Industrial Logistics Properties Trust — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Industrial Logistics Properties Trust is a Maryland real estate investment trust focused on owning and leasing industrial and logistics properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the same periods in 2019.
At June 30, 2020, the company owned 301 properties totaling approximately 43.8 million rentable square feet across Hawaii and 30 other states. The portfolio was 98.8% leased to 263 tenants, with a weighted average remaining lease term of approximately 9.1 years. A 39% outside investor interest in a joint venture holding 12 Mainland Properties is reported as noncontrolling interest.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Rental income | $65.1 million | $60.1 million | +8.4% |
| Net operating income | $51.1 million | $48.4 million | +5.7% |
| Net income | $14.6 million | $13.1 million | +11.0% |
| Net income attributable to common shareholders | $14.8 million | $13.1 million | +13.0% |
| Normalized FFO attributable to common shareholders | $30.6 million | $29.8 million | +2.5% |
| Normalized FFO per diluted share | $0.47 | $0.46 | +2.2% |
| Net income per diluted share | $0.23 | $0.20 | +15.0% |
Q2 net operating income represented approximately 78.5% of rental income, compared with approximately 80.5% in Q2 2019. Net income attributable to common shareholders represented approximately 22.8% of rental income, compared with approximately 21.8% in the prior-year quarter.
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change |
|---|---|---|---|
| Rental income | $129.4 million | $106.1 million | +22.0% |
| Net operating income | $101.4 million | $85.4 million | +18.7% |
| Net income | $27.3 million | $29.9 million | -8.9% |
| Net income attributable to common shareholders | $27.7 million | $29.9 million | -7.5% |
| Normalized FFO attributable to common shareholders | $60.7 million | $56.2 million | +8.0% |
| Normalized FFO per diluted share | $0.93 | $0.86 | +8.1% |
Six-month net operating income margin was approximately 78.4%, compared with approximately 80.5% in the prior-year period. The decline in reported net income primarily reflected higher depreciation and amortization, higher interest expense, and the absence of 2019 earnings from Affiliates Insurance Company, which dissolved in February 2020.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $62.9 million for the six months ended June 30, 2020, compared with $64.5 million in the prior-year period.
- Net cash used in investing activities was $74.4 million, including $71.6 million for the acquisition of one Phoenix property with approximately 820,000 rentable square feet. The prior-year period included $855.3 million of investing outflows, primarily for acquisitions.
- Net cash provided by financing activities was $23.9 million, including $107.6 million of net proceeds from the noncontrolling interest transaction, $10.0 million of net revolver borrowings, a $48.8 million mortgage repayment and $43.0 million of common distributions.
- Cash, cash equivalents and restricted cash totaled $47.0 million at June 30, 2020, including unrestricted cash of $33.3 million and restricted cash of $13.7 million.
- Total principal indebtedness was approximately $1.377 billion, consisting of $320.0 million outstanding under the revolving credit facility and $1.057 billion of mortgage debt. Debt carrying value, net of issuance costs and premiums, was approximately $1.368 billion.
- The $750 million unsecured revolving credit facility matured in December 2021, with two optional six-month extensions. At June 30 and July 27, 2020, $320.0 million was outstanding and $430.0 million was available.
- Mortgage maturities after June 30, 2020 totaled $1.057 billion: $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 the company was in compliance with applicable debt covenants at June 30, 2020.
Material changes versus the prior comparable period
- Rental income and NOI increased primarily because of acquisitions, leasing activity, rent resets and higher reimbursed property expenses. Comparable-property rental income increased 4.2% in Q2 and 3.5% for the six-month period.
- The company formed a joint venture for 12 Mainland Properties, receiving aggregate investor proceeds of $108.3 million for a 39% interest while retaining 61%. The joint venture assumed approximately $407.0 million of existing mortgage debt.
- The company prepaid a $48.8 million mortgage note in May 2020 and recorded a $120,000 gain on early extinguishment of debt.
- Interest expense declined 5.2% in Q2, but increased 28.8% for the six-month period because of higher borrowings used to fund prior acquisitions.
- Occupancy declined modestly to 98.8% from 99.3% at June 30, 2019. Average effective rental rates increased to $6.02 per square foot from $5.82 for Q2 and to $6.01 from $5.86 for the six-month period.
- During Q2, the company renewed approximately 314,000 square feet at weighted average rental rates approximately 26.6% above prior rates and completed rent resets for approximately 1.6 million square feet of Hawaii land at rates approximately 21.4% above prior rates.
Guidance, outlook, risks and unusual items
Management did not provide quantitative earnings guidance. Management stated that current liquidity and expected performance of the industrial and logistics sector were expected to support operations, debt service and distributions for the next 12 months and thereafter, but emphasized substantial uncertainty from COVID-19 and the economic downturn.
- COVID-19 had resulted in tenant requests for rent relief. As of July 27, 2020, the company had approved rent deferrals totaling $2.8 million for leases representing approximately 8.2% of annualized rental revenue. Approximately $2.3 million was recorded in accounts receivable at June 30, 2020; most deferred amounts were scheduled for repayment in 12 monthly installments beginning in September 2020.
- The company collected approximately 97% of contractual rents due during Q2 after giving effect to rent deferrals and did not record revenue reserves for the deferred amounts.
- Management identified risks including tenant defaults or bankruptcies, declining e-commerce demand, lower market rents, reduced occupancy, difficulty refinancing or accessing capital, covenant breaches, rising floating-rate expense, and uncertainty regarding future distributions.
- Amazon.com Services accounted for 15.9% of annualized rental revenue at June 30, 2020. The 20 largest tenants represented approximately 53.3% of annualized rental revenue, indicating material tenant concentration.
- Approximately 3.0% of annualized rental revenue was scheduled to expire over the following 12 months. Hawaii Properties represented approximately 40.7% of annualized rental revenue and include leases subject to periodic market-based rent resets.
- The company has no employees and relies on RMR LLC for business and property management. Q2 business management fees were $3.3 million and property management and construction supervision fees were $1.9 million.
- Environmental remediation costs of $6.9 million were accrued, primarily relating to certain Hawaii land holdings. The company stated that the timing of remediation is indeterminable and that additional environmental liabilities could arise.
- The company declared a $0.33 per share quarterly distribution on July 16, 2020, totaling approximately $21.5 million, payable around August 20, 2020.
Most important facts for investors to verify
- Whether tenants pay the approximately $2.8 million of deferred rent and whether additional concessions, defaults or bankruptcies arise as COVID-19 effects continue.
- The company’s ability to maintain occupancy, rental rates and Hawaii rent resets, particularly for the concentrated tenant base and major Amazon exposure.
- Refinancing and covenant capacity as the revolving credit facility approaches its December 2021 maturity and as capital market conditions evolve.
- The sustainability of the $0.33 per share quarterly distribution relative to Normalized FFO, cash flow, debt covenants and REIT distribution requirements.
- The economic performance, distributions and financing needs of the 61%-owned joint venture and the effect of its noncontrolling interest on common-shareholder results.
- Potential environmental remediation costs and the financial implications of the company’s related-party management arrangements with RMR LLC.