Q4 2020 Industrial Logistics Properties Trust Earnings Call
[music].
Good morning, and welcome to the industrial Logistics properties Trust fourth quarter 2020 financial results Conference call.
All participants will be in a listen only mode.
Do you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one. Please note. This event is being recorded I would now like to turn the conference over to Kevin Berry manager of Investor Relations. Please go ahead Sir.
Good morning, everyone and thank you for joining us today with me on the call for Imtt's, Chief Executive Officer, John Murray, Chief Financial Officer, Rick Sydell, and Chief operating Officer, Yale Duffy in just a moment they will provide details about our business and our performance for the fourth quarter of 2020, followed by a question 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 todays 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 <unk> beliefs and expectations as of today Thursday February 18th 2021, 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 IMTT reap dot com.
For the SEC's website.
<unk> 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 <unk> adjusted EBITDA and cash based net operating income or cash basis NOI.
A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distribution or CAD are available in our supplemental operating and financial data package, which can also be found on our losses.
With that I will now turn the call over to John.
Thank you Kevin.
Good morning, everyone and thanks for joining us.
On today's call I'll begin with a brief update on our results from the progress we made on key priorities during the fourth quarter.
I will review our latest property portfolio statistics, and recent leasing activity and Rick will discuss our financial results in more detail. We will then take questions.
Turning to our quarterly results, we closed out the year with continued financial growth solid leasing activity execution on our joint venture strategy reduce leverage and high quality industrial acquisition.
During the fourth quarter Apple portfolio achieved one 6% normalized <unk> growth year over year.
We collected over 98% of contractual rent after giving effect to modest rent deferrals granted to certain tenants earlier in the pandemic.
We executed new and renewal leases for 253000 square feet, while sustaining high occupancy at 98 five per cent.
In November we took another step forward with our joint venture initiative, adding a top tier global sovereign wealth fund with a 39% equity investment in the existing 12 properties JV for approximately $109 million of proceeds.
The first partner maintained their 39% stake in I O P. T owns the remaining 22% interest.
This vehicle provides I L. P T with an additional source of attractively priced equity capital. We're pleased to have this completed and look forward to continuing our growth.
Our acquisition strategy is to invest in modern high quality diversified assets that serve the growing needs of E. Commerce can generate consistent cash flows.
We are primarily focused on well located properties from the top 30 industrial markets occupied long term by high quality credit tenants.
At the same time, we may pursue expansion into smaller targeted infill locations that offer increased returns through rental rate roll ups as well as properties, but all for expansion opportunities with access to develop a land.
The intense competition for industrial real estate showed no signs of abating during the fourth quarter.
We continue to face aggressive market conditions, and a variety of investors looking for similar opportunities.
As we continue to evaluate a steady pipeline of investments we are maintaining a disciplined approach.
We submitted letters of intent for eight properties with value value exceeding $525 million during the fourth quarter.
28 properties with a combined value of more than $1 8 billion for the full year 2020.
Our underwriting remains competitive we are typically a finalist for the deals that we pursue.
In late December we closed on the acquisition of a 645000 square foot industrial building in Kansas City for a purchase price of $44 million. This class a single tenant properties are 100% net leased and has a remaining lease term of approximately 12 years.
This property is in the largest and fastest growing sub market of Kansas City, and expand <unk> geographic diversification into another top U S industrial market.
Purchase price reflects a $6 five per cent capitalization rate.
I'll now turn the call over to you all to review Opt's operating results for the quarter.
Thanks, John and good morning, everyone I'll start with a brief overview of industry and market trends provide an update on I O P teens portfolio. After the deconsolidation of the joint venture assets, and then summarize leasing activity for 2020 as well as the fourth quarter.
As you know the pandemic has been a catalyst for industrial real estate due to accelerated E commerce demand for consumer products groceries home furnishings and improvements.
Retailers are opting for multiple warehouses for single area evaluating supply chain optimization, and stockpiling inventory to meet consumer needs.
As a result for our facilities remain in strong demand.
In Hawaii, the local economy has been under significant pressure due to its reliance on leisure and hospitality. However, we remain confident in our business there as well.
<unk> 70 per cent of I O P T as tenants in Hawaii sort of industries beyond tourism. Additionally, our land remains in high demand due to its prime location relative to the central business District Airport and seaport.
Given these factors we believe the I O P. T is well positioned to serve the growing needs of our existing tenants, while maintaining high occupancy and rent growth both on the mainland and in Hawaii.
As of December 31st 2020.
I L. P. Ts portfolio consisted of 289 warehouse and distribution properties in 31 states totaling approximately 35 million square feet that were 98, 5% leased assets.
As a reminder, these figures exclude the 12 properties totaling $9 2 million square feet that were contributed to the joint venture.
Now our mainland portfolio includes 63 properties in 30 states totaling 18 million square feet that were 99, 7% leased at year end.
The balance of the portfolio is comprised of 17 million square feet of valuable industrial land in properties in Hawaii, which were 97, 2% leased.
I L. P. Ts top 20 tenants, representing 47 per cent of total annualized rental revenues with Amazon Fedex and restoration hardware, representing approximately 10% five per cent and three per cent of total annualized rental revenues respectively.
Investment grade rated tenants or subsidiaries of investment grade rated parent entities make up more than half of our mainland revenues.
Looking at the total portfolio more than 70 per cent of revenue comes from those investment grade rated tenants or subsidiaries or from our secure Hawaii land leases.
Total portfolio has a weighted average remaining lease term of approximately 10 years.
During 2020, we enter one renewal leases for approximately one 1 million square feet at rents that were $14, 7% higher than prior rents with an average lease term of 11 years and commitments for leasing capital and concessions of only 17 cents per square foot per lease year.
In 2020, we also completed rent resets for one 9 million square feet of land in Hawaii at rental rates that were approximately 20% higher than prior rental rates.
Our leasing activity in the fourth quarter comprised of 11, new and renewal leases for 253000 square feet at rental rates that were $14 one per cent higher than prior range with an average lease term of 13 years and commitments for leasing capital of only 15 cents per square foot per lease year.
These results exclude the 64 month renewal for Amazon that we discussed on our last earnings call for a 1 million square foot facility and Whitestone, Indiana, which is now part of the joint venture.
We believe these results combined with our success driving strong tenant retention and maintaining high occupancy levels demonstrate the strength of imtt's portfolio and the rapid expansion of the industrial and logistics sector.
Looking ahead to I L. P teased upcoming lease expirations near term explorations are relatively modest with one point for percent of total annualized revenue rolling in 2021.
In 2020 to a larger pool of leases will expire with nine 8% of total annualized revenue rolling mainly driven by Hawaii were 14, 6% of annualized revenue is scheduled to expire.
Given the high volume of explorations, Hawaii, and Hawaii next year, we plan to engage brokers to assist with our re leasing efforts. While this will drive incremental leasing costs in the back half of 2021 and into 2022 utilizing brokers will support I L. P. Ts efforts to maximize the rent growth.
And minimize potential downtime.
Our current leasing pipeline consists of $3 3 million square feet and includes 153000 square feet of new prospects that could partially absorb the 532000 square feet of vacant space across the portfolio.
Our monthly rent collections continue to trend above 98 per cent and granted rent deferrals totaled $3 $2 million.
Repayment activity has been strong as we have collected more than $1 million or over 30% of total granted rent deferrals to date.
While the impact of COVID-19 continues to be felt throughout the country. We have received no new deferral requests, which we believe demonstrates the strong resiliency of our tenants and their businesses.
As we previously disclosed in December we completed the sale for 308000 square foot warehouse building in Winchester, Virginia for approximately $11 million.
We believe that exiting this property reduce future rest for I O P T given the properties age and potential leasing challenges.
I'll now turn the call over to Iraq to provide details on this quarter's results and financial position.
Thanks, Kyle and good morning, everyone.
Total portfolio same property cash basis NOI for the fourth quarter decreased one eight per cent year over year.
This decline was primarily due to the change in timing for recognition of percentage rent that resulted from our execution of a lease amendment during the fourth quarter of 2019.
As discussed on previous call, we amended that lease and began recognizing approximately $1 million randomly throughout 2020.
Excluding the impact of that change same property cash basis, NOI increased 20 basis points year over year.
From a property type perspective, we reported a two nine per cent decrease in same property cash NOI in Hawaii.
Excluding the percentage rent timing change same property cash basis, NOI in Hawaii increased one 2% year over year.
Our mainland properties same property.
Cash NOI declined less than 1% due to slightly lower occupancy and slightly higher non escalator book expenses year over year.
The same property NOI performance, along with our half a quarter of <unk> from a 61% ownership in the joint venture contributed to fourth quarter normalized <unk> of $30 2 million or <unk> 46 per share.
As John mentioned earlier, we added a second partner in our joint venture during the fourth quarter and as a result of selling this additional 39% interest in our joint venture, we deconsolidation of the assets and related liabilities, including $470 million for secured debt.
If we had owned just our continuing 22% equity interest for the entire fourth quarter normalized <unk> would have been 44 cents per share.
The immediate financial benefits of the JV transaction for LPG are twofold.
It enabled us to efficiently raise equity capital at net asset value and substantially reduce leverage.
We recognized $24 million of gains on the sale and we used $109 million of proceeds from this transaction to pay down outstanding borrowings on our revolver.
As a result, we ended the quarter with debt to EBITDA just for nine times, which is three turns lower than we reported a year ago.
Adjusting for the mid quarter sale of the JV interest debt to EBITDA should normalize in the mid five times range.
As of December 31, we had $552 million in total liquidity, including cash on hand of about $23 million and availability on our revolving credit facility of $529 million.
With ample investment capacity, we are well positioned to pursue our disciplined acquisition strategy.
We spent approximately $3 2 million on capital expenditures during the fourth quarter of 2020.
Approximately two thirds of this capital related to tenant improvements and leasing costs. While the remainder was spent on building improvements throughout our portfolio.
In January we declared a regular quarterly distribution to shareholders of 33 per share, which is unchanged from the prior level and represents an annualized dividend yield of approximately 6% and our current share price.
Our dividend remains well covered at a normalized <unk> payout ratio of just below 72% or approximately 75% after normalizing for the mid quarter sale of the JV interest.
That concludes our prepared remarks, operator, please open up the lines for questions.
Certainly we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Our first question today will come from Bryan Mayer with B Riley. Please go ahead.
Good morning, everyone.
Two questions from me this morning.
Can you expand a little bit upon your acquisition of the Kansas City property.
We're not familiar with the tenant Excellence Learning Corporation and also what are your thoughts there on expansion of that property and then I have a follow up thanks.
Sure Brian.
That tenant is in.
And the business of providing educational materials and education related equipment.
Equipment.
Primarily focused on preschool and elementary school.
Age students.
Sure.
They've recently consolidated.
Their operations they had several different locations, where they were distributing.
Their products from they've consolidated them to this new building.
And we think that.
Uh huh.
You know they have a good business model.
You know the.
A higher cap rate on this transaction reflects that.
They are not are the strongest credit, but we believe particularly with the current a remote learning environment for many students across the United States that.
Have a bright near term future and and.
As they continue to to grow.
The long term future is respectable too. So so we think that's a good a good acquisition.
You know a reasonably new building.
It does have expansion capabilities.
We don't see that hub expansion happening in the near term.
But but we do have the ability to.
Either add onto this building or potentially.
Down the road, if we subdivide this land from from the existing parcel.
We could develop a separate industrial building.
Great and then as it relates to your leverage now being.
Sleep below six times net debt to EBITDA do you anticipate getting or lobbying for an investment grade rating in 2021, and how do you think about deploying your excess liquidity you know in this kind of a heated market for industrial assets. Thank you.
Brian It's a good question and it's one we've discussed internally quite a bit initially when we did the IPO, we came out with really low leverage and the plan was to seek an investment grade rating.
And then.
We had the opportunity to try to demonstrate the value of the Hawaii portfolio with the EMC MBS financing and when we look at the portfolio now.
When we think about our cost of capital I'm not sure that the investment grade rating would really help us all that much.
We do have a.
A significant number of our Hawaiian assets encumbered with that see MBS that for through 2029.
We've got great relationships with banks, we've got other capital partners that we could work with so from a long term capital perspective, we obviously want to maintain a fairly conservative balance sheet and remain well positioned but I don't know that it's as much of a priority is it might've been a couple of years ago.
Yeah.
And then from a <unk>.
Quiddity perspective for how to deploy that capital.
Turning to conquer in terms of deploying capital, where we're actively looking at potential transactions to acquire.
High quality industrial properties, we have.
I don't know five or six offers that are outstanding at the current time.
Several of which are moving into a.
Second round so.
You know the opportunities to invest are plentiful.
But exceeded only by the amount of investors who are chasing them.
So who knows whether we'll be successful.
Or you know what at what cap rates, but.
That's our current plan is to continue to grow them.
And we're.
We're making acquisitions that were.
I'm happy for IOP T to be the sole owner of long term.
But we also.
We do have the joint venture.
Setup with both investors.
Part of the joint venture now and so we have the ability to offer properties to the joint venture partners.
And in May from time to time.
Sell some of the acquired assets into that joint venture and and.
Continue our growth in that manner. So that we would own just 22% of of those properties going forward.
So we have good liquidity today on a.
Mostly through our revolver, but we have.
Even with our share price at what we believe is.
Depressed levels, we have access to attractively priced capital through the joint venture for equity capital should we need it.
Thanks, Tom.
Yeah.
Thank you.
And once again, if you'd like to ask a question. Please press Star then one.
And our next question will come from Jason <unk> with RBC. Please go ahead.
Thanks in the prepared remarks, I think you guys mentioned some potential for development opportunities and then obviously the Kansas City acquisition at some land on net as well. So just thinking about I guess, what's the investment pipeline to allocation to development opportunities versus stabilized acquisitions day.
And then going a little further how do you weigh those opportunities going forward.
We don't have a specific allocation between.
Growth through acquisition or through development.
The properties that we own today, there's a number of them that have a.
Excess land.
Where we could expand existing.
Facilities.
But.
For Triple net leased.
For them.
Properties. So it's.
It.
The tenant needs to want to expand.
We can't just go in and build or.
Expand on their on their buildings.
Without without their desire so it depends on the growth of their business and.
And other locations that they may have so it's hard to it's hard to predict.
We do have some opportunities.
Our.
Other opportunities within the RMR group of companies, where there's some vacant land where we may in.
In the future.
Acquire land from from other entities and just develop.
<unk>.
Belle properties ground up.
But that's not going to be.
A material component of our growth going forward. So I think development growth for us in the near term as.
It's gonna be sort of a peripheral.
A portion of the growth, it's primarily going to be through acquisitions over time, we'd like to make it more towards development.
If cap rates are going to remain as competitive as they are today.
Okay and then.
I guess what are your expectations for the Hawaii lease rolls in 2021 and 2022.
I don't know if you've had any early renewals or I'm sure. Those discussions are ongoing but if you could just provide any color on where you would expect those rental rates to come in.
Obviously, that's been an area that's been I guess more impacted than the mainland portfolio by the pandemic. So how are you guys thinking about that.
Sure. So we have 53 leases expiring in 2022 and Hawaii. So I think we have a real opportunity there to continue to see them.
Roll up in rents as I mentioned in the prepared remarks, we're engaging with brokers to help us with a little over half of those.
He says.
And I think.
The 14 per cent roll up we saw this quarter is a good indication of market I think there's definitely some parcels where I won't be able to exceed that expectation, but 15 to 20 per ton I think is a good gauge.
Got it thanks.
And our next question will come from Aaron Hecht with JMP Securities. Please go ahead.
Hey, guys. Thanks for taking my questions.
Wanted to hit on those those lease rolls I'm, a little bit more your 2022 2023 2020 for if that combines for over 30% of your total rents.
Wondering if you could separate that.
Between Hawaii and the mainland in.
Maybe if you could.
Talk about you know what.
Where they sit relative to market you talked about 'twenty two for Hawaii, but this overall for for all of those explorations. If you can give any insights.
Sure. So on the mainland we only have two leases expiring in 2021 of about 222000 square feet.
We're in active discussions with both of those tenants I think its a little too early to we haven't reached terms, yet, but I think.
Don.
Renault there'll be if we're able to complete that will be at market.
Again, 'twenty two is a big year in Hawaii.
We're in discussions with.
I think we have three 3 million square feet expiring between 'twenty, one and 23 in Hawaii and it we're in discussions or at least have proposals out to <unk> 53 per cent of that number so about $1 4 million.
And then for some of the other mainland properties.
'twenty two is a light year is while it's only about 715000 square feet and 23, we have a little over $2 million.
Believe it or not a lot of those tenants have already started to talk to us about renewals. So again I think we're.
I think we're.
The market is right now and it's everybody is trying to gobble up any vacancy that's coming on board I think the tenants Wanna.
Main and main in our buildings and they don't want their businesses to be disrupted. So I think we have an active audience.
I mean, any thoughts on where your mainland portfolio.
Whereas the market today versus maybe a year ago any sort of thoughts on that to give context for what could happen.
In future.
In terms of rents.
Yeah.
I think it is competitive I mean, it's hard to say because a lot of these leases will be second generation. So we're competing against new our product as well as some of the rent.
And the original leases have you now amortized Ti and non study.
I think there might I don't know that we'll be seeing you know five six per cent roll ups in rents, but I think you know two to three per cent is.
Probably where we expect to be.
Gotcha, and then one more if I could have you guys given thought and are investing in a multi tenanted facilities, maybe drive a little bit higher yield or is that just not our model.
That IMTT wants to go in and approach.
We.
We.
Primarily invested in single tenant properties, but we do look at both and we actually have offers out.
Currently on two different multi tenant properties so.
Well.
We're not.
We're not against them. It's just it really depends on who the tenants are and how the space is laid out and what we perceive it to be.
As the risks of a re tenant those properties if space becomes available.
So.
You May you may see some multi tenant properties added as we go forward.
Any thoughts on yield spread between the two types of assets single tenant traditionally work in and multi day.
When youre looking at.
It really depends on where the markets are and who the tenants are but I'd say maybe.
Maybe 25 to 50 basis points.
Honestly, it feels like a transactions or so aggressively bid right now that it's in.
In some markets there doesn't seem to be that much recognition of the difference.
Got you I appreciate it guys nice quarter.
Thank you.
And our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Great Thanks, and good morning.
Thank you had said on an adjusted basis. Your same store growth was 20 basis points in the quarter and I just want to understand.
As we look at the year ahead.
Is that a good run rate for this portfolio like what are the moving pieces that are going to.
I get that number higher or lower and I know you had said some of these.
Renewables Youre doing are kind of flattish. So I'm just trying to I, just I'd love to get your view on.
What does the kind of core growth outlook looks like for these assets.
I think it's a little different in the mainland than it is in Hawaii.
This quarter had a little bit of noise I mentioned slightly higher non.
Non escalator will expenses for example, and really what that was with some repairs. There was a sewer line issue in Hawaii and and.
And then we had some hail damage that we.
It wasn't.
Able to be passed through to the tenant on the mainland. So when you when you put some of that together. It does certainly drags the growth down a little bit and then.
We do have a multi tenant building in the portfolio today and.
One of the three tenants is struggling a bit and we have a little bit of noise in the P&L related to that but yeah.
Yeah, I can probably speak to it better than I can but the great news is that there is a backfill pretty much ready to go.
So again I think from time to time when your portfolio is essentially full any.
Any little disruption kind of dragging you down but it's.
It's a it's a high quality portfolio with good future prospects. So I would expect to be higher than where we are aside from the occasional bumping erosion that will come with the business.
So I mean, how would you lay out the building blocks like on a cash basis like what are your average rent bumps what do you think occupancy can do.
What do you think leasing spreads would look like.
I mean, historically, we've said that if you look at history, Hawaii is growing around 3% there is a little bit of occupancy decline that we've had there we're hopeful to get that back.
I mean in the short term with the impact of the pandemic. If that's growing at 2.5% to 3% I think were pleased in the short term until some of those leases roll.
And then on the mainland again long term leased to high credit quality tenants, if we're getting 1% bump in cash I think thats.
Pretty solid from where we are today.
Okay. So it sounds like kind of a one one to two and a half ish range.
For reasonable for this year.
Yeah, I think thats for.
Reasonable conservative expectation.
Okay.
And then.
You gave net debt to EBITDA I think it's on a consolidated basis do you have that number is like our look through leverage number.
What do you mean by look through leverage number for your share of JV.
<unk>.
Yeah.
The share.
In our EBITDA calculation now kind of following the EBITDA R. E definition from from NAREIT, you can clearly see our portion of the JV.
This quarter was $939000 I believe.
I don't have the supplemental in front of me, but on a go forward basis, I think I said, our leverage will settle in at that kind of five five times range.
Oh.
And that's that's a look through that's not just consolidated.
That's correct.
Okay. So you're.
Your JV income you are saying is currently that 900000 or so.
That would be.
That was the half quarter impact, though on a go forward basis, I would expect probably 2 million round numbers.
Of our share of EBITDA from the JV.
Okay.
Alright, great. Thank you.
And this will conclude our question and answer session I would like to share the conference back over to John Murray for any closing remarks.
Thanks, everyone for joining us today.
For it to hopefully seeing you soon at least virtually at some investor conferences. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
[music].
Yes.
[music].