Q3 2021 Industrial Logistics Properties Trust Earnings Call

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Good morning, and welcome to the industrial Logistics properties Trust third quarter 2021 earnings Conference call all participants will be in muscle of limit so.

Should you need assistance. Please signal conference specialist by touching on the Star can you followed by CFO. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Kevin Berry Director 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 Sydell, Chief operating Officer, Yale Duffy.

Just a moment they will provide details about our business and our performance for the third 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> beliefs and expectations as of today Thursday October 28, 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> dot com or the SEC's website investors are cautioned not to place undue reliance upon any forward looking statements. In addition, we will discuss.

The 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 <unk>.

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 the third quarter earnings call for industrial Logistics properties Trust.

In a moment I will highlight our lpt's third quarter performance and recent acquisitions.

And then I'll turn the call over to Rick for details on the LPT portfolio statistics leasing activity and financial results.

We reported third quarter results that were highlighted by solid growth in same property cash NOI strong leasing trends, 99% portfolio occupancy and continued expansion of our <unk> high quality industrial logistics portfolio.

Normalized <unk> came in at <unk> 46 per share, which was stable year over year. Despite the deconsolidation of our joint venture.

Cash NOI growth on a same property basis increased three 4% in the third quarter over the third quarter last year, we entered new and renewal leases and completed rent resets for approximately 818000 square feet of industrial space at weighted average rental rates that were over 20% higher than prior rental rates for the same space.

Yes.

This accelerating rental rate growth reflects continued strong demand for <unk> properties as well as ongoing market strength within the broader industrial real estate sector.

Turning to acquisitions, we remain focused on acquiring high quality properties with stable cash flows and a favorable risk adjusted return profile.

During the quarter, we closed on a portfolio of three class a industrial buildings totaling approximately one 3 million square feet in the Memphis industrial market for $100 million.

Representing a GAAP cap rate of four 7%.

The buildings are 100%.

<unk> 500 tenants and will work.

Buildings are 100% leased to five tenants and well located with excellent Airport rail and Interstate highway access.

The industrial real estate sector continues to benefit from strong fundamental tailwind leading to intense competition for acquisitions, our pipeline of opportunities remains active. However, we continue to maintain a disciplined approach to potential investments as cap rates continued to trend lower.

It's modest leverage on our balance sheet and healthy liquidity, we remain well positioned to pursue additional opportunities to complement our portfolio and drive cash flow growth.

Now I will turn the call over to Al to review Imtt's portfolio and leasing activity for the quarter.

Thanks, John and good morning, everyone. My prior calls I'll begin with an overview of Imtt's portfolio, and then provide an update on our leasing activity for the third quarter.

Okay.

Our tenant base.

Sure. It's a highly sought after industry verticals, including e-commerce distribution and consumer debt.

More than 70% of Iot <unk> annualized rental revenues come from investment grade rated tenants or subsidiaries or from our secure Hawaii land leases.

On the mainland investment grade rated tenants or subsidiaries of investment grade rated parent entity accounts for more than half of Iot revenue.

Our top 20 tenants, representing 44% of trial annualized rental revenue.

Amazon is our largest tenant representing nearly 10% of annualized revenue followed by Fedex and restoration hardware at approximately 4% and 3% of total annualized rental revenues respectively.

As of September 32021, Iot portfolio consisted of 294 warehouse and distribution properties in 33 states totaling approximately 36 million square feet.

Today, 70% of our mainland portfolio is located within the top 30 industrial market and our goal is to continue to expand within those markets as evidenced by our recent acquisition of three class a properties in Memphis that John discussed earlier.

Memphis is ranked within the top 15 industrial markets and has seen nearly 7% rent growth in 2021 and over 26% growth since 2017, According to Cushman <unk> Wakefield.

With this acquisition <unk> expect to rollout brands and capitalize on the strength of the market given the relatively short remaining lease term of approximately three and a half years for that portfolio.

Imtt's portfolio has a weighted average remaining lease term of approximately nine years and overall occupancy of 99% an increase of 20 basis points year over year.

Our mainland portfolio included 68 properties in 32 states totaling approximately $19 8 million square feet that are 100% leased.

The balance of the portfolio is comprised of $16 7 million square feet of industrial land in properties in Hawaii occupancy in Hawaii was 97, 8% at quarter end, which was a 70 basis point improvement compared to the prior year.

During the third quarter IMTT achieved its highest level of leasing activity in over a year driven by continued demand for industrial real estate.

We executed leases for 818000 square feet at rents that were 25% higher than prior rental rates for the same space.

We executed 15, new and renewal leases for approximately 771000 square feet at rental rates that were $19, 5% higher than prior rates with an average lease term of eight two years and commitments for leasing capital of <unk> 40 per square foot per lease year.

Our results reflect strong performance in Hawaii, where we signed 13 leases, including a rent reset at a 32, 6% roll up in Iraq with.

With these leases we were able to negotiate contractual annual increases of two to two 5% on the mainland in 2.5% to 3% in Hawaii, which will provide steady rental income growth.

Our scheduled lease expirations unmet resets for 2021 are essentially <unk>.

Completed.

In 2020, 266% of total annualized revenue is rolling mainly driven by Hawaii were 11, 2% of annualized revenue was up for renewal we remain focused on addressing expirations in a way that will maximize mark to market rent growth, while minimizing potential downtime and capital.

Hi.

Over the past three quarters IMTT has signed 12 leases representing approximately 20% of the annualized rental revenue that was scheduled to expire during 2022 and Hawaii.

Beyond 2022 expirations on the mainland will drive most of our leasing activity.

Given the aggressive market conditions, resulting from record breaking net absorption increased asking rents and low vacancy in new supply constraints. Several tenants have engaged us in early renewal discussions while tenant retention and portfolio is important we are focused on achieving favorable lease terms that will drive growth with.

Our portfolio.

I'll now turn the call over to Rick to provide details on this quarter's financial results.

Thank you al and good morning, everyone.

Total portfolio same property cash basis NOI for the third quarter increased three 4% driven by a six 7% increase in Hawaii, and a 50 basis point increase on the mainland.

The increase in Hawaii was a result of new leasing activity that I will discuss on this call as well as prior call combined with higher occupancy year over year.

The mainland increase was primarily driven by contractual rent steps in our leases, but partially offset by one time repair and maintenance expenses.

This same property performance along with year over year decreases of 9% in general and administrative expense and 30% and interest expense contributed to third quarter normalized <unk> of $33 million or <unk> 46 per share.

Adjusted EBITDA for the quarter came in at $41 2 million and we ended the quarter with debt to EBITDA of five eight times, which is approximately one five turns lower than what we reported a year ago and up modestly compared to the prior quarter as a result of our Memphis portfolio acquisition.

We spent approximately $3 4 million on capital expenditures during the third quarter.

Slightly more than half of this capital related to tenant improvements and leasing costs. While the remainder was spent on recurring capex for building improvements throughout the portfolio.

Earlier this month, we declared our regular quarterly distributions shareholders of 33 per share to be paid on November 18th to shareholders of record on October 25.

This equates to an annualized dividend yield of four 7% based on this morning's share price.

Our dividend remains well covered at a normalized <unk> payout ratio of just 72%.

As of September 30, we had approximately $440 million and totaled <unk> <unk>.

Including cash on hand of $44 million and availability on our revolving credit facility of $396 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 Touchtone phone.

We're 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.

Our first question today comes from Bryan Maher with B Riley. Please go ahead.

Good morning, a couple of questions for me, maybe start with Rick I think your credit facility comes too late.

Later this year what are the thoughts there.

Our plan to put a new one in place extend the existing one can you give us a little color on that.

Sure I guess the main thing Brian is to point out that we still have some flexibility. We do have two six month extension options.

So we have enough over a months to decide on whether to exercise those options or not but as you can imagine we have started talking to our banks about the facility and.

We will likely make a decision in the next few weeks.

And given your credit metrics and what's going on in the marketplace and I believe that important I might've made a comment about this recently.

The thought process I think when you guys. Originally spun out ways to have a couple of years go by and then may be seek an investment grade rating.

But I think I recall, Adam, saying recently that the bond market is such that there's so much demand for just below investment grade rating, but it didn't seem as.

Profoundly important as maybe a year or two ago are there any thoughts there at <unk> seeking an investment grade rating next year.

Yeah I think.

Shortly after the IPO I think that was that was the direction. We were headed seeking to get an investment grade rating, but I think what we've seen is that there is a disconnect in valuations between the private and public markets and.

We've been able to raise fairly attractively priced equity capital through through using JV partners, and that's something we'd likely continuous versus issuing shares at a substantial discount to NAV.

And our thoughts on leverage or kind of similar last year, when we when we deconsolidation of the joint venture.

Certainly the private markets thought that.

60% loan to value leverage that we had on those properties was conservative.

But meanwhile, it was over 10 times debt to EBITDA and we were under pressure in the public markets to reduce leverage so.

It is interesting how how the different markets are using leverage differently. So.

Again with our cost of equity capital, where it is I think we are looking to utilize more debt.

I wholeheartedly agree with the strategy of using a little bit more debt and that's why you saw our leverage tick up ever so slightly this quarter.

But we're going to continue to look to deploy capital Accretively.

And then just last for me and I think <unk> touched upon this but I believe the new acquisition you made in the Memphis has three six years left.

On those leases.

When you acquired the property I mean, what would the thought there with respect to renewing due to current tenants are they planning to renew in place.

Location. So good youre just not worried about it can you give us some more color on on that thought process.

I think it's a little bit of a combination of all of those things two of the larger tenants both have below market rents and relatively short remaining lease term I think.

One of the larger tenants their rents are about 13% below market.

Largest is about 6% below market, we also feel manifest as a strong.

Strong industrial market the buildings are.

Class a construction so even if they were to vacate we feel like our opportunity to re lease fees.

These spaces would be.

Relatively short so I think it's a combination.

Of all of those factors.

Okay. Thank you that's all for me.

Again, if you'd like to ask the question today and Thats Star then one Star then one to ask a question.

Our next question comes from.

Jason <unk> with RBC capital markets. Please go ahead.

Yes, I think John in the prepared remarks mentioned some potential disposition opportunities.

Just looking for some additional color around that maybe what markets.

You guys would be interested in selling out of and what.

What type of valuations you would expect.

Did stumble over a couple of words in the middle of my prepared remarks.

But.

I think you may have misheard me, we're not currently.

Looking at dispositions.

<unk>.

We made the Memphis portfolio acquisition, we continue to look at a pretty good pipeline. So.

We're focused on growth.

We sold.

We sold the property earlier in the year that Didnt really meet our investment criteria.

Otherwise, we're generally happy with the portfolio, we have and it's very difficult to replace the yields that we get on the property is currently with.

With better yields in the current <unk>.

Investment market. So so we're not actually looking to dispose of anything currently.

Okay, and how should we think about funding I know you guys do have some additional buffer here before you get to the low end of that leverage target.

But if you guys are active making investments how should we think about that more longer term one.

Are the types of sources of capital and how comfortable would you be less leverage tick up towards the higher end of the range.

Well I'll let.

Rick fill in behind me on this one but.

I think we are.

We're comfortable with leverage ticking up as Rick indicated earlier.

And using a little bit more leverage than we.

And where we had brought it down to.

We do have.

And off balance sheet joint.

<unk> venture.

Our joint venture partners.

Being sovereign.

Wealth fund type investors.

Move a little bit.

Let's quickly then.

Publicly traded Reits move and so.

They are evaluating the possibility of.

Taking on some of the properties that we've recently acquired site. So I think we have.

Our plan there that may take some time to rollout.

But where we would.

Sure.

I guess going back maybe this goes back to your disposition question to the extent, we dispose of properties, we would sell them into the June into our joint venture and retaining the 22% interest.

So.

We will use the proceeds from that process to pay down our line and provides.

More bandwidth for executing on acquisitions.

Sure.

Okay.

Got it thanks.

Ladies and gentlemen, this will conclude 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, again for joining us today, and we look forward to speaking with many of you at the virtual NAREIT coming up soon so thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.