Industrial Logistics (ILPT -1.09%) has withered under a self-inflicted wound. The unfortunate thing about the industrial real estate investment trust (REIT) is that it is operating in a fairly strong sector. In fact, its portfolio is actually performing pretty well. Yet, it just announced a token penny-per-share dividend -- again. Here's what investors can learn from this REIT's history.
Not bad at all
If you look at Industrial Logistics' portfolio, it is hard to find a reason to complain. For example, first-quarter 2023 occupancy remained high at 98.7%. It was able to increase rents on leases by a generous 15%. Some peers have had better numbers, but it is hard to suggest that this REIT is doing poorly from an operational perspective.
The landlord's 2022 business performance was pretty good, too. It ended last year with occupancy at 99.1%. And it was able to increase rental rates by a huge 22% on renewed leases. You might expect the stock to lag better-performing peers but not see it fall by more than 90% since hitting a high-water mark in late 2021.
That period of time, however, is pivotal. It was when Industrial Logistics agreed to buy peer Monmouth REIT for $4 billion. That deal was consummated in early 2022. And then Industrial Logistics cut its dividend from $0.33 per share per quarter to just a penny a few months later. No wonder investors have dumped the stock.
What went wrong?
The first thing that investors need to understand about Industrial Logistics is that it is externally managed by the RMR Group (RMR 0.39%). Investors generally prefer internal management because external managers can lead to conflicts of interest. RMR Group manages a number of public REITs. Notably, in Industrial Logistics' annual report, it highlights conflicts of interest multiple times, including this little gem:
We pay RMR substantial base management fees regardless of our financial results. These fee arrangements could incentivize RMR to pursue acquisitions, capital transactions, tenancies, and construction projects or to avoid disposing of our assets in order to increase or maintain its management fees...
Just having an external manager doesn't mean that a REIT will encounter problems. However, with that backdrop, investors looking at the acquisition of Monmouth might have sensed some trouble. Notably, Industrial Logistics sealed the deal with a plan to enter into joint ventures, effectively selling assets to raise cash and then pay back the debt it was taking on to get the purchase over the finish line. Basically, it signed a deal but didn't really have the money to pay for it. When the joint ventures didn't happen, it had to cut the dividend to preserve cash.
As of the first quarter of this year, there still hasn't been any movement. Part of the problem was that interest rates started to rise dramatically after the Monmouth deal closed, leading to a swift slowdown in the property market. You could argue that this was just a case of bad timing. But that doesn't change the fact that Industrial Logistics is stuck with a big debt pile and has no way to easily address it. And, notably, it has a lot of debt coming due in 2024. So far, it has been trying to wait for industrial market activity to pick up again, but it may not have a lot of time left to play wait-and-see.
When you step back, however, what you have is an external management team that was incentivized to aggressively take on a deal for which it hadn't lined up long-term financing. Conservative dividend investors probably should have seen that as a big warning sign from day one.
Too good a story
Although Industrial Logistics' dividend yield is relatively tiny today, it had long hovered in the 10%-plus range. That high yield is a big draw for some investors, but it should also be a warning sign that more caution is needed. This REIT's aggressive merger and deep dividend cut are proof of that fact. The damage has been done here, but if you are looking at an ultra-high-yield REIT, you might want to remember the lessons that have been learned the hard way with Industrial Logistics.
