Lack Of Liquidity Holds Back Industrial Logistics Properties

seekingalpha11-24 21:06

Industrial Logistics Properties Trust shows potential for a turnaround after major dividend cuts in recent years.With a portfolio of warehousing assets, it's benefiting from retail and consumer trends...

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rate cuts may reduce interest expenses, but the lack of a credit facility and floating-rate debt remain concerns.Despite potential dividend recovery and the discount to book, a hold makes more sense for the risks one would assume with such a position.   Luis Alvarez  Industrial Logistics Properties Trust (NASDAQ:ILPT) gives signs of being a potential turnaround.   ILPT Full Price History (Seeking Alpha) Down over 80% since its IPO, most of this loss occurred in 2022. Priced for a 1% dividend yield on the market, this does suggest that some kind of resurgence is in the mind of the market. ILPT owns warehouse properties that play a role in the logistics of shipping and retail, many believe this is an area well-poised for long-term growth. I believe there is real potential for a rebound, but the weak financing is a big concern, and it's much safer to treat this REIT as a hold. Financial History ILPT has had a counter-intuitive history of results, going back nine years.   Author's display of 10K data If we start with revenue, we see that it was mostly flat but began to grow substantially in the latter half of the period.   ILPT 5Y Annual Dividends (Seeking Alpha) Strangely, this also coincided with a massive reduction in the dividend, reaching the bare minimum of one penny per quarter, a rate that has continued into 2024.   Author's display of 10K data To get a better idea of the situation with the cash flows, funds from operations experienced a sharp drop, so the dividend cut was not surprising.   Income Statement (2023 Form 10K) The primary reasons for the decline in FFO was the increased interest expense that their floating-rate loans incurred as rate hikes began in 2022. There were also related impacts to their joint ventures, which contributed to losses.   Author's display of 10K data 2022 also saw significant acquisition activity, which increased total debt significantly.   Q3 2024 Form 10Q 2024's YTD results haven't shown improvements in funds from operations or the underlying problems dragging it down, either. They did have much of that debt due this year, which they managed to refinance, but that's not quite the same as resolving the issue. Future Outlook Historical data show a bleak picture, indicative of a company caught heavily off guard. A compelling turnaround story therefore needs to provide not only improved financial performance, but a confirmation that the old problems will not reoccur.   November 2024 Company Presentation The Fed has begun cutting interest rates again in both September and November. As a majority of their debt is floating rate, this should reduce the interest expense going forward. The weighted average maturity is 4.3 years, and thanks to refinancing done just after Q3 results, none is due until 2027. This means their liquidity situation should be improved going forward. Yet, I feel there will still be some lingering issues. I'll quote President & COO, Yael Duffy, from her remarks in the Q3 earnings call:  In recent months, we have been frequently asked when we expect to increase our dividend. We recognize the value of the dividend to our investors and it is a topic that we discuss regularly at both the management and board level. However, as ILPT does not have a credit facility, we feel it is important that we have ample liquidity and financial flexibility to address future leasing costs, capital expenditures and obligations under our debt agreement before increasing the dividend level.  The near-term expectation should be that the dividend will not be increased for a while. That much is clear. Still, I find it concerning that a company like this would lack a credit facility. Even if FFO quickly returns to prior levels, another setback means they would need to cut into the dividend to respond to it. Similarly, I find it concerning that they had floating-rate debt in the first place. Between that and a strange absence of a revolver, ILPT seems to have financing problems that I don't see even among mediocre REITs.   November 2024 Company Presentation Some may feel that secular trends favor ILPT's warehouse real estate too much, as growing consumer demand increase the needs for these locations. Not only can new sites be built or acquired, but existing portfolio assets can be expanded to earn more revenue.   ibisworld.com Revenues from warehousing have steadily grown for years, experiencing a sharp bump upward from COVID years, as increased e-commerce created greater need for warehouses. It's not for nothing that the current yield implies some growth or resurgence.   Author's display of 10K data As they didn't dilute their shares in response to the financial issues, a return of the full dividend is possible. At a rate of $1.32 per share, that's over a third of the recent price. Should the better scenario materialize, dividends alone would provide excellent returns. While the riskiness of an investment is usually a consequence of the price, I can't say that's quite the case here. This isn't just because of the potential dividend, but also because book value per share stands at $8.86. There's actually some margin of safety here, but as losses reduce their assets, this is a shrinking figure too. Conclusion Ultimately, I think ILPT is one to watch, but that needs for time and reassurance. The limitations of their financing concern me, and while their dividend could result in a 30% yield on cost or more, their heavy reliance on floating-rate loans and lack of a credit facility mean that a dividend recovery could just as easily be lost again.  Folks determined to invest in warehousing might look at Prologis (PLD), which I covered before. By just about every measure, it seems much less risky. While the upside potential is there for ILPT, until I have more reassurance, it's safer to rate this a Hold.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","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":"4.29.3","shortVersion":"4.29.3","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/2485380796"}