1 Actual Property Inventory to Keep away from Just like the Plague (and a couple of to Purchase As an alternative)
Posted On March 8, 2023
Industrial Logistics Properties Trust (ILPT -1.01%) has gotten mauled over the past year. Shares of the industrial real estate investment trust (REIT) have plummeted a staggering 83%. They could have further to fall. Because of that, investors should avoid this REIT like the plague.
Instead, they should consider buying shares of fellow industrial REITs Prologis (PLD -2.63%) and EastGroup Properties (EGP -1.60%). Here’s why they’re much better buys than the beaten-up Industrial Logistics Properties.
An expensive mistake
The biggest factor weighing on Industrial Logistics Properties Trust over the past year is its debt-laden balance sheet. In late 2021, the company won the bidding to acquire fellow industrial REIT Monmouth Real Estate Investment Corp in an all-cash transaction valued at $4 billion plus the assumption of Monmouth’s $409 million of debt. The company swooped in after Monmouth shareholders rejected a $3.4 billion cash-and-stock merger agreement with Equity Commonwealth (NYSE: EQC).
While that deal significantly increased Industrial Logistics Properties’ scale, it strained its balance sheet. An unanticipated increase in interest rates and deteriorating conditions in the real estate market made it hard for the company to complete its long-term financing plan, which included selling joint venture interests, divesting properties, and other refinancing activities. That forced the REIT to slash its dividend and focus on reducing leverage.
The company’s finances remain a mess. It currently has $4.3 billion of debt remaining, including nearly $2.7 billion that matures next year. Given its current earnings run rate, it has an almost unbearable leverage ratio of 13.1 times debt-to-EBITDA ratio. That debt is costing it $72.7 million per quarter. It’s a heavy burden for a company that generated $106 million of rental income last quarter. Given its massive, upcoming maturity wall, there’s a real risk this REIT will declare bankruptcy in the next year.
A fortress-like balance sheet
While Industrial Logistics Properties’ balance sheet is in shambles, Prologis boasts one of the best financial profiles in the entire REIT sector. The company has a low 4.0 times debt-to-adjusted EBITDA ratio. Meanwhile, it has a robust 11.2 times fixed-charge coverage ratio, suggesting it can cover its debt and interest payments with cash flow many times over. Because of that, it has A-rated credit, giving it one of the highest ratings in the sector.
Prologis has maintained a strong financial profile even though it also recently made a sizable acquisition. Last year, it acquired its largest rival, Duke Realty. The all-stock deal valued Duke at $26 billion, including the assumption of debt. By using stock to finance the highly accretive transaction, Prologis avoided putting pressure on its balance sheet.
Because of that, the company has been able to continue growing its dividend. It recently gave investors a 10% raise and has grown its payout at a sector-leading pace in recent years. The company sees lots more growth ahead.
Solid and getting stronger
EastGroup Properties also has a strong balance sheet. The company ended last year with a solid debt-to-EBITDA ratio of 5.12 times. Leverage was even lower at 4.25 times after backing out the impact of its current investments for value-add and development properties. As the REIT finishes those projects, the incremental earnings will lower its leverage.
The REIT’s solid financial profile gives it the flexibility to continue making new investments while paying a growing dividend. EastGroup Properties has increased its dividend for 11 straight years, including by 13.6% last August. Meanwhile, it’s investing $580.2 million across 12 development and value-add projects. Those investments will help grow the REIT’s cash flow so it can continue paying a rising dividend.
EastGroup Properties’ solid financial profile also gives it the access to capital it needs to fund its continued expansion. The REIT’s banks recently expanded the capacity of its unsecured bank-credit facilities by $200 million. It also closed a new $100 million senior unsecured term loan at a relatively attractive 5.27% interest rate. Because it can access low-cost financing, EastGroup Properties can focus on growing shareholder value instead of trying to find ways to shore up its financial situation.
The difference is night and day
Industrial Logistics Properties’ debt-fueled deal for Monmouth could be its undoing. The REIT has a massive maturity wall next year that it might be unable to overcome. Because of that, investors should avoid this REIT like the plague.
On the other hand, Prologis and EastGroup Properties have much stronger balance sheets. Because of that, they can continue investing in expanding their portfolios in the current environment. That could enable those REITs to continue growing their dividends and shareholder value, making them attractive investments right now.
Matthew DiLallo has positions in EastGroup Properties, Equity Commonwealth, and Prologis. The Motley Fool has positions in and recommends EastGroup Properties and Prologis. The Motley Fool has a disclosure policy.