There's no secret that industrial real estate -- especially e-commerce logistics properties -- is a very hot sector, with regular reports of record-low vacancies and soaring rents, especially when leases renew.
Real estate investment trusts (REITs) that specialize in warehouse space have benefited, certainly. Nareit, an industry trade group, says the 13 REITs it counts in the industrial sector recorded 62% in total returns in 2021 and are down only about 8.4% so far this year, well below the overall market swoon.
But there's a notable exception here: Industrial Logistics Properties Trust (ILPT -5.68%). This Boston-based industrial REIT joined in the feeding frenzy of big money chasing available properties in this sector, but with a twist. It outbid a pair of real estate billionaires last fall for the right to buy another REIT, Monmouth Real Estate Investment.
In February, Industrial Logistics closed on the Monmouth deal, adding 26 million square feet and 126 properties to a portfolio that now has 412 properties and 60 million square feet that are 98.8% occupied. That expansion also adds a good bit of nationwide geographic diversity to a portfolio that had been generating about half of its revenue solely from its legacy properties in Hawaii.
A buyout that came at a cost
The $3.8 billion acquisition of Monmouth was highly leveraged, including a joint venture with a private investor who bought a 39% stake in 95 of the former Monmouth properties for $587 million; a $1.4 billion floating-rate loan; a $700 million fixed-rate loan; and a $1.4 billion bridge loan.
All that financing contributed to the company reporting a net loss of $0.10 per share in the first quarter and seeing its funds from operations (FFO) fall by nearly 11% to $0.42 per share from the $0.47 it posted in the year-ago quarter, when it was about half the size it is now. It also missed analysts' consensus FFO estimates for the third time out of the past four quarters and has seen some downgrades from that crowd, too.
The market has punished Industrial Logistics Properties Trust. Its share price is bouncing around $14 after hitting a 52-week high of nearly $29 last November. The chart below shows that carnage and how it compares to the S&P U.S. REIT Index and S&P 500 over that time.
The news isn't all bad: There's the yield and the income.
But this news isn't all bad. Industrial Logistics stock is currently yielding about 9.5%. That's quite high, and while a buy-and-hold investor would expect that to come down when the share price recovers, this REIT's dividend history is respectable enough, too. It's paid $0.33 a share every quarter since 2018 when it was raised from the $0.27 it doled out as its first divided after its initial public offering.
Like other industrial REITs, the company is also able to raise rents, especially when leases renew. In this case, that was by about 28% for the 885,000 square feet that renewed in the first quarter, and same-property net operating income (NOI) was up about 3% year over year.
In its first-quarter earnings report from March 31, Yael Duffy, the company's president, said: "With the integration efforts completed, we are now focused on selling an additional equity interest in our newly formed joint venture consisting of 95 properties as well as divesting of 30 former [Monmouth] properties. We remain confident that these activities will be successful and will significantly reduce ILPT's leverage before year-end 2022."
But is it oversold?
Let's look at one important metric: FFO per share. The company's ratio is about 8.31 times price-to-FFO. Compare that to 15.8 for sector giant Prologis and 14.1 for another long-successful logistics REIT, Duke Realty. That could point to a bargain in the making if the debt burns off and the revenue keeps rising.
Prologis and Duke are good examples of what's happening in this industry. The former was just rebuffed in its efforts to buy the latter at what Prologis said would be a 29% premium to share prices that day, May 10.
Both those companies are older and have long-tenured management, many of whom helped build the companies to where they are. Industrial Logistics Properties Trust has only been public since 2018 and is externally managed by The RMR Group (RMR -2.70%).
Duffy has only been president since March and has been with the REIT since 2019. She's also a senior vice president with The RMR Group, responsible for overseeing asset management of a portfolio of office, industrial, and retail properties managed by RMR, as well as RMR's credit and business analytics teams.
That doesn't mean Industrial Logistics isn't well run. It just means it's not necessarily the sole focus of its owners and might be run a bit differently: selling big stakes in its holdings, for example, and having so much debt, especially with floating rates.
I own Industrial Logistics Properties Trust, and I'll be watching both its financial performance and how the market responds before adding more. But I do think this logistics player has the portfolio to keep the payouts going, and the management eager to grow share price, dividend payouts, and maybe even attract a nice takeover offer for itself.