Q4 2019 Earnings Call
good morning, and welcome to the industrial Logistics properties trust 2019 Financial results conference call. All participants will be in listen-only mode wage. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. She took girls star then one on your telephone keypad to withdraw your question, please press * then two. Please note this event is being recorded. I would now like to turn the car back over to Olivia Schneider manager of investor relations, please go ahead. Good morning everyone. Thanks for joining us today with me on the call or I'll be pissed Officer Rick Seidel and vice-presidency out Duffy just a moment. They will provide details about our business and our performance for the fourth quarter and year ended December 31st, 2019 followed by a club.
And answer session with sell-side analysts.
First I would like to 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 aisle PT's beliefs and expectations as of today Monday, February 24th, 2020 an 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. I opt read or the website investors are cautioned not to place undue Reliance upon any any forward-looking statements.
In addition, we will be discussing non-gaap numbers during this call including normalized funds from operations or normalized ffo adjusted ebitda and cash-based net operating income or cash analyze a Reconciliation of these non-gaap figures to net income and the components to calculate cash available for distribution or are available in our supplemental operating and financial data package, which also can be found on our website and now I will turn the call over to John.
Thank you, Olivia.
Good morning, and welcome to lpts fourth quarter and year-end 2019 earnings call. We are pleased to report solid performance for the fourth quarter with normalized ffo of 29.7 million dollars or $46 a share in the same store Cash basis and oh I increase of five and half percent year-over-year.
Additionally we announced too exciting transactions to start 2020 last week. We entered into agreements related to a 680 million dollar joint venture that we had been working towards the 2019 reform this joint venture with an Asian Institutional Investor to own a portfolio of 12 industrial properties containing 9.2 million square feet, which were required by opt in 2019 as part of two large portfolio acquisitions.
The investor will contribute approximately 108 million dollars for a 39% Equity interest in the new Venture an aisle. BT will retain the remaining 61% Equity interest Thursday. We close the joint venture with 11 properties and the investor will initially contribute approximately 82 million dollars.
Also assumed 350 million dollars of existing secured debt on the portfolio.
12th property in 5757 million dollars of additional Associated debt is expected to be contributed later subject to certain conditions will use the proceeds to redo a just any borrowings under a revolving credit facility.
The property valuations represent a 5.5% cap rate on Cash & Ally. I opt remains in discussion with an additional Institutional Investor and currently off this investor may also require a 39% Equity interest in the JV in coming quarters allowing. I opt to further reduce leverage while retaining an ownership stake in this high-quality portfolio off.
We believe this transaction once again underscores the value of IOP industrial properties. It also highlights the valuation disparity between the public market valuation of I opt in a private capitalist valuation.
This JV provides. I opt the opportunity for continued growth with private Equity Capital raised and approximately net asset value.
Also in February we acquired an eight hundred twenty thousand square foot distribution facility in Goodyear, Arizona for $72. This class a property is 100% leased to Amazon off remaining lease term of 5.8 years. The property is in Phoenix's West Valley which provides easy access to the I-10 freeway and Southern California edition of the properties within a quarter-mile of the future Arizona 303 Loop, which will provide improved access throughout the Phoenix Metro Area the purchase price reflects the 5.2% cap rate month.
On previous calls. We told you we plan to increase the number of independent trustees on I opt Sport and that we had engaged Korn ferry to assist us in that process last week Laura Wilkins and Kevin Phelan appointed as new independent trustees increasing the size of our board to 7 with five independent trustees two of whom were women.
This weekend is currently a senior advisor at Boston Consulting Group. She's held senior leadership positions focused on supply chain and Logistics at various companies including Petco Walmart wage Gap Levi, Strauss and lvmh Sephora.
Mister Phelan is currently co-chairman of the Boston office of Colliers International full service commercial real estate firm where he started the capital markets group Mister Phelan has since financed billions of dollars off commercial real estate transactions across the u.s.
It's the feeling is also active in several not-for-profit organizations either Miss Wilkins or Mister Phelan will serve on any other boards within the armoire group companies.
I'll now turn the call over the aisle to discuss at leasing activity. Thanks, John and good morning. Everyone at the end of the fourth quarter ltte's portfolio consisted of 300 warehouse and distribution properties in 30 States. Totaling 42.9 million square feet that were 99.3% leased our Mainland portfolio included 74 properties, Thursday 29th State totaling 26.2 million square feet that were a hundred percent least approximately 41% of I opt annualized rental revenues come from Sixteen point eight million square feet of industrial land and property is located in Hawaii. Our top three markets after Hawaii are Indiana, Ohio and Virginia representing approximately 10% 9% and 5% of I opt of Total annualized Rental revenues respectively year-end. Our top three tenants were Amazon FedEx and birth.
gamble representing approximate
At least 14% 4% and 4% of Total annualized Rental revenues respectively investment-grade rated tenants or subsidiaries of investment-grade rated parent entity that make up 61% of our Mainland revenues looking at the entire portfolio nearly three-quarters of revenues come from those investment-grade rated tennis or subsidiaries or from Georgia, Hawaii land leases.
Leasing activity was strong in the fourth quarter, totaling 1.4 million square feet a trench that were 16.9% higher than prior rent with an average lease term of 8.5 years and commitments for leasing capital and concessions of only $0.12 per square foot per lease year with little near-term lease roll. Most of our leasing activity or 1.5 million square feet was associated with early renewals for leases expiring in 2020 through 2023 on the mainland. We completed 757000 months of lease renewals a trench that were Fourteen and half percent higher than prior rent with an average lease term of 7.2 years in capital commitments of fourteen cents per square foot for life easier.
Q4 is
First quarter since I opt went public that we had meaningful Mainland leasing activity. We are pleased with both the results and are strong tenant retention in this competitive market.
In Hawaii, we enter three new leases for approximately 161000 square feet at rents that were 34.2% higher than prior rent with an average lease term of 16.4 years in capital commitments of just six cents per square foot per lease year. We also completed one rent reset for a hundred and five thousand square feet that resulted in a row off of 39.9%
As we previously discussed we're working through an agreement with a tenant in Hawaii that lease is approximately 1.2 a million square feet for 1.9 million dollars of annualized rents. That was a schedule to reset in 2019. We expect to finalize negotiations in the coming weeks.
If we look forward to our upcoming lease expirations, we are encouraged by what we have accomplished in 2019 portfolio leasing for the year totaled more than two point six million square box with a roll of in rent of 20.1% an average lease term of 9.5 years in capital commitments for new and renewing leases of $0.13 per square foot per lease. Ye near-term respirations are minimal in 2020 with only 2% of annualized rent scheduled to expire on the mainland and 1.3% in Hawaii S. Suck are focusing our efforts on 2021 and 2022 and have already begun discussions with multiple tennis and anticipate maintaining our strong leasing momentum in the new year brings the capital expenditures. We spent three point 1 million dollars in recurring Capital predominantly associated with building improvements on the mainland for roof spoiler and parking lot replacement.
additionally in the fourth quarter we
That 5.1 million dollars of Redevelopment capital and successfully completed the hundred ninety four thousand square foot Toro expansion. We finish the project on schedule and under budget for the total capital investment of 14.6 million dollars with Toros 15 year commitment the Expansion Project results in an incremental return on cost of 7.59% and increase rents of approximately 1 million dollars beginning in 2020. I'll now turn the call over to Rick to provide details on this quarter's Financial results, Good morning. Everyone normalized ffo for the fourth quarter of 2019 was 29 point seven million dollars or forty six cents per share up 15% from 25.9 million dollars or forty down there for the fourth quarter of 2018 adjusted even ask for the quarter was forty four point six million dollars up 44% year-over-year.
Our quarterly dividend of $0.33 per share continued to be well covered with a payout ratio of 71.7%
Total Rental income for the fourth quarter of 2019 increased by Twenty Point 1 billion dollars to sixty two point two million dollars representing a 48% increase over prior year result wage increase primarily reflects our acquisition activity as well as increases from Leasing and rent resets, but also include some activity worth highlighting for the quarter.
In Hawaii, we recognize percentage rent of 1 million dollars, which has historically been recognized in the first quarter of each year. We've amended this tenants lease establishing an annual floor for percentage range of 1 million dollars per year. Which going forward we will recognized ratably throughout the year with any favorable adjustment recognized in the fourth quarter offsetting this a small number of tenants in Hawaii life behind in their payments, and we reduced Revenue to reserve for amount outstanding and Q4 this included $900,000 of cash rents receivable and 1.3 million dollars a straight line bring rents received.
total portfolio
Same property Cash basis in a y increased by five and half percent over the prior-year with a 5.9% increase in Hawaii and a 5% increase on the mainland primarily due to contractual rent increases in Hawaii and the Toro Expansion Project. I mentioned previously
General administrative expense for the fourth quarter totaled 4.1 million dollars up 1.1 million dollars a year over year and depreciation expense is $18 up ten point four million dollars year-over-year wage increases are attributable to our acquisition activity in 2019.
Interest expense in the fourth quarter increased by $10 year-over-year to 14.6 million dollars primarily due to higher debt balances.
We finished the quarter with 310 million dollars outstanding on our revolving credit facility as John mentioned last week. We entered into agreements related to a joint venture transaction and will receive approximately $108,000 in proceeds, which will be used to pay down our revolver reducing net debt to adjusted ebit up by approximately 0.6 times. We are pleased to reduce leverage and will continue to explore opportunities to expand the Venture through additional Investments or with additional institutional partners.
that concludes our
Saturday marks operator, please open up the line for questions.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Our first question is from Michael Carroll with RBC Capital markets, please go ahead.
Hi guys, this is Jason calling from Mike. Just wondering how you will be pulling Capital into the future given the current leverage targets and where you guys decide.
I think that you know our Focus as we indicated in the press release and then our off the text of our script we're we're still working on adding an additional partner to the joint venture. And so I think that when it comes to uh, you know, we're we're always watching me Acquisitions market and seeing what types of products are available and then what markets but I think we're we're going to be fairly disciplined until we until I feel like we finalized the joint venture with with both partners and and and then we'll assess, you know, the capital markets and and whether whether we will grow using the the private capital or or other Capital, so it needs to be seeing that as time wears on.
Jason this is the one thing I would add.
Just kind of taking Sean's comments a step further. If we do bring in a second JV partner that'll have them more than the six times reduction in leverage that the first JV partner had I believe if we if we have to 39% Partners, we would likely D consolidate the assets and these these JV properties are on the books with about 60% loan-to-value. So it would you know, just taking our share of those assets instead of consolidating them would bring our overall leverage down closer to six times.
Okay, thanks. And how large would you be looking to grow the JV fund ultimately?
I don't think we have any particular limits. I mean, we we don't anticipate adding much from our existing portfolio into the joint venture that the that the plan would be to use to take advantage of the joint venture to to grow out portfolio. And so I don't think we have any particular limits of wage set by by I opt or by any either of our either partner or department or where we're seeking to add.
Thanks.
The next question is from Matt Boone with FBR, please go ahead. Hey guys. Good morning, just to start off.
Added to the JV.
I'm sorry. Can you say that again you cut out. Sorry. Yeah timing regarding when the 12th property is expected to be added to the JV. I was curious if there's any detail that you could provide there.
We think it'll be you know within the next month or hopefully it'll be within the next month. There's there's just a some Administrative Office mostly administrative things that need to be accomplished with with lenders. So we don't think it'll take long.
Okay, and then turning to Acquisitions just to clarify those are going to probably be more opportunistic in the near-term with the focus being on reducing the Leverage. Is that correct?
Yeah, I mean, I think I guess we think of those as two separate things the the adding to the joint venture with with by adding another partner will help significantly and in The Leverage reduction process and then we will be mostly opportunistic in terms of what we may acquire. Um, but we do intend to continue our growth once the once the partners are are finalized in the Venture itself.
Okay, one last one for me. Can you just remind us what your long-term Target leverage level is?
Sure, we had said that we hope to be between six and seven previously. We thought we might be a little bit lower. But the cost of equity is still a fairly high for us. If we look back at a 2019 we increased ffo per share by fifteen cents or about you know, little over 9% versus the prior year and we haven't really seen the favorable reaction in stock. So at this point we'll we'll grow a little slower or will grow with some private capital and you know continue to do things that are that are good for I opt shareholders. The one thing you should probably begin. I mean we've we've had great results this year kind of in line with what we would have expected. The the comment that I made in prepared remarks about the percentage rent is is worth noting because historically that's been recognized in q1. So, uh, just thinking forward to next quarter. We're going to kind of come out of the gate down about 4% so dead.
that's something that will need to be modeled in but
For the most part, you know the properties continue to perform really? Well, we've always said that our Mainland assets should grow cash in Hawaii between half and 1% a year. We did that and not similarly. Um, Hawaii should generally grow around 3% or so per year. We've had a couple of you know tenant issues here and they're really into real estate taxes some other costs increased but we think the long-term viability of those properties is still really strong. They are really special real estate. And again, we're going to continue to execute and be opportune a positions to try to grow ffo and CID
Okay, thank you. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to John Murray. Thank you very much for joining the call today. We look forward to seeing you soon. Thanks. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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