The trust’s portfolio consists of nearly 300 properties that collectively have about 36 million rentable square feet. The majority of its portfolio is in Hawaii and about half of its total revenue comes from that state. In the third quarter, revenue decreased 16% over the prior year’s quarter due to the sale of a significant joint venture equity stake.
Funds from operations (FFO) per share remained flat at $0.45. The trust continues to enjoy leasing momentum for its properties thanks to the sustainable tailwind of ever-increasing amounts of e-commerce.
Occupancy at the end of the quarter stood at an impressive 100%. Management has not provided any guidance. However, as the FFO per share in the first nine months of 2021 exceeded the prior year’s FFO per share by $0.01, we expect FFO per share of $1.87 in 2021.
On November 5th, 2021 Industrial Logistics agreed to acquire Monmouth Real Estate (MNR) for ~$2.1 billion in cash. As this amount exceeds the current market cap ($1.45 billion) of Industrial Logistics, the deal is transformative for the REIT.
The deal, which is expected to close in H1-2022, will offer Industrial Logistics 126 e-commerce focused industrial properties across 32 states and will be immediately accretive to FFO per share. Due to the size of the deal, the stock’s price has dropped 20% since the announcement.
Safety & Dividend Risk Analysis
Industrial Logistics is resilient to recessions thanks to its long lease terms, strong tenants, and exposure to e-commerce. This was confirmed during the pandemic, when the trust grew its FFO per share 6% and defended its dividend. The trust has enormous exposure to the state of Hawaii, but its major tenants include names like Amazon (AMZN) and FedEx (FDX), which are undoubtedly reliable. The trust also enjoys full occupancy.
Industrial Logistics has a debt-to-equity ratio below 90% and interest coverage of 2.7, roughly in-line with other well-funded REITs. We don’t see any financing risk. The trust is offering a 6.0% dividend, but it has paid the same dividend for 15 consecutive quarters. Given also the major pending acquisition, the dividend is not safe right now.
Growth, Value & Expected Total Return Analysis
The growth catalysts include higher rental rates per square foot and the major pending acquisition. However, while the long duration of some lease rates provides fantastic cash flow visibility, it also prevents the trust from renegotiating its terms for a long time. Hence, higher rental rates are to apply only on the short-term leases.
Overall, we expect the REIT to grow its FFO per share by 3% per year on average over the next five years. The stock trades at 11.8 times FFO estimates for 2021, which is below our estimate of fair value at 13.0 times FFO. This implies a 1.7% annualized tailwind to total returns.
Given also 3.0% forecasted annual growth of FFO per share and the 6.0% current dividend yield, we expect 9.6% in total annual returns over the next five years.