Industrial Logistics Properties Trust Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to Industrial Logistics Properties Trust Third Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the call over to Steven Colberg, Director of Investor Relations. Please go ahead.

Speaker 1

Good morning. Joining me on today's call are Yael Duffy, President and Chief Operating Officer and Tiffany Tsai, Chief Financial Officer and Treasurer. Today's call includes a presentation by management followed by a Please note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward looking statements are based on ILPT's beliefs and expectations as of today, October 26, 2023 and actual results may differ materially from those that we project.

Speaker 1

The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call. Additional information concerning Factors that could cause those differences is contained in our filings with the Securities and Exchange Commission or SEC, which can be accessed from our website, ilttreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward looking statements. In addition, we will be discussing non GAAP financial numbers during this call, including normalized funds from operations or normalized FFO, adjusted EBITDA and cash basis net operating income or cash basis NOI. A reconciliation of these non GAAP figures to net income is available in our financial results and supplemental information and presentation, which can be found on our website.

Speaker 1

With that, I'll turn the call over to Gaia.

Speaker 2

Thank you, Stephen, and good morning. Before we begin, I would like to welcome Tiffany Tsai, who joined ILPT as our Chief Financial Officer and Treasurer on October 1. On today's call, I will begin with an update on our disposition activity and then review ILPT's operating and leasing performance, before turning the call over to Tiffany to discuss our financial results. Last quarter, we reported that we had 3 properties, 2 that are encumbered under agreement to sell for an aggregate sales price of $65,300,000 We also discussed that while dispositions are challenging in this economic environment, ILPT may face additional difficulties given the property release provisions under our debt agreements. During the diligence process, one property fell out of agreement as the buyer was unable to receive the required licensing needed to operate its business and another terminated due to delays in the transaction timeline.

Speaker 2

The 3rd property, which is unencumbered, continues to be under agreement to sell for $21,500,000 Turning to our operating and leasing performance. As of September 30, 2023, our portfolio, which consists of 413 warehouse and distribution properties, achieved same property NOI and cash basis NOI growth of 5.3% and 6%, respectively, compared to the Q3 of 2022. We are finally beginning to see the positive impact of the 5,200,000 square feet of leasing we completed over the last year. As a point of reference, The impact of this activity is an increase of $7,400,000 in annualized rental revenue, which represents 2% of ILPT's total annualized revenue. With 11,200,000 square feet set to expire through 2025, We believe there is continued opportunity to generate organic cash flow growth.

Speaker 2

Turning to the quarter. We executed 12 new and renewal leases for nearly 758,000 square feet, resulting in modest GAAP and cash Leasing spreads of 13.5% and 10.3%, respectively. The impact of this activity is an increase of $841,000 in annualized rental revenues. These leases have a weighted average lease term of 4.1 years, which is Highlighted in our results is continued demand from ILPT's largest tenant, FedEx. We completed 3 renewals totaling 200 and 13,000 Square Feet in Texas, Georgia and Illinois at a roll up in rent of 15.9%.

Speaker 2

As FedEx works through its DRiV program initiative, our leasing and asset management teams have been engaged in discussions with FedEx decision makers as they work through their long term plans. Our leasing pipeline includes 1,600,000 square feet across 14 properties that is specific to FedEx, with only 2 known vacates through 2024, which represents less than 40 basis points of annualized revenue. Furthermore, over 71% of our FedEx portfolio and the associated $92,000,000 in annualized revenue is secure, given it is long term lease with expirations in 2027 and beyond. Leasing in Hawaii was minimal this quarter with just over 21,000 square feet. We believe this muted activity is a function of timing as our Hawaii leasing pipeline currently exceeds 3,000,000 square feet.

Speaker 2

Lastly, as we have communicated in the past, We are focused on improving ILPT's leverage, which has declined 1.4 times since last year. However, given the ongoing uncertainty in the capital markets, any improvement in the short term will be organic. With no near term debt maturities and a cash flowing portfolio, ILPT will continue to focus on tenant retention, maximizing mark to market rent growth opportunities and reducing operating expenses. I'll now turn the call over to Tiffany.

Speaker 3

Thank you, Yaron. Good morning, everyone. Starting with our consolidated financial results for the Q3 of 2023, Normalized funds from operations was flat on a sequential quarter basis at $7,900,000 or $0.12 per share and declined compared to the prior year quarter. Adjusted EBITDAre was $83,200,000 an increase on both sequential quarter and year over year basis. Our leasing activity generated increases in cash on a same property basis of $7,200,000 or 7.4 percent year over year, partially offset by operating expense increases of $2,700,000 or 12.2 percent, which resulted in a net 6% increase in same property cash basis NOI for the 3rd quarter.

Speaker 3

Interest expense was $72,900,000 for the quarter, an increase of $1,100,000 sequentially and and reflects the full quarter's impact of the mortgage loans we refinanced in May. Our 4th quarter estimated interest expense is approximately $73,000,000 consisting of $66,000,000 of cash interest expense, including the benefit from our in the money interest rate cap and the $7,000,000 of non cash amortization of financing costs. Turning to our balance sheet. IOPC ended the quarter with a net debt to total assets ratio of 68.5% compared to 69.9 percent a year ago, and our net debt coverage ratio declined to 12.3x compared to 13.7x on a year over year basis. All of our debt is currently carried at a fixed rate or a fixed through interest rate cap, with a total weighted average interest rate of 5.47%.

Speaker 3

Including IOPT has no debt maturities until 2027. Our first extension option on the $1,400,000,000 floating rate loan under our consolidated joint venture occurs in March 2024, subject to the replacement of the related interest rate cap. Based on today's pricing, replacement cap would range from $20,000,000 to $30,000,000 As of September 30, we had approximately $83,000,000 The cash on hand and $139,000,000 of restricted cash in our consolidated joint venture. As Gal mentioned earlier, we will continue to evaluate opportunities to reduce our leverage and build liquidity. However, we currently have no plans to market properties for sale.

Speaker 3

In closing, and rising rents across our portfolio. And we expect that IOPT will continue to benefit from demand for high quality industrial real estate like ours. That concludes our prepared remarks. Operator, please open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Speaker 4

Thank you and good morning, Yahya and Tiffany. Maybe sticking with the caps for a minute. Tiffany, did you say that was $28,000,000 to $30,000,000 or $20,000,000 to $30,000,000 I didn't quite catch that.

Speaker 3

I said $20,000,000 to 30,000,000 That is based on today's pricing, but also our expectations of The strike price. So there was some range there as well.

Speaker 4

And was that for one of the caps or was that for both of the 2024 caps?

Speaker 3

That is for 1 of the caps.

Speaker 4

And how does that pricing compare to the cap cost that was put on that loan back in 2022?

Speaker 3

Well, the most recent cap that we purchased was September of 20 And that was $47,000,000 That was at a much lower spread price, however, and is also a 2 year period. It's not necessarily apples to apples, but I will say that pricing has slightly increased since the last time we purchased.

Speaker 4

Okay. That's helpful. And then when we think about organic deleveraging, I think you mentioned or Yael mentioned that it's come down from 13.7x to I think 12.3x. Should we suspect that all else being equal over the next 12 months, we should see a similar amount of organic Deleveraging or do you think that moderates a little bit?

Speaker 3

No, I think it's a good proxy for run rate.

Speaker 4

Okay. And then just maybe for your eye on the asset dispositions, I caught all what you said on the 3 going to 1. And that I think you said you weren't actively marketing properties, but are you still receiving inbound inquiries into some of your properties and how are those progressing?

Speaker 2

So we have been, I will say that I think it's the unsolicited offers have slowed in the last quarter or so. And so with each offer that we get, we really do review If it makes sense to sell and I think we've talked about this on the prior last quarter's call, but it really is It's hard for us to sell things out of the collateral pools given the amount to Release the property from the collateral pool must be the greater of 115% of the allocated loan value or 100% of the net And so on top of that, we also have to maintain required debt service Coverage ratio, so really we have to look at the value of the property today versus what we closed on The value when we closed on the loan and I think we can all agree that there has been some shift in Valuations, so it's hard to make the math work and then if we're going to target underperforming Properties for sale, it's hard to we have to improve our debt yield when we remove it from the collateral pool, but It's hard to sell a property that's underperforming. So there's a lot of there's a lot that's going into it.

Speaker 2

But If the opportunity is right and it makes sense, we'll do it, but it's been far and few between.

Speaker 4

Okay, thanks. And just maybe last for me, a quick one on the dividend. I mean, when we look at the rolling 4 quarter, Trailing CAD being, I think it's $0.54 or so and you're paying out basically $0.04 Is there any thought to taking that dividend up even a little? Or is the focus just solely on paying down a Debt and keeping dry powder for cap costs?

Speaker 3

It's the latter. Currently, we're focusing on reducing our leverage. We'd like to get it to a lower level, I mean, at least and We can have a real, I think, discussion or considerations. But that market right now is

Speaker 4

I didn't catch that. Did you say you want to get leverage down to 10% before you rethink that?

Speaker 2

Yes, I think the Board Looking at it, Brian, but I think right now really we need to have liquidity to make sure that we have liquidity to buy the caps And then also to run the business. I mean, if we have some leasing that's coming up and then if FedEx Comes to us and wants to do a building expansion or a parking lot project, we want to make sure that we have the liquidity to partner with our tenants to meet their needs.

Speaker 4

Right. But to the extent that 10 is the bogey before the Board starts to think about it, that's helpful from our standpoint as we model out the Point as we model out the company kind of now through 2026, kind of where you hit that and where there could be thought process of a slight Dividend increase, nothing crazy, but anyways food for thought and thank you for all those comments.

Speaker 2

Thanks.

Operator

Our next question comes from Mitch Germain with JMP Securities. Please go ahead. Hello, please proceed with your question.

Speaker 5

Hi, can you hear me?

Operator

Yes, please proceed with your question.

Speaker 5

Yes, you had mentioned that there were Some FedEx move outs in 2024. Are there any other known move outs for the year?

Speaker 2

So we have the one property that we had under agreement to sell in Indiana. That's a 535 1,000 square feet property and that lease expires in June of 2024. So we know that Tenet is moving to a build to suit location. We are in discussions with them potentially for a short term Renewal because I think their construction has been delayed, but that's really the major On the Mainland and then, as we've talked about in the past, the home the parcel in Hawaii, the 2,200,000 square feet That was previously leased to Home Depot. That one will be coming back to us at the end of Q1.

Speaker 5

On that, y'all, I think last quarter you had mentioned that there was some activity on that. Is there any update?

Speaker 2

We continue to see good activity, nothing far enough along to announce, But I do we do feel confident that we'll be able to lease that with minimal downtime.

Operator

Okay. And the

Speaker 5

last one from me. I think you explained the shorter term on the new leasing during the quarter. Is there anything we can attribute the New lease rental changes too, because that has also changed quarter over quarter here.

Speaker 2

No, I think it's just in some of the past quarters, we've Really long lease terms, which have resulted in bigger GAAP rent increases. And so with the shorter Walt, we're not seeing that same robust strike increase, but I would also say We did re lease 1 property, which negatively impacted our results at a roll down in rent because we had It was previously leased to FedEx and it had amortizing TI, which was inflating their rent numbers. So without that Property kind of we excluded that we would be at 17%, 18% roll up. So that was part of the outlier this quarter.

Speaker 5

Okay, got it. Thank you.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Yael Dubby for any closing remarks.

Speaker 2

Thanks for joining us. Have a good day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Industrial Logistics Properties Trust Q3 2023
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