Freedom Maintained a “Buy” Rating on ILPT, Lowering the Target Price to $10

Rising lease rates upon renewals allow Industrial Logistics Properties Trust (ILPT) to increase revenue without acquiring new properties, according to Freedom Broker analysts Zhiger Kurmet and Said Musaev. In a report dated November 3, they maintained a “Buy” recommendation but lowered the target price from $11 to $10. The new target implies upside of about 51.5% versus the $6.60 closing price used in the analysis.

ILPT is a U.S. real estate investment trust that owns industrial and logistics properties and earns income from leasing them out. As of the end of Q3, its consolidated portfolio included 409 properties with a total area of about 59.6 million square feet.

Rental income increased despite lower occupancy

According to the company’s quarterly reporting, rental revenue rose 5.3% year over year to $116.8 million. Net operating income from real estate, or NOI, increased 5.8% to $92 million, at the upper end of the guidance range.

Results were supported by new leases signed on previously vacant properties in Indianapolis and Hawaii. At the same time, portfolio occupancy was 98.3%: it rose by 4.2 percentage points versus last year but fell by 0.8 points quarter over quarter after one tenant vacated a property in Columbus.

For the eighth consecutive quarter, ILPT recorded double-digit growth in rates on executed leases. In Freedom’s view, further convergence of lease terms toward market levels remains the key source of business growth.

The FFO shortfall is explained by a change in calculation

Normalized FFO totaled $21.3 million, or $0.32 per share, versus a forecast range of $0.34–0.36. This metric is used to assess REIT performance and excludes from net income, among other items, property depreciation and certain one-off items.

Following discussions with the U.S. Securities and Exchange Commission, the company changed its methodology: normalized FFO now includes accrued incentive management fees. Figures for prior periods were also restated. 

Excluding such fees of $1.9 million, quarterly FFO would have been $0.35 per share—the midpoint of the guidance range. Therefore, the analysts do not view the deviation as a sign of deterioration in the core business. At the same time, ILPT ended the quarter with a net loss attributable to shareholders of $30.2 million, including a non-cash loss on an investment in a joint venture.

Lease renewals create opportunities for further growth

Leases covering about 5 million square feet are at the negotiation stage. Roughly 90% of this volume relates to renewals of existing leases, and the expected weighted-average rent increase is approximately 30%.

This structure makes it possible to increase revenue from the existing portfolio without incurring costs to buy real estate. However, the leases have not yet been signed, so realizing this potential will depend on the final negotiation terms.

Management raised the lower end of its full-year NOI guidance: the company now expects $363–364 million instead of $359–364 million. Normalized FFO guidance was lowered to $1.23–1.25 per share to reflect the new calculation methodology.

Why Freedom lowered the target price

The main reason for the valuation revision is the rise in market interest rates. It reduces the present value of future cash flows and makes bonds a more attractive alternative to real estate. Freedom applied lower valuation multiples to ILPT’s results without materially changing its operating forecasts.

High leverage remains a risk: the company’s total debt is $4.22 billion, and net debt to annual adjusted EBITDAre is 11.6. At the same time, all debt is fixed-rate with an average rate of 5.48%, and the first maturity falls in February 2029. Therefore, higher market rates do not imply an immediate increase in expenses on existing borrowings.

Previously, Freedom Broker noted the potential for repricing lease rates in ILPT’s portfolio, while also drawing attention to the high debt burden. 

Not an individual investment recommendation.