income increased primarily from acquisitions, leasing activity and Hawaii rent resets. NOI margin was approximately 79.1% of rental income, compared with approximately 80.1% in 2018. Net income margin was approximately 22.9% in 2019 versus 45.8% in 2018; the decline primarily reflected substantially higher depreciation and interest expense.
- Real estate investments before depreciation increased to $2.34 billion from $1.46 billion.
- Total assets increased to $2.45 billion from $1.53 billion.
- Cash and cash equivalents were $28.4 million, with total cash, cash equivalents and restricted cash of $34.6 million.
- Shareholders’ equity was $995.7 million, compared with $1.03 billion at year-end 2018.
- Cash distributions totaled $85.9 million, or $1.32 per share, compared with $60.5 million, or $0.93 per share, in 2018. The 2019 distributions were characterized as 78.2% ordinary income and 21.8% return of capital.
Material Changes Versus the Prior Comparable Period
- ILPT acquired 30 industrial properties containing approximately 13.3 million square feet for an aggregate purchase price of $941.6 million, including acquisition costs.
- Comparable-property rental income increased 2.9%, while comparable-property NOI increased 1.7%. Occupancy remained 99.3% for both 2019 and 2018.
- Interest expense increased to $50.8 million from $16.1 million as borrowings were used to fund acquisitions.
- Depreciation and amortization increased to $61.9 million from $28.6 million, primarily because of acquisitions and capital improvements.
- Net income declined despite higher rental income and NOI because of increased depreciation, general and administrative expense and interest expense, partially offset by the acquired-property contribution.
- During 2019, ILPT obtained a $650.0 million Hawaii mortgage loan and a $350.0 million Mainland mortgage loan and assumed a $57.0 million mortgage note. Consolidated debt increased to $1.41 billion from $462.2 million.
- Leasing activity covered approximately 2.0 million square feet at weighted average rates approximately 17.1% above prior rates. Hawaii rent resets covering approximately 588,000 square feet were completed at rates approximately 30.7% above prior rates.
Liquidity, Debt and Outlook
- ILPT had a $750.0 million unsecured revolving credit facility, with $310.0 million outstanding and $440.0 million available at December 31, 2019. The facility matured in December 2021, with two six-month extension options subject to conditions.
- Mortgage principal totaled $1.11 billion at year-end, with maturities of $48.8 million in 2020, $310.0 million in 2021, $57.0 million in 2023 and $1.0 billion in 2029.
- Management stated that rents and available borrowings should be sufficient for operating expenses, debt service and distributions for the next 12 months and the foreseeable future.
- Management expected acquisitions, leasing activity and rent resets to support future cash flow growth and potentially improve distribution capacity, while noting that cash may instead be used to reduce debt or for other purposes.
- In February 2020, ILPT entered a joint venture involving up to 12 Mainland Properties. An Asian institutional investor agreed to contribute approximately $108.3 million for a 39% interest; ILPT retained 61%. The parties initially closed on 11 properties, with approximately $82.0 million to be contributed initially. ILPT expected to use net proceeds to reduce revolver borrowings.
- In February 2020, ILPT also acquired an approximately 820,000-square-foot, fully leased e-commerce distribution center in Goodyear, Arizona for $72.0 million.
Management Commentary, Risks and Unusual Items
- The strategy emphasizes industrial and logistics properties benefiting from e-commerce demand, long-term leases, tenant reimbursements, fixed rent increases and Hawaii market rent resets.
- Amazon-related tenants accounted for approximately 14.2% of annualized rental revenues and $31.6 million of 2019 rental income, creating tenant concentration risk.
- Most properties are leased to single tenants, increasing exposure to individual tenant defaults, bankruptcies, nonrenewals and specialized-building re-leasing costs.
- Hawaii concentration exposes the portfolio to rent-reset uncertainty, geographic and natural-disaster risks, possible changes in Hawaii law and environmental liabilities.
- ILPT had approximately $6.9 million reserved for potential environmental liabilities as of December 31, 2019. No property impairments were recorded at year-end.
- The company had no employees and relied on The RMR Group LLC for management and property services. The agreements have continuing 20-year terms and may require substantial termination fees, while related-party relationships create potential conflicts of interest.
- Floating-rate revolver borrowings were based on LIBOR. Management disclosed that LIBOR was expected to be phased out in 2021, with uncertainty regarding the replacement rate and its effect on interest expense.
- Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective. The auditor issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether acquisition-driven NOI and FFO growth can continue without excessive leverage or dilution.
- The ability to refinance or repay the $310.0 million revolver maturity and the $1.0 billion of mortgage maturities in 2029.
- Tenant concentration, particularly the approximately 14.2% revenue exposure to Amazon-related tenants and the portfolio’s single-tenant structure.
- The sustainability of 99.3% occupancy, future Hawaii rent resets and lease expirations, including the 17.5% of annualized rental revenues scheduled to expire in 2024.
- The terms, funding and debt-reduction impact of the February 2020 joint venture, including the addition of the twelfth property.
- The effect of LIBOR replacement, interest-rate changes, environmental obligations and climate-related insurance costs on cash flow and distributions.
- The coverage of the $1.32 per-share 2019 distribution by FFO, operating cash flow and recurring capital requirements.