Q2 2022 Industrial Logistics Properties Trust Earnings Call
Good morning, and welcome to the industrial Logistics properties Trust second quarter 2022 earnings Conference call.
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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 Sir.
Good morning, everyone and thank you for joining us today with me on the call our Iot <unk>, President and Chief operating officer at Yale Duffy and Chief Financial Officer, Rick side out in just a moment they'll provide details about our business and our performance for the second quarter of 2022, followed by a question and answer session with sell side analysts first ever.
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 July 27, 2022, 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 already 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 supper.
A mental operating and financial data package, which also can be found on our website with that I will now turn the call over the island.
Thank you Kevin and good morning, before I review Imtt's performance for the second quarter of 2022, I would like to start by discussing the announcement earlier. This month, we have temporarily reduced IOP Keith quarterly cash dividend.
We recognize the value of the dividend to our investors and the decision was not made lightly.
As you know earlier this year I O P. T. Clark on the strategic acquisition of Monmouth real estate investment and cooperation, which significantly enhance imtt's scam tenant base and geographic diversity as.
As we discussed on our call last quarter, our long term financing plan predominantly included property sales and the sale of an additional equity interest in IOP Ts consolidated joint venture.
However, as interest rates have increased rates significantly higher than projected it has led to a meaningful deterioration in real estate market conditions with fire speaking steep discounts and marketed properties or in many cases walking away from transaction.
We are not a distressed seller we have made the decision to move to remove the 30 monmouth's properties totaling $4 9 million square feet from the market and plan to Reengage in marketing effort, one debt and capital markets normalized.
Additionally, we have caused discussions with potential partners for the mountain industrial joint venture.
We continue to believe in the strength of these properties and the robust industry tailwind underpinning demand for our real estate. Accordingly, we plan to remain disciplined when considering future sales of properties or equity interest to ensure that we maximize value.
As it is taking us longer than we originally expected to complete our long term financing plan. We felt it was prudent to temporarily reduce the dividend to provide us with short term flexibility.
The reduction of the dividend preserves approximately $20 million of cash flow per quarter, which will enhance the nearly $300 million of cash we had on hand at the end of June .
Additionally, it provides us time to evaluate alternatives to repay our bridge facility.
These alternatives may include enduring longer duration debt exploring additional joint venture opportunities with properties, where our fixed rate debt is already in place an asset sale.
To be clear I O P. T continues to operate business as usual and all leasing efforts and capital projects are progressing as scheduled.
Now turning to portfolio fundamentals and operating results as of June 32022, IOP Tas consolidated portfolio included 412 warehouse and distribution properties in 39 states totaling approximately 60 million square feet with occupancy of nearly 90%.
9%.
The total portfolio has a weighted average remaining lease term of approximately nine years with 78% of our revenues coming from investment grade tenants or subsidiaries or from our secure Hawaii land leases.
During the second quarter I O P. T continued to benefit from favorable operating trends, which included record leasing activity of $3 9 million square feet at weighted average rental rates that were 61, 3% higher than prior rental rates for the same space.
Normalized <unk> per share was 43 cents in the same store cash NOI grew two 6% year over year.
We executed eight new leases for approximately $2 7 million square feet and an average roll up in ramp of 104, 7% and 22 lease renewals for approximately 1 million square feet and an average roll up in rents of 29, 1% in total new and renewal leasing yield.
At a weighted average rollout of 82, 8%.
New leasing activity was driven by two leases with home depot in Hawaii for approximately two 5 million square feet at an average roll up in rents of 110.3 perfect.
By way of background last year home depot submitted a request for proposal for an 84000 square foot ground lease for our retail operations.
As discussions progress with the RMR group's property and asset management teams are strategic opportunity emerge with home depot committing to a larger retail footprint of nearly 300000 square feet as well as a 2.2 million square foot parcel, which will serve as a warehouse and distribution hub.
We are thrilled to expand our relationship with home depot and a rated investment grade tenant across three states and totaling $3 4 million square feet home depot ranks as our third largest tenant representing five 7% of Iot Teasley square footage and four 4% of annualized revenues.
Renewal leasing activity included five lease extensions with Fedex for approximately 396000 square feet at an average roll up in rents of 17, 2% I highlight that says I believe there's a misconception in the market, but I'll say, that's leases are above market, which we do not believe to be true.
As we work through the portfolio and see firsthand the intense market demand and record low vacancy in the market, which our properties are located we continue to achieve roll ups in rent as these leases expire.
We spent $3 million on recurring capital expenditures, including $2 $6 million or just seven cents per square foot per lease year attributable to tenant improvements and leasing commissions additions.
Additionally, we spent $7 $1 million on development activity predominantly related to multiple parking lot expansion for Fedex as a reminder, by partnering with Fedex on these projects. There is an opportunity for Iot Peter grow rents ahead of natural lease expirations, while achieving a return on capital of 8%.
10%.
Now turning to our leasing opportunities.
Given all we have accomplished over the last year with nearly 100 leases signed totaling $7 1 million square feet only two 2% of total annualized revenue is set to expire during the second half of 2022.
As such our focus is on addressing lease expirations in the upcoming years were approximately 22% of Imtt's portfolio is scheduled to roll by the end of 2025.
We believe there is ample opportunity to maximize mark to market rent growth and increased cash flows consistent with a 39% roll up in rents we achieved over the past 12 months.
Our leasing pipeline includes 33 deals for approximately 4 million square feet and we anticipate a near term conversion of approximately 25% of our pipeline given that roughly 1 million square feet of current activity is in advanced stages of negotiation or lease documentation.
Before turning the call over to Rick I wanted to make you aware of the recent publication of the RMR group's annual sustainability report the report highlights insights accomplishments and data regarding our managers commitment to long term ESG goals.
Also for the first time, there is a sustainability supplement focus specifically on I O. P. T. We are proud of the progress made to strengthen <unk> sustainability practices and enhance our ESG transparency and disclosure you can find links to the complete report as well as the Iot T sustainability.
Supplement on our website at IR P T read dotcom.
Now I'll turn the call over to Rex to review our financial results.
Thanks, Kyle and good morning, everyone.
During the second quarter total portfolio same property NOI grew 10, 8% from prior year.
This reflects the favorable impact of approximately $3 $4 million.
Due to the noncash write off of a below market lease that we terminated in order to execute one of the new leases with home depot.
On a cash basis same property NOI increased two 6% year over year, driven by a 3% increase in Hawaii and a two 1% increase on the mainland.
This growth was due to higher rental rates and contractual rent steps in our leases across the portfolio.
Adjusted EBITDA increased nearly 100% year over year to $80 8 million, which reflects our same property NOI growth and the mom acquisition.
Interest expense came in at $77 $5 million during the second quarter.
This includes approximately $34 4 million of amortization of financing fees of which $33 million related to our bridge loan facility used to fund the acquisition.
The balance of $43 1 million is related to cash interest expense.
Second quarter normalized <unk> was $28 3 million or <unk> 43 per share, which includes the favorable impact of approximately <unk> <unk> per share related to the write off of the below market lease obligation I mentioned a moment ago.
Net loss for the quarter was $151 3 million, which included a noncash impairment charge of $107 million.
This charge was related to our decision not to sell in the current environment and subsequently reclassified 30 properties from held for sale to held for US due to the deterioration of the real estate transaction market caused by rising interest rates.
While we have seen stable and strengthening operating trends throughout our portfolio. The accounting rules required that we adjust the properties to fair value upon reclassification.
Our estimate of fair value was partially based on the offers we received as well as trends we are seeing in the financing and transaction market.
We continue to believe in the long term prospects of these properties and are not willing to transact in the current environment.
Turning to our balance sheet and financing activities.
At the end of the quarter, we had total consolidated debt of approximately $4 5 billion.
It had a weighted average interest rate of four 2% and a weighted average maturity of four one years.
The components of the debt included the following.
A $1 4 billion bridge loan facility at a floating interest rate of four 2% that matures in February of 2023.
$1 $4 billion of JV see MBS loans at a floating interest rate of 4% and approximately $1 $7 billion of fixed rate loans with a blended interest rate of four 2%.
While interest rates have continued to increase since the end of the second quarter. It is important to note that we do have interest rate caps in place that begin to protect us against further increases in interest rates, if so far exceeds two 7%.
We ended the quarter with $292 million of cash on hand, and debt to annualized adjusted EBITDA of $12 four times.
As <unk> mentioned the implementation of our long term plan to finance the moment acquisition is taking longer than expected.
Since we committed to the acquisition the terms sofa forward curve for the end of 2022 has increased by approximately 300 basis points.
To allow maximum short term flexibility as we evaluate alternatives to repay our bridge facility, we reduced our quarterly dividend of <unk> <unk> per share this equates to more than $20 million of cash flow each quarter and provides us with sufficient cash reserves to give us refinancing options and continue operating business as usual.
That concludes our prepared remarks, operator, please open up the lines for questions.
Okay.
Thank you we will begin we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keeps if at anytime you question, that's been addressed and you'd like to withdraw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble era.
And our first question will come from Bryan Mayer with B Riley FBR. Please go ahead.
Good morning, and thank you for that information and maybe just sticking with the debt for a moment since you just addressed it the cash on hand, and the availability of the dividend for the next couple of few quarters did you use the spec that the combination of those two items.
And we get to February of next year.
Jimmy you Havent layered on another JV partner and as Jim you Havent sold any assets. We gave you the capital available to get into some type of refinancing agreement with the banks to address the bridge loan.
Thanks for the question, Brian Yes, that's right I mean, we feel really good about the assets, we're going through the process too.
The bank's updated appraisals and all the things you need to do to get secured debt in place.
We are glad to see that the markets see MBS market. In particular is open there is certainly still some price discovery that will need to go through but it is positive that the market's open.
We are continuing to monitor that closely and we do have additional options to consider refinancing.
With our bank group and everything else so.
The extra liquidity provided by our by the dividend reduction just gives us additional flexibility we don't have to finance at the same loan to value we'd be able to bring it down if that's what it is.
That will help us get a better price on a refi. So we felt it was the prudent thing and again the real positive here is the assets are great.
Thanks, and on the JV partner I believe your eye on maybe you said that that has paused is there just one JV partner. In addition to the one already on boarded in the mix or is there more than one potential second JV partners you're speaking with.
So we had been talking to multiple groups and we were you know I would say further along with one additional partner, but as you know with the volatility in the interest rates and you know the JV does have floating rate debt in place I think we just felt it was best.
Conversations until.
Stabilized.
Okay. Thanks, and maybe last for me on this 30 M N or assets that.
That you kind of withdrew from marketing.
Is it safe to say that at some point you plan on remarketing those in the next couple of few quarters.
Might you market, some but not all and may be just keep some for the long term and what what are the thoughts there. The next maybe six to 12 months on those 30 properties.
I think we're flexible again it depends on where the market's land I think we feel you know these are really good assets that are representative of the larger monmouth's portfolio and so I think it's.
I think the problem today was that we had gone down the path and had awarded 27 of the 30 properties, but <unk>.
And we had come to a price, which reflects the 100 million dollar impairment that Rick talked about.
But these buyers are coming back and asking for additional price reductions given the volatility in the market and it was just something that we felt was unwarranted given the class and quality of these assets and so and also no assurances that they weren't going to come back to the table asking for more so I think we feel.
So again really good about these properties and are willing to hold them. If if that's what we decided to do.
Okay. Thank you.
Thank you.
Our next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yeah, Yeah in your prepared remarks, you kind of highlighted that there are that you might look to joint venture or other properties. I mean has that process started yet have you identified any other properties that you might joint venture.
So we haven't identified anything yet, but we do have 203 properties both on the mainland and in Hawaii that have you know $1 7 billion of fixed rate debt in place at an interest rate of approximately four 2%. So I think that just pros.
So that's another opportunity as you know our potential partners are uneasy west of floating rate debt.
I guess when does that process start keep you started that now I mean, how quickly could you execute a JV deal.
So again I think we haven't we haven't gone down the path, yet and I think for the same reasons why we took the other properties and you know how the discussions with potential partners for the mountain industrial I think it's really will be you.
Further down the line if we need to.
Okay, and then can you talk a little bit about the interest in the Hawaiian portfolio I'd imagine that there would be some some interest within those assets.
Would you look harder to joint venture some of those properties to pay down the bridge loan.
I think I don't think that it would be you know I don't think we do it to pay down the bridge loan I think our first action would be to enter into longer duration debt to repay the bridge facility just because it provides us flexibility and again those Hawaii properties are so valuable.
We've seen you know significant growth in rents we've improved the credit profile and you know the scarcity of industrial land in Hawaii as you know I think the vacancy rates, 1% right now so we wouldn't do anything any.
We wouldnt enter into any joint venture at pricing that wasn't at a premium.
Okay, and then can you talk about the refinancing options that you have for the bridge loan.
It seems like that's your number one goal I mean, when could something be announced there.
I think well well definitely have something done before February 23.
And what's the current rates that are being quoted on on refinancing that.
We don't have rates yet.
It's a little early to put a price on it at this point Mike.
We are watching the market pretty closely.
Back in February we were 276 or so basis points over sofa.
We saw a transaction in the market last week around 300, so it's possible that it is a little higher but.
Again really great quality assets, well, we'll see where it lands and we'll look to provide those updates as we can.
Okay, and then Rick I know you mentioned that you could reduce the LTV to probably get a little bit of a better rate I mean, what's the LTV that the bridge loans based off of right now and how far would you have to reduce that to get a more attractive rate.
It's a good question I guess, it'll it'll depend on where the markets are.
Is but I mean, the good news again, Mike is that the markets are open.
And we do have cash on the balance sheet in order to bring down the LTV. So we've got some flexibility in the dividend further adds to that the bridge loan was probably in the mid to high seventies loan to values. So we have the ability to bring it down too.
A more conservative number and.
To get the refinancing done but.
Where we're going to evaluate all our options.
Okay, and then Rick can you talk a little bit about the credit facility. It was how's the discussions of re implementing a a credit facility for the company.
Ah yes, the credit facility, we had gone fairly far down the road I think we're pretty much ready to go but a lot of it was contingent on the.
The new credit facility was the last piece to take out the bridge and we needed to to execute on the sale of the JV interest and the 30 properties and because of what's happened with interest rates in the market.
Yes that just didn't happen, but that's not because of our bank group, our lenders were fantastic going through that process and I think a number of them are still kind of disappointed that that deal didn't close but.
We're again going to continue to evaluate all of our options and seek flexibility where we can and.
Yes, I think we'll be in a good position.
Okay, and then just last could you talk a little about the I think that home depot lease is probably the bigger at least that's kind of impacted your leasing stats when did that lease commence I meant I mean did they start paying cash yet or is that the reason why your straight line rent jumped up pretty significantly this quarter compared to the prior quarter, yeah. So for the larger of the.
Two deals out there you know one for 300000 square feet and one for $2 2 million square feet and so the larger of the leases actually doesn't commence until another at least another tenant lease expires in early 2024. So it was that they did a proactive strategic.
<unk>.
You know at least make sure that they got that property.
Okay. So will earnings how much will earnings tick higher next quarter is it sounds like most of the leasing activities in 2024 or so in the near term earnings wont be materially impacted.
Well, we have I mean, we do have.
We have some good you know we have three.
$3 5 million square feet coming up on the mainland in 'twenty, three and then another $4 million in 'twenty four or so.
I mean, we still do have some good opportunities to continue to drive rents in the next coming years.
Mike overall from a from an earnings perspective going into next quarter. The results of the portfolio are continuing to be really strong.
But the interest headwinds are real so.
Based on where interest rates are today, we expect to see further deterioration in <unk>, but again I mean, I think were being pretty transparent about looking to move forward and refinance the floating rate definitely have.
Okay, great. Thank you.
Again, if you have a question. Please press Star then one our next question will come from James Feldman with Bank of America. Please go ahead.
Hi, everyone. This is sort of young Murphy on for Jamie Thanks for taking my question.
Could you talk about what you were seeing in terms of how much deals are repricing buy or where cap rates were trending for the assets you have on the market before you start or stopped marketing.
Hi, Good morning, So I think we're seeing generally a 50 to 75 basis point.
Swing in cap rates and again I think that's the initial.
And that range is the initial and then I think buyers are being opportunistic and coming back and asking for additional discounts just.
Assuming that.
Some sellers are desperate to sell which we are not.
Okay, great. Thank you and then you just.
Talk about what a 50 or 100 basis point increase in interest rates would be for your interest expense or <unk> per share.
Yeah. So we mentioned last quarter that every 50 basis points increase in interest and sulfur are true.
The in place to about four cents of <unk> per quarter.
That will continue.
Well, it's actually hard for us to go up 50 basis points from from where we are today. So.
So for I think yesterday was 232 and our caps kick in at $2 seven so.
Another 40 basis points or so and we'll start to see some of the protection from the caps, but the rule of thumb was every 50 basis points translates to about <unk>.
Okay, great. Thank you and then.
Are you seeing a pullback in leasing activity from any of your tenants and specifically, what you're seeing from investment grade tenants versus non investment grade.
No I think really I mean, I think our demand has been throughout I mean throughout the pandemic and even less inflationary market and rising interest rates I think if anything I think there is a lack of supply and the demand continues to be there.
Okay, great. Thank you.
That's awesome.
Thank you.
Our next question will come from Tom Catheter Wood with BTG. Please go ahead.
Thanks, and good morning, everybody I'm just.
Trying to triangulate a few things here. So yeah. I know you mentioned 27 of the 30 assets were in contract I get the buyers try to re trade and then pulling them off the market.
For that hundred million dollar impairment.
Was that kind of representative on the pricing on the 27 assets or is that across the full 30 that you pulled from the market that's across the whole authority. So you know when we bought the monmouth's portfolio, we assigned a value of approximately $725 million to those 30 assets.
And then as we were.
Worked through and you know, we kind of came to terms with buyers and we had a value of $625 million and.
You know and that and since we had agreed to sell 27 of the 30 properties at that 625 million.
Million.
Okay, and then and they were held for sale and then we put them back into service, we had to adjust that difference.
And valuation.
Gotcha. So let me just clarify that so the.
The 625 was for the 27 assets it was for the whole 30.
Okay. Okay got it got it got it.
<unk>.
Then I want to do a bit.
Get a sense of timing here, because because something doesn't lineup for me. So the Monmouth deal was originally announced November 5th the deal closes and the February three and a half months later at what point in time did those packages or Google or whatever what have you all those 30 assets get out.
To market.
So we began we began marketing them almost simultaneously went with when we close and as you might recall I think we talked about this at NAREIT. We had originally planned to sell one.
One or one large portfolio our two portfolios.
And I think that when the markets have started to erode and so our brokers suggested that we try to market them individually or in small clusters, because they thought we'd be able to maximize value. So we had come to an agreement you know as I mentioned I'm 27 of the 30 properties I would say in late April and May.
And you know the buyers kicked off diligence, we were working through legal docs and.
As a as everybody was going through the process and working towards closing these buyers a lot of them some withdrew altogether and others came back and asked her you know meaningful price adjustments, you know, 10% or more and really provided us with no assurances that they weren't going to come back to the table and asked for.
More and more of a price reduction as you know they completed their diligence or the interest rates continue to rise.
And it just was something we couldnt, we couldnt get behind because we really feel that these are really good assets and assets Iot team would be happy to continue to own.
So that was kind of the background of why we pulled them.
Okay.
Got it understood and then kind of final one for me you mentioned in your prepared remarks. This market impression that the Fedex leases are are above market and that was not the case and the two that you addressed this quarter.
In general when you look at that portfolio now that it's under your umbrella do you have a sense of where those assets overall, the fedex ones or per market and then kind of maybe more broadly do you have a sense for your mainland portfolio overall with what that looks like on a mark to market basis.
So we actually we actually did a five leased five lease renewals with Fedex this quarter and so I think it really depends market by market and also the you know the expiring rent because in some cases that has amortized ti into those rents and so am I.
I think mark the markets generally where these fedex locations are are experiencing rent growth and so we've been able to continue to push them. You know so that does have a hesitancy to put annual increase.
Increases into our lease structures, but we've been really the team's really been pushing to try to get those when we can.
And then I think we again with mining if we didn't have too many empty buildings. One I think we had one vacant building that we acquired and we have a couple that we think we're going to get back and we've been.
I mean, I think we will have we executed one since we've subsequent to Q2, but we've we've been able to get 10 to 15 in some cases, 20% roll up in less than those mainland properties.
Got it got it and just on those amortized T is is that.
All of the Fedex leases.
Fedex leases.
I think it's I mean, maybe 25% I think have it but again I think as the market rents have grown we've been able to bridge. The bridge. The gap of you know, we're able to recoup that as we do run off.
So it might not be a 30 foot that rollout, but it's still a 5% roll up.
Understood. That's it for me thanks, everyone. Thank you.
Our next question will come from Connor Seversky with Bahrenburg. Please go ahead.
Good morning out there thanks for having me on the call I just wanted to touch again on the comments related to that 60 to 75 basis point increase in some of the cap rate.
Estimates on those properties that were previously held for sale.
Considering that all of those lease terms of durations weren't the same for the Monmouth portfolio was there any material difference in those assets with shorter durations versus those I'd say the 15, the full 15 or 30 year lease term.
What I'm trying to get out here is to see if there was less of a movement in the short duration leases versus the longer world.
It's actually it's an interesting question because we joke here that you know it used to be great to have long term Walt and now in the way that the market rents have been growing that you know all buyers.
And investors are looking for shorter walls.
It was really it was it was kind of a mixed.
A mixed bag again like some where some of the buyers were smaller local players who actually wanted the longtime them. So they could have steady cash flows, but I think in general you know 50, 50 to 75 basis points, what was kind of across the board.
Okay.
Okay. That's all for me thank you.
Our next question will come from Mitch Germain with JMP. Please go ahead.
Thank you just I think he might have just answered it.
But was there any sort of characteristics about the profile of the buyers who we're talking to.
It was I mean, there was some there was it was you know we had 10 10 unique buyers and I would say, 50% of them at least where institutional and some more local players.
And last question for me given your commentary about additional GBS is it.
So we just interpret it that if it's not in the JV right now that the property could potentially be either a sale candidate or a JV candidate anything that's wholly owned is that the way that we should be thinking about this now I think that's a fair way to look at it.
Thank you so much thank you.
This concludes our question and answer session I would like to turn the conference back over to Yale Duffy, President and Chief operating officer for any closing remarks.
Thanks, everyone for joining us on the call today Iot Ts operating performance remains solid and we expect demand for our properties to processes as we execute on our financing plans. We look forward to providing you with updates on our progress and speaking with you soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.