Q3 2019 Earnings Call
Good morning, and welcome to the industrial Logistics properties Trust third quarter 2019 financial results Conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist I personally starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one I wonder telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded.
I'd now like turn the conference over to Libya Snyder manager of Investor Relations. Please go ahead.
Good morning, everyone. Thanks for joining us today with me on the color I Hope you keep President John Perry, Chief Financial Officer inside out and Vice President Yell Duffy.
And just a moment therefore I can tell what happens next nonperforming for the third quarter 2019, followed by a question and answer freshmen and <unk>.
First I would like to note that the recording and retransmission today's conference call. It forever didn't without prior written consent of the company.
Also note that todays conference call contain 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 island, he believes the expectations as of today.
On October 29, 2019, and actual results may differ materially north that we project. The company undertakes no obligation to revive are publicly released that result, I her basin to the forward looking statements made in today's conference call additional information concerning factors that couldn't cost those differences.
In our filings with Securities and Exchange Commission, RFP, which can be accessed from our website I LPP weak dotcom 40, I think these website.
Investors are cautioned not to place undue reliance upon any forward looking statements.
In addition, we'll be discussing non-GAAP numbers during this call, including normalized funds from operation our normalized FFO adjusted EBITDA and Kathy net operating income our coffee is an ally.
A reconciliation of these non-GAAP figure to net income and the components to calculate cash available for distribution or see I'd are available in our supplemental operating and financial data package, but also can be found on our website.
And now I will turn the call over to John .
Thank you it is.
Good morning, and welcome to I don't think is third quarter earnings call.
This morning, we reported third quarter normalized FFO of $28.5 million.44 per share.
As of the ended the third quarter Rpcs portfolio consisted of 300 warehouse and distribution properties with 42.7 million square feet located in 30 states that were 99.5% leased up from 99.3% last quarter.
Approximately 42% biopic is annualized rental revenues come from 16.8 million square feet industrial properties located on the around the belong in Hawaii.
Mainland portfolio consists of 74 properties with 26 million square feet located in 29 states that are 100% leased.
[noise], we remain focused on bringing leverage down for a long term target rich.
Last week, we obtained a 10 year $350 million, 3.33% interest already fixed rate loan secured by a portfolio of 11 mainland properties, which Rick will discuss in more detail later in the cone.
This is the first step towards the joint venture transaction, which we continue to actively pursue and hope to close in the fourth quarter.
Currently private capital seems to be very real estate investments more favorably than the public markets. We believe this transaction may demonstrate once again value and quality of our portfolio.
Given this new loans secured by the 11 mainland properties and the loan secured by a wide properties, which we announced earlier this year seeking an investment grade credit rating for LPT, there's not a strategic priority.
With confidence for the JV is likely in the near term during the third quarter. We completed the acquisition of two multi tenant class a industrial logistics buildings totaling 392000 square feet $32.1 million.
Properties located in Columbus, Ohio, Your Rickenbacker International Airport with immediate access to I to 70, rickenbach as cargo facilities and rail services.
The properties a newly built in 2017 in 2018 with attractive characteristics, such as 32 foot clear eyes, LNG lighting with motion sensors and best in class learning ratios.
Properties are 100% leased with a weighted average lease term a 4.4 years.
Primary 10, Zalando also known as the F., Our Expo freight global third party logistics provider that specializes in storage distribution and multi modal transportation.
Also occupying the buildings or twin Mad medical supply distributor.
Forward Air solutions, the transportation logistics provider for the air freight market and William R., Hey distributor of water filtration devices.
We continue to selectively evaluate acquisition opportunities, even while we manage our leverage down to more normal levels. However, the market for ecommerce focused industrial properties is very competitive pricing is aggressive so I do not anticipate additional significant acquisition activity for the balance of 2019.
I'll now turn the call over to you to discuss our leasing activity.
Thanks, John and good morning, as does the ended the third quarter I'd top three tenants or Amazon, that's an procter and gamble, representing 14.21st that 4% and 3.7% of total annualized rental revenues respectively.
Investment grade rated tenants subsidiaries of investment grade rated parent entity is make up 61% of our mainland revenues.
Looking at the entire portfolio nearly three quarters of revenues come from those investment grade rated tenants our subsidiaries the or from our secure Hawaii land leases.
Our top three markets after Hawaii of 42%, our Indiana, Ohio, and Virginia, representing 9.7%, 8.9% and 5.1% of our total annualized rental revenues respectively.
As the what's this back with a portfolio that is over 99% occupied leasing activity in the third quarter with minimal in Hawaii, we enter new and renewal leases for approximately 99000 square feet at rents that were 13.4% higher than higher Ed for an average lease term of 16 point.
One year.
The 13.4% roll out may appear a lower than our historical averages. It should be noted that the majority of this activity replaced the lease that was signed in May 2018.
Such this rollout represents strong growth in less than a year and a half leasing capital and concessions for the third quarter were just 44 cents per square foot per lease year.
As mentioned last quarter, one Hawaii lease for approximately 1.2 million square feet and $1.9 million, an annualized rent was scheduled to reset in 2019.
The tenant has chosen to go to arbitration to determine market rent and the hearing is scheduled for early Q1 2020.
We expect to see a roll up in Iraq and will receive any back to rent increases plus interest.
On the mainland we have no significant near term lease expiration with only 10 basis points of total annualized rents expiring over the remainder of 2019 and less than one person expiring in 2020.
We've already begun discussions, let these tenants and expect to see renewals and market right.
Turning to capital expenditures, we have made significant progress on the Toro expansion project with 5.2 million dollar the redevelopment capital being spent in the third quarter. As you may recall, we're adding 194000 square foot expansion to towards existing 450000 square foot distribution.
Well I'd to accommodate the tenants growing needs.
The approximately 15 million dollar project is expected to be complete in December and will result in increased rents of approximately $1 million beginning in 2020.
We also invested $1.6 million and recurring capital associated with building improvements on the mainland for parking lot and roof replacements as well as facade upgrades.
I'll now turn the call over direct to provide details on this quarter's financial results.
Thanks, and good morning, everyone.
Normalized AFFO for the third quarter of 2019 was $20.5 million or 44 cents per share.
From 39 cents per share for the third quarter of 2018.
Adjusted EBITDA for the quarter was $43.8 million up 48% year over year.
Total rental income for the third quarter of 2019 increased by $20.5 million to $61 million, representing a 51% increase over prior year results.
This increase primarily reflects our acquisition activity as well as increases from leasing rent resets and real estate tax expense reimbursement.
This quarter also included a 2 million dollar charge against revenue or three cents per share primarily related to straight line rent receivables following a tenant defaults in Hawaii.
Our team is working with the tenant to see if a settlement can be reached or if we need to gain possession of part of the parcels. So we can begin to find new tenants for the space.
Total portfolio same property cash basis analyze increased by 2.4% over the prior year as a result of a 2.9% increase in Hawaii same property cash basis in Hawaii, and a 1.8% increase in mainland same property cash basis in Hawaii.
This reflects increases in rents from new and renewal leases executed over the past year and contractual rent steps in earlier.
General and administrative expenses for the third quarter totaled $4.5 million and depreciation expense was $17.6 million.
These inc. These expenses have increased from the prior year as a result of our acquisition activity.
As John mentioned last week, we obtained a $350 million mortgage loan secured by 11 of our mainland properties containing an aggregate of approximately 8 million square feet located in eight states.
We were able to term out a portion of the balance of our floating rate revolving credit facility with this 3.33% tenure interest only mortgage which lowered our borrowing costs and increased our fixed rate debt to 79% of total debt and increased our average maturity to oversight and a half years as of September Thirtyth 2019.
Following the closing of our second large secured financing. This year. We believe we have demonstrated our ability to raise attractively priced long term capital to fund the accretive acquisitions completed earlier this year and do not believe seeking an investment grade credit rating will significantly reduce our cost of capital.
Interest expense in the third quarter increased by $10.6 million year over year to $14.7 million, primarily due to higher debt balances.
We finished the quarter was $650 million outstanding our revolver, resulting in debt to adjusted EBITDA of 7.8 times.
As John stated earlier, we hope to sell in equity stake in some of our properties to a joint venture partner in the coming months that would reduce our leverage below seven times and demonstrate the value of our mainland properties.
However, even without a joint venture we continue to operate the business comfortably at our current leverage level, thanks to our stable predictable and growing cash flows and well covered dividend just a 75% normalized FFO payout ratio.
That concludes our prepared remarks, operator, please open up the line.
Thank you we will now begin the question answer session to ask a question. You May proceed Star then one on your Touchtone phone.
I guess speakerphone, please pick up your handset before person the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble a roster.
Our first question comes from Brian Mayor with B. Riley FBR. Please go ahead.
Thank you and good morning.
A question on the potential JV, what are you thinking about their with timing I know you said fourth quarter would but would it be later in the fourth quarter.
Possibly slip into the first quarter and secondarily what type of investors are you speaking with on this or they sovereign wealth funds on it private equity what's the type of participant in that.
And our.
Current expectation is that.
This was real close in the fourth quarter and won't slip, but it's not closed yet. So you know anything is possible.
Weve.
We're focused on what the present time on sovereign wealth funds.
As potential JV partners.
And would it take a form similar to what we saw with SNH with the vertex pharmaceuticals headquarter in Boston, Yeah, maybe like a 40 or 49% position, where you guys keep the majority.
Yes initially.
We expect it to be similar to the vertex joint venture that SNH did.
With the investment approximately in that range around fortyish percent.
Yeah.
No, but I think we're going to westrock aiming to structure. This so that we could.
Add additional partners, whereas I think the vertex joint venture is.
Just one partner, we may have more than one partner in this joint venture.
And you alluded to some time between the recent refinancing at the mainland properties and the 11 properties.
Is it just those 11 properties that would be participants in the JV or would it be open too many more properties.
The current plan is those 11 plus one other property.
However.
When we hope that we destruction of the transaction so that we could potentially grow it.
So and then let's just leave it doesn't.
Okay. Thanks, and then lastly for me real estate taxes seemed a little bit higher than our expectations for the third quarter is there something going on there should we consider that kind of the run rate or was the third quarter an anomaly.
Hey, Brian This is Rick we saw about a 3.6 million dollar increase in real estate taxes 2.6 million of that was related to acquired properties and there was about a million dollars in comparable property increase.
The vast majority of that almost all of it is related to increased assessment in Hawaii, where taxes went up over 22% or so so pretty substantial I certainly don't think we'll see that.
Yes that type of increase again, but this may be the new normal that the good news for US is that the vast majority of our real estate taxes are recoverable under our leases where you know it's over 90%. That's it's recoverable from tenants. So we're obviously going to work with tenants to appeal values, where we can to try to try to bring a tax burden down but.
This is probably normal for now.
Okay. Thank you that's all for me.
Our next question comes from Mitch Germain with JMP Securities. Please go ahead.
Hi, Good morning show you, creating a a fund that you're just going to sell assets that you currently hold I know you've mentioned the 11, plus one but or will this be a potential co investment fund, where it creates a future growth vehicle that you'll be acquiring new assets.
You know us as identified.
Yes [laughter].
No it hasn't closed yet we're still negotiating some of the some of the finer points, but.
We are hopeful that.
When we finally have reached agreement it'll be a.
Vehicle that we can use to grow.
Our portfolio as well not just the finance not just Oh, where financing. These 12 properties. So maybe that we.
Add other properties from our portfolio to the joint venture overtime it may be that.
We acquired new properties with through the joint venture vehicle, where we may acquire new properties and then subsequently put them into the joint venture vehicle.
It really depends on a lot of a lot of factors, including where we're I share prices and market conditions in the public markets as well as.
The private markets.
Okay. That's helpful. Rick you said.
That the investment grade rating won't.
Due to your cost of capital and I totally understand that but wouldn't it diversify your sources of capital.
It would but again I think as we as we look at the capital stack for this entity. We think we can get a lower cost of capital using a combination of secured debt and JV equity than we could if we were to try to go the traditional unsecured route.
Unsecured is obviously attractive.
Preferable for property owners, because you don't need to seek lender approval or for any leasing or major decisions, but.
At the end of the day, it's really about allocating capital and lower the cost capital is the more successful we can be so thats.
Why we've done this I mean previously we did the Hawaii financing we thought the CMBS execution was important there we wanted the market to understand the appraisals on the value of those properties because I think it was misunderstood.
We think thats stories gotten out there a bit and now for this most recent financing. It was really just about lowering our cost of capital. It's not everyday we can close on a fixed rate 10 year loan and repay the revolver and have accretion I mean, we borrowed at 3.33% and our average revolver borrowing from the past quarter was 3.7, it's a little bit lower than that now.
But it was still a positive two to pay it back so yes.
The 2018 lease to Hawaii, Lisa you signed this past quarter.
Was that age I might've missed it was at a short term renewal and then you entered into a longer term discussion and you already got a portion of the upside in that short term renewals at the way to think about it.
Hi, This is the I'll I'll actually what happened was we mentioned last quarter that the tenant had gone into default and so we got the space back and we're able to currently sit within one month and so that's why we had the roll up in such a short time.
Gotcha.
Excellent and then just on the default that you referenced this quarter I guess, so you're not adjusting for the charges that the way to think about it.
No. So the then no we wouldn't adjust for a charge I mean, these things happen from time to time, you hope it doesn't but but it doesnt mean, the big difference this year versus last year.
Last year, the geography was that charges like that went through expenses is bad debt expense and this year, it's a it's a reduction or revenue so.
This quarter's numbers don't include any annualized rental income for these four parcels that this tenant leases.
Because we determined it was it was not probable that we collected so we took this is $2 million charge a lot of it was future straight line rent.
But similar to that to the story the I'll just mentioned I mean, the good news is there is a lot of demand for space. In these these regions are these areas submarkets of Hawaii. So we're hopeful that will get these released as well or will reach a settlement with the tenant I mean, we're not opposed to that but from a from an accounting standpoint, this quarter, we needed to take that.
Charge.
So just to understand this the right way, that's that's though there's no with evault impact other than the space was vacant and then it the impact on episodes that how we should think about it or is there enough if I went back.
There is I mean, it's on favorable to FFO this quarter as well, we took a charge that whole charged about $2 million.
The majority of it is future straight line, so that wouldn't have a cash NOI impact.
But our GAAP NOI.
He is impacted by it obviously, which is why we printed the small negative number. This quarter. We also do have the current rent that we've reserved for so we took no credit from a revenue this quarter. The tenant is still in the space and is trying to negotiate a settlement. So we are hopeful that we'll get some of that back in the future.
But the accounting rules are pretty conservative when it when it comes directly.
So.
Great.
Yes, so it's sitting rental like on basically effectively where the charges correct correct, yes, okay, great. Thank you.
Our next question is a follow up from Brian Mayor with B. Riley FBR. Please go ahead.
Okay, Great. Yeah, just wanted to follow to see what your thoughts were on the pro lodges 12 billion dollar acquisition of Liberty and what that kind of means for the space. If you think that there's going to be more M&A and I believe the cap rate was kind of like a mid fours and you guys are trading give or take around 7%. So can you just give us a little thoughts on.
How we should think about you guys sector relative to pro lodges is.
Very acquisitive past year.
[noise] My initial reaction was it.
So now the statement of how undervalued idle it is.
But you know it's clear that.
In re land.
Size is a as an important factor.
You know Blackstone and pro Largess are by far the two largest owners of institutional owners of industrial real estate.
And it makes it makes the.
Acquisition landscape very competitive so I think I think you're going to continue to see.
Both of those companies.
Growing aggressively both through acquisition and investing their existing portfolios.
But I think that theres still plenty of room.
Yeah.
It's a big space in the real estate sector, and I think there's plenty room for everybody to to make transactions, but it just I think it just makes things.
It makes the market continue to be.
Aggressively priced so.
Like I don't expect that you will see LPT acquiring any additional properties this quarter this coming quarter.
We're going to continue to focus on leverage.
But we're watching the market, where we're underwriting properties.
But we are seeing you know seller expectations are.
For aggressive pricing, so we're being careful about what we do what we don't do.
Hi, Thanks, John .
Thank you.
This concludes our question and answer session I would like to turn the conference back over to John Murray for any closing remarks. Thank.
Thank you for joining us on the call today, we look forward to hopefully seeing a bunch you with the on every conference in November Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.