Q2 2020 Industrial Logistics Properties Trust Earnings Call
Good morning, and welcome to the industry all the Justice properties Trust second quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please take note conference specialist by pressing star keep followed by the route after today's presentation, there will be an opportunity to out.
Question.
You asked a question you May press Star then one on your Touchtone phone to withdraw from the question too. Please press Star then too.
Please note that is being recorded I would now like to turn the conference over to Olivia sniper manager of Investor Relations. Please go ahead.
Thank you and good morning, everyone. Thanks for joining us today.
With me on the color I'll be teeth, probably didn't drive our chief Financial Officer, Rick Fido, Chief operating officer, we all Duffy.
At the moment they will provide details about our business our performance for the second quarter of 2020, followed by a question and answer session, we sell side analysts.
First I would like to note that the recording and retransmission of today's conference call prohibited without prior written consent helped the company.
Also note that today's conference call contain forward looking statements within the meaning of the private Securities Litigation Reform Act like 95, and other security God.
Forward looking statements are based on I'll pay TV beliefs expectations as of today Wednesday July 29, 2020, and actual results may differ materially from those that we project.
The company undertakes no obligation to revise leveraged lease the results are any revision to the forward looking statements made in today's conference call.
Additional information concerning factors that could cause those differences.
You did our filings with Securities Exchange Commission, or FTC, which can be accessed from our website I know pp rate dot com Orbio Ccs website.
Investors are cautioned not to place undue reliance upon any forward looking statement.
In addition, we will be discussing non-GAAP numbers during this call, including normalized funds from operations are normalized FFO.
Adjusted EBITDA and coffee net operating income or cash basis I don't want.
A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distribution force here. They are available in our supplemental operating and financial data package, which also can be found on our website.
Now I will turn the call over to John.
Thank you Olivia good morning, and welcome to <unk> second quarter 2020 earnings call.
Goldeneye team has had a tremendous negative impact on our economy, including most commercial real estate unchanged I would conduct business.
However, industrial properties remain highly sought after due to surging E. Commerce sales retail is exploring new delivery services and storage options and a renewed focus on domestic supply chain independent.
Given how this virus has expedited the E commerce evolution and powerful long term demand trends, leading industry experts are providing optimistic forecast for continued strength in industrial real estate fundamentals over the coming years.
Including healthy levels of both net absorption and overall rent growth.
Supported by these industry Tailwinds, we believe I hope it is positioned to perform well both through this recession and as the economy economic recovery unfolds.
[noise] Zhone, Rick will discuss later on the call. Despite a challenging economic backdrop, we were pleased to deliver strong second quarter results.
Putting same property cash NOI growth of 3.4% year over year.
Normalized AFFO growth of 2.5% year over year strong rent collections, and almost 2 million square feet of leasing activity with a 23% roll up and running an average lease term of more than 20 years.
We believe that I'll be T is well positioned to navigate any near term challenges caused by covert 19 and capture long term growth for the following results.
First nearly 80% of our revenues.
Come from logistics properties years for warehouse and distribution purposes.
Second on the mainland 84% of revenue comes from tenants that produce will provide goods or services that are deemed essential and many of our tenants, including our largest to convince Amazon Fedex is a critical to sustaining originally in supply chain.
Third in Hawaii, 80% of revenue comes from tenants deemed essential while some small businesses in Hawaii may struggle with a slow recovery and tourism, we believe that our Hawaii Island as some of the best industrial use real estate on the island of Awhile, where the state capital of Honolulu's, located where 90% of the goods.
Filmed in Hawaii are important.
As a result, we believed it irreplaceable nature of this portfolio will continue to drive its value in demand.
[noise] was approximately 75% of myopic is run comes from investment grade rated tenants subsidiaries of investment grade rated parenting days War Hawaiian land leases.
On the mainland alone 62% of rent comes from investment grade rated tenants well subsidiaries of investment grade rated parent analytics.
That's a portfolio as well developed diversified across geography and in the industry groups with limited outside outsize exposure to any one market our industry.
Finally, our balance sheet is strong with more than $460 million of liquidity, no near term debt maturities and a well cover dividend.
We continue to evaluate opportunities to grow our portfolio, but have not made any acquisitions this quarter.
Strong performance of industrial real estate. During this pandemic has continued to attract capital looking for deployment opportunities.
As such competition has been strong in cap rates continue to hold steady, especially for newer long term waste credit tenant buildings, which I'll P.T. target spirits portfolio.
I'll now turn the call over to you all to discuss market dynamics leasing activity and the status of rent deferrals.
Thank you and good morning, as John mentioned industrial real estate demand continues to be supported by the Tailwinds of E commerce consumer products, and Threepl and transportation industry.
I O P.T. his portfolio benefits from restaurant diversification across industry groups was 17% exposure to E commerce, 20% to consumer products and 15% a threepl in transportation, including household names such as Amazon Procter and Gamble General Mel.
Lastly, and Fedex.
It's actually believed that the nature of I O Pts business and the strength of our portfolio will allow us to successfully manage the ongoing economic disruption caused by coal that 19 as evidenced by our strong leasing activity this quarter and an active lease pipeline.
Despite market conditions in an existing portfolio occupancy of 98.8%.
This quarter I O P.T. executed 1.9 million square feet and leasing renewals in recess all of which were in Hawaii.
Oh, the 15 deal can were renewals totaling approximately 314000 square feet at rents that were 26.6 person higher than prior rate with an average lease term of 23.6 years and commitments for leasing capital in concessions have only four cents per square club.
At least here.
In contrast to other real estate sector, where tenants have generally been interested in short term extensions given the uncertainty if market conditions are tennis in Hawaii committed to longer lease terms at strong right with annual market increases and minimal concession.
The balance of our leasing activity consistent consisted of rent resets totaling 1.6 million square feet at rents that were 21.4% higher than prior rents.
In April we completed a rent reset the carried over from 2019 with a tenant leases approximately 1.2 million square feet for a $2 million an annualized revenues.
We were able to avoid arbitration and achieved well I've been rent of approximately 8%.
Excluding that the remaining resets work completed at 30.9% roll up in right.
Due to the proactive efforts of our real estate services and asset management team all rent resets scheduled for 2020 are now complete.
As of June 30 S. The majority of 2020 lease expirations have been addressed with only 72000 square feet or $646000 of annualized revenue outstanding.
As such we have turned our focus to mainland expirations in 2021, where approximately 2.5 million square feet or 5.9% of total annualized rent is set to expire and Hawaii expirations in 2022, or 2.4 million square feet or eight point.
3% of Toyota lived and total annualized rent is set to expire.
The team has established a comprehensive and strategic plan to address these expirations and away that will maximize market to market rent growth, while minimizing potential downtime and capital cost.
Our current leasing pipeline of 4.5 million square feet includes 85000 square feet that could absorb vacant space across the portfolio.
We anticipate a near term conversion a 35% of our pipeline given that roughly 1.5 million square feet of current activity activity isn't advanced stages of negotiation or at least documentation.
Turning to recollections and rent deferral after taking into consideration granted rent deferrals to certain tennis, 97% of contractual rent and do what collected in Q2 in July is trending in line with prior month.
I LPTA is top 20 tenants have all pay their July rent obligation.
During our Q1 earnings call, we reported that I L.P.T. had granted rent deferrals to 37, kinda totaling approximately $2.1 million, representing approximately 6.5% of annualized rent.
As of July 27, the numbers have grow modestly to 42 tenants totaling approximately 2.8 million dollar for the month of April through September, which represents 7.8% of annualized cash rent.
In aggregate these deferrals represent 2.4% of the contractual cash revenue over that period.
Today, no rat has been forgiven or abated.
We are committed to working with our tennis to support their long term success and position ourselves of the landlord of choice.
Well that deferral requests have significantly subsided as the economy began to reopen in June and July the extension of the 14 day quarantine order through the end of August and Hawaii may negatively impact small businesses that rely on tourism, resulting in additional requests in August and September.
To date, we have not seen an acceleration in deferral requests, but we're closely monitoring tenant activity, especially in Hawaii.
I'll now turn the call Overcorrect to provide details on the quarter resolved and financial position.
Thanks, and good morning, everyone.
As John mentioned total portfolio same property cash basis on a like for the second quarter increased 3.4% over the prior year.
This growth was the result of a 3% increase on the mainland and a 3.3% increase in Hawaii.
The mainland increase was primarily driven by contractual rent steps and the expansion completed in 2019 that we've discussed on prior calls.
The increase in Hawaii was the result of leasing activity the recognition of percentage rent and some collections of amounts previously reserved for partially offset by increased real say Saxon insurance expense.
The same property NOI growth along with our other results contributed to second quarter normalized AFFO of $30.6 million or 47 cents per share.
Two and a 5% year over year.
Adjusted EBITDA for the quarter was $46.9 million up 6.3% year over year.
In May we prepaid a 48.8 million dollar mortgage and currently have no debt maturing until our credit facility in December 2021, which is subjected to six month extensions at our option.
As of June Thirtyth, we had approximately $33 million, a cash on hand, and $430 million of availability on our revolving credit facility.
We ended the quarter with a consolidated net debt to EBITDA ratio was 7.2 time.
Excluding the death and EBITDA related to the joint venture the rest of the portfolio was at 6.3 times debt to EBITDA.
We continue to work towards expanding our joint venture and it may be possible for iOS T to further reduce our leverage this summer if were successful in negotiating to bring a second partner into the venture.
If these JV assets are de consolidated upon so in a second equity stake leverage, including our pro rata share of the unconsolidated joint venture would be below six times.
This JV may also provide I hope you see the opportunity for continued growth with equity capital raise the net asset value.
In the meantime, we remain confident that our current liquidity and financial profile supports our ability to operate our business effectively and securely.
Our portfolio continues to have minimal capital requirement, we spent just under $1.1 million on capital expenditures during the second quarter.
The majority of improvements related to two of our mainland properties, one for working project and the other for rest room renovation and upgraded lighting throughout the facility.
Earlier this month, we declared our regular quarterly distribution to shareholders unchanged from the prior level.
This 33 cents per share dividend, resulting in a normalized AFFO payout ratio just over 70%.
As we've said before our board evaluates the dividend every meeting and had been reluctant to raise it due to our current dividend yield relative to our peers.
We are encouraged <unk> second quarter results and continue to believe that our business will withstand the current economic challenges caused by the covert 19 pandemic with a strong balance sheet and portfolio stability supported by a resilient and growing industrial sector.
That concludes our prepared remarks, operator, please open up the line for questions.
We will now begin my question and answer session to ask a question you made a press star then one on your Touchtone phone. If you are using the speakerphone. Please pick up your handset be for Prosigna kit to withdraw from the question Keith. Please press Star then too.
Our first question is from Bryan Maher her B. Riley FBR. Please go ahead.
I'm. Good morning, So just a couple of questions I was hoping John maybe you could drill down a little bit more on the acquisition opportunities or lack thereof is there fewer opportunities out there or just fewer that are meeting your underwriting criteria because cap rates. It stayed so low.
Morning, Brian. It's good question, we we have been actively bidding on acquisition opportunities but.
You know where it where.
We've been more conservative about where cap rates, where we think cap rate should be.
And in certain markets for certain tenants.
Pricing has has been more aggressive than we were willing to go so we've.
Well, we're feeling pretty good about a couple of opportunities we're chasing currently.
I believe.
We've made it to the final round on a handful of opportunities and not been selected as the that's the winning bid so.
You know, it's it's very competitive.
We don't feel comfortable paying for cap rates below 5% currently so.
So we've been drawn the line.
Got it and they can you talk a little bit about new supply in your markets. I mean, clearly that would be you know X Hawaii.
But what are you seeing on the mainland anything that concerns you about competitive new supply in the markets where you operate.
I mean, there is new supply in.
Various markets, but I think that the net absorption has been high and so and vacancy rates remain low I think nationwide there probably on the around 5% so.
We feel that.
The Tailwinds of E commerce in particular, but no, but others onshoring more manufacturing and keeping a higher inventories of certain key.
Supplies.
Those are all things that are going to.
Continue to benefit us and saw.
Supply growth really is we don't feel it's a.
The concern right now.
Right and then just last for me on the second potential JV partner after the mainland assets what does the old up there is it mainly kind of a kobe driven inability to do due diligence is it something else and.
Do you think that that somebody that can happen on the back half of 2020.
I mean, I think we said in the script that we that we're hopeful that.
Yeah the.
This quarter, we get a this third quarter, we get we closed the second partner I think the delay is of you know that some of it has been.
Getting the legal documentation squared away and that's coming down to the final stages of some of it has been [noise] delays because of the pandemic in.
[music].
Allowing a.
Foreigners diligence teams to travel its very complicated even when the markets are open.
Penny and where the market sorry, you may not be able to get back to the market, where you live if you go someplace the due diligence. So there's a lot of there's a lot of logistics involved conducting due diligence these days, but but.
We're confident that we'll get it done this year.
Well. Thank you that's all from it.
The next question comes from Jason I join of RBC capital markets. Please go ahead.
Yes. Thanks. Good morning, guys I was wondering if you could touch on where the $700000 up newly deferred runs and also the unpaid and on deferred runs are coming from a could you point to either the mainland portfolio or the wind portfolio and if there's any specific industries.
Hi, Hi, Jason This is the <unk>. So we have had.
Most of the the new deferrals are for tenants in Hawaii.
<unk> mentioned these are just smaller businesses and that rely heavily on tourism.
But we feel.
We feel confident that once were able to a once tourism opens up again in the corn taint. The 14 day quarantined lifted on their businesses will be able to rebound I think most of the deferrals have been in general have been in the biggest bulk of it for US has been in the automotive and.
Industry I think we mentioned last what are that we had given almost a million dollars of rent apparel to American tire distributors.
No that's there a five locations on the mainland for us.
Okay got it and then how much rather new from the deferrals are you guys recording.
And what about the 3% of on deferred uncollected, Ron how much do you guys record.
So uh huh.
The 97% collections number excludes tenants.
Sorry. It includes tenants that we don't record revenue on our denominators based on our monthly billing and that would include amounts that we don't recorded revenue because we're not confident we'll collect.
The difference between what we do look for revenue and that denominators about 1%. So you know collections as a percent of revenue were closer to 98%.
And you know to date, we've had a 2.3 million of the 2.8 already passed so it's in our accounts receivable and will allow will collect that in the future the team doesn't evaluation.
Each period and concluded that a that those rents will be collected and therefore, it hasn't impacted our numbers.
Okay and last question for me I know last quarter, you guys gave a breakdown of the deferrals I'm looking forward over the next several months I was wondering if you guys could provide an update on that now that you up.
700000 of new deferrals, or just not useful data point.
Yes, so 11% as related to July and then it significantly dropped off and that's just a 2% and September is less than 1%. So as Rick said most of it is behind us already.
Got it thanks guys.
Thank you.
The next question is from Aaron Hack of JMP Securities. Please go ahead.
Morning, a wondering if you've seen enough property transaction at this point yet.
I read on cap rate trends obviously.
Interest rates have been going down or wondering ordering once in a corresponding decline in cap rates at this point.
For mainland properties.
We're seeing cap rates.
At least hold steady.
For for the stronger tenants last mile ecommerce type facilities.
They may even be getting a little bit more aggressive so.
Dropping below 5%.
Oh for you know for.
Quality buildings that are new well located for tenants like Amazon.
You know their cap rates are enforce so.
I think there or at least holding steady and maybe getting slightly more aggressive in certain markets.
Oh sure that I think in your first round of joint venture.
The cap rate was 5.87.
Or you think this next round will be somewhat somewhere to that or.
As the valuation proposition changed.
To a degree.
[noise] devaluation proposition for the second partner I mean there.
Entering at this at the same valuation as the prior partner so.
You know.
And then together, we'll all evaluate investment opportunities going forward to make sure. They that we all agree they meet our Uh huh.
Considerations.
Got it turns.
Okay, and then the 5.6% of mainland leases the turn in 2021, sorry, if I missed that any thoughts on where those rents are sitting today compared to the market rich.
So.
Based on our current pipeline, we're hoping to see an increase of approximately 4% to 5% over expiring rents.
Okay.
Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to John Murray for closing remarks.
Thanks, everyone for joining us today.
Believe our tenant base is strong and our assets sub long runway for demand. We we're optimistic about the resilience of our sector moving forward, we'd like to thank our teams for their continued hard work.
Well sure all health and wellness going forward. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.