$ILPT Rise 25% Last Week: A High-Risk, High-Reward Opportunity?

In today's edition, we will track the fundamental readings of long-term bullish companies in strong (TigerTrade Top 1 Gainer) concepts each week and look forward to your attention and discussion.

Disclaimer: Capital at risk. This is not direct financial advice or a recommendation to acquire or dispose of any investment, but for communication only.

It was a volatile week in the market. The best-performing concepts are security & alarm services, industrial REITs and paper products.

Considering the different perceptions of the stock, this time TigerPicks choose $Industrial Logistics Properties Trust(ILPT)$ to have a fundamental highlight to help users understand it better.

$Industrial Logistics Properties Trust(ILPT)$

Industrial Logistics is a REIT that owns and leases industrial and logistics properties throughout the United States. ILPT focuses on industrial properties used for retail warehouses and distribution.

Property Portfolio

The vast majority of ILPT's portfolio was in Hawaii where it owned 226 buildings, leasable land parcels, and easements with approximately 16.7 million square feet, and 68 industrial and logistics properties with approximately 19.8 million square feet were located in 33 states on the U.S. mainland.

This started to change in 2022 when ILPT successfully acquired Monmouth Real Estate Investment Corporation, which marked a major milestone for the company. Through this acquisition, it has grown as an organization - now having 126 e-commerce-focused mainland properties as part of its portfolio.

So, the current portfolio has moved away from a mainly Hawaii-focused portfolio to a more diverse one with 226 properties in Hawaii and 187 in the U.S. mainland totaling 413 properties. 318 of which are 100% ILPT wholly owned ones and 94 are via Mountain Industrial REIT.

The company recognizes its revenue from rental income and approximately 27.4% came from Hawaii properties in Q1 2023 down from 37.4% Y-o-Y. The management is focusing more on the U.S. mainland since the acquisition.

Geographic Mix of Annualized Rental Revenues

Financials & Earnings

The company reported better-than-expected results but the company is still very far from its heights before the acquisition of Monmouth.

Normalized FFO was $7.9 million, or $0.12 per share, exceeding the $0.08 consensus, and a rise from $0.08 in the prior quarter. On March 31st, 2023, the occupancy rate of the properties decreased slightly to 99% compared to 99.3% registered on March 31st, 2022, and 99.1% at the end of 2022.

In the first three months of 2023, they managed to enter 12 new and renewal leases for a total of 1.1 million square feet with an average lease term of 8.9 years. This initiative will result in a $1.4 million increase in rental revenue per year starting from 2023, with 75% of total income coming from it.

The majority of ILPT's leasing in the quarter was attributed to mainland renewals, especially three with FedEx totaling 587,000 square feet. These renewals yielded cash rent increases of 12.6% on average. The management has a guaranteed source of income from its $FedEx(FDX)$ portfolio, as over 75% of it is under long-term lease agreements expiring in 2027 or further. This has secured an annualized revenue of $96.9 million.

One of the main risks to ILPT is its very concentrated tenant portfolio.

Subsidiaries of FedEx Corporation, accounted for approximately 32% of the company's rental income for the three months ended March 31, 2023, up from 19% Y-o-Y.

Subsidiaries of $Amazon.com(AMZN)$, accounted for 6.8% of ILPT's rental income for the three months ended March 31, 2023, so the company's portfolio highly depends on 3-4 major logistics players.

$Home Depot(HD)$, the company's third most prominent tenant, utilized its right to terminate the agreement of leasing a 2.2 million square foot parcel in Hawaii from ILPT that was signed last year. ILPT is currently having conversations with Home Depot about the site. This end of the lease had no immediate effect on ILPT's financial results since they are still receiving rent payments from the tenant until March 2024. But it highlights the risks of the highly concentrated portfolio.

As of March 31, ILPT had six years' worth of debt with no maturities up until 2027. The total debt comprised both fixed-rate and fixed-to-interest rate caps, with an overall weighted average interest rate of 5.4%.

Valuation

In Q3 2022 investors saw an enormous growth in the trust's revenue from the previous year; a large part of this being attributed to the Monmouth acquisition.

FFO per unit dropped drastically from $0.46 to $0.23, with the main reasons being a sharp hike in operating costs and interest expenses. This trend has continued in Q4 2022 with an FFO per share dropping to $0.08. As I mentioned above the first quarter results were better than expected and the company posted a $0.12 per share FFO. So, it seems that after the sharp decline, operations started to stabilize. Operating expenses significantly increased after the acquisition in Q3 2022, with interest expenses increasing substantially to $89.7 million a 10-fold increase Y-o-Y. Since then this has declined to $70.8 million by the end of March 2023 and the signs of no more interest rate increases will help the company in the long-term.

Price to tangible book value has plummeted since the beginning of 2022 and the decrease accelerated after the Fed started to increase the base rate more aggressively and the consequences of the acquisition were crystal clear for investors. ILPT is trading at only 0.177x its tangible book value.

In addition, the company is trading at approximately 4 times its annual FFO (if calculated with the most recent data), a very low figure in the company's history. The company clearly is undervalued but its balance sheet, a dividend cut, and the potential loss of its third biggest tenant gives plenty of reasons why.

Chart

Stock Price Forecast:

Here are the target price forecast for the future 12 months from analysts on CNNMoney.com.

The 2 analysts offering 12-month price forecasts for Industrial Logistics Properties Trust have a median target of 6.50, with a high estimate of 10.00 and a low estimate of 3.00. The median estimate represents a +71.96% increase from the last price of 3.78.

Hope this analysis helps you get more understanding of the company's whole image, Tiger Picks will follow up the monthly performance as a longterm track.

Resource:

https://seekingalpha.com/article/4600376-industrial-logistics-properties-stock-stabilization-has-started-but-problems-are-not-over-yet

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