Industrial Logistics Properties Trust — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2021, filed July 28, 2021. ILPT is a REIT that owns and leases industrial and logistics properties. At June 30, 2021, its wholly owned portfolio comprised 291 properties totaling approximately 35.2 million rentable square feet, leased 99.0% to 259 tenants. ILPT also held a 22% interest in a 12-property unconsolidated joint venture totaling approximately 9.2 million square feet.
Approximately 50.6% of annualized rental revenue was generated by Hawaii Properties and 49.4% by Mainland Properties. Amazon-related tenants represented 9.9% of annualized rental revenues.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Rental income | $54.2 million | $65.1 million | (16.8%) |
| Net operating income | $42.4 million | $51.1 million | (17.2%) |
| NOI margin | 78.2% | 78.5% | Approximately stable |
| Net income attributable to common shareholders | $18.8 million | $14.8 million | 27.1% |
| Normalized FFO | $30.6 million | $30.6 million | Approximately flat |
| Normalized FFO per diluted share | $0.47 | $0.47 | Flat |
| Net income per diluted share | $0.29 | $0.23 | Increase of $0.06 |
| Metric | Six Months 2021 | Six Months 2020 | Change |
|---|---|---|---|
| Rental income | $108.4 million | $129.4 million | (16.2%) |
| NOI | $84.3 million | $101.4 million | (16.8%) |
| NOI margin | 77.8% | 78.4% | Approximately stable |
| Net income attributable to common shareholders | $38.2 million | $27.7 million | 38.0% |
| Normalized FFO | $61.3 million | $60.7 million | 0.9% |
| Normalized FFO per diluted share | $0.94 | $0.93 | Increase of $0.01 |
Six-month operating cash flow was $62.6 million versus $62.9 million in the prior-year period. Investing activities used $34.6 million, primarily for acquisitions, compared with $74.4 million used in 2020. Financing activities used $20.3 million, including $43.1 million of shareholder distributions. Cash and cash equivalents totaled $30.5 million at June 30, 2021.
Total liabilities were $935.6 million and shareholders’ equity was $999.1 million. Debt principal consisted of $244.0 million outstanding under the revolving credit facility and $650.0 million of mortgage debt. The mortgage debt bears fixed interest at 4.31% and matures in 2029; the revolving facility bore interest at 1.40% at quarter end.
Material Changes Versus the Prior Comparable Period
- Reported rental income and NOI declined primarily because 12 properties contributed to the joint venture were deconsolidated in November 2020. Comparable-property rental income increased 2.9% in the quarter and 3.3% for the six-month period.
- Comparable-property leasing remained favorable. Weighted average rental rate changes were 14.2% for leases executed in the quarter and 15.2% for the six-month period.
- Net income increased despite lower rental income because depreciation and amortization declined, interest expense declined, and ILPT recognized $1.9 million in quarterly and $4.5 million in six-month equity earnings from the joint venture. These earnings primarily reflected increases in the investment’s estimated fair value.
- Interest expense decreased 34.5% in the quarter and 37.3% for the six-month period, primarily due to lower average outstanding indebtedness and lower floating interest rates.
- ILPT acquired a Dallas developable land parcel and a 357,504-square-foot Columbus, Ohio property for an aggregate $34.1 million, including acquisition costs.
- Occupancy improved modestly: all-property leased percentage was 99.0% at June 30, 2021 versus 98.8% a year earlier; comparable-property occupancy was 98.9% versus 98.4%.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings guidance. Management stated that available cash, rental receipts and $506.0 million of unused revolving-credit capacity were expected to be sufficient for operating expenses, debt service, distributions and foreseeable needs. A $0.33 per share quarterly distribution was declared after quarter end, totaling approximately $21.6 million and expected to be paid around August 19, 2021.
- The revolving credit facility matures December 29, 2021, with two six-month extension options subject to fees and conditions. Refinancing or extension execution is an important liquidity consideration.
- Management expected to spend approximately $12.7 million to construct a building on the Dallas land parcel.
- Certain tenants had been granted rent deferrals totaling $3.8 million as of July 26, 2021; $1.4 million remained in rents receivable at June 30, 2021. The filing states these deferrals had not negatively affected reported results through June 30, 2021, but future collection remains a risk.
- COVID-19 had not materially adversely affected operations through the reporting date, but management could not determine its ultimate impact. Tenant credit, rent collection, lease renewals, economic conditions and capital-market access remain key uncertainties.
- Only 0.2% of leased square feet and 0.4% of annualized rental revenues were scheduled to expire in the remainder of 2021. However, 19.4% of leased square feet and 13.8% of annualized rental revenues were scheduled to expire in 2024.
- Hawaii lease rents periodically reset based on fair market values. Future resets may increase or decrease rental income depending on market conditions.
- Environmental remediation accruals totaled $6.9 million. Certain Hawaii properties may require additional remediation, and the company generally lacks insurance specifically covering known or unknown environmental conditions not caused by an insured event.
- The company has no employees and relies on RMR LLC for business and property management. Related-party relationships and management fees are continuing governance and expense considerations.
- A one-percentage-point increase in floating rates would increase annual interest expense by approximately $2.4 million on the $244.0 million drawn balance, or approximately $7.5 million if the facility were fully drawn.
Most Important Facts for Investors to Verify
- Ability to extend or refinance the $244.0 million revolving facility before or at its December 2021 maturity.
- Actual rent collections and repayment of the remaining COVID-19-related deferred rents.
- Sustainability of normalized FFO and the $0.33 per share distribution, particularly after deconsolidation-related revenue reductions.
- Valuation assumptions supporting the $62.9 million joint venture investment and the $4.5 million six-month fair-value gain.
- Lease renewal and rent-reset outcomes, especially for Hawaii Properties and the 2024 expiration concentration.
- Funding and expected returns for the planned approximately $12.7 million Dallas development.
- Tenant concentration, including Amazon-related revenue, and exposure to tenant defaults or nonrenewals.
- Compliance with debt covenants, environmental obligations and risks associated with RMR LLC-related transactions.