Q4 2022 Industrial Logistics Properties Trust Earnings Call

Good morning, and they'll come through the industrial logistics properties Trust fourth quarter 2022 financial results conference call.

All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by CEO .

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

Draw. 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 Directive.

Relations. Please go ahead Sir.

Good morning, everyone and thank you for joining us today.

With me on the call our I O P cheese, President and Chief operating Officer, and Yale Duffy, and Chief Financial Officer, and Treasurer, Brian Donley and.

Just a moment they will provide details about our business and our performance for the fourth 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 February 15, 2023, 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 I L. P.

T Rieck 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>.

The EBITDA and cash based net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income and components to calculate cash available for distribution are available in our supplemental operating and financial data package, which also can be found on our website.

I will now turn the call over to Yale. Thank you, Kevin and good morning, I will begin with a review of IOP piece portfolio and operating performance and then turn the call over to Brian to provide an update on our financial results.

Imtt's consolidated portfolio increased 413 warehouse and distribution properties.

39 states totaling 60 million square feet with a weighted average remaining lease term of approximately nine years.

Occupancy at year end was 99, 1% Fedex Amazon or home depot represented approximately 40% of our annualized rental revenues and 78% of our revenues come from investment grade rated tenants or their subsidiaries or from our secure Hawaii land leases.

We finished the year with strong demand for our high quality portfolio consistent with the trends we saw throughout 2022 for the full year, we achieved a record annual leasing activity of $7 8 million square feet at weighted average rental rates that were 47, 3% higher than prior rental rate.

For the same space.

The impact of this activity is an increase of $17 $1 million in annualized rental revenue of which more than two thirds will take effect in 2023 or 2024.

These results showcase our ability to generate organic cash flow, while maintaining portfolio stability.

During the fourth quarter, we entered 17, new and renewal leases and one rent reset for a total of one 4 million square feet at a weighted average lease term of eight years.

This activity resulted in GAAP and cash leasing spreads of 18, 7% and six 7% respectively.

Renewals on the mainland drove most of our leasing activity. Our leasing spreads include a 338000 square foot renewal in a tertiary market in Iowa, where we are only able to achieve a 4.5% roll up in rent excluding.

Excluding this renewal GAAP and cash leasing spreads were 25, 7% and 14, 1% respectively.

Looking ahead, approximately 12 million square feet or 18% of IOP Ts portfolio is scheduled to roll by the end of 2025, primarily driven by our mainland properties.

We are currently tracking 28 deals in our pipeline for $2 8 million square feet. Once executed. We expect these leases will yield average roll up in rent of 20% on the mainland and 30% in Hawaii further illustrating the strength of our portfolio.

Lastly, as we have communicated in the past we are focusing on focus on improving <unk> leverage however, given the ongoing uncertainty in the capital markets our timeline for addressing these priorities is unknown.

With no near term debt maturities and the cash flowing portfolio Iot to you will continue to be patient as we evaluate opportunities I will now turn the call over to Brian .

Thank you al good morning, everyone.

Starting with our consolidated financial results for the fourth quarter of 2020 to normalized funds from operations were $5 4 million or eight cents per share a decline of $26 $3 million compared to the prior year quarter.

The major drivers impacting normalized <unk> the prior year quarter was higher interest expense, partially offset by a $40 million increase in NOI.

Adjusted EBITDA increased 88% year over year to $79 $2 million.

These changes were a result of our acquisition of Mamas and the related financing activities earlier in 2022.

Total portfolio same property cash basis, NOI for the fourth quarter increased 30 basis points year over year.

Prior year included a reduction to reserves for uncollectible rents of approximately a half a million dollars negatively impacted comparisons.

Putting these charges consolidated same property cash basis, NOI increased one 3%, primarily due to our leasing activity and contractual rent steps.

Interest expense increased $62 $6 million over the prior year quarter. The interest rate cap, we have for a $1 2 billion floating rate <unk> and exceeded the strike rate for the entire fourth quarter and the capital of $1 4 billion floating rate loan in our consolidated joint venture Cross the strike rate in mid November .

Assuming short term interest rates remain at current levels or continue to rise. Our current estimated quarterly interest expense run rate will remain fixed at approximately $72 million.

This consists of $59 million of cash interest expense and $13 million of noncash amortization of financing costs, including the interest rate caps.

Turning to our balance sheet, including extension options I hope he teased weighted average debt maturity of six years with no maturities until 2027.

As of December 31, our total debt either carrier at a fixed rate or fixed through interest rate caps. The total weighted average interest rate of five 4%.

Currently have $48 million of cash on hand, excluding the cash held by our consolidated joint venture and amounts escrowed under our debt agreements.

Capital expenditures for the fourth quarter were $7 9 billion.

Including $4 $4 million of tenant improvements and leasing costs too.

$2 $2 million of building improvements and $1 $3 million of development costs.

In closing our operations remain strong with an exceptional tenant roster near full occupancy and rising rents across our portfolio and we expect that RPT will continue to benefit from industry demand for high quality industrial real estate.

Before we turn the call over to Q&A I'd like to point out that we've included additional disclosures in our supplemental operating and financial data package. This quarter that provides additional details and insight into the different components of our portfolio as well as our joint ventures that we believe may be helpful to stakeholders.

That concludes our prepared remarks, operator, please open the line for questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on phone if you're using a speakerphone. Please pick up your handset before pressing the keys.

If at any time. Your question has been actress and you would like to withdraw your question.

Please press Star then two at this time, we will pause momentarily to assemble our roster.

The first question comes from Bryan Maher with B Riley FBR. Please go ahead.

Yes, good morning, Yale and Brian a couple of questions for me.

When it comes to the Reengagement.

A dialog, let's say with potential JV partners for the Marmot JV and asset sales I know you touched upon this briefly in your opening comments, but do you have any thoughts on you know.

When that might eat up are there any discussions currently how should we be thinking about that.

Good morning, Brian So for the property sales I think we really haven't seen.

Much in the form of the transaction markets, it's been pretty quiet as you could argue would expect with the rising interest rates and the availability for financing. So I think we're really looking to see more and more data to trying to kind of see what what.

But you know what the cap rates look like so.

So I think.

That's the answer to that.

In terms of discussions with a potential joint venture partner, where for the mountain, we're not having any conversations currently.

Brian alluded to in his prepared remarks, we've put in additional data in our supplemental if you look to that you'll see that.

Currently not cash flowing in that joint venture. So it would be very hard for us to find a second joint venture partner until interest rates decrease.

Okay. Thanks, and then maybe for Brian and we noticed that the leverage went to the third quarter from 13, seven I think it went down to like 13 one.

Assuming you don't have asset sales or deconsolidation that the mountain JV is that a good run rate you know maybe give or take get their part too.

Yes, great.

Great question and good morning.

I think you know as time passes and we continue to see the effect of rent roll ups, it'll come down marginally, but the high 12, 13 range thats sort of where we expect things to be.

Throughout 2003.

And you touched upon the leasing activity for 2023, it seemed like a pretty solid 2022 in a very strong.

Full year in the fourth quarter was pretty decent, but where are you seeing any potential strengths or weaknesses over the next two years in lease renewals or should we just continue to expect that this portfolio runs at roughly 99% occupancy and are there any known vacancies.

Yeah.

So.

I think I think the you know I think this year was an exceptional year for US we had a lot of leasing in Hawaii. So I think you know as we go into 'twenty, three and 'twenty four a lot of the leasing will be focused on the mainland and so I'm not sure we're going to see.

47% roll up for the year in 'twenty, three but I think you know, 20% I think as I said.

Estimate.

In terms of known vacancies, we have a couple that we know about in Hawaii generally we've been able to release those within a quarter or two so there's no concerns there and I think.

You know I think the 99%, 98% I think it's a good.

Estimate for where we think occupancy will turn out.

Okay and then just last from me, maybe maybe for Bryan on the extensions for that too and then a related.

Debt financings you now out to 2027 from 2024 is there anything you know in the covenants or anything that you could foresee that would prohibit you from exercising any dose extensions.

No. The only requirement is that we replace or add a new interest rate cap upon expiration of the current maturities. So 24, we'll have to get a new interest rate cap for the extension period for each of those debt instruments, which we don't foresee a problem.

Okay, great. Thank you that's all for me.

Thank you.

Again as a reminder, if you have a question. Please press star then one to be joined into the Q.

Our next question comes from Mitch Germain with JMP Securities. Please go ahead.

Good morning.

When does the same store pool change will it be next quarter or do we wait until the new calendar year.

Same store, meaning to include the mom with acquisition that would be in Q2, okay. Okay, and just talking a little bit about that performance in the same store pool.

You know occupancy is sort of flat.

Rents higher you know not a lot of growth is there anything specific that you guys want to point out there.

Yeah.

We talked about you know, we did $7 8 million square feet of leasing them this year and.

66% of it really doesn't go into effect until 2023 or 2024.

And we talked about earlier this year, we talked about the two leases we did it with home depot, which were pretty significant roll ups in rent and that actually we won't see the benefit of that in cash NOI until 2024, So I think.

You know.

Some of that activity just hasn't made its way into 2022, So I think as we start the year well start seeing some of that growth.

Okay.

And then last question for me when you think about.

Be considering some potential asset sales.

Everything on the table or is it are we back to that original pool that you had considered of monmouth's assets or is that now been scrapped and you'll just be opportunistic based on what the market will give you.

We're really looking at everything within our portfolio to see what opportunities. We have so we're not by any means married to the 30 properties. We originally brought out to the market I think if it makes sense, where we can.

Consider a potential disposition.

Any property in our portfolio.

Got you. Thank you. Thank you.

Yeah.

Our next question comes from Michael Carroll with RBC capital markets. Please go ahead.

Yeah. Thanks, Yeah did you indicate that you are currently not marketing any portfolios for sale right now.

Correct.

Now at what point in time do you start thinking about marketing properties for sale I mean, do you need to see interest rates move lower.

There are point in time, where when you are ready to bring something to the market.

I mean, I don't we don't have a set criteria I really just think we need to see more transaction volume.

Ongoing discussions with brokers and both you know kind of across different major brokerage groups and I think everybody generally agrees that it's still early to bring something out in 'twenty. Three so I think as we progress through the year, hopefully there'll be more transaction activity.

And we'll see transactions closing and we'll feel comfortable going back out to the market you know where we've already started a process called the properties. We don't want to do the same thing again.

Okay and then when you are thinking about from some bigger sales I mean is it fair to assume that you're more looking at outright asset sales that could generate maybe better valuations versus the.

The traditional JV is that you had been doing.

I think we're open to either of those options again, I think whatever brings us the highest proceeds we'd be willing to evaluate.

Are you willing to sell from our Hawaiian assets at this point.

No that that's a lever we can pull so and there's you know incredible value in Hawaii. So we would be what we would consider it.

Okay, great. Thank you. Thank you.

This concludes our question and answer session I would like to turn the conference back over to Yahoo. Duffy for any closing remarks. Please go ahead. Thank thanks, everyone for joining us today, and we look forward to speaking with you again soon.

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