Q2 2021 Industrial Logistics Properties Trust Earnings Call
[music].
Good morning, and.
Welcome to industrial logistics properties Trust second quarter 'twenty 'twenty 1.
Results Conference call.
After todays presentation, there will be and opportunity for you to ask questions.
To ask a question you May press Star then 1 on you touched on phone.
To withdraw your question. Please press Star then 2.
Please note.
Financial event is being recorded.
I would now like to turn the call 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 or Iot to Chief Executive Officer, John Murray, Chief Financial Officer, Rick side, now and keep operating.
Officer dialed back and just a moment they will provide details about our business and our performance for the second quarter of 2021, followed by a question and answer session with sell side analysts for.
Firstly 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.
And looking statements within the meaning of the private Securities Litigation Reform Act of $19.95, and other securities laws. These forward looking statements are based on <unk> beliefs and expectations as of today Thursday July 29, 2021 and.
Actual results may differ materially from those that we project the company.
<unk> undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call and 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> dot com or the SEC.
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 <unk> adjusted EBITDA and cash based net operating income or cash basis NOI. A reconciliation of these non-GAAP figures for.
Web site and the components to calculate cash available for distribution or CAD are available on 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 welcome to <unk> second quarter earnings call.
I'll begin with a brief update.
Net income and Rpt's second quarter performance, and then turn the call over to Yale and react for details on our <unk> portfolio statistics leasing activity and financial results.
We reported second quarter results that were highlighted by same property cash NOI growth and strong demand for our properties with solid leasing momentum and portfolio.
Occupancy of 99% up 40 basis points sequentially we.
We generated normalized <unk> of $30.6 million.
<unk> 47 per share, which was stable year over year, despite the deconsolidation of our joint venture.
We executed 564000 square feet of leases and rent resets, resulting.
<unk> and and average rent roll up of approximately 18%.
In June we completed our acquisition of a high quality industrial property and the Columbus, Ohio market area.
1 other countries Premier distribution Carter's due to its strong rental growth and central location and providing access to nearly 60% on both the us and Canadian population.
And within a 1 day drive.
The building is 100% net leased to snacks Corporation for 7 years and includes excess land that can accommodate a future expansion of more than 100000 square feet.
<unk> also purchased a 14 acre parcel of land and the Dallas, Texas market during the quarter. The property is well located less.
And 1 mile and loss of the Union Pacific Intermodal rail terminal with convenient access to the entire Dallas Fort worth market and represents an attractive opportunity for future industrial development and a market with robust leasing activity.
While development and may not be material driver of Rpc's growth and the near term, we will continue to assess the potential.
<unk> to build or expand on available land and our portfolio.
We anticipate new acquisitions will remain the key contributor to our growth to that and we have a steady pipeline of additional acquisition opportunities that we continue to evaluate.
We are maintaining a disciplined approach regarding potential investments as the market for industrial assets.
<unk> remains highly competitive supported by strong and persistent industry tailwind.
With ample liquidity on our balance sheet, we are prepared to react quickly to opportunities that meet our acquisition criteria and complement our portfolio and enhance our ability to generate risk adjusted returns for our shareholders now.
Now I'll turn the call over to Jan to review Opt's operating.
Results for the quarter.
And John and good morning, everyone I'll begin with an overview of Imtt's portfolio, and then summarize on our leasing activity for the second quarter average.
And then third is too.
And 21 IOP Keith portfolio consisted of 291 warehouse and distribution properties and 30 cheese.
States totaling approximately 35 million square feet.
For all occupancy increased to 99%, a 40 basis point increase as compared to the prior quarter on.
Mainland portfolio includes 65 properties and 31 states totaling 18 million square feet that are 100% leased.
The balance of the portfolio was comprised of 17 million square feet of industrial land and properties and Hawaii.
Occupancy and Hawaii was 97, 8% of quarter and a sequential improvement of 80 basis points.
Total portfolio has a weighted average remaining lease term of approximately 19.
9 years.
Iot portfolio remains strong with a diverse roster of credit quality tenants, our top 20 tenants representing 45 percentage of total annualized rental revenues with Amazon Fedex and restoration hardware, representing approximately 10%, 5% and 3.
Of total annual.
Revenue rental revenues, respectively and <unk>.
That's an a 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% of revenue comes from those investment grade rated tenants or subsidiaries.
The aries or from our secure Hawaii land leases.
From a geographic perspective, Imtt's top 3 markets after Hawaii at 51%, our Ohio, and South Carolina, and Indiana, representing 7% and 5% and 5% of our total annualized revenues respectively.
Leasing momentum remains strong and the second quarter, despite portfolio occupancy of 99% IOP T executed 564000 square feet and overall leasing that was 17, 9% higher than prior rental rates for the same space.
We executed 13, new and renew.
Renewal leases for approximately 485000 square feet at rental rates that were 14, 2% higher than prior rates with an average lease term of 7.6 years and commitments for leasing capital of 35 per square foot per lease year on.
Our results reflect strong performance and Hawaii.
And where we signed 11 leases and a 28, 5% roll up and ran the highest overall increase and GAAP rent and 3 years the balance of our leasing activity for the quarter consisted of 2 rent resets for a combined 79000 square feet and Hawaii at rents that were 37, 4% higher.
Higher than prior rents.
Remaining near term expirations are minimal with less than 1 percentage of total annualized revenues scheduled to expire during the second half of 2021.
As such our focus is on addressing lease expirations and the upcoming years is approximately 30% of IL <unk>.
<unk> is scheduled to roll by the end of 2024.
In 2020, 287% of total annualized revenue is rolling mainly driven by Hawaii were $13.1 per cent of annualized revenue is up for renewal and the real estate services and asset management teams within the RMR group.
And our manager are making steady progress on addressing the 54 leases set to expire in Hawaii and 2020 to buy.
By understanding the needs of our tenants RMR has established a comprehensive and strategic plan to address explorations and a way that will maximize mark to market rental growth while minimizing.
Port for downtime and capital costs low.
Accordingly over the past year, we have already signed leases for more than 20% of the annualized rental revenue and Hawaii that was scheduled to expire during 2022.
Beyond 2022 expirations on the mainland will drive most of our leasing activity.
We have begun renewal discussions with several tenants, but remain highly focused on balancing tenant retention with lease negotiation outcomes that will generate healthy cash flow growth, while maintaining portfolio stability.
Our current pipeline consists of 58 deals for $4.3 million square feet across the portfolio, including.
Adding 48 deals for $2.1 million square feet, and Hawaii, and 10 deals for $2.2 million square feet on the mainland we anticipate a near term conversion of 20% of our pipeline given that roughly 1.2 million square feet of current activity is in advanced stages of negotiation or at least documentation.
And now I'll turn the call over to Rick to provide details on this core financial results.
Thanks, Doyle and good morning, everyone.
Our rental income and substantially all of our expenses decreased year over year. Following the deconsolidation of the 12 properties and our joint venture during the fourth quarter of 2020.
Total portfolio same property cash.
Basis NOI for the second quarter increased 1.4% driven by a 1.7 percentage increase in Hawaii, and a 1.1% increase on the mainland.
The increase and Hawaii was a result of new leasing activity and rent resets combined with higher occupancy year over year.
Mainland increase was primarily driven by contractual rent steps and our.
At least the same property performance, along with decreases in general and administrative expense and interest expense and including our share of <unk> from our income through unconsolidated joint venture contributed to second quarter normalized <unk> of $30.6 million or <unk> 47 per share.
Our results were flat compared to Q2 of last year.
And despite the deconsolidation of $9.2 million square feet and our joint venture.
Adjusted EBITDA for the quarter came in at $49 million and we ended the quarter with debt to EBITDA of 5.3 times, which is approximately 2 turns lower than we reported a year ago.
Our property portfolio had minimal capital requirements during the second.
Second quarter, we spent approximately $1.1 million on capital expenditures, including $1 million related to recurring capex for building improvements and leasing costs.
Earlier this month, we declared our regular quarterly distributions to shareholders of 33 per share.
This equates to an annualized dividend yield of approximately 4.
9% based on yesterday's closing price.
Our dividend remains well covered at a 70% <unk>.
<unk> payout ratio.
As of June 30, we had approximately $537 million and total liquidity, including cash on hand of $31 million and availability on our revolving credit facility of 500.
For <unk>.
We are well positioned to continue to grow our industrial portfolio increased cash flow and enhance returns to our shareholders over the long term.
That concludes our prepared remarks, operator, please open up the line for questions.
Thank you very much.
Moving.
And I'll begin the question and answer session.
To ask a question for you May press.
Star then 1 on the industrial and telephone.
If youre using a speakerphone please pick up your handset before pressing the keys.
And so at any time. Your question has been addressed and you would like to withdraw your question. Please.
Please press Star then 2.
6 months at this time, we will pause momentarily to assemble our roster.
Okay.
We take our first question from Brian <unk> from B Riley Securities. Please go ahead.
Good morning, a couple.
Couple of questions for me and as it relates to Hawaii, you know about a year ago I think that there was a little bit of tenant stress for those you had kind of a hospitality centric business and.
That effectively abated at this point with travel to Hawaii, resuming and our Houston.
And any pushback on rate increases.
Renewals come up.
Hi, Brian not at all actually.
As you mentioned effective starting July 8th day, Hawaii took away the mandatory quarantine for vaccinated.
Travelers.
We're seeing that there has been increased air passenger accounts I think retail spending is up sales.
I think our tenants are well positioned and we haven't seen any I think that the land is valuable and they know it and they are really not backing it.
Rental increases.
Okay, Great and then.
Maybe we can touch a little bit upon.
The land parcel you purchased and Dallas, Yeah that combined with you know.
At least 1 or a couple.
Spansion potentials, you have at existing sites.
Right.
And John or Kim.
Can you talk a little bit about the appetite of LPG and the board to pursue development on those sites given how competitive cap rates are and.
And if you were to pursue that.
Kind of dollars on what kind of.
Hi, mom, who would be.
Yeah.
Well I'll start yeah, you can you can add if he as you prefer the.
And we wouldn't have bought the land and mesquite, Texas, which.
Which is.
The Dallas Submarket.
February.
Looking at onboard with the idea of possible development.
That said it's.
It's not a huge.
On parcel parcel of land, so it's not going to be.
And.
And very significant bill.
Building on our portfolio and when we decided to <unk>.
Was it on but I think the yield you can get and.
Developing and in certain markets are.
Oh at or expanding existing properties, we have excess land are much better than the yield you can get.
And from acquisitions today so.
So we are.
And our RMR group has a development and construction group, we've built buildings and various sectors, including expanding.
And some of our industrial properties already and.
We expect to continue to do that for some of our existing tenants and.
Again, I don't expect it to.
To happen that quickly.
We are developing.
Developing this mesquite property it's.
And we're doing some zoning work on it currently.
So it's probably over a year away from from actual.
Moving dirt and.
And putting up a building but.
But it is something we're going to continue to do.
And maybe just last for me on that note.
Given how tough it is defined developed sites already at acceptable cap rate how easy is it to find these.
Type of development sites around the country.
And in high profile strong markets like you've seen and Columbus and others. You know is there a good bit of availability to continue to acquire land for development.
And you know it.
Hasn't been a primary focus to be looking for sites.
Our primary focus.
<unk> remains on acquisitions of existing.
Properties.
On.
So on.
I can only give you a partial answer.
And so on that I can tell you that we have.
As an example travel centers of America, Scott sites, along the U S. Interstate highway system.
Outside of almost every major market and the United States and.
And.
And there are.
Their site debt.
The.
Travel centers average 20 acres of land.
And there are a number of those travel centers that have has excess land that are.
That may be strategic for companies that are on the logistics space because they have ready access to the highway ready access.
Yes to a company that can help repair their trucks.
Fueled net trucks, so there may be some opportunities.
And our existing portfolio too.
Within the RMR group to find sites, a little bit more easily than.
And.
And then going after.
Third parties.
Thanks, John that's all for me.
Thank you.
To ask a question. Please press Star then 1.
The next question is from Elvis Rodriguez from Bank of America. Please go ahead.
Good morning.
Morning. Thank you Yeah, I'm, sorry, I was hoping I was hoping that maybe you can dive in a little bit into the 28 per cent that you mentioned of pipeline and advanced stages.
Where other properties potential yields and.
Timing on closing.
So I mean as.
And I mentioned, we're still in negotiation and so does that.
Final until it's executed but the 1 on the 28 per cent that day.
Asked about are mostly in Hawaii, we have a couple of renewals that we're working on on the mainland I would say.
Our expense.
Expected to see probably.
15% to 20% roll up and rents.
And in Hawaii, as we have in the past 2 to 3 quarters.
And then.
Probably.
Again, the mainland is a little bit.
Less clear because it's a little earlier on and negotiations, but hopefully.
5 to 10 per cent.
Sure the cash roll up and those as opposed to the GAAP roll up.
And we really do.
We reported everything based on GAAP, but I mean.
For your modeling purposes, we could say you know I think and Hawaii annual increases between 2 and 2 and a half for that.
On the mainland and 2.5% to 3% and Hawaii.
Okay and then.
I know you bought.
And I guess, a land parcel, but do you think that over the last few years.
And you haven't been as aggressive on acquisitions, I mean cap rates have compressed.
Tremendous amount specifically over the last year. So how are you thinking about buying land and that's not sort of delivering income today, but could delay.
Bought the income and yield and the future versus perhaps buying.
Assets are actually income producing.
Well the mesquite purchases just a couple of million dollars. So.
I don't think that that's a big.
Some of it doesn't have a material.
<unk> impact on <unk>.
And so on our investment activity, we are aggressively for.
Acquisition activity and we just Oh there.
And there are a lot of groups, who are aggressively pursuing acquisition activity. So.
We have.
Liver off the capital, we're not going to buy aggressively.
Just to run in place or core or to go backwards and so.
And when we are.
Achieving cap rates that we think are the right risk adjusted returns.
We go as aggressively as we can and.
Some markets it works and so.
Some cases.
We may have less comfort because of tenant credit quality ore and they have.
Less comfort because of.
The amount of development and the timing of when and when rent renewals are coming up and so we.
We may not get as aggressive as as other parties.
And so.
And just.
And you do the best you can.
Thanks, John and just 1 more for me how much have cap rates moved on for the acquisitions that you were targeting call. It 2 years.
And a year ago versus today.
And I'd say you know we did some.
Some deals and the 6 months in 2018, 2019 time for him and and <unk>.
Cap rates are regularly and the low for us.
Occasionally.
Does it go for depending on the market but.
I'd say.
Over 200 basis points.
And then if I could just follow up you mentioned that some deals are just not comfortable with the re leasing risk potentially taken on released and risk, but you have this RMR structure.
That's pretty.
And so long and can get the leasing done. So you know and the market is pretty hot and demand is pretty robust so why not perhaps moving out a little bit on the scale.
But we do evaluate moving out on the scale, but perhaps it's because we have such a good market presence around the country and that we.
We may understand the risks and some sometimes and sometimes I have on our presence on the market 2 well and.
And so.
Yes.
So the perceived risk may be higher because you do know.
From experience.
And what.
And how long it takes to renew what local market rents really are versus what brokers may be telling you and an offering memorandum or sales process. So I think.
We feel very good about the.
And the qualifications of our team both on the asset management real estate.
Beside and.
We've put a lot of faith and the information that they provide as well as the information we get from third party sources and.
Yeah.
Yeah.
We take the risks we think are acceptable.
Great. Thank you.
Service SKU.
The next question is from Tom Catherwood from <unk> you May go ahead. Please.
Thank you and more and everybody just to kind of follow up on on Elvis This question John.
John Your opening remarks, you kind of alluded to having a strong acquisition pipeline.
And yet do you then kind of sound a little more cautious on on kind of whats happening and the market right now, which is understandable given cap rate compression and all the interest and industrial right now, but can you kind of provide.
Provide us some more color on what's in your pipeline and kind of whats youre looking at how you.
<unk> and deals now and kind of what's your level of confidence that you'll be able to close on some of the deals youre looking at right now.
I'd, rather not go into too much detail there, but we do have.
We do have transactions were pursuing.
Your sourcing ware.
And purchase and sale agreements are being negotiated and diligence being conducted.
We have.
We have other transactions where we're at.
And where.
And we've advanced past the first round.
I think we have 1 where we've.
Gone through a buyer and of the around but have not.
And have not gotten feed.
Feedback yet on where we stand so and.
And then we have.
A long list of properties on our and our acquisition pipeline report that we're currently doing our underwriting so so we have.
Debt we have.
We have a big funnel and like every fund all it gets narrower as you get closer to finding out if you won or lost and.
And.
So we have we have a few properties that we're hopeful that we'll be able to talk about.
And more detail on our next.
Next call.
And when we complete them and we have.
We have others that are.
We're working hard on and we'll see what happens.
Got it thanks, John and then <unk> last quarter, you had mentioned, bringing in some brokerage firms and home.
To help assist with the re leasing and the reset process and 2022, and then and your prepared remarks, you mentioned kind of setting up a plan to both maximize rent upside and and minimized downtime or tenant loss can you provide.
And maybe a little bit more detail on on kind of what the approach is there and maybe is the approach now different than you typically do or different and you're done before and that market.
So we've used historically, we've handled all of the renewal on direct without engaging brokers.
On a spot where we have just so much volume and 2022.
Debt is the plan I think.
The ratio was about 40% were handling direct and 60% we've engaged third party for and so we're working with 3 different groups and.
Okay.
Depending on the.
The different also different parks is how we've broken it up but.
So far I think we've only signed for for the leases we've done so far for explorations and 22 have been with a broker.
But I think we can.
And a frontloaded our own.
Our on.
Renewals that we thought we'd be able to handle direct and then maybe some other tenants who are either were more reluctant and responding to our initial proposal.
And we've engaged for a price to.
And I think we've actually seen a lot of momentum as we've engaged brokers I think for tenants are taking the renewals a little more seriously and worry that they might be.
Have competition for there.
Parcels. So it's been we feel we feel good we have as I as I mentioned a pretty.
A help on pipeline and Hawaii, So I think for being able to get a lot of it cash flow before the leases come up and try and Tim.
Makes sense. Thank you for for that and then just 1 more question for me.
And the JV portfolio and I know this isn't going to have a huge impact on earnings but you know.
Healthy exploration left in 2021, and then nothing really rolling until 2024.
What are your expectations on that 1 lease that's still coming due this year.
So we actually executed that fast.
Last week, so a 5 year renewal on that 1.
<unk> net rent roll up yeah.
Yes.
Excellent.
That's it for me thanks, everyone.
Yes.
Thank you.
The next question is from Elvis Rodriguez from Bank of America. Please go ahead.
Yeah.
John just a quick follow up on.
Oh, your interest and potentially doing like a public to public M&A or acquiring any big portfolios that are out there I know you've mentioned from a cost of capital perspective. Your stock is still trading at a discount, but just curious how you view potential opportunities to do a bigger portfolio.
Great.
Hum.
And I won't comment on whether we are looking at anything like that.
But.
Generally speaking, it's just as easy to buy a large portfolio of properties.
At 1 time and as it is to buy 1 or 2 properties.
Individually so.
Whenever we become aware of.
And opportunity whether it's corporate.
Transaction or.
Large portfolio transactions.
We are on.
Almost always.
Right It up and review it with.
Credit Committee and if necessary with our board.
So it's something that.
We regularly evaluate.
Great. Thank you.
Okay.
Thank you.
Next question is from Aaron Hecht from JMP Securities. Please go.
Because I think he made the comment that after 2 to 2022.
The majority of the turn leases and rent growth will be coming out on the mainland.
Sounds like a.
Value could be maximized or you know.
<unk> for a period of time on the Hawaii.
For him folio and that.
And that scenario any thoughts on.
On monetization events once assets experienced maximize that and why thank.
Thank you.
Yeah.
And Hawaii.
Yeah Yeah.
Yeah, It sounds it sounds like.
After the 2022 leases turn.
And that you know you may have.
Hold a lot of the juice out of Hawaii.
Yeah well.
And we'll have a quick break in 2023, but then we have 2.8 million square feet and.
In 2000 and for Rolling which is 17.
1%. So I think I think Hawaii continues to really be a huge driver for us. So I don't I mean year over year, and we're continuing to see rent growth. So I don't think we have any appetite.
Do any dispositions there.
Gotcha. Thank you.
Sure.
Yeah.
Yeah.
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.
Thank you for joining us on the call today, we look forward.
Forward to seeing as many of you as possible in person and that.
Coming NAREIT conference.
Thank you.
Okay.
Thank you.
With that we conclude this conference call you may all now disconnect. Thank you.
Yeah.