Q1 2021 Industrial Logistics Properties Trust Earnings Call
Good morning, and welcome to the industrial Logistics properties Trust first quarter 2021 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal of the conference specialist by pressing the Starkey of followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
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.
Good morning, everyone and thank you for joining us today.
With me on the call are <unk>, Chief Executive Officer, John Murray, Chief Financial Officer, Rick said, Hell, and Chief operating Officer <unk> Duffy in just a moment they will provide details about our business and our performance for the first quarter of 2021, 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>.
<unk> beliefs and expectations as of today Tuesday April 27th 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 <unk>.
<unk> dot com or the SEC's website.
Masters 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 of normalized <unk> adjusted EBITDA and cash based net operating income or cash basis NOI a reconciliation of these non-GAAP.
Of the figures to net income and the components to calculate cash available for distribution of cash are 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, everyone and thank you for joining us.
I'll provide a quick overview of first quarter performance and then the island Rick will run through the details of portfolio of statistics leasing activity and financial results.
We began 2021 with earnings growth solves the leasing activity and the commitment to acquire of high quality distribution distribution properties.
First quarter normalized <unk> per share increased to <unk> 47 from 46 cents from the prior year quarter of two 2% growth.
We executed new and renewal leases for 620000 square feet, achieving 16% growth in for.
Portfolio occupancy remained healthy at 98, 6%.
Also earlier this month, our board decided to maintain our regular quarterly distributions to shareholders of 33 per share.
Our acquisition strategy is to invest in modern high quality diversified assets with stable cash flows and strong rental growth markets.
We're primarily focused on well located properties from the top 30 industrial markets as well as properties that offer of expansion opportunities with access to develop the land.
While the development will not be a primary driver of <unk> growth from the near term, we continue to evaluate the potential to build or expand on vacant land in the portfolio.
In the meantime, acquisitions will likely be the primary driver of growth.
In March we agreed to buy of newly built 358000 square foot class a industrial building near the Rickenbacker intermodal terminal and the airport in Columbus, Ohio for $31 5 million.
The properties of 100% of these to a high quality credit tenant for approximately seven years and includes 25 acres of land that can support future expansion of over 100000 square feet.
The purchase price.
Reflects a four 6% cap range.
We have an active pipeline of attractive acquisition targets and the capacity to fund portfolio growth with more than $550 million of liquidity moderate leverage.
During the first quarter, we submitted letters of intent for non properties with a combined value of more than $540 million.
The competition for ecommerce industrial properties remains aggressive.
Especially for newer buildings long term loans to credit tenants, which I LPT target switch portfolio with cap rates currently averaging below 5%.
Now I'll turn the call over the aisle to review of Lpt's operating results for the quarter. Thanks, Jon and good morning, everyone. I'll begin with an overview of the ILP teeth portfolio, and then summarize our leasing activity for the first quarter.
As of March 31st 2021, Iot Keith portfolio consisted of 289 warehouse and distribution properties in 31 states totaling approximately 35 million square feet.
For 98, 6% leased our mainland portfolio includes 63 properties in 30 states totaling 18 million square feet.
Mainland occupancy improved to 100% at quarter end of.
The balance of the portfolio is comprised of 17 million square feet of industrial land in properties in Hawaii that we're 97% leased.
IMTT top 20 tenants represented 46% of total annualized rental revenues with Amazon Fedex and the restoration hardware, representing approximately 10% five per cent and 3% of total annualized rental revenues respectively.
That's in the greater rate of tenants are subsidiaries of investment grade rated parent entities makeup more than half of our mainland revenue.
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.
The total portfolio has a weighted average remaining lease term of approximately nine years.
During the first quarter, we achieved strong leasing results, which is reflective of our proactive approach of engaging in early renewal discussions 18 to 24 months ahead of lease expiration for.
First quarter leasing activity included 23, new and renewal leases for 620000 square feet of.
The 18% or for leases scheduled to expire in 2022 and 2023 in total rental rates were 16% higher than prior rates with an average lease term of 12 years and commitments for leasing capital of 45 cents per square foot per lease year.
We signed 21 leases in Hawaii for 443000 square feet at rental rates that were 19% higher than prior rates with an average lease term of 14 years.
On the mainland we leased the last remaining vacancy of approximately 60000 square feet for a five year term to achieve of 100% occupancy.
Additionally, we reached an early termination agreement with a tenant in Minnesota that was experiencing financial hardship, we recognized a $507000 of termination fee and simultaneously executed a 10 year lease with a new tenant at a 9% roll up in range.
Looking ahead near term expirations are minimal with approximately 1% of total annualized rental revenue is scheduled to expire this year.
S actually continue to focus on lease expirations in the coming years as approximately 30% of Iot ptc's portfolio of schedule cover off by the end of 2024.
In 2020 to over 9% of total annualized revenue is rolling mainly driven by Hawaii or 13, 6% of annualized revenue is up for renewal.
Our real estate services and asset management teams are proactively engaging with tenants to maximize the rank growth and minimize any potential downtime.
Beyond 2022 expirations on the mainland and will drive most of our leasing activity. We are encouraged the several tenants have begun to engage in early renewal discussions and expect negotiations to continue in the coming quarters.
Our current pipeline consists of 67 deals for for 4 million square feet across the portfolio, including 57 deals for two point of 1 million square feet in Hawaii, and 10 deals for $2 3 million square feet on the mainland.
Now I'll turn the call over the Iraq to provide details on this quarter's results and financial position.
Thanks, Kyle and good morning, everyone.
Our rental income and substantially all of our expenses decreased year over year. Following the deconsolidation of the 12 properties in our joint venture during the fourth quarter of 2020.
Total portfolio same property cash basis, NOI for the first quarter decreased less than 1% year over year, excluding the $507000 of lease termination income we recognized during the quarter. The Gal discussed a moment ago.
From a property type perspective, we reported modest growth in our mainland properties because of occupancy returned to 100% and of two 2% decrease in same property cash NOI in Hawaii due to slightly lower occupancy year over year combined with one lease we amended in order to give the tenant additional free rent as they were delayed getting the permits required to.
The improved the land get a COVID-19.
The same property performance, along with decreases in general and administrative expense and interest expense and including our share of <unk> from the non consolidated joint venture contributed to first quarter normalized <unk> of $30 7 million or <unk> 47 per share compared to <unk> 46 per share in Q1 of last year.
Adjusted EBITDA for the quarter came in at $45 million and we ended the quarter with debt to EBITDA of five two times, which is more than two terms two turns lower than what we reported a year ago.
Our property portfolio had minimal capital requirements. During the first quarter. We spent approximately $1 1 million on capital expenditures, primarily related to leasing costs and building improvements at a handful of properties.
Earlier this month, we declared our regular quarterly distributions shareholders of <unk> 33 per share, which is unchanged from the prior level and represents an annualized dividend yield of approximately five 4% based on yesterday's closing price.
Our dividend remains well covered at a normalized <unk> payout ratio of just north of 70%.
As of March 31, we had $559 million of total liquidity, including cash on hand of $26 $1 million and.
<unk> on our revolving credit facility of $533 million.
That concludes our prepared remarks, operator, please open up the line for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are 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 our roster.
Okay.
Yeah.
Our first question is from Bryan Mayer with B Riley Securities. Please go ahead.
Good morning, everyone. Just a couple of questions for me when we look at the EBITDA.
The generated from the JV in the first quarter would.
Would you consider that to be a decent run rate for our modeling going forward.
Thanks, Brian that's a good question, yes, I mean this is the full quarter of JV activity and I don't think there was anything particularly unique or interesting in the JV of this quarter. So.
I think that's fair from an EBITDA perspective.
Great and Rick while I got you do you guys have an outlook for Capex for 2021.
Well, we typically don't provide guidance, but I would I would tell you that for Q2, we expect it to be a tick higher than Q1.
Just from a seasonal perspective, there is theres some parking lot improvement from concrete work. Some rooftop units that will likely replace so Q2 is probably in the $2 million to $3 million range I would expect it on the higher end.
Okay, and maybe for you I'll.
How do all of the discussions going first of all congratulations on getting ahead of the lease.
<unk> and renewals, but the how are the discussions going with tenants, particularly in Hawaii as you try and drive you know rate higher, particularly in light of what they've experienced the market in 2020.
That's a good question, we've actually haven't gotten any pushback on the rents because I think the tenants know that this is a market and there really is such a scarcity of available land that if they want to continue.
Operating on these parcels that they need to.
The market rent.
So I think with some of the renewal of the tenants might be asking for maybe a month or two of free rent, which we might not have previously granted but besides the concessions have been minimal and the tenants are agreeing to the increased rents.
Okay, and maybe for for John or you're out.
When you guys look at acquisitions.
What's going on with construction of the new industrial assets with.
Kind of the crescendo of.
E Commerce and industrial uplift in 2020, not not that it's going to go down, but we certainly saw much more demand in 2020, what are you guys seeing with cap rates.
Thank you mentioned, maybe the low 5% and I was a little surprised with the four 6% cap rate on the Columbus property. My guess is that you probably got paid the little bit lower of the cap rate because of the land that came with it but how are you thinking about the marketing.
Putting in so many bids and coming away with just one asset for the $30 million can you can you shed low light on that.
Sure. Thanks, Brian.
Yes.
It continues to be development of new properties.
But the.
Generally the absorption.
<unk> has been healthy as well and.
It's a very desirable.
Real estate for them today.
Not just industrial typical industrial.
<unk> players chasing chasing transactions.
The net lease reached the traditionally haven't invested in industrial properties are investing there.
High net worth individuals are investing.
And all of the traditional players are still after transaction so.
We have seen.
A number of transactions, where the properties of traded below a four cap.
And.
Uh huh.
There is no point of investing in properties, where youre going to be running in place of work on going backwards. So.
So we've.
We've we've had a number of of transactions this quarter, where we did in the first round and then just not non.
Not chased the transaction into the second round, even though we were invited by the brokers because the.
The price expectations for just too aggressive.
The property that we did agree to buy in Columbus.
It is attractive to us because it's a solid credit for the 10.
As development potential the.
Market.
Rental growth in the south.
East section of Columbus as has been in excess of 5% for <unk>.
At least five years now and so.
No.
It's Scott.
It's got great access to one of the most active cargo airports in the country.
And great access to Norfolk Southern.
Intermodal center.
Net.
Can take double stacked trailers from the core.
For the Norfolk and less than the day. So so we feel that that's a very strong revenue for.
The 13th largest market in the country, we feel we feel pretty good about the end markets.
That's why we are willing to pay of the aggressive cap rate there.
Okay. Thanks, that's all for me.
Again, if you have a question. Please press Star then one day.
The next question is from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Thank you sticking with the Capex I was just hoping you guys could provide a little more color on the elevated leasing costs in the quarter.
And then also.
Can you just talk about what your cash leasing spreads or I'm, just trying to better understand.
The deal Economics, I think you provide GAAP only.
Hi, Jamie.
So the Capex this quarter, we had done as you know typically the leasing on the mainland is includes tenant improvements and leasing commissions, which we usually don't have in Hawaii. So we did that one.
The deal in Minnesota, where are we.
Backfill the.
Expiring lease and so that deal has a dollar of 50 per square foot per lease year. So that was kind of the driver of the elevated <unk> 45 per square foot this quarter.
And then as you said, we usually just disclose really our spreads of based on GAAP.
GAAP, but I guess for your modeling purposes, you could.
Model high single digits for cash spreads would be appropriate.
That's what they were in the first quarter of that's what you were thinking that's what's the word that's what they were for the first quarter. Most of our leases that were doing on the mainland have between two and two 5% rent growth in in Hawaii, 2.5% to 3%.
That's what we've typically seen.
Okay.
Alright, that's helpful and then.
I guess just.
Okay.
It just kind of following up to a prior question, but just thinking about how you get deals done.
Are you willing to get a little more creative here in terms of.
Whether it's new markets or different property types or just the kind of to keep growing the business.
Growing the platform.
Any any thoughts about potential.
Potential style drift.
Find opportunities given cap rates are so low and competition so high for the core assets you're looking at.
That's a good question, Jamie we talk about about the how to consider that topic a lot internally.
And we have been.
No.
Willing to look at the at the.
The properties that maybe aren't in.
The top 25 markets, but because because it's a good.
Newly built property will because of the rent growth is strong in those markets.
We have been.
We have been looking a little bit outside of our box.
We could go into a tertiary markets and class B and C buildings, but.
At the end of the day.
Getting the high yield today on the lesser quality real estate.
As on the good long term strategy. So we're avoiding.
All of them.
The rabble, where we are looking at.
We may of excess land, where we could develop properties.
Not just within <unk> existing relationships, but even across the RMR platform, where there may be excess land. So you may see over time, a little bit more development from us than you've seen historically.
The focus is going to remain.
On the quality real estate first.
As we look at.
Different ways to achieve higher yields, but it is something that we are looking at trying to figure out new ways to.
Yes.
Sub five cap rates.
Tough to make work.
Okay. That's helpful and so just to confirm the development you're talking about is that warehouse development or that the other property types.
The industrial warehouse properties, it's all of industrial warehouse.
And what about other stuff that's tangential I saw this morning, I think TPG is putting up the.
Yeah.
It's the port business kind of Port operating business I know like all of our got into the truck stop business years ago.
Think about other types of platforms.
It could still be kind of industrial focused under this entity.
I'd say at the present time, we're not we're not considering the type of.
Modification to our business plan.
Okay ill never say never.
The euro.
Right. We have we have diversified over time in the RMR group.
And that's likely to continue but.
Within LPT I don't I.
I don't see anything on the horizon.
Okay alright, thank you.
Yeah.
Your next question is from Tom Catherwood with B T. I G. Please go ahead.
Excellent. Thank you so much for taking the questions and good morning.
John a question for you on the.
The joint venture portfolio, you, obviously, it's been the up and running for for a couple of months here, but you had mentioned during past calls that there is the opportunity to put some assets into the joint venture going forward. How do you think of of that as the source of capital as you're kind of looking at more D.
Reels or even buying within that portfolio of especially at the lower cap rates and being able to kind of juice you returns with some fees there.
Okay.
Well, we do think that the joint venture is a useful.
The potential source of capital equity capital for them for our growth.
And from time to time, we do evaluate properties that are end of the portfolio.
Might be a good fit for our joint venture partners.
And so.
And we're in regular discussions with the.
The joint venture partners about our existing properties as well as.
Potential acquisitions.
So.
I think.
Although our share price has has improved we're still.
Quite a ways away from where it makes sense to issue common equity so.
It's still much more attractively priced equity to use.
The joint venture.
For for equity capital.
Where we can.
We can get that it essentially at net asset value. So.
So in the near term I would expect.
The debt.
We would consider.
Some some sales of the contributions of properties that we currently own.
Two of the joint venture.
And we could close we could acquire properties in close into the joint venture to.
If we do enough homework upfront, so I wouldn't rule that out although we're not working on anything like that currently.
Okay, No I appreciate that John and then.
The question on an asset in the joint venture portfolio. It looks like you extended the lease.
From maybe 20 to 2020 for exploration out for 2030 didn't see any leasing mentioned, though was that just kind of picking up the the Amazon renewal in Indiana from the prior quarter or is that something new.
Hi, Tom this of the IL, we did a 10 year renewal with Procter and Gamble in Ohio.
And so that extended the lease we just didn't it's as it is.
The consolidated we don't we didn't talk about the leasing in the JV.
Got it understood. Thank you for the the island kind of one follow up on kind of leasing I know last quarter, you mentioned that of.
The two leases expiring in 2021 of you were in active negotiations with the tenants any kind of updated thoughts on all of that or any of any progress on that front.
Yeah, both of them are actually and LOI status right now so we're working through the lease amendments.
Excellent that's it for me thanks, everyone. Thank you.
The next question is from Jason Idling with RBC capital markets. Please go ahead.
Hey, Good morning, guys I was wondering if you could touch on maybe where some of those potential development opportunities are located in.
Those opportunities will compare with kind of the core markets that you're targeting with acquisitions.
We have.
We have excess land on properties in a variety of different markets. The one.
The Texas land on.
On the property we are presently pursuing.
The Columbus the property, we acquired in Kansas City.
Late last year has excess develop the land.
We have we of other properties around the country of the two as well.
And we are currently looking at a.
A parcel of that.
Had formerly been.
Travel center.
Hum.
And the Dallas industrial market.
For possible development as well so.
They're all over.
Got it.
And then I was just kind of a follow on do you guys have any I guess the teacher until what type of yield would be reasonable to expect to develop out unless market.
No I think it's market by market and depends on the.
The size of the building of that can be developed or in some cases, it may be expanding existing buildings. So uh huh.
I'd be reluctant to give you a specific rate of other than to say it would be better than.
Bye.
Okay. Thanks.
This concludes our question and answer session I would like to turn the conference back over to John Murray for any closing remarks.
Thank you very much for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
One of the intermodal.
Yes.
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