Description
Thesis
ILPT is a left-for-dead trading sardine with convex upside nodes and limited downside (due to its depressed share price). The opportunity exists because ILPT is an extremely over-levered externally managed REIT, run by a notoriously self-dealing manager, that top-ticked the market for industrial assets by acquiring a large portfolio of assets at a 4.5% cap rate via a bidding war, 100% funded by 6% floating rate debt and subsequently cut its quarterly dividend to 1c. The market doesn’t understand that ILPT is extremely unlikely to file bankruptcy despite its debt burden, and once in a blue moon, shareholders’ interests at RMR-managed REITs are aligned with RMR and its self-dealing greed. There are reasonable scenarios for the equity to be a 3-4x from here (while still trading at a large discount to “NAV”) over the next year.
Business
ILPT is an externally managed industrial REIT. ILPT has one-of-a-kind trophy assets in Hawaii comprising approximately 30% of cash NOI and middling U.S. mainland industrial assets comprising the balance of its portfolio. ILPT has been the subject of two previous write-ups, once by broncos727 in May 2022 at a share price of $13.97, and one by alcideholder in May 2018 at a share price of $21.60.
A complete list of ILPT’s properties, including ownership percentage, in spreadsheet form can be found here.
Most of ILPT’s Hawaiian assets serve as collateral for a 2019 vintage CMBS transaction. Below are links to Rating Agency reports discussing these assets:
Rating Agency reports discussing other ILPT assets are below:
Recent history
November 5, 2021 – Announced acquisition of Monmouth REIT after outbidding Equity Commonwealth.
January 13, 2022 – 33c quarterly dividend announced.
February 28, 2022 – Completed acquisition of Monmouth assets.
April 14, 2022 – 33c quarterly dividend announced.
July 14, 2022 – Dividend cut to 1c/quarter. “ILPT currently anticipates that its dividend will return to a rate at, or close to, its historical level sometime in 2023.”
September 23, 2022 – Bridge loan refinanced at SOFR+393, with SOFR cap of 2.25%.
November 18, 2022 – ILPT Director and head of Colliers’ Boston office, Kevin Phelan, makes open market purchase at $3.41 per share.
RMR’s incentives
RMR’s incentives are clearly spelled out in the Business Management Agreement between ILPT and RMR. I believe that RMR’s first priority is to ensure the continuity of its fee stream from ILPT (i.e. not allow ILPT to become creditor controlled). I believe that RMR’s second priority is to maximize the dollars it extracts from ILPT by torpedoing ILPT’s share price such that RMR is entitled to extract an incentive fee when ILPT shares mean revert, given the incentive fee is not subject to a high-water mark.
I believe that in order for RMR to achieve its objectives, it must de-lever ILPT over time. Given ILPT’s depressed share price, ILPT’s unique Hawaiian assets, and RMR’s desire to earn incentive fees from ILPT in the future, I believe it is likely that RMR will seek to monetize a portion of ILPT’s Hawaiian assets, reassure the market of its intention to increase ILPT’s quarterly dividend following debt reduction, and subsequently issue additional ILPT equity to de-lever.
This strategy would be consistent with RMR’s objective of increasing its fees as it would maintain control of assets, increase the capital base upon which it assess management fees and deliver a narrative supportive of a higher share price by partially monetizing trophy assets. In the past, ILPT has explicitly clarified that RMR earns full fees from assets that are partially monetized via JV structures.
Importantly, the majority of ILPT’s most valuable Hawaiian assets are financed in a fixed-rate structure that would provide a prospective equity JV partner with the benefit of locked-in long-term debt financing.
Valuation
Below is an illustrative “NAV” analysis. I believe this valuation is conservative as I have ascribed zero equity value to financing structures that were executed in 2022.
Applying the below CBRE assessed cap rates to ILPT’s portfolio on an asset-by-asset basis would lead to a NAV north of $20 per share.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
1. Monetize assets at relatively attractive valuations
2. Repay debt and normalize capital structure
3. Announce intention to increase dividend
4. Tax loss selling abates