Industrial Logistics Properties Trust — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly results for the three months ended March 31, 2020, compared with the three months ended March 31, 2019. ILPT is a REIT focused on industrial and logistics properties. At March 31, 2020, it owned 301 properties totaling approximately 43.8 million rentable square feet, was 98.9% leased to 266 tenants, and had a weighted average remaining lease term of approximately 9.3 years.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Rental income | $64.3 million | $46.0 million | +39.8% |
| Net operating income | $50.3 million | $37.0 million | +35.8% |
| Net income attributable to common shareholders | $12.8 million | $16.8 million | -23.5% |
| Net income per diluted share | $0.20 | $0.26 | -$0.06 |
| FFO and Normalized FFO attributable to common shareholders | $30.2 million | $26.4 million | +14.3% |
| FFO and Normalized FFO per diluted share | $0.46 | $0.41 | +$0.05 |
| Net cash provided by operating activities | $29.4 million | $28.3 million | +$1.1 million |
NOI margin was approximately 78.2% of rental income in Q1 2020 versus 80.5% in Q1 2019. Net income margin declined to approximately 19.9% from 36.5%, primarily because depreciation and amortization and interest expense increased substantially.
At March 31, 2020, total assets were $2.51 billion, unrestricted cash and cash equivalents were $19.9 million, and cash, cash equivalents and restricted cash totaled $31.2 million. Principal debt consisted of $265.0 million outstanding on the revolving credit facility and $1.11 billion of mortgage notes. The revolving facility had $485.0 million of remaining availability as of March 31 and April 29, 2020.
Material Changes Versus the Prior Comparable Period
- Rental income increased primarily from acquisitions, leasing activity, rent resets and higher tenant reimbursements. Comparable-property rental income increased 3.0%, while acquired-property rental income contributed $19.5 million versus $2.5 million in the prior-year period.
- ILPT acquired one Goodyear, Arizona industrial property containing approximately 820,000 rentable square feet for $71.6 million, including acquisition costs.
- The company formed a joint venture for 12 Mainland Properties with an Asian institutional investor. ILPT received $108.3 million for a 39% noncontrolling interest and retained 61%; the joint venture assumed approximately $407.0 million of existing mortgage debt.
- Operating cash flow increased modestly, while investing cash outflows declined to $73.9 million from $281.9 million because Q1 2019 included substantially greater acquisition spending.
- Interest expense increased 91.1% to $14.5 million, and depreciation and amortization increased 90.3% to $18.3 million, reflecting prior acquisition activity and increased borrowings.
- Occupancy declined to 98.9% from 99.4%, while average effective rental rates increased to $6.02 per leased square foot from $5.89.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative earnings guidance. Management stated that current financial resources and expected industrial and logistics demand should enable the company to withstand COVID-19-related disruption, but emphasized that the ultimate impact cannot currently be determined.
- As of April 27, 2020, ILPT had approved $2.1 million of rent deferrals for tenants representing approximately 6.5% of annualized rental revenues. In most cases, repayment is scheduled in 12 equal monthly installments beginning in September 2020.
- Management cited $48.8 million of debt maturities during the remainder of 2020, with the next maturity thereafter being the revolving credit facility in 2021. The facility may be extended for two six-month periods subject to conditions.
- Approximately 74.1% of annualized rental revenues came from investment-grade tenants, subsidiaries of investment-grade parents or Hawaii land leases. Only 0.5% of annualized rental revenues were scheduled to expire during the following 12 months as of March 31, 2020.
- COVID-19 risks include tenant defaults or bankruptcies, additional rent concessions, lower demand for industrial space, declining property values, reduced access to capital and possible covenant or debt-service pressure.
- Amazon-related tenants generated $9.7 million, or 15.0%, of Q1 2020 rental income, creating tenant concentration exposure.
- Fixed-rate mortgage debt had a principal balance of $1.11 billion; a one-percentage-point refinancing rate increase would increase estimated annual interest cost by approximately $11.1 million. A one-percentage-point increase in rates on the $265.0 million of floating-rate debt would increase annual interest expense by approximately $2.7 million.
- The company declared a $0.33 per-share quarterly distribution on April 6, 2020, expected to total approximately $21.5 million and to be paid on or about May 21, 2020. Future distributions remain subject to operating performance, liquidity, debt covenants and Board discretion.
- ILPT had no employees; business and property management services were provided by related party RMR LLC. Q1 2020 business management fees were $3.3 million and property management and construction supervision fees were $1.9 million.
Important Facts for Investors to Verify
- Whether deferred rents are collected beginning in September 2020 and whether additional tenant concessions or defaults arise.
- Actual rent collection, occupancy and tenant credit performance as the COVID-19 economic effects continue.
- Availability under the revolving credit facility, compliance with debt covenants and refinancing plans for the 2020 and 2021 maturities.
- The effect of the 39% joint venture interest on consolidated results, debt, cash flow and future financing capacity.
- Sustainability of the $0.33 quarterly distribution relative to recurring cash flow, FFO and liquidity.
- Exposure to Amazon and other concentrated tenants, Hawaii rent resets, environmental remediation obligations and related-party management arrangements.