Industrial Logistics Properties Trust(ILPT) - 2023 Q1 - Quarterly Report

PART I: Financial Information Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Industrial Logistics Properties Trust as of March 31, 2023, and for the three-month periods ended March 31, 2023, and 2022. It includes the balance sheets, statements of comprehensive income (loss), statements of shareholders' equity, statements of cash flows, and accompanying notes Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets from $5.68 billion at year-end 2022 to $5.63 billion as of March 31, 2023. Total liabilities remained relatively stable at approximately $4.35 billion, while total equity decreased from $1.33 billion to $1.29 billion, primarily due to a net loss and distributions Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total real estate properties, net | $4,873,569 | $4,902,641 | | Cash and cash equivalents | $61,250 | $48,261 | | Total assets | $5,634,976 | $5,676,166 | | Mortgages and notes payable, net | $4,245,651 | $4,244,501 | | Total liabilities | $4,348,801 | $4,345,395 | | Total equity | $1,286,175 | $1,330,771 | Condensed Consolidated Statements of Comprehensive Income (Loss) For the three months ended March 31, 2023, the company reported a net loss of $35.5 million, a significant increase from the $9.8 million net loss in the same period of 2022. The net loss attributable to common shareholders was $24.8 million, or ($0.38) per share, compared to a loss of $6.5 million, or ($0.10) per share, in Q1 2022. The increased loss was driven by higher interest and operating expenses following acquisition activities Q1 2023 vs. Q1 2022 Performance (in thousands, except per share data) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Rental income | $110,258 | $71,375 | | Total expenses | $79,149 | $45,163 | | Interest expense | ($70,771) | ($40,999) | | Net loss | ($35,546) | ($9,787) | | Net loss attributable to common shareholders | ($24,809) | ($6,514) | | Net loss per share (basic and diluted) | ($0.38) | ($0.10) | Condensed Consolidated Statements of Shareholders' Equity Total equity decreased from $1.33 billion at the end of 2022 to $1.29 billion at March 31, 2023. The decrease was primarily driven by a net loss of $35.5 million and common distributions of $0.7 million, partially offset by share-based compensation - Total equity attributable to common shareholders declined from $790.7 million to $758.6 million during the first quarter of 2023[14] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $1.2 million in Q1 2023, a sharp decrease from $56.6 million in Q1 2022, mainly due to higher interest payments. Investing activities provided $9.4 million, compared to a $3.4 billion use of cash in the prior-year period which included the MNR acquisition. Financing activities used $6.2 million, a reversal from the $3.8 billion provided in Q1 2022 which was used to fund the acquisition Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,167 | $56,639 | | Net cash provided by (used in) investing activities | $9,435 | ($3,442,485) | | Net cash (used in) provided by financing activities | ($6,223) | $3,777,878 | | Increase in cash, cash equivalents and restricted cash | $4,379 | $392,032 | Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosure on the company's accounting policies and activities. Key details include the composition of the real estate portfolio, joint venture structures, lease information including tenant and geographic concentrations, a breakdown of outstanding indebtedness and related interest rate caps, and details on related party transactions with its manager, RMR - As of March 31, 2023, the portfolio consisted of 413 consolidated properties totaling approximately 60.0 million rentable square feet[24] - For Q1 2023, subsidiaries of FedEx Corporation and Amazon.com, Inc. accounted for 31.6% and 6.8% of rental income, respectively. Properties in Hawaii accounted for 27.4% of rental income[40][41] - The company has two floating-rate loans totaling $2.635 billion, with interest rate caps to manage exposure to rising SOFR rates[70] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's operating results for Q1 2023 compared to Q1 2022, highlighting the impact of the MNR acquisition on revenue and expenses. The discussion covers property operations, leasing activity, non-GAAP financial measures (NOI and FFO), liquidity, capital resources, and debt covenants. Management also acknowledges macroeconomic risks from inflation and rising interest rates Overview and Property Operations As of March 31, 2023, ILPT's consolidated portfolio of 413 properties was 98.7% leased, with a weighted average remaining lease term of 8.4 years. The company executed 1.14 million square feet of new and renewal leases in Q1 2023 with a weighted average rental rate increase of 15.1%. Management notes that rising interest rates and inflation have increased the cost of capital and pose a risk to financial conditions Portfolio Occupancy | Metric | As of March 31, 2023 | As of March 31, 2022 | | :--- | :--- | :--- | | Total properties | 413 | 412 | | Total rentable square feet (thousands) | 59,983 | 59,736 | | Percent leased | 98.7% | 98.9% | Q1 2023 Leasing Activity | Metric | Total | | :--- | :--- | | Square feet leased (thousands) | 1,143 | | Weighted average rental rate change | 15.1% | | Weighted average lease term (years) | 8.9 | - Leases representing 2.9% of total annualized rental revenues are scheduled to expire by the end of 2023[84] - The company faces risks from inflationary pressures and rising interest rates, which have increased its cost of capital and could negatively impact tenant financial health and property values[78] Results of Operations Comparing Q1 2023 to Q1 2022, rental income rose 54.5% to $110.3 million, primarily due to the MNR acquisition. However, this was offset by a 74.5% increase in real estate taxes, a 98.7% increase in depreciation and amortization, and a 72.6% rise in interest expense, all largely attributable to the acquisition. Consequently, the net loss widened from $9.8 million to $35.5 million Consolidated Results Comparison (in thousands) | Line Item | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Rental income | $110,258 | $71,375 | 54.5% | | Total operating expenses | $25,785 | $16,208 | 59.1% | | Net operating income (NOI) | $84,473 | $55,167 | 53.1% | | Depreciation and amortization | $45,457 | $22,878 | 98.7% | | Interest expense | ($70,771) | ($40,999) | 72.6% | | Net loss | ($35,546) | ($9,787) | N/M | - The significant increases in rental income, operating expenses, depreciation, and interest expense are primarily a result of the acquisition of Monmouth Real Estate Investment Corporation (MNR) in February 2022[96][97][99][100] Non-GAAP Financial Measures The company reported Net Operating Income (NOI) of $84.5 million for Q1 2023, up 53.1% from $55.2 million in Q1 2022. Normalized Funds From Operations (Normalized FFO) attributable to common shareholders was $7.9 million, or $0.12 per share, a significant decrease from $27.6 million, or $0.42 per share, in Q1 2022. The decline in Normalized FFO was primarily due to higher interest expense NOI Reconciliation (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net loss | ($35,546) | ($9,787) | | Add back: Interest, G&A, D&A, etc. | $120,019 | $64,954 | | NOI | $84,473 | $55,167 | Normalized FFO Reconciliation (in thousands, except per share data) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net loss attributable to common shareholders | ($24,809) | ($6,514) | | Adjustments (D&A, etc.) | $32,725 | $14,616 | | FFO attributable to common shareholders | $7,916 | $8,102 | | Acquisition and transaction related costs | — | $18,673 | | Normalized FFO attributable to common shareholders | $7,916 | $27,603 | | Normalized FFO per share | $0.12 | $0.42 | Liquidity and Capital Resources As of March 31, 2023, the company had $61.3 million in cash and cash equivalents. The primary source of liquidity is rent from tenants. The company has $4.28 billion in debt, with significant floating-rate loans maturing in 2024. Management believes operating cash flow will be sufficient to meet obligations for the next 12 months but notes that the REIT distribution requirement limits capital retention. The company is in compliance with all debt covenants - The company's principal sources of funds are rents from tenants. As of March 31, 2023, 77.6% of annualized rental revenues came from investment-grade tenants or Hawaii land leases[114] - The company has two major floating-rate loans: a $1.235 billion loan maturing in October 2024 and a $1.4 billion loan (in a consolidated JV) maturing in March 2024. Both have extension options[118][119] - As of March 31, 2023, the company believes it was in compliance with all debt covenants, including a minimum consolidated net worth of $250 million and liquidity of at least $15 million required by one of its mortgage loans[132] Q1 2023 Capital Expenditures (in thousands) | Category | Amount | | :--- | :--- | | Tenant improvements and leasing costs | $2,040 | | Building improvements | $370 | | Development, redevelopment and other | $2,521 | | Total | $4,931 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its $2.64 billion of floating-rate debt. This risk is partially managed through interest rate caps. A hypothetical 1% increase in interest rates would increase annual interest expense by approximately $26.7 million, excluding the impact of the caps. The company also has $1.65 billion in fixed-rate debt, whose fair value is sensitive to market rate changes Floating Rate Debt Summary (as of March 31, 2023) | Debt | Principal Balance | Interest Rate | | :--- | :--- | :--- | | ILPT Floating Rate Loan | $1,235,000,000 | 6.18% | | Floating Rate Loan (JV) | $1,400,000,000 | 6.17% | | Total | $2,635,000,000 | | - To hedge against rising SOFR rates, the company purchased an interest rate cap with a 2.25% strike rate for the ILPT Floating Rate Loan and a 3.40% strike rate for the JV's Floating Rate Loan[140] - A hypothetical immediate one percentage point increase in interest rates would change the fair value of the company's fixed-rate debt by approximately $26.7 million[146] Controls and Procedures Management, including the President, COO, and CFO, evaluated the company's disclosure controls and procedures and concluded that they were effective as of March 31, 2023. There were no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the period, the company's management concluded that its disclosure controls and procedures are effective[147] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[148] PART II: Other Information Risk Factors This section states that there have been no material changes to the risk factors from those previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors from those provided in the 2022 Annual Report[159] Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2023, the company purchased a total of 976 of its own common shares at a weighted average price of $3.33 per share. These purchases were made to satisfy tax withholding obligations for certain former officers and employees of RMR in connection with vested share awards Issuer Purchases of Equity Securities (Q1 2023) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2023 | 582 | $3.50 | | March 2023 | 394 | $3.07 | | Total | 976 | $3.33 | Exhibits This section lists the exhibits filed with the Form 10-Q, including the company's organizational documents, officer certifications (Rule 13a-14(a) and Section 1350), and XBRL data files - The exhibits filed include certifications by the President & COO and the CFO & Treasurer regarding the accuracy and completeness of the report[162]