I wrote about Industrial Logistics Properties Trust (ILPT, Financial) last year and also bought the stock. Since then, the stock price has been a disaster, down 86% year to date. Needless to say it's not been a pleasant experience. I would have been better off with Bitcoin or the Ark Innovation ETF (ARKK). Is it time to cry uncle and give up?
Industrial Logistics Properties Trust is an externally managed industrial and warehouse REIT managed by The RMR Group (RMR, Financial), a private equity management company which specializes in real estate. Industrial Logistics Properties Trust owns industrial properties (mainly warehouses) throughout the U.S., with a particularly heavy concentration in Hawaii. The RMR Group charges a fee from managing Industrial Logistics Properties Trust.
An acquisition gone wrong
A good chunk of Industrial Logistics Properties Trust's woes can be attributed to its acquisition of the larger Monmouth Real Estate Investment Corp. in November 2021 following a bidding war. In hindsight, it clearly overpaid when ndustrial REITs were a red-hot commodity thanks to supply chain issues. It bought Monmouth for $4 billion in cash funded the transaction with debt as well as a joint venture.
Industrial Logistics Properties Trust closed on Monmouth in the first quarter of 2022 . At the same time, it entered into a new joint venture with an institutional investor for 95 Monmouth properties that are expected to generate approximately $137 million in annualized net operating income in 2022. The investor contributed approximately $587 million for a 39% non-controlling equity interest and Industrial Logistics Properties Trust retained a 61% equity interest in the joint venture. The joint venture also entered into a $1.4 billion floating rate CMBS loan secured by 82 of the acquired properties and assumed $323 million of existing Monmouth mortgage debt. Industrial Logistics Properties Trust used the proceeds from the joint venture to partially fund the Monmouth purchase.
Recent results
This is only the second quarter of the combined company following the Monmouth acquisition, so it's tough to get a read on things. However, in mid-July, Industrial Logistics Properties Trust slashed its dividend by nearly 100% and said:
"Industrial Logistics Properties Trust is reducing its quarterly dividend to enhance its liquidity until it completes its long term financing plan for the Monmouth acquisition and/or its leverage profile otherwise improves. Industrial Logistics Properties Trust currently anticipates that its dividend will return to a rate at, or close to, its historical level sometime in 2023."
Industrial Logistics Properties Trust's third-quarter earnings dropped from the previous quarter and from a year ago as the industrial REIT absorbed the debt from the acquisition.
During the quarter, the company closed on a $1.2 billion debt financing that allowed it to repay the $1.4 billion bridge loan facility used to partly finance the acquisition of Monmouth.
"Given the challenging debt market conditions, we were pleased with the outcome of this transaction, which extended our weighted average debt maturity and provided us flexibility as we evaluate opportunities to strengthen Industrial Logistics Properties Trust's balance sheet and reduce leverage," President and CEO Yael Duffy said. Industrial Logistics Properties Trust had net mortgages and notes payable of $4.24 billion as of Sept. 30, versus just $645 milllion at the end of 2021.
Not all is lost
Investors have been understandably scared off by Industrial Logistics Properties Trust's high debt load, the deterioration of the macroeconomic environment, interest rate hikes and an expected recession. Industrial Logistics Properties Trust bought Monmouth at the height of the market bubble in its industry, and it took on an astronomical level of debt right as the Federal Reserve began to raise rates again. This was followed by a virtual elimination of the dividend, which drove off dividend-focused investors, as many invest in REITs specificially for the dividiend.
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Another perceived problem is The RMR Group, which is the external manager of the REIT. Many investors believe that the manager's interests are not aligned with Industrial Logistics Properties Trust's common investors. The RMR Group gets paid on Industrial Logistics Properties Trust's total enterprise value and is not much affected by the value of Industrial Logistics Properties Trust's equity, as the manager only owns 1.14% of Industrial Logistics Properties Trust's equity. However, I think this concern is overstated. Agency problems exist with both internal or external managers. The sub-optimal compensation structure with the external manager is already reflected in the stock price.
However, although Industrial Logistics Properties Trust's debt is high, I do not think it is headed for bankruptcy any time soon. Industrial Logistics Properties Trust has managed to spread out debt maturities and should be able to ride out the coming recession. Demand for its warehouse properties is still strong and Industrial Logistics Properties Trust is getting good re-leasing rates on expiring leases.
The Fed is likely to stop hiking rates in early 2023 and could potentially start up easy monetary policies again in 2024 after it's clear that inflation has slowed down.
Overall, I think it's too early to throw in the towel as Industrial Logistics Properties Trust is still in the process of stabilizing post-merger. If Industrial Logistics Properties Trust does stabilize itself over the next couple of years and reinstates the dividend in 2024, I believe the stock could be a multi-bagger.
