(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
(Address of Principal Executive Offices) | (Zip Code) |
Title of Each Class | Trading Symbol(s) | Name Of Each Exchange On Which Registered | ||
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
☒ | Smaller reporting company | |||
Emerging growth company |
Page | ||
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Real estate properties: | ||||||||
Land | $ | $ | ||||||
Buildings and improvements | ||||||||
Accumulated depreciation | ( | ) | ( | ) | ||||
Acquired real estate leases, net | ||||||||
Cash and cash equivalents | ||||||||
Rents receivable, including straight line rents of $57,951 and $54,916, respectively | ||||||||
Deferred leasing costs, net | ||||||||
Debt issuance costs, net | ||||||||
Due from related persons | ||||||||
Other assets, net | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Revolving credit facility | $ | $ | ||||||
Mortgage notes payable, net | ||||||||
Assumed real estate lease obligations, net | ||||||||
Accounts payable and other liabilities | ||||||||
Rents collected in advance | ||||||||
Security deposits | ||||||||
Due to related persons | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Common shares of beneficial interest, $.01 par value: 100,000,000 shares authorized; 65,181,913 and 65,074,791 shares issued and outstanding, respectively | ||||||||
Additional paid in capital | ||||||||
Cumulative net income | ||||||||
Cumulative other comprehensive income | ||||||||
Cumulative common distributions | ( | ) | ( | ) | ||||
Total shareholders' equity | ||||||||
Total liabilities and shareholders' equity | $ | $ |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Rental income | $ | $ | $ | $ | ||||||||||||
Expenses: | ||||||||||||||||
Real estate taxes | ||||||||||||||||
Other operating expenses | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
General and administrative | ||||||||||||||||
Total expenses | ||||||||||||||||
Interest income | ||||||||||||||||
Interest expense (including net amortization of debt issuance costs and premiums of $524, $309, $1,421 and $931, respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income before income tax expense and equity in earnings of an investee | ||||||||||||||||
Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Equity in earnings of an investee | ||||||||||||||||
Net income | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||
Equity in unrealized gains (losses) of an investee | ( | ) | ||||||||||||||
Other comprehensive income | ( | ) | ||||||||||||||
Comprehensive income | $ | $ | $ | $ | ||||||||||||
Weighted average common shares outstanding - basic | ||||||||||||||||
Weighted average common shares outstanding - diluted | ||||||||||||||||
Net income per common share - basic and diluted | $ | $ | $ | $ |
Cumulative | |||||||||||||||||||||||||||
Number of | Additional | Cumulative | Other | Cumulative | |||||||||||||||||||||||
Common | Common | Paid In | Net | Comprehensive | Common | ||||||||||||||||||||||
Shares | Shares | Capital | Income | Income | Distributions | Total | |||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||
Equity in unrealized gains of investee | — | — | — | — | — | ||||||||||||||||||||||
Share grants | — | — | — | — | — | ||||||||||||||||||||||
Distributions to common shareholders | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||
Balance at March 31, 2019 | ( | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||
Equity in unrealized gains of investee | — | — | — | — | — | ||||||||||||||||||||||
Share grants | — | — | — | — | |||||||||||||||||||||||
Share repurchases | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||
Share forfeitures | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||
Distributions to common shareholders | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||
Balance at June 30, 2019 | ( | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||
Equity in unrealized losses of investee | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Share grants | — | — | — | ||||||||||||||||||||||||
Share repurchases | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||
Distributions to common shareholders | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ |
Number of | Additional | Cumulative | Cumulative | ||||||||||||||||||||
Common | Common | Paid In | Net | Common | |||||||||||||||||||
Shares | Shares | Capital | Income | Distributions | Total | ||||||||||||||||||
Balance at December 31, 2017 | $ | $ | $ | $ | $ | ||||||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Contributions | — | — | — | — | |||||||||||||||||||
Distributions | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
Issuance of common shares, net | — | — | |||||||||||||||||||||
Share grants | — | — | — | ||||||||||||||||||||
Balance at March 31, 2018 | |||||||||||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Share grants | — | — | — | ||||||||||||||||||||
Distributions to common shareholders | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Balance at June 30, 2018 | ( | ) | |||||||||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Share grants | — | — | |||||||||||||||||||||
Share repurchases | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||
Distributions to common shareholders | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | $ | ( | ) | $ |
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | ||||||||
Net amortization of debt issuance costs and premiums | ||||||||
Amortization of acquired real estate leases and assumed real estate lease obligations | ||||||||
Amortization of deferred leasing costs | ||||||||
Provision for losses on rents receivable | ||||||||
Straight line rental income | ( | ) | ( | ) | ||||
Other non-cash expenses | ||||||||
Equity in earnings of an investee | ( | ) | ||||||
Change in assets and liabilities: | ||||||||
Rents receivable | ( | ) | ||||||
Deferred leasing costs | ( | ) | ( | ) | ||||
Due from related persons | ( | ) | ||||||
Other assets | ( | ) | ( | ) | ||||
Accounts payable and other liabilities | ||||||||
Rents collected in advance | ||||||||
Security deposits | ||||||||
Due to related persons | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Real estate acquisitions and deposits | ( | ) | ( | ) | ||||
Real estate improvements | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common shares, net | ||||||||
Proceeds from issuance of mortgage notes payable | ||||||||
Borrowings under revolving credit facility | ||||||||
Repayments of revolving credit facility | ( | ) | ( | ) | ||||
Payment of debt issuance costs | ( | ) | ( | ) | ||||
Distributions to common shareholders | ( | ) | ( | ) | ||||
Repurchase of common shares | ( | ) | ( | ) | ||||
Contributions | ||||||||
Distributions | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Increase in cash and cash equivalents | ||||||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Interest paid | $ | $ | ||||||
Income taxes paid | $ | $ | ||||||
NON-CASH INVESTING ACTIVITIES: | ||||||||
Real estate acquired by assumption of mortgage notes payable | $ | ( | ) | $ | ||||
NON-CASH FINANCING ACTIVITIES: | ||||||||
Assumption of mortgage notes payable | $ | $ |
Acquired | ||||||||||||||||||||||||||||||||
Number | Rentable | Buildings | Acquired | Real Estate | Discount | |||||||||||||||||||||||||||
of | Square | Purchase | and | Real Estate | Lease | on Assumed | ||||||||||||||||||||||||||
Date | Market Area | Properties | Feet | Price | Land | Improvements | Leases | Obligations | Debt | |||||||||||||||||||||||
February 2019 | 2 mainland states | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
April 2019 | Indianapolis, IN | |||||||||||||||||||||||||||||||
April 2019 | 12 mainland states | ( | ) | |||||||||||||||||||||||||||||
August 2019 | Columbus, OH | |||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | ( | ) | $ |
Year | Amount | |||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ |
At September 30, 2019 | At December 31, 2018 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value (1) | Fair Value | Value (1) | Fair Value | |||||||||||||
Mortgage notes payable | $ | $ | $ | $ |
(1) | Includes unamortized premiums (discounts) and debt issuance costs of ($ |
Record Date | Payment Date | Distribution Per Share | Total Distribution | |||
January 28, 2019 | February 21, 2019 | $ | $ | |||
April 29, 2019 | May 16, 2019 | $ | $ | |||
July 29, 2019 | August 15, 2019 | $ | $ |
Three Months Ended September 30, | Nine Months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Weighted average common shares for basic earnings per share | ||||||||||||
Effect of dilutive securities: unvested share awards | ||||||||||||
Weighted average common shares for diluted earnings per share |
All Properties | Comparable Properties (1) | |||||||||||
As of September 30, | As of September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Total properties | 300 | 269 | 266 | 266 | ||||||||
Total rentable square feet (2) | 42,745 | 29,216 | 28,472 | 28,550 | ||||||||
Percent leased (3) | 99.5 | % | 99.3 | % | 99.2 | % | 99.2 | % |
(1) | Consists of properties that we owned (including for the period SIR owned our properties prior to our IPO) continuously since January 1, 2018. |
(2) | Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases. |
(3) | Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of September 30, 2019, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Average effective rental rates per square foot leased: (1) | ||||||||||||||||
All properties | $ | 5.76 | $ | 5.66 | $ | 5.82 | $ | 5.65 | ||||||||
Comparable properties (2) | $ | 5.76 | $ | 5.68 | $ | 5.83 | $ | 5.66 |
(1) | Average effective rental rates per square foot leased represents annualized rental income during the period specified divided by the average rentable square feet leased during the period specified. |
(2) | Comparable properties for the three months ended September 30, 2019 and 2018 consist of 267 buildings, leasable land parcels and easements that we owned continuously since July 1, 2018. Comparable properties for the nine months ended September 30, 2019 and 2018 consist of 266 buildings, leasable land parcels and easements that we owned (including for the period that SIR owned our properties prior to our IPO) continuously since January 1, 2018. |
% of Total | Cumulative | ||||||||||||||||||||||
% of Total | Cumulative % | Annualized | Annualized | % of Total | |||||||||||||||||||
Rented | Rented | of Total Rented | Rental | Rental | Annualized | ||||||||||||||||||
Number of | Square Feet | Square Feet | Square Feet | Revenues | Revenues | Rental Revenues | |||||||||||||||||
Period / Year | Tenants | Expiring (1) | Expiring (1) | Expiring (1) | Expiring | Expiring | Expiring | ||||||||||||||||
10/1/2019-12/31/2019 | 2 | 38 | 0.1 | % | 0.1 | % | $ | 274 | 0.1 | % | 0.1 | % | |||||||||||
2020 | 16 | 687 | 1.6 | % | 1.7 | % | 2,898 | 1.2 | % | 1.3 | % | ||||||||||||
2021 | 31 | 3,045 | 7.2 | % | 8.9 | % | 17,267 | 7.0 | % | 8.3 | % | ||||||||||||
2022 | 68 | 3,080 | 7.2 | % | 16.1 | % | 23,267 | 9.5 | % | 17.8 | % | ||||||||||||
2023 | 28 | 2,757 | 6.5 | % | 22.6 | % | 17,203 | 7.0 | % | 24.8 | % | ||||||||||||
2024 | 28 | 10,270 | 24.1 | % | 46.7 | % | 43,453 | 17.7 | % | 42.5 | % | ||||||||||||
2025 | 14 | 1,445 | 3.4 | % | 50.1 | % | 8,146 | 3.3 | % | 45.8 | % | ||||||||||||
2026 | 2 | 611 | 1.4 | % | 51.5 | % | 3,128 | 1.3 | % | 47.1 | % | ||||||||||||
2027 | 9 | 5,538 | 13.0 | % | 64.5 | % | 27,171 | 11.1 | % | 58.2 | % | ||||||||||||
2028 | 21 | 2,921 | 6.9 | % | 71.4 | % | 20,605 | 8.4 | % | 66.6 | % | ||||||||||||
Thereafter | 86 | 12,139 | (2 | ) | 28.6 | % | 100.0 | % | 81,865 | 33.4 | % | 100.0 | % | ||||||||||
Total | 305 | 42,531 | 100.0 | % | $ | 245,277 | 100.0 | % | |||||||||||||||
Weighted average remaining lease term (in years): | 8.6 | 9.6 |
(1) | Rented square feet is pursuant to existing leases as of September 30, 2019 and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
(2) | Rented square feet excludes a 194 square foot expansion under construction until the commencement of the lease for that space. |
Annualized | ||||
Rental Revenues as of | ||||
September 30, 2019 | ||||
Scheduled to Reset | ||||
10/1/2019 - 12/31/2019 | $ | 1,901 | ||
2020 | 2,681 | |||
2021 | 2,610 | |||
2022 | 4,209 | |||
2023 | 3,005 | |||
2024 and thereafter | 16,942 | |||
Total | $ | 31,348 |
% of Total | ||||||||||||||
No. of | Rented | % of Total | Annualized Rental | |||||||||||
Tenant | States | Properties | Sq. Ft. (1) | Rented Sq. Ft. (1) | Revenues | |||||||||
1 | Amazon.com Services, Inc. | FL, IN, SC, TN, VA | 6 | 6,119 | 14.4 | % | 14.2 | % | ||||||
2 | Federal Express Corporation / FedEx Ground Package System, Inc. | AR, CO, HI, IA, ID, IL, MN, MO, NC, ND, NV, OH, OK, UT | 17 | 952 | 2.2 | % | 4.0 | % | ||||||
3 | The Procter & Gamble Distributing LLC | OH | 1 | 1,791 | 4.2 | % | 3.7 | % | ||||||
4 | Restoration Hardware, Inc. | MD | 1 | 1,195 | 2.8 | % | 2.5 | % | ||||||
5 | American Tire Distributors, Inc. | CO, LA, NE, NY, OH | 5 | 722 | 1.7 | % | 2.1 | % | ||||||
6 | UPS Supply Chain Solutions Inc. | NH | 1 | 614 | 1.4 | % | 2.0 | % | ||||||
7 | Par Hawaii Refining, LLC | HI | 3 | 3,148 | 7.4 | % | 1.9 | % | ||||||
8 | Servco Pacific Inc. | HI | 4 | 537 | 1.3 | % | 1.9 | % | ||||||
9 | SKF USA Inc. | MO | 1 | 431 | 1.0 | % | 1.7 | % | ||||||
10 | EF Transit, Inc. | IN | 1 | 535 | 1.3 | % | 1.6 | % | ||||||
11 | BJ's Wholesale Club, Inc. | NJ | 1 | 634 | 1.5 | % | 1.4 | % | ||||||
12 | Subaru of America, Inc. | IN | 1 | 963 | 2.3 | % | 1.4 | % | ||||||
13 | Shurtech Brands, LLC | OH | 1 | 645 | 1.5 | % | 1.4 | % | ||||||
14 | Safeway Inc. | HI | 2 | 146 | 0.3 | % | 1.4 | % | ||||||
15 | Exel Inc. | SC | 1 | 945 | 2.2 | % | 1.2 | % | ||||||
16 | A.L. Kilgo Company, Inc. | HI | 5 | 310 | 0.7 | % | 1.2 | % | ||||||
17 | Trex Company, Inc. | NV, VA | 2 | 646 | 1.5 | % | 1.2 | % | ||||||
18 | Avnet, Inc. | OH | 1 | 581 | 1.4 | % | 1.2 | % | ||||||
19 | Cummins Inc. | KY | 1 | 604 | 1.4 | % | 1.2 | % | ||||||
20 | Manheim Remarketing, Inc. | HI | 1 | 338 | 0.8 | % | 1.2 | % | ||||||
21 | Warehouse Rentals Inc. | HI | 5 | 278 | 0.7 | % | 1.1 | % | ||||||
22 | Coca-Cola Bottling of Hawaii, LLC | HI | 4 | 351 | 0.8 | % | 1.1 | % | ||||||
23 | Whirlpool Corporation | IN | 1 | 805 | 1.9 | % | 1.0 | % | ||||||
Total | 66 | 23,290 | 54.7 | % | 51.6 | % |
(1) | Rented square feet is pursuant to existing leases as of September 30, 2019 and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
Comparable Properties Results (1) | Acquired Properties Results (2) | Consolidated Results | |||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
$ | % | $ | $ | % | |||||||||||||||||||||||||||||||||||||
2019 | 2018 | Change | Change | 2019 | 2018 | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||||||||||||
Rental income | $ | 41,046 | $ | 40,395 | $ | 651 | 1.6 | % | $ | 19,912 | $ | 36 | $ | 19,876 | $ | 60,958 | $ | 40,431 | $ | 20,527 | 50.8 | % | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
Real estate taxes | 5,917 | 4,935 | 982 | 19.9 | % | 2,669 | 7 | 2,662 | 8,586 | 4,942 | 3,644 | 73.7 | % | ||||||||||||||||||||||||||||
Other operating expenses | 3,147 | 3,280 | (133 | ) | (4.1 | %) | 1,674 | 1 | 1,673 | 4,821 | 3,281 | 1,540 | 46.9 | % | |||||||||||||||||||||||||||
Total operating expenses | 9,064 | 8,215 | 849 | 10.3 | % | 4,343 | 8 | 4,335 | 13,407 | 8,223 | 5,184 | 63.0 | % | ||||||||||||||||||||||||||||
Net operating income (3) | $ | 31,982 | $ | 32,180 | $ | (198 | ) | (0.6 | %) | $ | 15,569 | $ | 28 | $ | 15,541 | 47,551 | 32,208 | 15,343 | 47.6 | % | |||||||||||||||||||||
Other expenses: | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 17,568 | 7,152 | 10,416 | 145.6 | % | ||||||||||||||||||||||||||||||||||||
General and administrative | 4,475 | 2,924 | 1,551 | 53.0 | % | ||||||||||||||||||||||||||||||||||||
Total other expenses | 22,043 | 10,076 | 11,967 | 118.8 | % | ||||||||||||||||||||||||||||||||||||
Interest income | 81 | 71 | 10 | 14.1 | % | ||||||||||||||||||||||||||||||||||||
Interest expense | (14,687 | ) | (4,052 | ) | (10,635 | ) | 262.5 | % | |||||||||||||||||||||||||||||||||
Income before income tax expense and equity earnings of an investee | 10,902 | 18,151 | (7,249 | ) | (39.9 | %) | |||||||||||||||||||||||||||||||||||
Income tax expense | (63 | ) | (9 | ) | (54 | ) | 600.0 | % | |||||||||||||||||||||||||||||||||
Equity in earnings of an investee | 83 | — | 83 | N/M | |||||||||||||||||||||||||||||||||||||
Net income | $ | 10,922 | $ | 18,142 | $ | (7,220 | ) | (39.8 | %) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 65,055 | 65,022 | 33 | 0.1 | % | ||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - diluted | 65,060 | 65,022 | 38 | 0.1 | % | ||||||||||||||||||||||||||||||||||||
Net income per common share - basic and diluted | $ | 0.17 | $ | 0.28 | $ | (0.11 | ) | (39.3 | %) |
(1) | Consists of 267 buildings, leasable land parcels and easements that we owned continuously since July 1, 2018. |
(2) | Consists of 33 properties that we acquired during the period from July 1, 2018 to September 30, 2019. |
(3) | See our definition of NOI and our reconciliation of net income to NOI below under the heading “Non-GAAP Financial Measures.” |
Comparable Properties Results (1) | Acquired Properties Results (2) | Consolidated Results | |||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
$ | % | $ | $ | % | |||||||||||||||||||||||||||||||||||||
2019 | 2018 | Change | Change | 2019 | 2018 | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||||||||||||
Rental income | $ | 123,280 | $ | 119,826 | $ | 3,454 | 2.9 | % | $ | 43,755 | $ | 630 | $ | 43,125 | $ | 167,035 | $ | 120,456 | $ | 46,579 | 38.7 | % | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
Real estate taxes | 15,868 | 14,101 | 1,767 | 12.5 | % | 5,778 | 8 | 5,770 | 21,646 | 14,109 | 7,537 | 53.4 | % | ||||||||||||||||||||||||||||
Other operating expenses | 9,213 | 9,631 | (418 | ) | (4.3 | %) | 3,192 | 19 | 3,173 | 12,405 | 9,650 | 2,755 | 28.5 | % | |||||||||||||||||||||||||||
Total operating expenses | 25,081 | 23,732 | 1,349 | 5.7 | % | 8,970 | 27 | 8,943 | 34,051 | 23,759 | 10,292 | 43.3 | % | ||||||||||||||||||||||||||||
Net operating income (3) | $ | 98,199 | $ | 96,094 | $ | 2,105 | 2.2 | % | $ | 34,785 | $ | 603 | $ | 34,182 | 132,984 | 96,697 | 36,287 | 37.5 | % | ||||||||||||||||||||||
Other expenses: | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 43,888 | 20,915 | 22,973 | 109.8 | % | ||||||||||||||||||||||||||||||||||||
General and administrative | 13,131 | 8,386 | 4,745 | 56.6 | % | ||||||||||||||||||||||||||||||||||||
Total other expenses | 57,019 | 29,301 | 27,718 | 94.6 | % | ||||||||||||||||||||||||||||||||||||
Interest income | 580 | 134 | 446 | 332.8 | % | ||||||||||||||||||||||||||||||||||||
Interest expense | (36,207 | ) | (11,406 | ) | (24,801 | ) | 217.4 | % | |||||||||||||||||||||||||||||||||
Income before income tax expense | 40,338 | 56,124 | (15,786 | ) | (28.1 | %) | |||||||||||||||||||||||||||||||||||
Income tax expense | (131 | ) | (24 | ) | (107 | ) | 445.8 | % | |||||||||||||||||||||||||||||||||
Equity in earnings of an investee | 617 | — | 617 | N/M | |||||||||||||||||||||||||||||||||||||
Net income | $ | 40,824 | $ | 56,100 | $ | (15,276 | ) | (27.2 | %) | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 65,042 | 63,839 | 1,203 | 1.9 | % | ||||||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - diluted | 65,048 | 63,839 | 1,209 | 1.9 | % | ||||||||||||||||||||||||||||||||||||
Net income per common share - basic and diluted | $ | 0.63 | $ | 0.88 | $ | (0.25 | ) | (28.4 | %) |
(1) | Consists of 266 buildings, leasable land parcels and easements that we owned (including for the period that SIR owned our properties prior to our IPO) continuously since January 1, 2018. |
(2) | Consists of 34 properties that we acquired during the period from January 1, 2018 to September 30, 2019. |
(3) | See our definition of NOI and our reconciliation of net income to NOI below under the heading “Non-GAAP Financial Measures.” |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||
Reconciliation of Net Income to NOI: | |||||||||||||||||||||||||||||
Net income | $ | 10,922 | $ | 18,142 | $ | 40,824 | $ | 56,100 | |||||||||||||||||||||
Equity in earnings of an investee | (83 | ) | — | (617 | ) | — | |||||||||||||||||||||||
Income tax expense | 63 | 9 | 131 | 24 | |||||||||||||||||||||||||
Income before income tax expense and equity earnings of an investee | 10,902 | 18,151 | 40,338 | 56,124 | |||||||||||||||||||||||||
Interest expense | 14,687 | 4,052 | 36,207 | 11,406 | |||||||||||||||||||||||||
Interest income | (81 | ) | (71 | ) | (580 | ) | (134 | ) | |||||||||||||||||||||
General and administrative | 4,475 | 2,924 | 13,131 | 8,386 | |||||||||||||||||||||||||
Depreciation and amortization | 17,568 | 7,152 | 43,888 | 20,915 | |||||||||||||||||||||||||
NOI | $ | 47,551 | $ | 32,208 | $ | 132,984 | $ | 96,697 | |||||||||||||||||||||
NOI: | |||||||||||||||||||||||||||||
Hawaii Properties | $ | 17,821 | $ | 18,006 | $ | 56,817 | $ | 55,088 | |||||||||||||||||||||
Mainland Properties | 29,730 | 14,202 | 76,167 | 41,609 | |||||||||||||||||||||||||
NOI | $ | 47,551 | $ | 32,208 | $ | 132,984 | $ | 96,697 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||
Reconciliation of Net Income to FFO and Normalized FFO: | |||||||||||||||||||||||||||||
Net income | $ | 10,922 | $ | 18,142 | $ | 40,824 | $ | 56,100 | |||||||||||||||||||||
Plus: depreciation and amortization | 17,568 | 7,152 | 43,888 | 20,915 | |||||||||||||||||||||||||
FFO and Normalized FFO | $ | 28,490 | $ | 25,294 | $ | 84,712 | $ | 77,015 | |||||||||||||||||||||
FFO and Normalized FFO per common share - basic and diluted | $ | 0.44 | $ | 0.39 | $ | 1.30 | $ | 1.21 |
• | maintain the occupancy of, and maintain or increase the rental rates at, our properties; |
• | control our operating cost increases; and |
• | purchase additional properties that produce cash flows in excess of our costs of acquisition capital and property operating expenses. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Tenant improvements (1) | $ | 173 | $ | — | $ | 173 | $ | 69 | ||||||||
Leasing costs (2) | 322 | 188 | 716 | 517 | ||||||||||||
Building improvements (3) | 1,093 | 657 | 2,986 | 958 | ||||||||||||
Development, redevelopment and other activities (4) | 5,208 | 110 | 7,921 | 566 | ||||||||||||
$ | 6,796 | $ | 955 | $ | 11,796 | $ | 2,110 |
(1) | Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space. |
(2) | Leasing costs include leasing related costs, such as brokerage commissions, legal costs and tenant inducements. |
(3) | Building improvements generally include (i) expenditures to replace obsolete building components and (ii) expenditures that extend the useful life of existing assets. |
(4) | Development, redevelopment and other activities generally include (i) capital expenditure projects that reposition a property or (ii) result in new sources of revenue. |
New Leases | Renewals | Totals | |||||||||
Square feet leased during the period | 73 | 26 | 99 | ||||||||
Total leasing costs and concession commitments (1) | $ | 708 | $ | — | $ | 708 | |||||
Total leasing costs and concession commitments per square foot (1) | $ | 9.70 | $ | — | $ | 7.15 | |||||
Weighted average lease term by square feet (years) | 20.0 | 5.2 | 16.1 | ||||||||
Total leasing costs and concession commitments per square foot per year (1) | $ | 0.48 | $ | — | $ | 0.44 |
(1) | Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements. |
Annual | Annual | Interest | |||||||||||||
Principal | Interest | Interest | Payments | ||||||||||||
Debt | Balance (1) | Rate (1) | Expense (1) | Maturity | Due | ||||||||||
Mortgage note (one property in Virginia) | $ | 48,750 | 3.99 | % | $ | 1,945 | 2020 | Monthly | |||||||
Mortgage note (one property in Florida) | 56,980 | 3.60 | % | 2,051 | 2023 | Monthly | |||||||||
Mortgage notes (186 properties in Hawaii) | 650,000 | 4.31 | % | 28,015 | 2029 | Monthly | |||||||||
$ | 755,730 | $ | 32,011 |
(1) | The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed or issued this debt. |
Impact of an Increase in Interest Rates | |||||||||||||||
Total Interest | Annual | ||||||||||||||
Interest Rate | Outstanding | Expense | Earnings Per | ||||||||||||
Per Year | Debt | Per Year | Share Impact (1) | ||||||||||||
At September 30, 2019 | 3.59 | % | $ | 650,000 | $ | 23,335 | $ | 0.36 | |||||||
One percentage point increase | 4.59 | % | $ | 650,000 | $ | 29,835 | $ | 0.46 |
(1) | Based on the diluted weighted average common shares outstanding for the nine months ended September 30, 2019. |
Impact of an Increase in Interest Rates | |||||||||||||||
Total Interest | Annual | ||||||||||||||
Interest Rate | Outstanding | Expense | Earnings Per | ||||||||||||
Per Year | Debt | Per Year | Share Impact (1) | ||||||||||||
At September 30, 2019 | 3.59 | % | $ | 750,000 | $ | 26,925 | $ | 0.41 | |||||||
One percentage point increase | 4.59 | % | $ | 750,000 | $ | 34,425 | $ | 0.53 |
(1) | Based on the diluted weighted average common shares outstanding for the nine months ended September 30, 2019. |
• | The likelihood that our tenants will pay rent or be negatively affected by cyclical economic conditions, |
• | The likelihood that our tenants will renew or extend their leases or that we will be able to obtain replacement tenants, |
• | Our acquisitions of properties, |
• | Our ability to compete for acquisitions and tenancies effectively, |
• | The likelihood that our rents will increase when we renew or extend our leases, when we enter new leases, or when our rents reset at our Hawaii Properties, |
• | Our ability to pay distributions to our shareholders and to sustain the amount of such distributions, |
• | The future availability of borrowings under our revolving credit facility, |
• | Our policies and plans regarding investments, financings and dispositions, |
• | Our ability to raise debt or equity capital, |
• | Our ability to pay interest on and principal of our debt, |
• | Our ability to appropriately balance our use of debt and equity capital, |
• | Changes in the security of cash flows from our properties, |
• | Our tenants’ ability and willingness to pay their rent obligations to us, |
• | Our ability to successfully and profitably complete expansion and renovation projects at our properties and to realize our expected returns on those projects, |
• | Our expectation that we benefit from our relationships with RMR Inc., |
• | Our qualification for taxation as a REIT, |
• | Changes in federal or state tax laws, |
• | The credit qualities of our tenants, |
• | Changes in environmental laws or in their interpretations or enforcement as a result of climate change or otherwise, or our incurring environmental remediation costs or other liabilities, |
• | Our sales of properties, and |
• | Other matters. |
• | The impact of conditions in the economy and the capital markets on us and our tenants, |
• | Competition within the real estate industry, particularly for industrial and logistics properties in those markets in which our properties are located, |
• | Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters, |
• | Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes, |
• | Actual and potential conflicts of interest with our related parties, including our managing trustees, RMR LLC, RMR Inc. and others affiliated with them, and |
• | Acts of terrorism, outbreaks of so called pandemics or other manmade or natural disasters beyond our control. |
• | Our ability to make future distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our future earnings, the capital costs we incur to lease our properties and our working capital requirements. We may be unable to pay our debt obligations or to increase or maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated, |
• | Our leasing activity and our recent acquisitions may fail to achieve the expected increases in future cash flows and enhancements in our ability to increase our distributions to shareholders in the future. Even if we realize increased cash flows and enhancements in our ability to increase our distributions to shareholders, we may elect to utilize that cash for purpose other than increasing our distributions to shareholders. Our distributions are set from time to time by our Board of Trustees. Our Board considers many factors when setting our distributions, including our historical and projected income, Normalized FFO, our then current and expected needs of availability of cash to pay our obligations and fund our investments, our distribution rate compared to the trading price of our common shares and to the dividend yields of other industrial REITs, distributions which may be required to be paid by us to maintain our qualification for taxation as a REIT, and other factors deemed relevant by our Board of Trustees in its discretion. Accordingly, for these and other reasons, we may not increase our distributions in the future and our distributions to shareholders may be decreased, |
• | Our ability to grow our business and increase our distributions depends in large part upon our ability to buy properties and lease them for rents, less their property operating costs, that exceed our capital costs. We may be unable to identify properties that we want to acquire, and we may fail to reach agreement with the sellers and complete the purchases of any properties we do want to acquire. In addition, any properties we may acquire may not provide us with rents less property operating costs that exceed our capital costs or achieve our expected returns, |
• | Contingencies in our acquisition and sale agreements may not be satisfied and any expected acquisitions and sales may not occur, may be delayed or the terms of such transactions may change, |
• | Rents that we can charge at our properties may decline upon rent resets, lease renewals or lease expirations because of changing market conditions or otherwise, |
• | Leasing for some of our properties depends on a single tenant and we may be adversely affected by the bankruptcy, insolvency, a downturn of business or a lease termination of a single tenant at these properties, |
• | Certain of our Hawaii Properties are lands leased for rents that periodically reset based on then current fair market values. Rental income from our properties in Hawaii have generally increased during our and our predecessors’ ownership as the leases for those properties have been reset, extended or renewed. Although we expect that rents for our Hawaii Properties will increase in the future, we cannot be sure they will increase. Future rents from these properties could decrease or not increase to the extent they have in the past or by the amount we expect, |
• | Our possible development or redevelopment of certain of our properties may not be realized or be successful, |
• | It is difficult to accurately estimate leasing related obligations and costs of development and tenant improvement costs. Our leasing related obligations, development projects and tenant improvements may cost more and may take longer to complete than we currently expect and we may incur increasing amounts for these and similar purposes in the future, |
• | Economic conditions in areas where our properties are located may decline in the future. Such circumstances or other conditions may reduce demand for leasing industrial space. If the demand for leasing industrial space is reduced, we may be unable to renew leases with our tenants as leases expire or enter new leases at rental rates as high as expiring rents and our financial results may decline, |
• | E-commerce retail sales may not continue to grow and increase the demand for industrial and logistics real estate as we expect, |
• | Increasing development of industrial and logistics properties may reduce the demand for, and rents from, our properties, |
• | Our belief that there is a likelihood that tenants may renew or extend our leases prior to their expirations whenever they have made significant investments in the leased properties, or because those properties may be of strategic importance to them, may not be realized, |
• | Some of our tenants may not renew expiring leases, and we may be unable to obtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties, |
• | The competitive advantages we believe we have may not in fact exist or provide us with the advantages we expect. We may fail to maintain any of these advantages or our competition may obtain or increase their competitive advantages relative to us, |
• | We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital, |
• | Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions that we may be unable to satisfy, |
• | Actual costs under our revolving credit facility will be higher than LIBOR plus a premium because of fees and expenses associated with such debt, |
• | We may be unable to repay our debt obligations when they become due, |
• | The maximum borrowing availability under our revolving credit facility may be increased to up to $1.5 billion in certain circumstances. However, increasing the maximum borrowing availability under our revolving credit facility is subject to our obtaining additional commitments from lenders, which may not occur, |
• | We have the option to extend the maturity date of our revolving credit facility upon payment of a fee and meeting other conditions. However, the applicable conditions may not be met, |
• | The premiums used to determine the interest rate payable on our revolving credit facility and the unused fee payable on our revolving credit facility are based on our leverage. Changes in our leverage may cause the interest and fees we pay to increase, |
• | We may not reduce our level of indebtedness or maintain any reduction we may effect and increased leverage may restrict our ability to acquire properties and pursue business opportunities, |
• | We may spend more for capital expenditures than we currently expect or than we have in the past, |
• | Any joint venture arrangements that we may enter may not be successful, |
• | Our Board considers, among other factors, our distribution rate compared to the trading price of our common shares and to the dividend yields of other industrial REITs when setting our distributions to shareholders. This may imply that we will maintain or seek to maintain a specific dividend yield on our common shares. However, the dividend yield is only one of many factors our Board considers in its discretion when setting our distributions to shareholders. Further, various market and other factors impact trading prices for our and our competitors’ securities and the corresponding yields on those securities. As a result, the trading prices on our common shares and the yields on our common shares are subject to change and may fluctuate significantly. We do not intend to maintain or to seek to maintain any specific yield on our common shares, |
• | The business and property management agreements between us and RMR LLC have continuing 20 year terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms, |
• | We believe that our relationships with our related parties, including RMR LLC, RMR Inc. and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and |
• | We expect to receive a capital distribution in the fourth quarter of 2019 in connection with the dissolution of AIC. We cannot be sure that such distribution will occur when expected or at all. |
Maximum | ||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||
Shares Purchased | Value of Shares that | |||||||||||||
Number of | Average | as Part of Publicly | May Yet Be Purchased | |||||||||||
Shares | Price Paid | Announced Plans | Under the Plans or | |||||||||||
Calendar Month | Purchased (1) | per Share | or Programs | Programs | ||||||||||
July 2019 | 668 | $ | 21.48 | — | $ | — | ||||||||
September 2019 | 9,808 | 21.27 | — | — | ||||||||||
Total | 10,476 | $ | 21.28 | — | $ | — |
Exhibit Number | Description |
3.1 | |
3.2 | |
4.1 | |
10.1 | |
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document. (Filed herewith.) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
INDUSTRIAL LOGISTICS PROPERTIES TRUST | ||
By: | /s/ John G. Murray | |
John G. Murray | ||
President and Chief Executive Officer | ||
Dated: October 29, 2019 | ||
By: | /s/ Richard W. Siedel, Jr. | |
Richard W. Siedel, Jr. | ||
Chief Financial Officer and Treasurer | ||
(principal financial officer and principal accounting officer) | ||
Dated: October 29, 2019 |
1. | I have reviewed this Quarterly Report on Form 10-Q of Industrial Logistics Properties Trust; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
5 | |||||
Date: October 29, 2019 | /s/ John G. Murray | ||||
John G. Murray | |||||
President and Chief Executive Officer |
1. | I have reviewed this Quarterly Report on Form 10-Q of Industrial Logistics Properties Trust; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
5 | |||||
Date: October 29, 2019 | /s/ Richard W. Siedel, Jr. | ||||
Richard W. Siedel, Jr. | |||||
Chief Financial Officer and Treasurer |
1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
9 | |||
/s/ John G. Murray | /s/ Richard W. Siedel, Jr. | ||
John G. Murray | Richard W. Siedel, Jr. | ||
President and Chief Executive Officer | Chief Financial Officer and Treasurer | ||
Date: October 29, 2019 |
Real Estate Properties (Tables) |
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Real Estate [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of real estate properties | We allocated the purchase prices for these acquisitions based on the estimated fair value of the acquired assets and assumed liabilities as follows:
|
Weighted Average Common Shares (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Weighted Average Number of Shares | The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):
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Leases (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2019 |
Sep. 30, 2019 |
|
Leases [Abstract] | ||
Certain variable payments | $ 10,915 | $ 28,679 |
Tenant reimbursements | $ 10,915 | $ 27,517 |
Basis of Presentation |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Basis of Presentation | Basis of Presentation The accompanying condensed consolidated financial statements of Industrial Logistics Properties Trust and its consolidated subsidiaries, or we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or our 2018 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. In part because of the significant changes resulting from our initial public offering, or our IPO, on January 17, 2018, the financial results reported may not be indicative of our expected future results. For periods prior to January 17, 2018, our historical operating information and financial position have been derived from the financial statements of our former parent, Select Income REIT, or SIR, a former publicly traded real estate investment trust, or REIT, that merged with and into a wholly owned subsidiary of Office Properties Income Trust, or OPI, on December 31, 2018. |
Business and Property Management Agreements with RMR LLC (Details) $ in Thousands |
1 Months Ended | 3 Months Ended | 5 Months Ended | 9 Months Ended | ||
---|---|---|---|---|---|---|
Jan. 16, 2018
USD ($)
|
Sep. 30, 2019
USD ($)
employee
agreement
|
Sep. 30, 2018
USD ($)
|
Jun. 30, 2018
USD ($)
|
Sep. 30, 2019
USD ($)
employee
agreement
|
Jan. 17, 2018
agreement
|
|
Related Party Transaction [Line Items] | ||||||
Number of employees | employee | 0 | 0 | ||||
Reit Management And Research L L C | ||||||
Related Party Transaction [Line Items] | ||||||
Number of management service agreements | agreement | 2 | 2 | 2 | |||
Business management fees | $ 308 | $ 3,291 | $ 1,923 | $ 5,229 | ||
Construction supervision fees | 230 | 2,098 | 5,367 | 3,327 | $ 1,205 | |
Related party reimbursement expense | $ 120 | $ 1,203 | $ 3,132 | $ 2,116 | $ 809 |
Fair Value of Assets and Liabilities (Details) - USD ($) $ in Thousands |
Sep. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Fair Value of Financial Instruments | ||
Mortgage notes payable | $ 749,640 | $ 49,195 |
Carrying Value | ||
Fair Value of Financial Instruments | ||
Mortgage notes payable | 749,640 | 49,195 |
Estimated Fair Value | ||
Fair Value of Financial Instruments | ||
Mortgage notes payable | 823,036 | 48,642 |
Mortgage note payable | ||
Fair Value of Financial Instruments | ||
Unamortized premium | $ (6,090) | $ (445) |
Indebtedness |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Debt Disclosure [Abstract] | |
Indebtedness | Indebtedness Our principal debt obligations at September 30, 2019 were: (1) $650,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; and (2) three mortgage notes with an aggregate outstanding principal amount of $755,730. We have a $750,000 unsecured revolving credit facility that is available for our general business purposes, including acquisitions. The maturity date of our revolving credit facility is December 29, 2021. We may borrow, repay and reborrow funds under our revolving credit facility until maturity, and no principal repayment is due until maturity. Interest on borrowings under our revolving credit facility is calculated at floating rates based on LIBOR plus a premium that varies based on our leverage ratio. We have the option to extend the maturity date of our revolving credit facility for two, six month periods, subject to payment of extension fees and satisfaction of other conditions. We are also required to pay a commitment fee on the unused portion of our revolving credit facility until and if such time as we make a ratings election, and thereafter we will be required to pay a facility fee in lieu of such commitment fee based on the maximum amount of our revolving credit facility. The agreement governing our revolving credit facility, or our credit agreement, also includes a feature under which the maximum borrowing availability under our revolving credit facility may be increased to up to $1,500,000 in certain circumstances. As of September 30, 2019, interest payable on the amount outstanding under our revolving credit facility was LIBOR plus 155 basis points and our commitment fee was 15 basis points. As of September 30, 2019 and December 31, 2018, the interest rate payable on borrowings under our revolving credit facility was 3.59% and 3.81%, respectively. The weighted average interest rate for borrowings under our revolving credit facility was 3.73% and 3.39% for the three months ended September 30, 2019 and 2018, respectively, and 3.75% and 3.21% for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and October 28, 2019, we had $650,000 and $310,000, respectively, outstanding under our revolving credit facility, and $100,000 and $440,000, respectively, available to borrow under our revolving credit facility. Our credit agreement provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our credit agreement also contains covenants, including those that restrict our ability to incur debts or to make distributions in certain circumstances, and generally requires us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of the covenants under our credit agreement at September 30, 2019. In January 2019, we obtained a $650,000 mortgage loan secured by 186 of our properties containing approximately 9.6 million square feet located on the island of Oahu, Hawaii. This non-amortizing loan matures on February 7, 2029 and requires monthly payments of interest only at a fixed rate of 4.31% per annum. In connection with the acquisition of a portfolio of 20 industrial properties in April 2019, as discussed in Note 3, we assumed a $56,980 mortgage note secured by one property containing approximately 1.0 million square feet located in Ruskin, FL. This non-amortizing loan matures on October 1, 2023 and requires monthly payments of interest only at a fixed rate of 3.60% per annum. We recorded a $1,332 discount in connection with this assumed mortgage debt, which increased its effective interest rate to 4.22% per annum. We recorded this discount because we believed the interest rate payable on this mortgage note was below the rate we would have had to pay for debt with the same maturity and similar other terms at the time we assumed this obligation. As of September 30, 2019, the aggregate principal amount outstanding under our three mortgage notes was $755,730. These mortgage notes were secured by 188 properties with an aggregate net book value of $662,565 as of September 30, 2019. In October 2019, we obtained a $350,000 mortgage loan secured by 11 of our Mainland Properties containing an aggregate of approximately 8.0 million rentable square feet and are located in eight states. This non-amortizing loan matures in November 2029 and requires monthly payments of interest at a fixed rate of 3.33% per annum. We used the proceeds from this loan to reduce outstanding borrowings under our revolving credit facility.
|
Certain Historical Arrangements and Operations Prior to our IPO |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Certain Historical Arrangements and Operations Prior to our IPO | Certain Historical Arrangements and Operations Prior to our IPO In connection with our IPO, on September 29, 2017, SIR contributed to us 266 properties with a total of approximately 28,540,000 rentable square feet, or our Initial Properties, including 16,834,000 rentable square feet of primarily industrial lands in Hawaii and approximately 11,706,000 rentable square feet of industrial and logistics properties in 24 other states. In connection with our IPO, we reimbursed SIR for approximately $7,271 of costs that SIR incurred in connection with our formation and preparation for our IPO. We do not have any employees. As a wholly owned subsidiary of SIR, until the completion of our IPO, we had received services from RMR LLC under SIR’s business and property management agreements with RMR LLC. For periods prior to the completion of our IPO on January 17, 2018, base management fees payable by SIR under SIR’s business management agreement with RMR LLC and allocated to us were calculated based on the historical costs of our Initial Properties, and incentive management fees, and internal audit costs payable by SIR and allocated to us were based on the percentage of our base management fees compared to the total base management fees paid by SIR. During the period from January 1, 2018 to January 16, 2018, the base management fees payable by SIR and allocated to us were $308. This amount is included in general and administrative expenses in our condensed consolidated statements of comprehensive income. The property management and construction supervision fees payable by SIR under SIR’s property management agreement with RMR LLC that were allocated to us for the period from January 1, 2018 to January 16, 2018 were $230. This amount is included in other operating expenses or has been capitalized, as appropriate, in our condensed consolidated financial statements. For the period from January 1, 2018 to January 16, 2018, the total amount allocated to us for reimbursements that SIR paid to RMR LLC for employment and related expenses of RMR LLC employees assigned to work exclusively or partly at properties then owned by SIR, including the Initial Properties, SIR’s share of the wages, benefits and other related costs of RMR LLC’s centralized accounting personnel, SIR’s share of RMR LLC’s costs for providing SIR’s internal audit function and for other agreed upon amounts with respect to SIR’s business and property management agreements with RMR LLC was $120. This amount was included in other operating expenses in our condensed consolidated statements of comprehensive income. All these management fees and reimbursements allocated to us for periods prior to January 17, 2018 were paid by SIR and not us. In connection with our IPO, we entered two agreements with RMR LLC to provide management services to us. See Notes 10 and 11 for further information regarding our relationships, agreements and transactions with RMR LLC and SIR.
|
Certain Historical Arrangements and Operations Prior to our IPO (Details) $ in Thousands |
1 Months Ended | 3 Months Ended | 5 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|---|---|
Sep. 29, 2017
USD ($)
ft²
state
property
|
Jan. 16, 2018
USD ($)
|
Sep. 30, 2019
USD ($)
ft²
state
property
agreement
building
|
Sep. 30, 2018
USD ($)
|
Jun. 30, 2018
USD ($)
|
Sep. 30, 2019
USD ($)
ft²
state
property
agreement
building
|
Jan. 17, 2018
agreement
|
|
Line of Credit Facility [Line Items] | |||||||
Number of properties owned | property | 266 | 300 | 300 | ||||
Net rentable area | ft² | 28,540,000 | 42,745,000 | 42,745,000 | ||||
Reit Management And Research L L C | |||||||
Line of Credit Facility [Line Items] | |||||||
Business management fees | $ 308 | $ 3,291 | $ 1,923 | $ 5,229 | |||
Construction supervision fees | 230 | 2,098 | 5,367 | 3,327 | $ 1,205 | ||
Related party reimbursement expense | $ 120 | $ 1,203 | $ 3,132 | $ 2,116 | $ 809 | ||
Number of management service agreements | agreement | 2 | 2 | 2 | ||||
Hawaii | |||||||
Line of Credit Facility [Line Items] | |||||||
Net rentable area | ft² | 16,834,000 | 16,756,000 | 16,756,000 | ||||
Other States | |||||||
Line of Credit Facility [Line Items] | |||||||
Number of properties owned | building | 74 | 74 | |||||
Net rentable area | ft² | 11,706,000 | 25,989,000 | 25,989,000 | ||||
Number of states where real estate is located | state | 24 | 29 | 29 | ||||
Select Income REIT | |||||||
Line of Credit Facility [Line Items] | |||||||
Payments of stock issuance costs | $ 7,271 |
Fair Value of Assets and Liabilities |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value of Assets and Liabilities | Fair Value of Assets and Liabilities Our financial instruments include cash and cash equivalents, rents receivable, our revolving credit facility, mortgage notes payable, accounts payable, rents collected in advance, security deposits and amounts due from or to related persons. At September 30, 2019 and December 31, 2018, the fair value of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows:
We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
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Business and Property Management Agreements with RMR LLC |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Related Party Transactions [Abstract] | |
Business and Property Management Agreements with RMR LLC | Business and Property Management Agreements with RMR LLC We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations. Pursuant to our business management agreement with RMR LLC, we recognized business management fees of $3,291 and $8,576 for the three and nine months ended September 30, 2019, respectively, and $1,923 and $5,229 for the three months ended September 30, 2018 and for the period from January 17, 2018 through September 30, 2018, respectively. Based on our common share total return, as defined in our business management agreement, as of September 30, 2019, no estimated 2019 incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2019. The actual amount of annual incentive fees for 2019, if any, will be based on our common share total return, as defined in our business management agreement, for the period from January 12, 2018 to December 31, 2019 and will be payable in 2020. No estimated 2018 incentive fees are included in the net business management fees we recognized for the three months ended September 30, 2018 or for the period from January 17, 2018 through September 30, 2018. The amounts for business management fees are included in general and administrative expenses in our condensed consolidated statements of comprehensive income. Pursuant to our property management agreement with RMR LLC, we recognized aggregate property management and construction supervision fees of $2,098 and $5,367 for the three and nine months ended September 30, 2019, respectively, and $1,205 and $3,327 for the three months ended September 30, 2018 and for the period from January 17, 2018 through September 30, 2018, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC’s centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, or as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $1,203 and $3,132 for these expenses and costs for the three and nine months ended September 30, 2019, respectively, and $809 and $2,116 for the three months ended September 30, 2018 and for the period from January 17, 2018 through September 30, 2018, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income. See Notes 9 and 11 for further information regarding our relationships, agreements and transactions with RMR LLC.
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Leases - Schedule of Operating Lease Maturities (Details) $ in Thousands |
Sep. 30, 2019
USD ($)
|
---|---|
Leases [Abstract] | |
2019 | $ 50,503 |
2020 | 201,117 |
2021 | 196,700 |
2022 | 186,968 |
2023 | 166,945 |
Thereafter | 1,262,250 |
Total | $ 2,064,483 |
Leases (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Operating Lease Maturities | The following table presents our operating lease maturity analysis as of September 30, 2019:
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Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2019 |
Sep. 30, 2018 |
Sep. 30, 2019 |
Sep. 30, 2018 |
|
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | ||||
Rental income | $ 60,958 | $ 40,431 | $ 167,035 | $ 120,456 |
Accounting Standards Update 2016-02 | ||||
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | ||||
Rental income | $ 5,650 | $ 16,986 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2019 |
Sep. 30, 2018 |
Sep. 30, 2019 |
Sep. 30, 2018 |
|
Income Statement [Abstract] | ||||
Amortization of debt issuance costs and premium | $ 524 | $ 309 | $ 1,421 | $ 931 |
Recent Accounting Pronouncements |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
New Accounting Pronouncements and Changes in Accounting Principles [Abstract] | |
Recent Accounting Pronouncements | Recent Accounting Pronouncements In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors. Collectively, these standards set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. ASU No. 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. These standards were effective as of January 1, 2019. Upon adoption, we applied the package of practical expedients that has allowed us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Furthermore, we applied the optional transition method in ASU No. 2018-11, which has allowed us to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the adoption period, although we did not have an adjustment. Additionally, our leases met the criteria in ASU No. 2018-11 to not separate non-lease components from the related lease component; therefore, the accounting for these leases remained largely unchanged from the previous standard. The adoption of ASU No. 2016-02 and the related improvements did not have a material impact in our condensed consolidated financial statements. Upon adoption, (i) amounts previously recognized as tenant reimbursements and other income, which totaled $5,650 and $16,986 for the three and nine months ended September 30, 2018, respectively, have been reclassified as rental income, (ii) allowances for bad debts are now recognized as a direct reduction of rental income, and (iii) legal costs associated with the execution of our leases, which were previously capitalized and amortized over the life of their respective leases, are expensed as incurred. Subsequent to January 1, 2019, provisions for credit losses are included in rental income in our condensed consolidated financial statements. Provisions for credit losses prior to January 1, 2019 were previously included in other operating expenses in our condensed consolidated financial statements and prior periods are not reclassified to conform to the current presentation. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements although lease related receivables are governed by the lease standards referred to above and are not subject to ASU No. 2016-13. We currently expect to adopt the standard using the modified retrospective approach.
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Leases |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
Leases | Leases We are a lessor of industrial and logistics properties. Our leases provide our tenants with the contractual right to use and economically benefit from all the physical space specified in the leases; therefore, we have determined to evaluate our leases as lease arrangements. Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income, and percentage rents until the specific events that trigger the variable payments have occurred. Such payments totaled $10,915 and $28,679 for the three and nine months ended September 30, 2019, respectively, of which tenant reimbursements totaled $10,915 and $27,517, respectively. Certain of our leases contain non-lease components, such as property level operating expenses and capital expenditures reimbursed by our tenants as well as other required lease payments. We have determined that all our leases qualify for the practical expedient to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as those of the lease components. We apply Accounting Standards Codification 842, Leases, to the combined component. Income derived by our leases is recorded in rental income in our condensed consolidated statements of comprehensive income. Certain tenants are obligated to pay directly their obligations under their leases for insurance, real estate taxes and certain other expenses. These obligations, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our condensed consolidated financial statements. To the extent any tenant responsible for any such obligations under the applicable lease defaults on such lease or if it is deemed probable that the tenant will fail to pay for such obligations, we would record a liability for such obligations. The following table presents our operating lease maturity analysis as of September 30, 2019:
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Weighted Average Common Shares |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted Average Common Shares | Weighted Average Common Shares The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):
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Recent Accounting Pronouncements (Policies) |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
New Accounting Pronouncements and Changes in Accounting Principles [Abstract] | |
Organization and basis of presentation | The accompanying condensed consolidated financial statements of Industrial Logistics Properties Trust and its consolidated subsidiaries, or we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or our 2018 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. In part because of the significant changes resulting from our initial public offering, or our IPO, on January 17, 2018, the financial results reported may not be indicative of our expected future results. For periods prior to January 17, 2018, our historical operating information and financial position have been derived from the financial statements of our former parent, Select Income REIT, or SIR, a former publicly traded real estate investment trust, or REIT, that merged with and into a wholly owned subsidiary of Office Properties Income Trust, or OPI, on December 31, 2018. |
Use of estimates | The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets, impairments of real estate and related intangibles.
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Recent Accounting Pronouncements | In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors. Collectively, these standards set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. ASU No. 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. These standards were effective as of January 1, 2019. Upon adoption, we applied the package of practical expedients that has allowed us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Furthermore, we applied the optional transition method in ASU No. 2018-11, which has allowed us to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the adoption period, although we did not have an adjustment. Additionally, our leases met the criteria in ASU No. 2018-11 to not separate non-lease components from the related lease component; therefore, the accounting for these leases remained largely unchanged from the previous standard. The adoption of ASU No. 2016-02 and the related improvements did not have a material impact in our condensed consolidated financial statements. Upon adoption, (i) amounts previously recognized as tenant reimbursements and other income, which totaled $5,650 and $16,986 for the three and nine months ended September 30, 2018, respectively, have been reclassified as rental income, (ii) allowances for bad debts are now recognized as a direct reduction of rental income, and (iii) legal costs associated with the execution of our leases, which were previously capitalized and amortized over the life of their respective leases, are expensed as incurred. Subsequent to January 1, 2019, provisions for credit losses are included in rental income in our condensed consolidated financial statements. Provisions for credit losses prior to January 1, 2019 were previously included in other operating expenses in our condensed consolidated financial statements and prior periods are not reclassified to conform to the current presentation. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements although lease related receivables are governed by the lease standards referred to above and are not subject to ASU No. 2016-13. We currently expect to adopt the standard using the modified retrospective approach.
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Fair Value of Assets and Liabilities | We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
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