Q1 2022 Industrial Logistics Properties Trust Earnings Call
Good morning, and welcome to the industrial Logistics properties Trust first quarter 2022 earnings Conference call.
I'd now like to turn the call over to Mr. Kevin Berry Director of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us today.
With me on the call our I O P T President and Chief operating Officer, Yale Duffy and Chief Financial Officer Rich side at all.
Just a moment they will provide details about our business and our performance for the first quarter of 2022, 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 Wednesday April 27, 2022, and actual results may differ materially from those that we project the.
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 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 <unk> are available.
In our supplemental operating and financial data package, which.
It also can be found on our website.
With that I will now turn the call over to Yale. Thank you Kevin Good morning, everyone and welcome to the first quarter earnings call for industrial Logistics properties Trust.
I will start with an update on the acquisition and integration of Monmouth real estate investment corporations summarized key metrics for the combined portfolio review first quarter leasing activity and look ahead to 2022, and 2023 and leasing opportunities.
On February 20th that we completed the acquisition acquisition online, marking a significant milestone for our company and creating a stronger Iot team with the addition of 126 high quality E Commerce focused mainland properties, which provide increased tenant and geographic diversity.
Since we announced the transaction last fall that had been substantial changes to the macro economic geopolitical and financing environment.
Despite these challenges we believe this acquisition will enhance imtt's growth prospects over the long term and the industrial markets and offering operating fundamentals remain strong.
In the first quarter of 2022, New U S industrial leasing activity surpassed 200 million square feet for the sixth quarter in a row now.
National average asking rents reached $7 89 per square foot, a 15, 2% increase year over year and the national vacancy rate dropped to a record low of three 3%.
These metrics are the result of tenants needing to expand as they love to capitalize on robust e-commerce , while increasing inventory level to meet consumer needs and protect against potential supply chain disruption.
These are trends, we are seeing firsthand as an example in Hawaii with an industrial market vacancy rate of one 4% and the lowest in recorded history.
Tenant space, a daunting challenge to lease suitable let space for their growing businesses.
Tenants are now being proactive and working to identify availability before it becomes public.
In the past year, we have helped eight of our existing tenants in Hawaii grow until additional IOP T on property.
Our portfolio is well positioned to take advantage of these market dynamics through tenant retention mark to market opportunities and leveraging expanded tenant relationships to enhance the ilp's cash flows in the years ahead.
Due to the efforts of our manager the RMR group the integration of the Mama properties into I L. P. T is complete with over 30 offices and more than 600 employees across the United States. Just about every part of the RMR organization contributed to the seamless effort.
Whether it be a personalised introduction to each new tenant in the portfolio on boarding as capital projects are hiring brokers to assist and leasing efforts.
As you may be aware that as our top tenant and has committed to a ball to reach carbon neutral operations by 2040.
Key step to achieving this include a focus on alternative energy and more efficient energy usage and thats facilities vehicles aircrafts another business operation.
RMR on our behalf has engage with Fedex on a strategic level to ensure we are alive with its long term sustainability and growth plans.
We believe many of our properties are well equipped to support Fedex as sustainability initiatives with key attributes, including rooftop solar energy adaptability ample space to accommodate electric vehicles and charging station energy efficient lighting.
And the potential to lead to achieve LEED certification by.
By partnering with Fedex on these project there will be an opportunity for <unk> to grow rest ahead of natural lease expirations.
The last and only outstanding from a component of the mine. This acquisition is the reduction of debt.
This effort Whats Rep will review in more detail includes selling an additional equity interest in our newly formed joint venture and the disposition of 30 legacy Monmouth's properties, consisting of $4 9 million square feet.
Properties held for sale are representative of the large our portfolio geographically diverse located in markets experiencing rent growth and leads to high quality tenants.
The properties are currently in the market and we expect to begin closing on sales in the second half of the year.
Turning to portfolio fundamentals as of March 31, 2022, Imtt's consolidated portfolio consisted of 412 warehouse and distribution properties in 39 states totaling approximately 60 million square feet with occupancy just under 99%.
Our mainland portfolio includes 186 properties in 38 states totaling 43 million square feet that are 98, 9% leased.
The balance of the portfolio is comprised of 17 million square feet of industrial land in properties in Hawaii.
Occupancy in Hawaii increased to 98, 7% at quarter end, which represents a 170 basis point improvement compared to the prior year.
The total portfolio has a weighted average remaining lease term of approximately nine years.
More than 75% of our revenues come from investment grade rated tenants or subsidiaries or from our secure Hawaii land leases.
I L. P. Te's top 10 tenants represented 48% of our total annualized rental revenues with Fedex, Amazon and home depot, representing 30% to 7% and 2% of annualized rental revenues respectively.
Fedex and Amazon are both key components of the supply chain and E. Commerce. It is protect projected to increase to approximately 35% of total U S. Sales by year end 2025, our properties are well positioned to benefit from growing E Commerce volume.
During the first quarter of 2022, we continue to build on the strong momentum from 2021 with solid property level operating results.
Same property cash basis, NOI grew three 1% compared to the same quarter a year ago and same property occupancy increased on both a sequential and a year over year basis to 99, 3%.
Leasing activity, which was supported by attractive industrial real estate fundamentals and persistent demand for Iot teeth properties, what's wrong.
Overall first quarter leasing totaled 885000 square feet and resulted in a 27, 9% roll up over prior rents and marked the 10th consecutive quarter of double digit growth.
We executed 17, new and renewal leases for 829000 square feet with an average lease term of eight nine years.
Of approximate of the approximately $3 $5 million spent on spent on recurring expenditures in the first quarter $3 $4 million or <unk> 65 per square foot per lease year was attributable to tenant improvements and leasing commissions.
In the quarter, we signed seven new leases in Hawaii for 281000 square feet and an average roll up in rents of 61%. It is important to note, though that rent growth in our portfolio was not limited to Hawaii.
Our results also include the renewal of 167000 square foot property in Northern New Jersey for 29% roll up in Iraq, with no lease incentives or tenant improvement concessions.
Lastly, we completed 56000 square feet of rent reset with three tenants in Hawaii that were 36% higher than prior rental rates.
Turning now to our leasing opportunities, we intend to continue to capitalize on the attractive operating environment to deliver favorable leasing outcome.
One near term expirations are minimal with three 6% of total annualized revenue is scheduled to expire. This year. We believe there is an embedded opportunity for growth within our existing portfolio.
With approximately 30% of IOP Ts portfolio scheduled to roll by the end of 2025, our leasing pipeline is active and we are currently tracking 52 transactions for approximately $6 3 million square feet.
We anticipate a near term conversion of approximately 65% of our pipeline given that roughly $4 1 million square feet of current activity is in advanced stages of negotiation or lease documentation.
Once executed we expect these leases will yield the average roll up in rent of 20% on the mainland and 50% in Hawaii further illustrating the strength of our portfolio.
Finally, we are proud of the progress we continue to make to strengthen IOP teeth corporate governance in March we welcome junior liens as the newest member of our board of Trustees.
June has more than 30 years of experience in supply chain management, and corporate logistics across multiple industries and a range of fortune 500 companies.
We look forward to benefiting from her insight and experience I will now turn the call over to Ray.
Thanks, Kyle and good morning, everyone.
I'll begin with a review of our first quarter financial results and then provide further detail on our financing activities and balance sheet.
Total portfolio same property cash basis NOI for the first quarter increased three 1% year over year.
This includes a negative impact of approximately 200 basis points of charges related to our pending lease termination in Hawaii.
This strategic lease termination gave our team the opportunity to negotiate a new lease with an investment grade rated tenants and a substantial roll up in rent to backfill approximately 300000 square feet.
This lease is nearly in final form and we expect it to be included in our second quarter leasing results.
Excluding these charges same property cash basis NOI in Hawaii increased eight 5% driven by strong leasing activity over the past year.
On the mainland same property cash basis, NOI grew by one 9% primarily due to contractual rent steps.
Adjusted EBITDA came in at $52 5 million, an increase of approximately 30% year over year, which reflects our same property NOI growth and the <unk> acquisition.
First quarter normalized <unk> was $27 6 million or <unk> 42 per share.
Our normalized <unk> per share was adversely affected by the following.
<unk> due to I'll be Jewish sale of six properties to our own consolidated joint venture at the end of 2021, and <unk> <unk> due to $1 $7 million of charges recorded related to the lease termination I mentioned earlier.
Turning to our financing activities and balance sheet to finance the moment acquisition, we entered into a new joint venture with an institutional investor for 95, Monmouth's properties or the mountain industrial JV.
The investor contributed $587 million for a 39% equity interest in <unk> and the JV incurred an aggregate of $3 $5 billion of new debt.
In connection with the closing of the acquisition, we terminated our revolving credit facility, which was scheduled to expire in June .
We ended the quarter with $275 million of cash on hand, and debt to annualized adjusted EBITDA of $13 two times.
Interest expense was $41 million during the first quarter.
This includes approximately $20 million of amortization of financing fees related to our bridge loan facility and the mortgages used to fund the acquisition.
The balance is related to cash interest expense.
Looking forward, we are focused on reducing leverage by executing a three part strategy.
First we are in active discussions to sell additional equity interest in the mountain industrial JV.
Second at the Isle mentioned, we are marketing 30, former monmouth's properties for sale, we expect to generate gross proceeds over $700 million and average cap rate in line with our acquisition.
And third we plan to enter into a new revolving credit facility, which will be used to repay a portion of the bridge loan and provide us with additional flexibility in the future.
We are confident that these activities will be successful in significantly reducing <unk> leverage to approximately eight times debt to EBITDA before the end of 2022.
In summary, we are excited about the acquisition and the opportunity in front of us to accelerate growth and strengthen lpt's competitiveness.
With enhanced scale and a high quality portfolio of industrial assets LPTA is well positioned to take advantage of the intense demand environment robust industry fundamentals and strong secular tailwind to drive long term growth. We look forward to updating you on our progress.
That concludes our prepared remarks, operator, please open up the line for questions.
Okay.
Thank you.
Well begin the question and answer session.
That's a good question you May Press Star then one on your Touchtone phone.
So you've got a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First question comes from Bryan Maher B Riley Securities. Please go ahead.
Good morning, guys and thanks for all those comments, Rick I was hoping you could clarify something for me.
Spencers ran a little bit higher than we were modeling for Q1 was anything related to that Hawaii tenant and lease that you just talked about impacting that or were there any kind of one time items related to marmot.
That we should take into consideration when modeling opex and G&A for the balance of the year.
Thanks, Bryan it's a it's a good question. We did have a few kind of seasonal onetime or snow removal things like that during the first quarter that you would typically expect to see obviously less so in Hawaii, but.
There wasn't anything in particular related to that tenant in opex, but you know.
From time to time, we do have a small things that do come up that will address.
We did go through a pretty extensive financing process. So we had a lot of third parties out of sites and doing things like that so.
There, there's elevated activity throughout the portfolio, but where we're really happy with where we've landed.
<unk>.
On a go forward basis I would say.
There's not much to really bring your attention from a G&A perspective.
It's pretty typical if youre looking at seasonality the second quarter. There is typically trustees share grants that are.
A second quarter item.
But otherwise it should be pretty vanilla going forward.
Okay, and then as it relates to the spike in interest rates, we've seen over the past couple of months another yes.
Macroeconomic and geopolitical events as anything that's transpired, yet any meaningful leak any meaningful way kind of changed your outlook on the ability to get from kind of the Adas. The from when you announced the mall, but transaction late last year.
Hi, Brian CIO. So I think no I think our plan is to be out of the bridge by the end of the third quarter and again we have.
Couple of different ways, we can do that.
Additional equity from the joint venture the selling of the 30 <unk>.
Properties.
The new revolver that Rick talked about or cash on hand, so between those four factors will we're hopeful to be out of the bridge by.
Q3.
Were there any first quarter.
Vacates in the portfolio that might have I know you guys run exceedingly high occupancy right. Yeah. So you really can't quibble between.
$98, nine and 100% occupancy but was there any.
Abnormal kind of vacates or anything with the timing of the mom with acquisition that would have kind of jerked around occupancy a little bit relative to the numbers that you put up.
No. So the one Monmouth came over there our occupancy was 97, 9%, which was high was still lower than ILP T legacy, but since then we've.
I think we were under an LOI with one of the vacancies and so we're hoping to have that lease executed in Q2 and occupancy will be backup.
Okay and then just last for me on the 30 properties that you're planning to sell.
How is it that those properties are different than the 95, yeah that you keep it I mean is there any kind of differentiating factor there that you're kind of singled out those 30.
No there really are representative of the larger bigger portfolio, we tried to.
Do a mix of non Fedex property than Fedex properties, and you know in all the markets that we're seeing good good activity and strong population growth, Florida, Georgia, South Carolina, Arizona, So really indicative of the bigger picture.
Okay, and maybe just one more if I can try to add the other JV partner by you know lets say the second half of this year in order to get leverage down from I think 13 times to eight times I mean that really is key that the partner that's going to take this over 50% and got the deconsolidation of the debt.
From the balance sheet is that correct.
Correct.
Yeah.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Michael Carroll.
Of RBC capital markets. Please go ahead.
Yeah. Thanks, I was hoping you could provide some additional color on that lease termination charge in Hawaii. So I guess did IOP T paid roughly three cents.
Off of your share count to remove a tenant I guess.
Yes.
Yeah. So we had a long term lease in place with a tenant who the principle.
The company ended up passing away and they were looking for an opportunity to sublease.
Their parcel.
And we ended up finding a replacement tenant and doing a direct deal with them, but as part of that we had to terminate the lease so that was that's the history behind it.
But it is.
Sorry.
And I guess, just kind of exactly what's the.
Go ahead.
It's a really good opportunity because it's the existing tenant that we terminated was non investment grade the new replacement tenant will be investment grade and of National brand that people will recognize and it really increases the profile of our Hawaii portfolio.
And then kind of trying to describe the difference between the absolute rent of the new tenant coming in versus the old tenant how much of a change is that on an annual basis.
It's Mike.
Mike just one thing I'd point out of the $1 7 million of charges, it's about half and half writing off straight line rent for the future along with kind of current revenue. So the old revenue was about 700 ish.
A year and the new lease is expected to be close to $1 1 million.
Okay, and windows that actually commence Rick did that did those leases commence sometime in the second quarter is that fair. So the old rents rolling off and then simultaneously the new rents rolling on yeah.
Yes, where we're anticipating mid may for the new lease start date.
Okay.
And is this the reason why the difference between the Hawaii same store GAAP and cash NOI growth or change was so different was due to this termination.
That's right. The GAAP includes the full $1 7 million of charges, while the cash would exclude the rough.
Roughly half of.
Straight line rent write off.
Okay.
And then just going back to the sale of the remaining I guess, the noncore Monmouth asset and bringing on the new JV partner has the interest in those assets changed given the increase in interest rates, especially given that these are assets that have long lease terms on them. I mean has the higher interest rates kind of push those copper.
It's a little bit higher versus when you acquired them.
So where we're marketing the properties on an individual basis and we've we've really seen a lot of activity from a lot of different groups. I think we have over 150 unique investors.
Interested.
And I think the way.
We've structured it is we've had interest on individual properties and also portfolios of two or three properties, usually cluster by geography and.
I think where the I mean, I don't want to use the word bite size about where on an individual basis and a lot of these buyers are able to.
Just a bit on a on a cash basis. So it has the debt markets are so much impacting their decision making.
Okay.
And what about the new JV partner I mean would you.
That you could sell I guess, the similar state because the first one at a similar valuation and what happens if it comes in at a different valuation just given the macro environment that we're in today.
So we're in we're in discussions.
Already and.
As of today the valuation is the same as the first partner and the stake is somewhere between 20% to 40%.
So we haven't seen any re trading.
Okay and then just last one for me can you kind of describe or give us some kind of gives or takes of the.
<unk> run rate that we could look at today post the Monmouth sale and JV I mean is there a way to think about of what this post.
Transaction run rate will be.
Sure I think it's a little bit before and after the the bridge financing is still outstanding So our model has.
Next quarter pretty pretty similar to where we were this quarter.
One of the sensitivities, obviously as interest rates every 50 basis points or so of interest rate rise will cost us about <unk> <unk> of <unk>, while the bridges outstanding.
But after we've completed the property sales that number changes to just one penny per share of <unk>.
So we're obviously looking forward to.
Executing on our sales and moving forward with getting out of the bridge.
But I think that's the biggest variable right now but for the most part the portfolio is performing really well and the team is executing on the integration is done and we feel pretty good about where it's going.
Okay.
Okay, great. Thank you.
Thanks.
Thank you and the next question comes from Mitch Germain of JMP Securities. Please go ahead.
Hi, good morning, the asset management fee for the quarter.
That doesn't include the joint venture right. That's just that's separate to RMR. So the way to think about it.
It's kind of neutral from an RMR perspective, so while the joint venture has a similar management agreement that I LPT does.
While its consolidated LPT gets a credit against its fee for any fees paid by the venture so it's essentially neutral.
Pass through basically.
I think you guys mentioned around $700 million of asset sales.
Holding I guess I guess the allocation of the purchase price allocation has 724 million for those properties. So just basically what you bought them out is what we should be around what should we expect you guys to sell them out is that the way to think about it that's right.
And then.
The joint venture it when you sell that stake and get below 50 does it become on consolidated or are there any is there any sort of language that gives you guys full authority and that will keep it consolidated how should we think about that going forward.
I think it's a pretty standard joint venture.
Pretty consistent with our previous venture so questions about consolidation I'm always a little afraid to answer without talking to the accountants, because it can get pretty technical sometimes but our.
<unk> is that if we go below the 50% we will likely deconsolidation the joint venture.
And the existing party is a party to your other JV is that the way to think about it.
So one of the the one that's already in place is an existing partner.
Okay. Thank you. Thank you.
Thank you.
Okay.
So I'd like to turn the call back over to Ms.
As we have no more questions. She is the president and Chief operating officer to close the call.
Thanks, everyone for joining us on today's call. We look forward to seeing many of you at NAREIT in another.
Industry conferences this summer.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.