Industrial Logistics Properties Trust: In A Tough Place

seekingalpha06-11

Industrial Logistics Properties Trust shares have plummeted due to high leverage, an ill-timed acquisition, higher interest rates, and governance issues.Industrial Logistics Properties owns over 400 ...

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This means that shares trade discounted during an era of near 100% occupancy rates and decent rental growth. In fact, shares trade at a fraction of book value, with investors having to hope for a lower interest rate environment and/or asset sales, and governance improvements, something which I do not feel comfortable betting on. Facts About Industrial & Logistics Trust ILPT is a US REIT which owns over 400 industrial and logistics properties, totaling more than 60 million rentable square feet. While the company has activities across 39 US states, it is Hawaii which makes up nearly 30% of rental revenues. The trust reports 99% occupancy rates and a weighted average remaining lease term of about 8 years, with next debt maturities only due in 2027. The portfolio is really comprised of two portfolios. The mainland portfolio comprises just 185 properties, which are typically larger, and responsible for 72% of rents. Generally, these are triple net leases with significant investments made by tenants. The portfolio in Hawaii is much different. This includes 226 locations which on average are much smaller, responsible for 28% of rents, all located around Oahu. Most of these are ground leases, as this is really a scarcity play. To complicate things even more, the mainland properties include 90 properties which are fully owned, as well as a 61% interest in properties held in the so-called Mountain industrial JV. In terms of leasing activities, about two-thirds of revenues are generated from warehouse & distribution properties, nearly 30% from ground leases, and the remainder from light manufacturing. FedEx is by far the largest tenant, responsible for 29% of rental revenues, with the second-largest tenant Amazon being responsible for just over 6% of sales. The company has grown substantially recently, in part due to an ill-timed acquisition of Monmouth REIT early in 2022, as the $4 billion deal significantly leveraged up the balance sheet. In fact, a $20 stock at the time of the deal announcement was down to $3 by year-end as the market realized this, amidst ever-high interest rates. About The Numbers In February, ILPT posted a nearly 13% increase in rental income to $437 million. The company reported $308 million in expenses, mostly composed of a $178 million depreciation expense, complemented by real estate taxes. The issue of ILPT is clearly seen in the P&L statement already, as the company incurred $288 million in interest expenses, outsized compared to the rental income. Subsequently, the company posted net losses of $108 million, resulting in a GAAP loss of $1.65 per share based on a share tally of 65 million shares. The balance sheet tells a similar story. The company reports total assets of $5.6 billion, of course, mostly comprised of real estate properties. All this is financed by $4.4 billion in debt and payables, as the company is paying effective interest rates of around 6.5% on these. Equity is reported at just $1.16 billion with nearly half a billion attributed to non-controlling interests (related to JV's), for a common equity position of $670 million. The company has suffered from overleverage, variable rates, and poor governance. Trying to address the issues, the company stopped acquisition activity in 2023, while delivering on a disappointing and mere $25 million in dispositions. The so-called adjusted normalized Funds From Operations totaled just $31 million in 2023. Despite the woes, the company still announced a penny quarterly dividend. While annual cash outflows come in at just $2 million and change, it remains quite telling that a minimal dividend has been maintained. In April, the company posted first quarter results with rental revenues up less than 2% to $112 million, as FFO rose from nearly $8 million this period last year to $9 million and change. The company managed to deliver some cost savings, offset by quarterly interest expenses ticking up to $73 million. What Now? The 65 million shares of ILPT trade near $4 per share, for a mere quarter of a billion market value here, far below the $643 million equity position. This implies a near $400 million discount from book value. Looking at the properties, the company generated $450 million in annual revenues on a book value of $4.7 billion of properties, for a near 10% gross rental yield, a yield which increases to more than 10% if we factor in the discount to the equity position. For investors, the overleveraged situation, too much variable debt, and governance issues have created a nightmare scenario. The common equity shareholders, which saw shares trade in the mid-twenties in 2021, when interest rates were very low, made that equity of the company traded at roughly a billion premium to book. The reality is that shares mostly represent a call option now on lower interest rates, but it feels as if the company really has some governance issues. If the company could really sell assets at book value, the company and its shareholders might have been far better off. This is certainly the case in complicated JVs. Besides this observation, there is the role of RMR as the manager, which has long-dated management contracts, with quite some incentives, which somewhat feels not really at par compared to market standard.  With no debt due until 2027, Industrial Logistics Properties Trust is really a bet on lower interest rates, as shares have doubled from a low of $1 and changed in the fall. While shares certainly look cheap and value can be unlocked by selling off assets, I am fearful of poor governance structures, as continued underperformance can leave investors in the dark. All this makes me very hard-pressed to get involved, despite the cheapness argument.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2442826073"}