ILPT dividend cut

Industrial Logistics Properties Trust (ILPT) Dividend Cut

Industrial Logistics Properties Trust (ILPT) has a large following among retail investors because of its yield, property portfolio, and high occupancy rate. But the acquisition of Monmouth in 2022 increased total debt, leverage, and interest expenses. The REIT seemingly did not account for the high inflation and the U.S. central bank’s response. Draining of liquidity and increasing interest rates made short-term debt much more expensive. Hence, ILPT struggled to cover the dividend payout as interest expenses climbed and thus cut the dividend. Consequently, the stock price plummeted, and the yield soared into the double-digits, approaching 20%, a value typically associated with a warning to sell a dividend stock. The low dividend safety combined with debt from a large acquisition resulted in a dividend cut.


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Overview of Industrial Logistics Properties Trust (ILPT)

Industrial Logistics Properties Trust (ILPT) was founded in 2017 and is headquartered in Newton, Massachusetts. The company operates as a real estate investment trust (REIT) that owns and leases large industrial and logistics properties in the United States. The company is a subsidiary of RMR Group (RMR), an alternative management company.

ILPT owns 413 industrial and logistics properties with approximately 60 million square feet of rentable space. Of these properties, 226 with 16.7 million square feet are in Oahu, Hawaii, and generate about ~29% of the annualized rental revenue. The remaining 187 properties and 43 million square feet are spread out over 38 states.

Overall, the properties have 99.2% occupancy with a weighted average remaining lease term of around 8.9 years. The largest single customer is FedEx (FDX), providing 29.6% of annualized rental revenue. Other significant customers are Amazon.com Inc (AMZN), Home Depot (HD), United Parcel Service (UPS), and Restoration Hardware comprise 43.9% of total annualized rental revenue.

Total revenue was $219.6 million in 2021 and $338.3 million in the past twelve months.

ILPT Overview
Source: Industrial Logistics Properties Trust Investor Relations

ILPT Dividend Cut Announcement

ILPT announced a dividend cut on July 14, 2022. The company reduced the quarterly dividend to $0.01 from $0.33 per share. Specifically, the REIT’s management stated,

“Earlier this year, ILPT closed on the strategic acquisition of Monmouth Real Estate Investment Corporation, or Monmouth, which significantly enhanced ILPT’s scale, tenant base and geographic diversity. Since then, there have been unanticipated increases in interest rates and deterioration in real estate market conditions. As a result, it is taking longer than originally expected to complete ILPT’s long term financing plan for the Monmouth acquisition, which includes the sale of additional equity interests in its consolidated joint venture, property sales and other refinancing activities. ILPT 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. ILPT currently anticipates that its dividend will return to a rate at, or close to, its historical level sometime in 2023.”

The announcement indicated management did not anticipate the United States Federal Reserve to increase interest rates so quickly. From the statement, the REIT is seemingly struggling to obtain financing to pay for the Monmouth acquisition.

Challenges

ILPT’s main issue was the Monmouth acquisition at a time when interest rates rose rapidly, resulting in an excessive debt load combined with high interest expense.

Monmouth Acquisition

ILPT expanded its property portfolio by acquiring Monmouth on February 25, 2022. The REIT added 125 e-commerce-focused assets, mainly across the Sunbelt states. In addition, the acquisition increased exposure to transportation and logistics. Specifically, FedEx and Amazon represented about 60% of the revenue for Monmouth.

Although the acquisition will probably be synergistic over the long term, ILPT was challenged by how it financed the purchase. The firm used a $1.385 billion 1-year bridge loan, due in February 2023. This type of loan is normally indexed to the 6-month LIBOR or a similar metric.

Rising interest rates casued an increase in interest expense because short-term rates are usually based on the LIBOR. For context, the 6-month LIBOR was roughly 0.75% near the end of February 2022 and exceeded 4% in September 2022. The rate is now over 5%.

Leverage

The Monmouth acquisition significantly increased total debt. The chart below from Portfolio Insight* shows that total debt increased more than five times from ~$828 million to ~$4.39 billion because of the acquisition. Consequently, leverage has soared to over 17.8X from ~5.3X, while interest coverage has plunged to around 0.5X. By any measure, these values are poor. Granted, REITs tend to operate with higher leverage and lower interest coverage, but ILPT has too much debt and too little interest coverage. Consequently, the dividend cut was not surprising.

Portfolio Insight - ILPT (Total Debt)
Source: Portfolio Insight*

Dividend Safety

ILPT has a short operating history as a public company. The firm must meet the minimum requirements for paying its dividend as a REIT. Specifically, it must distribute a minimum of 90% of taxable income in the form of shareholder dividends each year.

Despite the dividend cut, the firm intends to maintain its REIT status. ILPT management stated,

“Regardless of its current reduced quarterly dividend rate of $0.01 per share, ILPT expects that its dividends to its common shareholders in 2022 will be at least equal to the minimum amounts required for ILPT to remain a real estate investment trust, or REIT, for federal income tax purposes.”

But rising interest payments likely hindered paying the dividend. For perspective, interest expense was $35.63 million in 2021 but rose more than sixfold to $217.44 million in the last twelve months. Moreover, the yield had increased to almost 20%, suggesting distress. After the reduction, the forward dividend yield is now about 1.14%, low for a REIT. 

But after the cut, the dividend safety has increased dramatically. The annual dividend now requires about $2.64 million ($0.04 yearly dividend x 64 million shares) compared to $86.24 million in 2021 and $65.40 million in the last twelve months.

Moreover, ILPT successfully refinanced the expensive bridge loan. The CEO stated,

“We are pleased to have closed this $1.235 billion debt financing in the midst of difficult market conditions. This debt financing enabled us to fully repay our $1.385 billion bridge loan due in February 2023 with debt that has a final maturity date in October 2027 and excess cash. ILPT currently has no near term debt maturities but maintains flexibility to repay significant debt and reduce leverage in the future through prepayment options. This is important because we continue to evaluate strategies to strengthen ILPT’s balance sheet and reduce leverage.”

Generally, the cut has placed the dividend in better standing. But still, the balance sheet has high debt, and interest expenses are much more than before the Monmouth acquisition. So although a cut below $0.01 per quarter may not happen, ILPT’s dividend is hardly safe.

Final Thoughts on Industrial Logistics Properties Trust (ILPT) Dividend Cut

Despite the dividend cut, the new rate is not entirely safe. The bridge loan refinancing has possibly removed the immediate danger, but the balance sheet is still leveraged, and interest expense is high. The firm is trying to dispose of some properties and take on partners for its joint venture to reduce debt. On the plus side, the properties have high occupancy rates and rising rents. But total debt is high, and it will take time to deleverage. Investors following a dividend growth strategy or seeking REITs should undoubtedly look elsewhere. Moreover, extant shareholders have some risk of dilution if the ILPT raises cash by issuing equity.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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