Q3 2022 Industrial Logistics Properties Trust Earnings Call

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I'd like to turn the call 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>, President and Chief operating Officer, Yale Duffy, and Chief Financial Officer, and Treasurer, Brian Donnelly in just a moment they will provide details about our business and our performance for the third 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 Imtt's beliefs and expectations as of today Wednesday October 26, 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 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.

Summary of our financing and deleveraging plans and review our third quarter operating in leasing performance Brown.

Brian will then provide details on our financial results and balance sheet before we open the call to questions.

In September we closed on a 1.2 billion dollar debt package that enabled us to fully repay the bridge loan facility used for the Monmouth Real estate investment Corporation acquisition.

While the pricing on this that is wider than the pricing of the bridge loan interest rates and market spreads have continued to rise.

Additionally, we are pleased accordingly, we are pleased with the outcome of this transaction. We believe continued demand within the industrial sector, coupled with our high quality investment grade portfolio allowed us to execute during the challenging time in the debt markets. Importantly, this refinancing extended are weighted average detmar.

Charity to over four years and provides us time and flexibility to execute on our deleveraging plans.

As we have discussed on prior calls are plan may include re launching the marketing campaign is a 30 properties previously identified for disposition.

Resuming discussions with potential partners for an equity interest in ILP tease mountain industrial joint venture or exploring additional joint venture opportunities with properties were fixed that is already in place.

As we work through these strategies, we will use available proceeds to pay down debt and improve leverage.

Now turning to portfolio fundamentals and operating results.

As of September 30th 2022, Ilp's consolidated portfolio included 413 warehouse and distribution properties in 39 states totaling approximately 60 million square feet with a weighted average remaining lease time of approximately nine years.

Occupancy a quarter and reached 99.2% up 30 basis points on a sequential quarter basis.

As we are in a time of economic uncertainty, we are encouraged that 70% of our revenues come from investment grade.

Grade tenants are subsidiaries or from our secure Hawaii land leases.

During the third quarter, we entered new one renewal leases for approximately 1.7 million square feet at weighted average rental rates that were nearly 77.5% higher than prior rental rates for the same space, reflecting record quarterly leasing spreads.

The impact of this activity is an increase of $4.8 million, an annualized rental revenue, which showcases our ability to generate organic cash flow growth, while maintaining portfolio stability.

We executed five new leases totaling approximately 533 543000 square feet for a weighted average lease term seven four years.

Included in this activity was a five year lease for our 368000 square foot warehouse and distribution building in Ohio that we acquired vacant as part of the Monmouth acquisition.

And under six months, we were able to leverage industry and broker relationships to lease the building to an investment grade rating tenant with minimal concessions.

We signed for new deals in Hawaii, totaling 175000 square feet at a blended roll up and ran a 62%.

Is buying will discuss later in the call. We recorded a bad debt reserve of $1.2 million this quarter related to one tenant which leaves three parcels within our Damon portfolio in Hawaii.

Almost immediately we were able to execute new leases with replacement tenant's average roll ups and rat of 68%.

These results continue to highlight the scarcity of land persistent demand and value of our Hawaii real estate.

Renewal activity was also strong with nine executed leases for approximately 1.1 million square feet, primarily on the mainland and an average roll up and rent of $26, 1% with a weighted average lease term was 3.7 years.

Is asking runs continued to increase we are selectively completing short term renewals with certain tenants to take advantage of market conditions.

For example, we signed 760000 square feet of renewal activity in the Columbus market, which is experienced record low vacancy and rent growth of nearly 20% year over year by.

By completing three year renewals, we were able to achieve 40% roll up and ran while allowing for further growth.

Now turning to our leasing opportunities.

With minimal lease explorations for the remainder of 2022, our focus continues to be on the future approximately 20% of Ilp's portfolio is scheduled to roll by the end of 2025, mainly driven by our mainland properties.

Given the strength of the industrial sector. We feel confident that are actively thank pipeline will position us to maximize mark to market rent growth and increased cash flows.

Or a pipeline includes 36 deals for 3.6 million square feet of which roughly 1.4 million square feet is an advanced stages of negotiation or leaf documentation.

Once executed we expect these leases will yield average roll ups and rat of 20% on the mainland and 40% in Hawaii further illustrating the strength of our portfolio I will now turn the call over to Brian to review our financial results.

And good morning, everyone.

Starting with Arkansas financial results for the third quarter of 2022 normal earthworms from operations were $14.9 million or 23 cents per share a decline of $15.4 million compared to the prior year quarter.

Adjusted EBITDA increased approximately 85% year over year February $6.1 million, primarily as a result of our recreational marbles.

The major drivers and voted rewards up referrals prior year quarter Register experience, partially offshore for a birdie.

Increasingly an award primarily from the model portfolio.

The total portfolio strewn property crash finishes renoir from the third quarter decreased 1.9% a year over year. This includes the negative thoughts of $1.2 million, a bird that reserves work to the Hawaiian.

Much earlier.

Exclude reviews charges consoled as of June property cash Bruce.

Bruce one 2%.

Detour.

And contractual wrench groups.

With restricted to improve $87 million over the priority to quarter, including a $44.6 million improvement triage interest experience <unk>.

$35.5 million of non-cash amortization of foreigners in fees.

31, $44 million was related to the bridge loan facilities that we paid off at the end of the quarter.

Experts increased $4.4 million into the broader quarter, primarily as a result of our larger scale fall in the mall with a physician.

Turner door balance sheet and finance derivatives.

September research virtually closed on a 1.2 billion dollar mortgage financing reviews, the loan proceeds cash on hand.

Barnes under a $1.4 billion bridge loan facilities.

The new findings junior secured by a portfolio of 100 for industrial properties total 18.6 million square feet across 31 stage. It is comprised of a 1.1 billion dollar mortgage and $135 million level.

The loans are interest only farther floating rate loans with two year initial terms and three one year extension options majority of total weighted average interest rate of schools were closed 393 basis points per annum.

We also are entered into our interest rate trout, limiting chauffeur to 2.25% through October 2024, effectively fixing the interest rate on new cars to embryos Loners search point, 100%.

This new foreigners or external are weighted average don't mature two to 444 years and allows for a portion of the borrowers to be prepared without penalty.

Including extension on the <unk> there is no debt maturities until 2000 2017.

Which part of the loan agreements, we are maintaining flexibility to reboot, because we further execute on our deleveraging berge.

Assuming short term interest rates continue to rise and our cats were made in the mornings are current quarterly cash interest expense run rate is approximately $59 million.

Non-cash amortization of financing cost is projected to be approximately $6.7 million in the fourth quarter.

Turn into investment activities as previously disclosed are consolidated joint venture requires one or two properties that were under agreement by Marvel to $38 million during the quarter.

The JV terminated the contract for the shipping committed property given the market volatility.

Last few months.

We spent $8.5 million on capital expenditures during the third quarter, including $5 million for development costs, $2 2 million barrels, a turn and improvements illusion cause and $1.3 million building improvements.

Regarding the common dividend, we expect to maintain the current quarterly distribution root of one cents per share to preserve liquids.

For short term flexibility until we improved loyalty to leverage profile.

Our financing plans were subject to market conditions in the timeline to accomplish our goal is currently uncertainty.

We believe are obligated continues to own a strong real estate portfolio of infrastructure alternate roster and dependable cash flows we look forward to providing updates on our progress in the future.

Concludes our prepared remarks, operator, please open the launch proportions.

We will now begin the question and answer session to ask a question you May Crestar then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

The first question is from Brian .

Mahoe of be Riley Securities. Please go ahead.

Good morning.

A couple of questions, maybe maybe just start with the dividend.

Yale and Brian what leveraged level when she.

So you start to delevering through asset sales or J B do you think the board would start to contemplate reinstating.

At least some compelling dividend.

Brian at the borders question.

The front of everybody's mind here, where research when we put in a bunny.

I think arguably leveraging plans for you there's a lot of movie pieces in different permutations that could happen, but we need to turn you'll get interest down a few turns you know where debt to EBITDA over 13 times right now.

Killer in the single digits I don't think it's a real conversation so.

We'll keep through the board will keep reevaluate every quarter and we'll see where we're at but it's.

It's not gonna happen until.

23 at the earliest.

Okay, and then maybe to that point, given what you're seeing in the marketplace and giving your discussions with.

J D partners that were you know potentially aren't gonna onboard.

To the mom and dad sets in the sales process I think it was like I'm 30 properties and what would be your best guess that you think you know what quarter or half year do you think you might be able to.

Legitimately re engage with those at the G to start to to prune off assets or or is it just too soon to tell.

Hi, Brian I think it's too soon to tell you know I think we've been in discussions with brokers with some of our other industrial peers and I think everyone is just waiting for things to Normalise and I know that's you know.

That is a subjective answer but.

40, <unk> been 40 per cent last transaction volume from Q2 to Q3, I think buyers and sellers buyers don't want O.

By before the they feel that the bottom has been reached and sellers.

Who aren't distressed aren't willing to you know.

Be distressed sellers. So I think I think the next couple of quarters I think we'll see what the new normal is.

Mmk just two more quick ones are you guys seeing any rent pushed back on those increases that you're implementing.

Mmm none.

Okay, and then lastly, maybe for Brian .

Yeah. The Opex I think it was 8.4 8.5 million somewhere in there is that a good run rate for now until we see either <unk> or the deconsolidation is J D.

Yeah that that's that's a pretty good proxy this quarter.

Some seasonality type opex numbers in there and we do recover a large percentage of the operating costs that run through our piano.

We should get back to that in for modeling purposes.

Okay. Thank you very much.

Again, if you have a question. Please press Star then won the next question is from Mitchell domain of JMP Securities. Please go ahead.

Thank you and good morning, Uhm, the Hawaii <unk> potentially.

Potentially credit upgrade there is there any sort of color you can give us.

Yeah. So as I mentioned, it was 110 and who leaves three parcels they actually had a natural leaf exploration of October .

Of 22, and so they had wanted to again there were a local player. They wanted to renew one of the three parcels and we chose.

We felt there was opportunity to relief to better credit tenants, which we actually were able to accomplish both we.

Of the three parcels.

10 at least one and another tenant leaves to end all both of them are investment grade investment grade.

Right.

Is there a timing differential we should be aware of.

Nope, the new leases will go into effect on November 1st.

I appreciate it.

Hi, Brian mentioned, some flexibility on the mortgage the new financing.

And I'm curious.

You could pay down like can you pay down the Meuse is that kind of what you're talking about or can you pay down the principal of the entire what maybe just provide some perspective on how that can work going forward.

Yeah. What was negotiated is that we could repay 20% of both loans as part of the deal. So that's roughly $250 million without penalty.

With no penalty.

<unk>.

Right and you guys had mentioned some color around.

Some of the flexibility you have with regards to deleveraging are we just talking about the mainland or you know can you <unk> would you, possibly look to capitalize on some of the property.

Yeah. So we have fixed that in place on both the men the mainland and in Hawaii. So I think we can be selective if we decide to go down.

Presenting additional joint venture opportunities either or.

Gotcha. That's helpful. And then last one for me, Brian Uhm I, just Wanna make sure I understand the kind of one time or is this quarter, you've got the 1.2 million that get adjusted out there's some opex noise and then you gave us a run right around 66 or so million gap for.

Interest before next quarter or is that the way to think about it.

That's correct yeah that this quarter had the the rest of the noise from the bridge loan facility, which were adjusted out of it by phone.

Great I appreciate everything I appreciate it.

Hi.

The next question is from Tom <unk>, a P. T. I G. Please go ahead.

Thank you so much.

Morning, everybody, maybe sticking with the bed.

That I understand the 1.2 million, but obviously, if we compare to two Q, it's down kind of a $4 million on a rental revenue basis is that just gap adjustments as the 1.2 million just the the the the the cashback dead or is there something else that was dragging down that rental revenue this quarter.

Yeah. That's a great question the queue to actually had a long time or to the positive there was $3 million to $5 million of below market leaves.

<unk> value that was written off related to a tenant that was turning over so.

Q2 was artificially inflated and then you had the bad guys in Q3 of the $1.2 million.

So you're saying that those those two items.

That's a better one right.

Got it I appreciate that Brian and then I assume the the backfill y'all I owe you mentioned the blended 68% for those three spaces in Hawaii I assume that was in October so that didn't hit three.

Three two numbers is that a fair assumption that the.

Yep, that's exactly right.

Okay.

Then.

You know you can.

Late at the scenario appreciate your commentary around you know potentially bring a 30 asset backed market looking at additional G. B's and and you know maybe look into doing more J V. As in the fixed rate assets, but not rushing into anything because of what's going on the market but.

It's it seems like a basic question, but how long can you wait is there a point in time, where you say we need to begin to <unk> begin to transact just to bring this leverage down <unk>.

I think we we have time to be patient I mean, we all know that the bridge was you know looming over us with a maturity of February 23. So you know the fact that we were able to refinance out of the bridge I think again provides us time to be patient. So I don't think we're gonna you know.

Pre payment Charlie do something that isn't in the best interests.

[laughter] alright, that'd be Brian how was the jet cross collateralized and does that kind of limit what is available to sell outright right now or do you have some flexibility there.

We have some flexibility I mean, there there are certain parts of the portfolio and have mortgages and we'd have to look at what we could get for the total proceeds but.

Each each loan tranche the the overall CMV S. As we outlined as igloo inclusive of 105 assets and you.

The mountain J V floating rate that has its own portfolio, but.

There are options around that that we that we can look to to pull different levers to raise capital.

So so maybe that.

To say it another way the 30 assets that you had first brought to market and then pulled before you did the refinancing.

Does the refinance that you reduce that pool of 30 assets or could get up are those still available to go out to market.

Still available to go to market.

That's right.

Got it and then kinda last one for me cause I'm thinking bigger picture strategically with the relationship with the RMR group in a normal operating environment. The discussion around what are the benefits of of of RMR is you know the the the the resources. The scale you know you've you've talked often about the large funnel when it <unk>.

To see more acquisitions and being able to underwrite more <unk>.

When it gets to a situation like this where it's all hands on deck and trying to delever and trying to really manage through a challenging market and situation.

What is the interaction with the RMR group and and kind of <unk> is there a benefit that that scale brings in this type of environment not just a normal operating environment.

Yeah, I mean, I think even more so in today's environment. I mean, you know we're in a time of economic uncertainty I think asset management property management accounting I mean, it's all hands on deck.

Add to the to the Civs financing was was a direct correlation your banking relationships and is familiar the ability to execute on such a large transaction.

Was a huge benefit having amara behind us.

So you do think when kind of the capital markets or with the investment sales market's open back up you'll be able to move swiftly on that front just to delever be cause of that is that the benefit of that relationship as well.

Absolutely.

Got it I appreciate it all thanks, everyone.

Nice.

The next question is from a D D a.

B C capital markets. Please go ahead.

Thank you. Good morning, just a really quick question for me can you remind us what is $100 million I'll be sure to catch per day you too.

Yeah 100 million is that the mountain joint venture levels and that includes mmm operating cash as well as loan reserves.

J V level.

Okay cool that was really all I have thank.

Thank you.

Thank you.

There are no other questions at this time. This concludes our question and answer session I would like to turn the conference back over.

For closing remarks.

Thanks, everyone for joining us on the call today, we look forward to speaking with many of you at Navy in the coming weeks.

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