Q1 2023 Earnings Call Industrial Logistics Properties Trust
Hello, and welcome to the industrial Logistics properties Trust first quarter 2023 financial results Conference call.
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Now the teleconference over to Stephen Colbert Director of Investor Relations. Please go ahead Sir.
Good morning, joining me on today's call are you I'll, Duffy, President and Chief operating Officer, and Brian Donley, Treasurer, and Chief Financial Officer.
Today's call includes a presentation by management, followed by a question and answer session with analysts.
Please 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 April 26 two.
23, 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 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 financial 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.
A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distributions are available in our supplemental operating and financial data package, which can be found on our website.
That I will turn the call over to you.
You Stephen and good morning, I would like to begin by highlighting the enhanced earnings release format that we issued last night.
We believe that combined presentation of information will be helpful for analysts and investors to efficiently Digest information about our company and resolve them.
On today's call I will review IOP, Ts operating and leasing performance and then turn the call over to Brian to provide an update on our financial results.
We started the year with continued demand for our high quality portfolio consistent with the trends we saw throughout 2022.
Same property cash basis, NOI grew by three 2% compared to the same period last year.
We executed new and renewal leases for one 1 million square feet in total occupancy remained healthy at 98, 7%.
Before we get into the details of the quarter. We wanted to make you aware that home depot, our third largest tenant exercised its termination right on a 2.2 million square foot land parcel in Hawaii.
They agreed to lease from us last year.
The lease was executed in June of 2022 and allowed for a due diligence period that was scheduled to expire on March 30 <unk>.
We remain in active discussions with home depot regarding this site, but have also reengage broader leasing effort there.
This lease termination had no impact on our financial results as we continue to recognize rent from an existing tenant that leases. The site through March 2024, which we believe gives us ample time to release the property prior to the tenant's lease maturity.
Turning to our operating and leasing results.
Imtt's consolidated portfolio includes 413 warehouse and distribution properties in 39 states totaling approximately 60 million square feet with a weighted average remaining lease term of approximately eight years.
During the first quarter, we entered 12, new and renewal leases for approximately one 1 million square feet at a weighted average lease term of $8 nine here.
This activity resulted in GAAP and cash leasing spreads of 15, 1% and nine 5% respectively.
The impact of this activity is an increase of $1 $4 million in annualized rental revenue of which 75% will go into effect in 2023.
These results continue to showcase our ability to generate organic cash flow growth, while maintaining portfolio stability.
Renewals on the mainland for most of our leasing for the quarter, including three renewals, what's that's our largest tenant that total 587000 square feet with a weighted average roll up in GAAP and cash rents of 14, 1% and 12, 6% respectively.
Earlier, this month and its drive Investor event, So that's announced that it plans to consolidate its operating companies into one organization, which will emerge, but that's express ground and several other of its operating companies into Federal Express Corporation.
Our leasing and asset management teams have a strong relationship with Fedex decision maker, who have committed to having an open dialogue with us as they work through their plans.
Furthermore, over 75% of our Fedex portfolio and the associated $96 $9 million in annualized revenue is secure given up long term lease with expirations in 2027 and beyond.
Looking ahead, approximately 18% of Imtt's portfolio is scheduled for roll by the end of 2025, primarily driven by our mainland property.
We are currently tracking 27 deals in our pipeline for more than two and a half million square feet.
Anticipate a near term conversion of 62% of our pipeline given that one 6 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 ups in rent of 20% on the mainland and 30% in Hawaii further illustrating the strength of our portfolio.
Before turning the call over to Brian 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 how long term ESG goals. We are proud of the progress made.
So strengthen I O P T sustainability practices and enhanced our ESG transparency and disclosure you can find links to the complete report as well as an I O P. T specific tear sheet on our website and I L. P T Rieck dotcom Brian .
Thank you Jan and good morning.
Starting with our consolidated financial results for the first quarter of 2023 normalized funds from operations were $7 $9 million or <unk> 12 per share a decline of $19 $7 million compared to the prior year quarter.
The major drivers impacting normalized <unk> over the prior year quarter as higher interest expense, partially offset by a $29 $3 million increase it at a loss.
Adjusted EBITDA increased 53, 6% year over year to $87 million.
These changes were a result of our acquisition and related financing activities a month in 2022.
Total portfolio same property cash basis NOI for the first quarter increased three 2% year over year. The increase this quarter was driven by a favorable change to reserve for uncollectible rents of approximately $850000 and an increase in percentage rents or at one of our Hawaii properties.
Interest expense increased $29 $8 million over the prior year quarter as a result of our financing activities related to Mark the mom with acquisition in 2022.
As a reminder, we have interest rate caps for our $2 $6 billion of floating rate loans at rates continue to exceed the strike rates fixing our interest through the initial maturities in 2024.
Our current estimated quarterly interest expense run rate is approximately $71 million consisting of $58 million of cash interest expense and $13 million of non cash amortization of financing financing costs, including the interest rate caps.
Turning to our balance sheet, including extension options Opt's weighted average debt maturity of six years with no maturities until 2027.
As of March 31, our total debt either carried a fixed rate or fixed through interest rate caps with a total weighted average interest rate of five 4%.
We currently have $61 million of cash on hand, excluding the cash held by our consolidated joint venture and amounts Ashford under our debt agreements.
Capital expenditures for the fourth quarter were $4 $9 billion, including $2 $5 billion of development cost $2 million of tenant improvements and leasing costs in Florida thousand doors of building improvements.
In closing, we're focused on our operations and continue to monitor market conditions for potential dispositions and deleveraging opportunities are.
Our portfolio remains strong with exceptional tenant roster near full occupancy and rising rents across our portfolio.
That RPT will continue to benefit from industry demand for high quality industrial real estate that concludes our prepared remarks operator. Please open the line for questions. Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the.
Keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Bryan Maher with B Riley FBR.
Thank you good morning, guys and Brian maybe a question for Brian to start on the interest rate yeah. Its a big topic. These days and you kind of walk through the cash component and the noncash component.
As we think out to 2024.
And.
Let's assume that you.
Exercise their extension options and you have to make you know pay for new caps, how should we think about that noncash component of the amortization and the cost of the new caps and let's just say you assume you'll have to do that you know at today's rates you know how should we think about interest expense next year.
Under that scenario.
Thanks, Brian Good morning, So it's a good question.
As we look at the interest rate caps, and how that accounting works, you're essentially buying down the interests too.
To maintain the same strike rate for the next one year period, if we were to buy a cap today, you know I would estimate a one year cap based on today's sulfur curve anywhere from 10 to 20 million, it's a very volatile market and interest rates as you know can change on a whim.
But the way that will work is the amortization of the current capital expire and I will note, especially on the MBS well than we did in September that cap was very expensive right now.
$50 million.
Yeah, so the amortization of that cap there could be a favorable change in what we're where we're recognizing for interest expense if the cap for one year is cheaper.
Yeah. So that's the best guidance I can give today that you know hopefully the the rates continue the forward curve continues to decline in the price of those caps decline because theyre not cheap today.
Right. That's helpful and you know another company that we cover here last.
Bought some caps or some hedges or did something I'd have to go look it up last year, knowing that caps on it you know it would expire this year on loans that they were gonna extend is there anything that you're looking at given the 10 year at 340 today that you could do today that would lock in something for an.
And for next year.
Yeah. That's that's that's that's a that's a good question, it's not something we're considering I think all pundits would say that interest rates are expected decline at some point in the future.
The forward curve is what drives the pricing on our cap yeah, It's something we talk to different people on what that could look like in a year.
For us as well.
We're going to give it some more time on what the backdrop settled and hopefully over the next few quarters.
Okay, and maybe shifting gears can you elaborate a little bit more maybe I'll on the.
Home depot termination.
You know it seems like you're still engaged with them and they just simply looking for a lower price and maybe how deep is the benches are potential tenants to take that space. If you can't come to an agreement with them.
Thanks, Brian .
This is a unique circumstance, where we generally don't allow for diligence periods than in termination rates in our leases and you know with home depot. This is a very large parcel of $2 2 million square feet and they had done some diligence.
Now as I think we mentioned earlier there are planning on putting a warehouse and distribution facility on the site. So they they just needed a little more time on their you know their planning and stuff.
As I mentioned they didn't they didn't give us the reason why they terminated but I think they realized at that site would be really essential as they grow their network and they remain interested but.
As I mentioned, we we have started engaging the broader market and I think I think the reasons why home depot like this site. Another you know mainland retailer would also find it attractive.
And I think our chances are good and that's part and.
Park woven James Campbell Industrial Park, and as of Q1, it had less than a half percent.
Vacancy. So you know I think that provides us with a competitive advantage to release it.
And just last for me you mentioned the 2007 deals in that that you're tracking two 5 million square feet for the next couple of years really saying he said something about 62% conversion anticipated.
Am I to assume from that of the properties or tenants that you've engaged in that 38% are looking to renew and what are the prospects for those properties.
No.
No that's actually not not what I meant so we have in our pipeline in 'twenty three 'twenty four exploration we actually.
Had very minimal expirations in the next couple of years and so.
That's mostly 'twenty three and 'twenty four and so we just have we've engaged them.
With with them early and.
The ones that are 62% likely to execute or just the ones that we have assigned LOI over and we're negotiating a lease.
Yeah.
Okay. If you had to put some kind of probability on the level of renewals from those that are expiring, yeah give or take five percentage points, what what do you anticipate that being.
So currently today, we only know of three properties, where the tenants likely to vacate and it represents less than half a percent of Iot teeth annualized revenue about.
240000 square feet.
Perfect. Thank you yep.
Thank you and the next question comes from Mitch Germain with JMP Securities.
Hi, Good morning, appreciate the new disclosures.
Wanted to talk about <unk>.
Revenues, Brian I know you talked about a reserve and a percentage rent from Hawaii, So assuming the reserves or kind of a one timer what about the percentage rent is that just going to be.
A one time benefit in the quarter.
Yeah.
Tenants paying percentage rent annually.
Yeah, we've got tenants.
Second increase in their revenues they were lower as a percent of variety could repeat next year, but it's a percentage rent that could be it could disappear as well. So it's not something all of us and so we're driving for but we will receive some form of percentage ramp at that time it.
What's the dollar amount of that.
Yeah, we had an increase of $680000 and change.
Year over year quarter over quarter.
Okay. So about $1 5 million of revenues. This quarter that are non recurring is that the way to think about it.
Yes.
Okay.
I I saw par Pacific you know entered your.
Top tenant list anything you can provide some perspective there.
No I think it's just with home depot.
You know what that lease terminating that was $2 2 million square feet. They just moved up in the ranks.
Gotcha.
Okay, and you talked about the leasing spreads Yale you know, 9%, but then you referenced Fedex was a bit higher I think it was 12. So you know what and I think it looks like Fedex was about half of your leasing in the quarter. So you know kind of.
What was on the lower end anything specific that we should be noting there or any trends that we should be worried about.
No I you know it is you know when we do renewal leasing.
Some.
Definitely in Hawaii those are smaller.
Right.
In certain instances the rollout just aren't.
Big and we had a couple leases in Hawaii.
On the renewal.
Okay, you know given where your cost of debt is today.
You know is there any thought about maybe pursuing some one off sales.
Now that the market is at least kind of digesting the higher rates and it seems to be stabilizing a bit.
Yeah, we're constantly evaluating opportunities we've had you know a lot of inbound.
Inquiries from opportunistic buyers looking and we're evaluating all of those on a case by case basis. I think you know I think that's still a period of price discovery in our transaction volume is considerably down year over year I.
I think upwards of 55% so.
I think if the opportunity presents itself and it makes sense, we will but I think we're still holding holding Titan are going to be patient until we have a little more data.
Thank you.
Thank you.
Thank you and once again, please press star and then one if you would like to ask a question.
And the next question comes from on D. G Welsh Undrawn with RBC capital markets.
Hi, Good morning can you talk a little bit more about what you're seeing the transaction market right now and what exactly what needs to happen or change for you to bring something to the market.
Yeah.
Yeah, I mean, you know what.
We have really a big network of brokers capital market brokers, we have a you know acquisitions and dispositions team or that are very close to the market and.
There just hasn't been a lot of deals closing and so.
Again, I think until there.
More price discovery I think we're just waiting till I mean again I think from what we hear things might start to open up in Q2 Q3 and.
Interest rates kind of settle I think the banking crisis kind of put a little bit of a <unk>.
Low down in the process.
So hopefully in the next quarter or two well we'll have more data.
Okay got it and.
Is it fair to assume that you're thinking about like some of the outright asset sales or what were you what are your thought process on that.
I think any way, we can maximize value I think we're open to a portfolio, but again I think with financing being hard to come by I think you know that's a limited buyer pool also.
Again, we have a robust team that can execute on individual sales.
We're we're fine to go that route if we can maximize value.
Okay, great. Thank you.
Yeah.
Thank you. Our next question on the power from Mitch Germain with JMP Securities.
Sorry, I couldn't help myself.
Yeah, what happened with home depot in Illinois.
I know you talked about Hawaii, yeah. So they they they came to their natural lease expiration when we actually bought the Monmouth portfolio, we knew that to be a known vacate.
We're in active discussions with another tenant and we're hoping to be able to lease it this quarter.
Right appreciate it yeah.
Thank you and we all saw far from Bryan Maher with B Riley FBR.
Yeah, just to Joe just a quick one.
As it comes to thinking about potential dispositions or JV partner.
The war, you know putting assets into a JV that you've already established are you still actively engaged in as a JV partner or sovereign wealth funds that you'd had dialog with our worked with in the past and what's their level of interest currently.
As you know we have you know we have a couple of JV is in place and we're in active discussions with them because we're managing the JV is what's that for them, but for bringing on additional partner, especially for the mountain JV.
Theres been no discussion.
You can see from our financial supplemental disclosures.
JV is not currently cash flowing so it would be hard to make it attractive for a new partner.
But given the fixed rate debt on that and you know a valuation. That's you know you can tell me maybe north of a 1 billion five.
What would the appetite be there for I O P T.
Yeah, I think we're I mean, we're really evaluating anything that could help with our deleveraging. So that's not off the table, but we're not in any active conversations right now.
And can you share with us what you think that that property is worth currently in Hawaii, maybe give or take $100 million.
Thank you our assumption was correct if not a little while.
Perfect. Thank you.
Thank you and this concludes our question and answer session I would like to turn the call over Y'all Duffey, President and Chief operating officer for any closing remarks remarks.
Thank you everyone for joining us on the call today, we look forward to speaking with many of you at NAREIT in June .
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phone lines.