Industrial Logistics Properties Trust — Q1 2021 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 months ended March 31, 2021, compared with the three months ended March 31, 2020.
At March 31, 2021, the company owned 289 properties totaling approximately 34.9 million rentable square feet, with properties in Hawaii and 30 other states. Consolidated properties were 98.6% leased to 253 tenants, with a weighted average remaining lease term of approximately 9.4 years. The company also held a 22% interest in a 12-property unconsolidated joint venture.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Rental income | $54.2 million | $64.3 million | Down 15.7% |
| Net operating income | $42.0 million | $50.3 million | Down 16.5% |
| Net income attributable to common shareholders | $19.3 million | $12.8 million | Up 50.5% |
| Net income per diluted share | $0.30 | $0.20 | Up $0.10 |
| FFO and Normalized FFO | $30.7 million | $30.2 million | Up 1.7% |
| FFO and Normalized FFO per diluted share | $0.47 | $0.46 | Up $0.01 |
| Net cash provided by operating activities | $29.7 million | $29.4 million | Up $0.2 million |
NOI margin was approximately 77.5% in Q1 2021 versus 78.2% in Q1 2020. Comparable-property rental income increased 3.6%, while comparable-property NOI increased 1.9%. Average effective rental rates per leased square foot increased to $6.31 from $6.02.
Cash and cash equivalents were $26.1 million at March 31, 2021. The company generated $29.7 million from operating activities, used $0.8 million in investing activities and used $25.6 million in financing activities, including $21.6 million of common distributions. Capital expenditures totaled approximately $1.1 million.
Total debt consisted primarily of $217.0 million outstanding under the revolving credit facility and $650.0 million of mortgage debt. The revolving facility had $533.0 million of available capacity at March 31 and April 22, 2021. The mortgage debt is secured by 186 Hawaii properties, bears interest at 4.31% and matures in 2029. The revolving facility bears interest at 1.41% at March 31, 2021 and matures December 29, 2021, with two six-month extension options subject to conditions.
Material Changes Versus the Prior Comparable Period
- Rental income and consolidated NOI declined primarily because 12 properties were contributed to a joint venture in 2020 and the joint venture was deconsolidated in November 2020. Comparable-property operating performance improved.
- Net income increased because of lower interest expense, lower depreciation and amortization, lower general and administrative expense, and $2.6 million of equity earnings from the unconsolidated joint venture.
- Interest expense decreased 39.8% to $8.7 million, primarily due to lower average debt balances and lower revolving-facility borrowing costs.
- Depreciation and amortization decreased 30.7% to $12.7 million, and general and administrative expense decreased 22.3% to $3.8 million.
- Operating cash flow was broadly stable, while Q1 2020 investing cash outflows included $71.6 million of real estate acquisitions that did not recur in Q1 2021.
- The company paid a quarterly distribution of $0.33 per common share, totaling $21.6 million, and declared another $0.33 distribution for payment on or about May 20, 2021.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that available operating cash flow, cash on hand and revolving-credit availability are expected to fund operating and capital expenses, debt service and distributions for the next 12 months and the foreseeable future.
Management reported that COVID-19 had not had a significant adverse impact on the business through the filing date, but certain tenants received rent deferrals. As of April 23, 2021, deferred rent arrangements totaled $3.1 million, relating to leases representing approximately 1.5% of annualized rental revenues; $1.7 million remained recorded in rents receivable at March 31, 2021.
The company entered into an agreement to acquire a newly built, approximately 358,000-square-foot, single-tenant property near Columbus, Ohio, for $31.5 million, excluding acquisition costs. Closing was expected in Q2 2021 but remained subject to conditions and could be delayed, modified or not completed.
Approximately 0.9% of leased square feet and annualized rental revenues were scheduled to expire by December 31, 2021. Key risks include tenant credit and renewal risk, rent resets at Hawaii properties, COVID-19 effects, access to capital, refinancing of the revolving facility, floating interest rates, environmental remediation, concentration among major tenants and related-party management arrangements with RMR LLC.
The company had accrued environmental remediation costs of $6.9 million. Management stated that it believed the company was in compliance with its debt covenants at March 31, 2021. A one-percentage-point increase in rates on the outstanding revolving debt would increase estimated annual interest expense by approximately $2.2 million, or about $0.03 per diluted share based on the filing's sensitivity data.
Important Facts for Investors to Verify
- Whether the revolving credit facility is extended or refinanced before its December 2021 maturity and on what terms.
- Whether the Columbus, Ohio acquisition closes in Q2 2021 and the resulting effect on rental income and leverage.
- Collection of deferred rents and any increase in tenant defaults or lease concessions related to COVID-19.
- Renewal and rent-reset outcomes for leases expiring or resetting in 2021 through 2024, particularly in Hawaii.
- The sustainability of the $0.33 per share quarterly distribution relative to FFO, operating cash flow and debt requirements.
- The valuation assumptions supporting the $62.5 million fair value of the 22% joint venture investment.
- Exposure to Amazon and other significant tenants, including tenant concentration and lease-renewal risk.
- Potential environmental remediation costs and the effect of interest-rate changes or LIBOR replacement on borrowing costs.