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Industrial property REIT taps CMBS for cashout refi of Honolulu portfolio

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Industrial Logistics Properties Trust, a real estate investment trust, is tapping the commercial mortgage bond market for a cashout refinancing of a portfolio of industrial properties in Honolulu, Hawaii.

On Jan. 29, the REIT obtained a $650 million mortgage on the portfolio from four banks: Morgan Stanley (50%), Citigroup (20%), UBS (20%) and JPMorgan Chase (10%). A $390 million portion of a the loan, which pays a fixed rate of 4.31%, and no principal, for its entire 10-year term, is being securitized in a transaction called ILPT 2019-SURF; the remaining $260 million will be contributed to one or more future CMBS transactions.

Proceeds from the financing were used to return approximately $267.2 million of equity to the sponsor, according to Kroll Bond Rating Agency. However, the sponsor or a predecessor of the sponsor has owned the properties since early 2003 and has maintained an average occupancy of 99.5% over the past 16 years.

The loan is secured by the borrower’s leased fee interests in approximately 9.3 million square feet of land underlying 177 predominantly industrial properties and its fee simple interests in eight industrial properties (295,388 square feet) and one parking lot (30,000 square feet). The portfolio represents a fraction of ILPT's total portfolio, which comprised 269 industrial and logistics properties with 29.2 million rentable square feet, as of Sept. 30.

Hawaii is a strong commercial property market. The state imports 80% of everything it consumes, necessitating a strong industrial sector to process imports/exports and store goods, Fitch Ratings notes in its presale report. There is also a lack of land that can be developed (Oahu is an active volcano), which has led to high historical occupancy in the industrial market.

Overall, 179 (93.2%) of the 186 assets are situated in the two established industrial-commercial parks of Mapunapuna (67.3%) and Sand Island (25.9%) in proximity to the Honolulu International Airport and Honolulu Harbor, respectively. Of the remaining properties, four are located in Downtown Honolulu (3.9%), two (2.6%) in the Salt Lake neighborhood, and one property is situated in an industrial park in Waipahu (0.3%). Tenants The properties are leased to over 170 unique tenants, none of which account for more than 5.0% of total base rent.

The mortgage loan exhibits low in-trust leverage; Kroll puts the loan-to-value ratio at 69.9%, based on its own estimate of sustainable net cash flow and value; it says this is “meaningfully” below that of the nine single-borrower securitizations it has rated over the last 12 months, which averaged 88.5%. The leverage also compares favorably with the average KLTV of 101.8% for the 23 conduits rated by Kroll containing industrial properties over the same time period.

Fitch also puts the LTV at 69.6%.; it notes favorably that the property is not encumbered by any debt held outside the securitization trust, and the terms of the mortgage do not allow any additional debt to be taken out in the future.

Both Kroll and Fitch expect to assign triple-A ratings to the most senior tranche of securities to be issued in the transaction.

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