Q3 2020 Industrial Logistics Properties Trust Earnings Call
Good morning, and welcome to industrial Logistics properties Trust third quarter 2020 financial results Conference call.
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Please note this event is being recorded.
I would now let's turn the conference over to Kevin Berry manager of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us today.
The other call our I O Pete <unk>, Chief Executive Officer, John Murray, Chief Financial Officer, Rick said, no Chief operating Officer Jonathan.
It's just a moment they will provide details about our business and our performance for the third quarter 2020.
A question and answer session with sell side analysts.
First I'd like to know the recording and retransmission of today's conference call is prohibited.
Without the prior written consent of the company.
Also note that todays conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act 90, 95, and other securities laws.
Forward looking statements are based on <unk> beliefs and expectations as of today Wednesday October 28 2020.
Actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly released 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 resi to see where she access from our website.
Peace tea, we dot com, where the Fccs website investors are cautioned not to place undue reliance upon any forward looking statements.
In addition, we will be discussing non-GAAP numbers during this call, including normalized funds from operations or normalized FFO adjust.
Adjusted EBITDA and cash based net operating income per cafe satellite.
A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distribution or CAD.
Our available in our supplemental operating and financial data package, which can also be found on our website.
With that I will now turn the call over to John.
Thank you Kevin Good morning, welcome to while Ptcs third quarter 2020 earnings call.
This morning, we reported solid results for the third quarter, they reflect the strength and stability of our portfolio of ecommerce focused industrial logistics properties.
I'll P.T. continues to benefit from robust industry fundamentals, a portfolio of high quality warehouse and distribution assets.
Quality credit tenants.
During the third quarter same property cash NOI increased apropos grew year over year.
Could it be remain strong.
Despite the impact of COVID-19 on the economy, we executed nearly 800000 square feet of leasing activity.
Demand for our properties was strong with occupancy rates holding steady at 99%.
After giving effect to modest rental pearls granted to certain tenants, we collected 98% of our contractual rents during the quarter.
Also earlier this month, we maintained our regular quarterly distribution to shareholders.
[music], we continue to evaluate opportunities to grow our portfolio, but did not make any acquisitions. This quarter. Despite submitting letters of intent for 16 properties with an aggregate value in excess of $950 million since our last earnings call.
Consistent with the market conditions, we experienced during the second quarter interest in industrial real estate remains very aggressive he continues to attract capital looking for deployment opportunities.
The acquisition environment is very competitive and cap rates are steady or decline by about 50 basis points in top markets, especially for newer long term leased credit tenant buildings, which I'll be ttcogen spirits portfolio.
Well, we are maintaining a disciplined approach to potential investments our pipeline of acquisition opportunities remain steady and we're prepared to react quickly to opportunities to complement our portfolio.
In terms of dispositions, we entered into an agreement to sell non core building with approximately 300000 square feet in Winchester, Virginia.
For $11 million. This is a relatively minor transaction. It reflects an opportunistic sale that will enable us to further reduce borrowings on our line of credit.
[music], we remain on track with our plans to expand our JV with private capital whoever the timing of closing remains uncertain.
The pandemic had made it challenging to complete property due diligence and there have been some delays working through documentation.
We continue to view this venture is an important vehicle to sport I hope he is growth and value creation over the long term.
Now I'll turn the call over the I'll review, our Lpds operating results for the quarter.
Thanks, John and good morning, everyone I'll start with a brief overview of our portfolio and then provide details on leasing activity in collections during the third quarter.
Today, I'll T P ons and leases industrial assets that we believe are credible.
Sustaining and supporting essential products and services across the United States.
Our portfolio consists of 301 warehouse and distribution properties in 31 states totaling approximately 44 million square feet that are 98.8% return.
Our mainland portfolio includes 75 properties in 30 states totaling 27 million square feet that are 99.8% late.
Approximately 41% of I O P. P is annualized rental revenues are generated by 17 million square feet, a valuable industrial land and properties in Hawaii.
Our top three tenants are Amazon, Fedex, and Procter and gamble, representing approximately 16% for <unk> and 4% of total annualized rental revenues respectively.
Investment grade rated tenants are subsidiaries of investment grade rated parent entity you make up nearly two thirds of our mainline revenue.
Looking at the entire portfolio more than three quarters of revenue comes from those investment grade rated tenants are subsidiaries or from Arthrocare, Hawaii land leases, but.
The total portfolio has a weighted average remaining lease term of approximately nine years.
During the third quarter leasing activity remains strong and active despite aggressive market conditions for our industrial logistics properties and an existing portfolio occupancy of 98.8%.
LPP executed 776000 square feet in leasing activity that was approximately 9.6% higher than prior rental rates are the same thing.
In the third quarter, we executed 10, new and renewal leases for approximately 486000 square feet at rental rates that were approximately 7.9% higher than prior rate with an average lease term of 4.4 years and commitments for leasing capital of four.
44 cents per square foot per lease year.
While this roll up in rent is below our historical average as it should be noted that our results were negatively impacted by three relatively short term leases in Hawaii that.
The balance of our leasing activity consisted of two rent resets totaling 290000 square feet in Hawaii at rents that were 15.6% higher than prior rent.
In October we executed an early renewal with Amazon for a million square foot sorting facility and whites County, Indiana.
The current rep for this property represents nearly 2.3% of I O P is annualized rental income.
While there were no resulted in a 1.5% roll down in rent, we exceeded our acquisition underwriting of a 13% roll down what was expected due to the current leases amortization of excess tenant improvement.
Amazon is a leading demand driver in the rapidly growing E commerce space and we are pleased to continue our existing relationship with them at that property.
As our scheduled rent resets on lease negotiations for 2020 are essentially complete our continued focus has been on lease expirations in the coming years.
In 2021, excluding the early renewal competed with Amazon the majority of lease expirations will be driven by four tenants on the mainland totaling approximately 1.1 million square feet or 2.2% of total annualized right.
In 2022, the majority of expirations will be driven by tenants in Hawaii, totaling 2.2 million square feet or 6.3% of total annualized rent.
Our real estate services and asset management teams have and proactive discussions with many of these tenants and plan to address these expirations in a way that will maximize the rent growth.
While minimizing potential downtime in capital costs.
As such our current leasing pipeline have grown to 5.9 million square feet up from Q2 levels of four and a half million square feet and includes 90000 square feet of new prospects that could partially absorb the 542000 square feet a vacant space across the portfolio.
We anticipate a near term conversion of approximately 17% of our pipeline given that roughly 1 million square feet of current activity is in advanced stages of negotiation or lease documentation.
Turning to last collections and might differ.
We are pleased to report that recollections remains strong during the third quarter and wrapped up our older class continued to stabilize after.
After taking into consideration grant said rack deferrals to certain kinda, 98% of contractual rescue was collected in Q3.
Since our Q2 earnings call in July we granted one new rank deferral request to a tenant who leases multiple parcels from us in Hawaii.
As of October 23rd we have graduated ranked deferrals to 43 tenants.
The total amount of write the tougher today is $3.6 million, which represents 2% of the contractual cash revenue over the month with deferral, which is April through December.
To date, we've collected $338000 of these deferrals and our current balance of deferrals outstanding is approximately 3.2 million.
Lastly, we are encouraged that Hawaii has taken steps to reopen the state with a pretty travel testing option as.
As of October 15th Traveler can bypass the two week quarantine and what the negative cobot test within 72 hours of departure we.
We are cautiously optimistic that this is the first step in reopening the local economy and supporting small businesses that rely on tourism.
We will continue to monitor tenant activity and work with our tenants that supports our long term success, while positioning ourselves as a landlord of choice.
I'll now turn the call over to Iraq to provide details on the quarter's results and financial position.
Thanks, John and good morning, everyone.
Total portfolio same property cash basis in Hawaii for the third quarter increased 1.9% year over year with a 2.1% increase on the mainland and a 1.6% increase in Hawaii.
The mainland increase was primarily driven by contractual rent steps inventories expansion project completed in Q4 of last year that we've discussed on prior calls.
The increase in Hawaii was the result of our leasing activity, partially offset by lower occupancy year over year.
This same property NOI growth along with our other results contributed to third quarter normalized FFO of $30.1 million or 46 cents per share up 5.7% year over year.
Adjusted EBITDA for the quarter was $46.1 million up 5.2% year over year.
We currently have no debt maturities until our credit facility in December of 2021, which is subject to two six month extensions at our option.
As of September Thirtyth, we had approximately $39 million of cash on hand, and $430 million of availability on our revolving credit facility, which has increased to $457 million of availability as of today.
We ended the quarter with consolidated net debt to EBITDA of 7.3 times.
Excluding the debt to EBITDA related to the joint venture the rest of the portfolio was at 6.4 times debt to EBITDA.
We remain confident that our current liquidity and financial profile supports our ability to operate our business effectively and securely.
[noise], our property portfolio had minimal capital requirements during the third quarter.
We spent approximately $1.2 million on capital expenditures the majority of the spend pertain to improvements in three of our mainland properties two of which were for roofing products and the other related to a truck court improvement.
As John mentioned earlier in October we entered into an agreement to sell the property in Winchester, Virginia for $11 million. This.
This out that is reported as property held for sale on our balance sheet as of September 30 up 2020.
Earlier this month, we declared our regular quarterly distribution to shareholders of 33 cents per share, which is unchanged from the prior level.
Our normalized FFO payout ratio was just under 72%.
Our board evaluates the dividend every meeting and has been reluctant to raise is due to our current dividend yield really relative to our peers.
We are encouraged by I think these third quarter results and believe that our business will continue to withstand the economic downturn caused by the ongoing pandemic.
Our balance sheet is strong our portfolio remains stable and we expect the resilient growing industrial sector will continue to support our result.
That concludes our prepared remarks, operator, please open up the line for questions.
[noise], we will now begin the question and answers.
<unk>.
Good question in the press Star then one on your telephone keypad if.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Bryan Maher of the Riley FBR. Please go ahead.
Yes, good morning, and thanks for all that information.
A couple of quick questions and maybe I missed this and if I did I apologize, but was there any update on the potential second JV partner that would've come into that first JV that you set up.
[noise] there was an.
An update just that we continue to work towards.
Adding that a second.
Partner and you know.
But the timing has been elusive because the diligence process, which is now complete took more time than we expected because of the pandemic.
And you know there's still some final documentation matters that are being worked through but you know the documentation has been has been provided to our lenders to get their consent. So you know we're in the latter stages. We believe in and we're you know we're confident that we will get it done.
Okay, Great and then when we look at the number of.
Shannon I think this 43 years, so that grant what granted deferrals.
Are those all were primarily Hawaii tenants and I'm guessing that there probably smallish in size and related to tourism can you give us a little more color on that.
Hi, Brian This is <unk>, so you're right 81% of the tenants.
That we granted rent deferral to war in Hawaii, but they only account for 1.9 million a backup of the deferred of the 3.6 million and.
You know it's interesting because a lot of these tenants indirectly have to do with four of them. We have you know some dry cleaners, we have.
Tenants that conduct.
Wow, that's a you know an organized those so I think <unk>.
While they might not be exactly in tourism they.
Support tourism. So we're really encouraged that Hawaii has allowed tourism back and what the negative called pass then we'd actually even seen unemployment start to drop I think in April it was almost 24% and as at September It was 15%. So it's moving in the right direction.
Okay, and then just two more from me when it comes to the other bidders you're competing against for these assets.
A change in that mix and how much of that is really being private equity dread them with all the capital that they have a sideline.
You know that's a good question, we don't get the Oh than the gory details but.
We do know that when we when we get color from from brokers that.
There seem to be substantially higher number of bidders.
For most of the properties that we're looking at and you know that the most common bidders that we run up against the private equity other read.
Pension money.
And then some of some family office as well so I.
I think all those participants are active private equity definitely definitely is.
Okay and then just lastly, operating expenses were just a little bit higher than we had been modeling is there.
Sure anything going on there I think I may be nodes property taxes up a bit is there anything that we should be thinking about as we model for 21 and 22.
No I think Brian like you said, we certainly had some some increases in a real estate tax we were able to escalate and a good chunk of it but there is certainly some flowing through to the bottom line.
You know, we had some kind of seasonal and repair and maintenance expense project that we try to knock out during this time of year.
It was a little bit on favorable as well, but for the most part.
It's a pretty decent run rate.
In the expenses.
Thank you very much.
Again, if you have a question. Please press Star then one on the Touchtone phone.
The next question comes from James Feldman.
Second of American Securities. Please go ahead.
Good morning. This is all this rodriguez from Jamie I just had a quick question on the leases done in the quarter. You mentioned 44 cents of Ti per square foot per lease year versus four cents. In Q2 can you just maybe discuss a little bit of what drove higher T.I.s this quarter's leases versus last call.
Sure.
Sure we had a couple instances, where we actually had to pave brokers <unk>, who helped us with some of these leases which is atypical for us.
And we also gave some of you know where these where four of the leases completed one new leases, they're usually we do give a little bit of T.I. there as well.
And then can you maybe talk a little bit about a little bit more on the Amazon business, you mentioned, the roll down, but doing better than expectations. How many of these how many more of these type of leases do you have in your portfolio.
In the coming years.
So you know we have some big tenants I'm rolling in the you know in 2023 24, and you know I think that the tenants such as Amazon Procter and Gamble Whirlpool.
They really have I guess I'd, maybe to use the word purchasing power for their top negotiator is and so I think.
They are I think we'll try to do our best to get roll ups in rents, but you know some of these leases are first generation leases that have amortized tie into the rental rates. So we might see that well do market deals, but just where they're expiring rent is.
And might there might be.
Minimal roll up versus.
What we're seeing you know on new leasing.
And do these tenants have a lot of other options within.
Those markets that these buildings are located in because it seems like the industrial space seems pretty robust across all across the country. So its surprising to hear that there's roll downs occur these long leases.
Well I guess again for this Amazon lease they had 75 cents and amortized T.I. into their base rent so.
That was really the reason for the roll down but for this property in Indiana, we had.
Amazon leases eight eight different locations within the greater vicinity and so there is.
That construction happening and they have they have options. So it's important for US we felt was important for us to retain them and.
Again, where we did we did a market deal.
Okay. Thanks, and then just one more question can you just discuss I know you're in like 30 markets in the U.S.. So maybe lots of drilling to each but just maybe the supply demand dynamics as we got into 21 or your marketing more supply relative to the rest of the U.S.
I think I think there's just a lot of activity and so I think I guess I can't speak for all 31 markets. You know are pretty well leased on especially on the mainland and almost 100%. So the activity that we've seen.
Hey, Ben.
Really more around renewal conversations and I think on the acquisition side.
We've been reviewing potential acquisitions were seeing that.
There's a lot of Africa.
Activity, but also even with the some of those new construction, there's a lot of available land. So I think there's that construction happening whats well.
Yes, the bank competition.
Great. Thank you so much.
The next question comes from Michael Carroll of RBC capital markets. Please go ahead.
Yes. Thanks can you guys talk a little bit about the other 2% and collect it right and that was pretty small, but how does that compare historically and when does that typically get paid I guess, where the tenants and I guess, what's some of the reasoning behind.
But by that by that unfortunately.
Mike. This is work maybe I'll take a stab at it and you all can add some color she wants but I I think when we give that collections metric, it's really over contractual rents do so we don't actually book revenue and we we generally haven't book revenue on that 2% for for quite some time there's.
There is always some tenants in the space that we that we don't expect to pay and what kind of working through the process. So you know at this stage in the game the 98% collected in Q3 and a 97 plus percent in October that we've collected is Oh, you know, what we'll get a little bit more of the October but we're not.
During our breath for for some of the Q3 reps I mean, the team will continue to to try to chase to chase it down and we'll collect what we what we can but.
Realistically, that's never really been reflected in our revenue.
Weve you know Weve also historically had some slower payers in Hawaii, because we're dealing with small or smaller businesses and a lot of cases and just the nature of the Beast. It's it tends to come in a little slower.
Okay and is there an ability to get that space back and releasing eventually or is that just kind of you get that space back. But then you have other smaller issues that so it's always kind of right around that 2% range.
It's it's historically been around that 2% of kind of Oh say growth potential ran across contractual rent.
You know, we do from time to time, how bad debt I mean, a year ago. You see you see this year, we have a pretty favorable comp on the gap and why one because we had some pretty substantial straight line bad debt charges last year. Yeah, you don't see that on the cash line as much but on the <unk> as a percent of our.
GAAP revenue or cash revenue Youd, we typically see bad debt, averaging somewhere around 50, or so basis point, yes. It does.
Move a little bit it could be up to 150 basis points one quarter. That's what we saw last year in Q3, it could vary and be a seven basis point recovery, which we saw you know a couple of quarters ago. So it does move around a bit by average is somewhere in that 50 to maybe 75 basis points.
Under normal bad debt and that's using our revenue as a as a denominator as compared to the contractual amount, which again our team is really pretty good about chasing down and if somebody is not going to pay us getting them out of the space as quickly as possible.
Okay, Great and then can you talk a little bit about the Amazon leaves I guess, what was the new term I guess it expired, but is it this year or next year I guess, how many years do you get on that lease and that 1.5% roll down was that a GAAP number our cash number.
This is the I also we <unk>, we signed a 64 months lease with them their lease expired in April of 2021, and Ah roll down in rent was a GAAP number.
Okay can you provide us what was the cash number there.
The cash right.
Yes, yes, so for 10 square foot with 2% increases.
And how much was the roll down in cash rents compared to the prior lease.
30 cents.
Okay.
And then I guess last question from me is <unk> and I said that the JV you kind of mentioned a little bit earlier in your in your prepared remarks, I guess, what's the expectation there in terms of timing is it still just a little bit uncertain until you can get contracts signed and is that something that could still happen. This year or is it next year or what the expectation.
There.
There is still some uncertainty around it but we're cautiously optimistic that we'll get it done later this quarter so before year end.
Okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to John Murray, President and CEO for any closing remarks.
Thanks, everyone for joining us today, and we look forward to speaking with many of you at the upcoming virtual memory.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].