Industrial Logistics Properties Trust Q3 2024 Earnings Call Transcript

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October 30, 2024

Key Takeaways

  • ILPT reported Q3 funds from operations (FFO) of $8.1 million, or $0.12 per share, up 1.5% year-over-year, with cash‐basis NOI rising 1.1% despite a 0.7% decline in GAAP NOI.
  • Leasing momentum remained strong as ILPT executed over 2.7 million square feet of new and renewal leases at average rents 7% higher than prior agreements and an average lease term of 5.5 years.
  • The portfolio comprises 411 properties totaling ~60 million square feet across 39 states, including a unique Hawaii footprint of 226 properties (16.7 million sq ft) and a Q3 occupancy rate of 94.4%.
  • American Tire Distributors, ILPT’s 4th largest tenant (1.6% of revenues), filed Chapter 11 but continues operations, has paid rent on all five leased properties, and is not expected to reject leases.
  • ILPT extended a $1.2 billion floating-rate loan and acquired a $17 million interest‐rate cap at a 2.78% strike, ending Q3 with 68.1% net debt to assets and $154 million of unrestricted cash, while maintaining its $0.01 quarterly dividend.
AI Generated. May Contain Errors.
Earnings Conference Call
Industrial Logistics Properties Trust Q3 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Industrial Logistics Properties Trust Third Quarter 20 24 Financial Results Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask questions. Over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Speaker 1

Thank you, Dorwin. Good morning. Joining me on today's call are ILPT's President and Chief Operating Officer, Yael Duffy Chief Financial Officer and Treasurer, Tiffany Tsai and Vice President, Mark Krum. Today's call includes a presentation by management followed by a question and answer session with analysts. Please note that the reporting and retransmission of today's conference call is prohibited without the prior written consent of the company.

Speaker 1

Also, please 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 30, 2024 and actual results may differ materially from those that we project. 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 ilptreit.com. Investors are cautioned not to place undue reliance upon any forward looking statements.

Speaker 1

In addition, we will be discussing non GAAP financial measures during this call, including funds from operations or FFO, adjusted EBITDAre and cash basis net operating income or cash basis NOI. A reconciliation of these non GAAP measures to net income is available in our financial results package, which can be found on our website. With that, I will now turn the call over to Gail.

Speaker 2

Thank you, Melissa, and good morning. On today's call, I will start with a high level update on our portfolio and Q3 operating performance before handing it over to Mark to discuss our leasing achievements. From there, Tiffany will review our financial results. We remain encouraged by the continued demand for ILPT's high quality portfolio and the strength in industrial real estate fundamentals. We delivered strong results in the 3rd quarter with year over year growth in key metrics including FFO and cash basis NOI.

Speaker 2

Given many of our leases have contractual escalations and we have illustrated a track record of capturing rent growth through our leasing efforts, we believe there is embedded opportunity to drive organic cash flow growth. As of September 30, 2024, ILPT's portfolio consisted of 411 distribution and logistics properties in 39 states totaling approximately 60,000,000 square feet. Our strategically diversified portfolio is highlighted by our unique Hawaii footprint consisting of 226 properties totaling more than 16,700,000 square feet. Our portfolio carries a weighted average lease term of 8 years and is anchored by tenants with strong business profiles and stable cash flows. ILPT's top 10 tenants account for nearly half of our total annualized rental revenues and 77% of our annualized revenues come from investment grade rated tenants are from our secure Hawaii land leases.

Speaker 2

Last week American Tire Distributors, our 4th largest tenant representing 1.6% of ILPT's annualized revenues filed voluntary Chapter 11 proceedings as it contemplates a restructuring agreement with an ad hoc group of its lenders. American Tire has publicly indicated that it will continue to operate across its nationwide distribution network. Within our portfolio, all rent obligations have been paid and the 5 properties they lease from us are being fully utilized. At quarter end, our consolidated occupancy was 94.4%, a slight decrease from the Q2, primarily due to the previously disclosed 535,000 square foot property located in the East submarket of Indianapolis that became vacant in July. Leasing this vacancy along with a 2,200,000 square foot parcel in Hawaii that became vacant on April 1 are among our top priorities.

Speaker 2

Tour and proposal activity for the sites has increased and we are optimistic that both will be leased in 2025. Also impacting our GAAP NOI results this quarter is a $1,300,000 non cash charge resulting from the early termination of 1 tenant, which leased 2 parcels within our Hawaii portfolio. After the end of the quarter, we were able to execute a new lease with a replacement tenant for 1 parcel and are negotiating a lease for the other parcel, both at average roll ups in rent of 48%. These results continue to highlight the scarcity of land, persistent demand and value of our Hawaii real estate. In the Q3, strong relationships with key tenants such as FedEx drove much of our leasing momentum as we executed over 2,700,000 square feet of leasing at weighted average rates that were 7% higher than prior leases with a weighted average lease term of 5.5 years, which Mark will provide more detail on momentarily.

Speaker 2

We intend to continue capitalizing on the attractive operating environment to deliver favorable leasing outcomes. While near term expirations are minimal with approximately 4.5% of total annualized revenues scheduled to expire through 2025, we plan to address expirations in a way that will maximize mark to market rent growth while minimizing potential downtime and capital costs. Lastly, earlier this month ILTT announced that it would maintain its quarterly cash dividend at a $0.01 per share. In recent months, we have been frequently asked when we expect to increase our dividend. We recognize the value of the dividend to our investors and it is a topic that we discuss regularly at both the management and Board level.

Speaker 2

However, as ILPT does not have a credit facility, we feel it is important that we have ample liquidity and financial flexibility to address future leasing costs, capital expenditures and obligations under our debt agreements before increasing the dividend level. With that, I'll turn the call over to Mark.

Speaker 3

Thank you, and good morning, everyone. As Yael mentioned, our 3rd quarter leasing activity totaled more than 2,700,000 square feet, which was highlighted by 13 renewals with our largest tenant FedEx, encompassing over 2,000,000 square feet across 8 states at average lease term of 5.1 years and a GAAP roll up in rent of 4.5%. This mutually beneficial renewal provided ILPT with cash flow security with no leasing concessions in the form of free rent or tenant improvements. In return, FedEx was able to secure strategic locations within its network as it continues to execute on its optimization plan it announced in April of 2023. Since we acquired Monmouth Real Estate Investment Corporation in February 2022, we have executed 33 leases with FedEx totaling nearly 3,800,000 square feet.

Speaker 3

Furthermore, over 94% of our FedEx portfolio and the associated $121,000,000 in annualized revenue is secure given it is long term lease with expirations in 20 27 beyond. We believe this reinforces ILPT and R. Morse commitment to fostering strong tenant relationships, addressing our tenants' needs and being a landlord of choice. We also executed renewals with tenants in key markets, including a 302,000 square foot early renewal in Charleston, South Carolina and a 125,000 square foot renewal in Columbus, Ohio. In aggregate, these two renewals represent an average GAAP rent increase of 18% with a weighted average lease term of 6.4 years.

Speaker 3

Nearly all of our remaining 2024 expirations have been addressed with only 79,000 square feet set to expire. As we look ahead to 2025 2026, 6,900,000 square feet or 9.5 percent of ILPT's total annualized revenue is set to expire.

Speaker 4

We

Speaker 3

are currently tracking 39 deals or over 8,300,000 square feet of which 3,200,000 square feet or 38 percent is in advanced stages of negotiation or lease documentation. Now, I'll turn the call over to Tiffany.

Speaker 4

Thank you, Mark, and good morning, everyone. Yesterday, we reported 3rd quarter FFO of $8,100,000 or $0.12 per share, representing an increase of 1.5% compared to the same quarter in 2023. 3rd quarter NOI decreased by 0.7 percent to $84,700,000 and cash basis NOI increased by 1.1% to $82,500,000 compared to the same quarter in 2023, while adjusted EBITDAre increased by 0.9 percent to $83,900,000 In October 2024, we exercised the first of our 3 1 year extension options for a $1,200,000,000 floating rate loan. As part of the extension, we purchased a 1 year interest rate cap for $17,000,000 with a silver strike rate of 2.78 percent replacing our previous cap with a rate of 2.25%. The cost of this cap was less than previously expected as a result of the Fed interest rate cut in September.

Speaker 4

Additionally, the lender allowed for the higher strike rate based on the strong performance of the property securing the loan. We expect that further interest rate cuts will lower the cost of any caps that we may purchase in the future and provide us more flexibility as we evaluate opportunities to reduce leverage. During the Q3, we paid $58,800,000 of cash interest expense, net of the cash we received from our interest rate cap and recognized $16,100,000 of non cash amortization of financing and interest rate cap costs. We expect our 4th quarter interest expense to decline from $73,900,000 to approximately $72,000,000 reflecting the impact of the new interest rate cap. Turning to our balance sheet.

Speaker 4

As of September 30, our net debt to total assets ratio was 68.1 percent, an improvement of 40 basis points compared to a year ago, while our net debt coverage ratio declined to 12.1 times from 12.3 times in the Q3 of 2023. Total cash excluding $101,000,000 of restricted cash was approximately $154,000,000 We expect to use this cash to fund future leasing obligations and provide us with greater flexibility when evaluating our financing options, which may include purchasing interest rate caps in the future. As a reminder, including extension options, ILPT has no debt maturities until 2027. Looking ahead, we expect that our strategic leasing approach will continue to result in strong tenant retention and generate stable cash flows to support our operations and deleveraging efforts. That concludes our prepared remarks.

Speaker 4

Operator, please open the lines for questions.

Operator

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

Speaker 5

Great. Thank you and good morning. Just a few for me today. Just wanted to drill down a little bit more on the interest rate cap costs. So with $17,000,000 I think we had been modeling for like $27,500,000 just to be conservative.

Speaker 5

But you're going to pay a higher interest rate and rough calculations maybe $6,000,000 on that $1,200,000,000 so kind of $17,000,000 plus $6,000,000 is $23,000,000 So still below what we were thinking. But can you talk about how you were thinking about the trade off in pricing versus interest rate?

Speaker 4

Sure. So good morning. So our interest rate for this particular loan has been increased to 6.71 percent and our weighted average for ILPT set as overall will be around 5.5%. Our lender determines the strike rate on our cap based on required debt service coverage ratio. And so as I said in the prepared remarks, based on the performance of the properties that secure the loan, they allowed for a higher strike rate of 2.78%.

Speaker 4

So we were actually pretty pleased to be able to save some upfront costs with that $17,000,000 price tag. Effectively, we are able to defer interest rate payments. And so we will pay interest as it comes due, but that's how we thought about that. We were pleased to save upfront costs.

Speaker 5

Okay. That's kind of what I thought. Moving on to leasing Hawaii and Indianapolis. Yaho, I think you said or maybe Mark 2025. Can you be a little bit more granular there?

Speaker 5

Is it 2nd quarter? Is it 3rd quarter? I know you want to be conservative, but it's a pretty wide gap for modeling purposes.

Speaker 2

Yes. Hi, Brian. I think the reality is, especially for the Hawaii land parcel, there's just a lot of diligence that any prospective tenant will have to do to evaluate what it's going to cost them to execute on their business plan for that parcel. So while we're having discussions, a lot of it depends on the timeline for the tenants. So I would say the second half of the year for 2025 would be probably more most realistic for Hawaii.

Speaker 2

And then for Indianapolis, I think we could be able to be in a position probably in the first half of twenty twenty five.

Speaker 5

Okay. And so the American Tire commentary that you made, I'm assuming based upon what you said that there are no expected vacates there. Correct me if I'm wrong. And are there any known vacates that we should know about over the next 12 months?

Speaker 2

From what we know today on American Tire, we expect them to I mean, they're utilizing the properties and we expect that they won't reject the leases. But again, it's very early. They just made the announcement last week. And then there are there's nothing else material from a known vacate perspective.

Speaker 5

Do they have the ability in the bankruptcy process to, I'm sure they probably do to some degree to request a lower rent rate? And if they did, could you tell them to go pound sand and vacate?

Speaker 2

Yes. I mean, as part of the as part of their bankruptcy like proceedings, I think they can come and try to negotiate with the landlord and it would be our decision if they want to if we want to do that. I guess I would just note, American Tire has been in this position before. They filed for bankruptcy in 2018 and actually leased these same properties from us and they didn't reject the leases at that time and have since renewed all of them. So there's we take some comfort in that as well.

Speaker 5

Okay. Just two more quick ones for me. As it relates to the Mountain JV, I know there's a 39% JV partner. And if you were to get another partner to onboard north of so you're north of 50 percent, you can deconsolidate that. Maybe for Tiffany, have you guys run the numbers as it stands now?

Speaker 5

And I'm sure we could probably back into them roughly. But do you have the numbers on what net debt to EBITDA would move to should you be able to deconsolidate that JV?

Speaker 4

There are a lot of factors that we would have to consider. So we don't have exact numbers that we would share at this point.

Speaker 5

Okay. And then just last for me, Yael, I know you talked a little bit about the dividend. We also get a lot of questions on your dividend with CAD running at $0.70 on a trailing 4 quarter basis. I don't know that anybody that I've spoken to on the buy side is looking for any whopper of a dividend, but to simply take it up from $0.04 to a dime or something around there is maybe $6,000,000 a year dividend payments when you're sitting on whatever $154,000,000 of cash and cat expected to be roughly $0.70

Speaker 4

on a

Speaker 5

go forward basis. So if I could just throw that out there, we do get a lot of questions on that. I don't think anybody's asking for some big whopper of a dividend pre Monmouth, but something to reflect the improving overall positioning of ILPT, I think would be really welcomed by the investment community. That's all for me.

Speaker 1

All right. Thanks, Brian.

Operator

The next question is from Mitch Germain with Citizens JMP. Please go ahead.

Speaker 6

Good morning. Thanks. Tiffany, I just want to understand the interest expense forecast. The change quarter over quarter, is that entirely non cash? Is that the way to think about it?

Speaker 4

It's not entirely non cash. So I guess to give a little bit more perspective or a little bit more transparency, so we're expecting our cash interest expense to be $60,000,000 and then the non cash to be $12,000,000 So what will happen is our cash interest expense will increase some to cover the differences between the 2.25 percent and the 2.78% strike rate, but then our non cash amortization will decrease. And that is 2 fold that's based on the cap amortization, but that's also, we have some deferred financing costs that are running off. They're fully amortized as of September 30. So we get a benefit from that.

Speaker 4

Hopefully, that's helpful.

Speaker 6

And that's helpful. And the lower cap has nothing to do with a higher swap rate, correct? You said that swap rate is determined by the lender. So it's not like you traded a lower cap for a higher amount. Is that the way to think about

Speaker 4

it? That's correct. It's I want to make sure I'm understanding your question. It's the same notional amount. On the cap was

Speaker 6

$17,000,000 but it was at $278,000,000 replacing something was at 225,000,000 which was at a higher amount that you paid for the rate cap. So I didn't know there was a reflection of

Speaker 4

the

Speaker 6

lower amount being the that it rised. Okay. You're right.

Speaker 4

There's a piece of that as well.

Speaker 6

Yes. Okay, great. And then I think Mark talked about what 8,000,000 or so square feet under consideration right now. Assuming that only includes Hawaii once. And then if so, just curious about kind of how many users are circling the wagon and is it all full site or is there a discussion around breaking it up?

Speaker 2

Hi, Mitch. You're right. So we only include within the $8,800,000 we only include the $2,200,000 once. And so far the conversations we've been having have been with tenants for the entire parcel.

Speaker 6

Okay. Great. And then last one for me. I mean, it looks like the rate environment to become a bit more accommodating on a forward basis, which obviously helps your balance sheet, but is it a time for the firm to start considering asset sales again? And kind of where does that potentially sit?

Speaker 2

So we have been we do get a lot of inbound unsolicited offers and we are evaluating all of them as they come in. We have found that there's still been a little bit of a disconnect between what we think the properties are worth and what somebody is willing to pay for. But it is something we are constantly evaluating. But I guess I will just remind and I feel like I'm a broken record about this, but to release properties from our debt, we have several different covenants that we need to look at to make it accretive. So that is also something we're up against.

Speaker 6

Understood. Does that suggest that one off sales are more difficult or does that suggest that portfolio sales are more difficult as you look to unwind some of those covenants?

Speaker 2

I don't think one is more difficult than the other. I think it really depends on the assets and where they in which loan pool they sit.

Speaker 6

Thank you.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Yayo Duffield, Chief Operating Officer and President for any closing remarks.

Speaker 2

Thank you for joining us today. Have a good day.

Operator

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

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