Q2 2023 Industrial Logistics Properties Trust Earnings Call
Good day and welcome to the industrial lot Logistics property Trust second quarter 2023 financial results Conference call.
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I would like now to turn the conference over to Stephen Colbert Director of Investor Relations. Please go ahead Sir.
Good morning.
Joining me on today's call are Y'all, 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 July 26, 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.
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> adjust.
Adjusted EBITDA.
And cash based net operating income or cash basis NOI.
This quarter, we are also introducing our calculation of cash available for distribution or <unk>.
A reconciliation of these non-GAAP figures to net income is available in our supplemental operating and financial data package, which can be found on our website.
And with that I will turn the call over to Yahoo.
Thank you Stephen and good morning on today's call I will review I O P. Ts operating and leasing performance and then provide an update on our disposition activity before turning the call over to Brian to discuss our financial results.
As we enter the second half of the year, we remain encouraged by the continued demand for Iot teeth high quality portfolio and the strength in the industrial real estate in real estate fundamentals in.
In the first six months of 2023, we signed 32 leases totaling more than $3 1 million square feet at weighted average rental rate that were 23% higher than prior rental rates for the same space.
The impact of this activity is an increase of $4.8 million in annualized rental revenue of which more than half will take effect in the second half of 2023 are in 2024.
These results along with a tenant retention rate of 87% showcase our ability to generate organic cash flow growth, while maintaining portfolio stability.
As of June 32023, our portfolio, which consists of 413 warehouse and distribution properties achieved 99.1% occupancy representing a 40 basis point increase sequentially.
During the quarter, we executed 17, new and renewal leases and three rent resets for nearly 2 million square feet at a weighted average lease term of eight nine years.
This activity resulted in GAAP and cash leasing spreads of 29, 6% and 10, 2% respectively.
Highlighted in these results is the robust activity within our Hawaii portfolio, what are the market vacancy rate under 1% strong tenant demand and minimal new construction in the pipeline, we have been able to take advantage of mark to market opportunities we.
We executed 855000 square feet of leasing in Hawaii, our weighted average rental rates that were 41, 7% higher than prior rental including five new leases totaling 195000 square feet and increases in rent of 62, 2%.
Leasing in our wholly owned mainland portfolio was also strong with total leasing of approximately 428000 square feet, including one new lease and three renewals a weighted average roll up in rent of 50% and 36% respectively.
Looking ahead 12 million square feet or 16% of I O T. T. Total annualized revenue is set to expire through 2025.
We believe there is ample opportunity to increase cash was consistent with the 30% roll up in GAAP rents, we achieved over the past 12 months.
Turning to transactions among the most frequently asked questions. We receive is when we expect to resume our disposition program to reduce leverage.
Based on what we are seeing firsthand and through discussions with brokers. We believe the market has slowly begun to thought as investors look for opportunities to deploy capital.
We consistently receive unsolicited offers for the high quality properties in our portfolio.
However, given we are not a distressed seller it isn't as simple as finding a buyer as we evaluate each opportunity our ability to transact is dependent on pricing and the impact of our financial position.
For each offer we may receive we compare the potential transaction price to the allocated loan amount under our debt agreements and confirm that we can maintain the required debt service coverage ratios. Additionally.
Additionally, potential tax gains and the impact to our overall liquidity needs to be considered as.
As such disposition opportunities have been limited in this challenging sales market.
Given these obstacles we are happy to report that we currently have three properties too that are encumbered totaling 762000 square feet under agreement to sell for an aggregate sales price of $65 $3 million.
We hope to continue to improve our financial position with additional disposition opportunities. However, we expect activity activity to be limited in the short term I'll now turn the call over to Brian .
Thank you Jan and good morning, everyone.
Starting with our consolidated financial results for the second quarter of 2023 normalized funds from operations was flat on a sequential basis of 12 <unk> per share a decline compared to the prior year quarter, primarily as a result of our higher interest expense incurred under our floating rate debt.
Yes.
Cash available for distribution in Q2 was $9 $8 million and adjusted EBITDA was $81 $3 billion for the quarter.
Our leasing activity generated increases in cash rents for our comparable portfolio of $1 8 million or two 2% per year year over year. However, our rent growth was partially offset by operating expense increases which resulted in a net 50 basis point increase in total portfolio same property cash basis NOI for the <unk>.
Second quarter.
Comparisons with same property GAAP NOI were negatively impacted by a $3 $4 million write off of below market lease liability in the prior year quarter related to a lease termination.
Interest expense increased $24 $6 million compared to the prior year quarter, excluding the impact of the amortization of British low cost recognized in the prior year.
This quarter, we executed on a cash out refinancing within our consolidated joint venture.
Yes, the new $91 million fixed rate interest only model and secured by four properties that bears interest at six 5% and used as part of the proceeds to repay for amortizing loans with a total principal balance of 35 $49 million.
As a result of our current estimated quarterly interest expense run rate is approximately $73 million consisting of $60 million of cash interest expense of $13 million of noncash amortization of financing costs.
It's the same interest rate caps.
Turning to our balance sheet.
Including extension options <unk> weighted average debt maturity is five five years with no maturities until 2027.
As of June 30 of our total debt carries a fixed rate or fixed through interest rate caps for total weighted average interest rate of 546%.
As John mentioned, we have three wholly owned properties under agreement for sale for $65 $3 million.
So I mean, those transaction closed $42 million of the proceeds from two of the properties will be used to repay a portion of the $1 2 billion.
Floating rates your MBS well.
Yeah, Mark to release the property from the collateral pool under this loan is the greater of 115% of the allocated more value under our debt agreement or the net sales proceeds.
We also need to maintain the overall debt service coverage ratio that was in place when the loan was underwritten.
These dispositions of LPG can transact without needing to contribute additional cash to maintain the loan covenants.
So we currently have $71 $7 million of cash on hand, as well as $138 $7 million of restricted cash in our consolidated joint venture we continue to look for opportunities to build our cash reserves.
Accordingly, the proceeds from the sale of a one unencumbered asset would be help to further enhance our liquidity.
In closing our portfolio remains strong with an exceptional tenet roster, therefore occupancy rising rents across our portfolio and we expect that <unk> 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.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one or two it's that touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys you said anytime. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please hold while we collect question.
The first question comes with Bryan Maher with B Riley Securities. Please go ahead.
Thank you good morning, Yale and Brian just a couple from me. This morning, you know when we think about the asset sales and building cash reserves and paying down some debt.
How big of an opportunity do you think that that is over the next couple of few quarters.
Good morning, Brian I think we're reviewing you know opportunities.
Opportunities as they come.
Two of these two of the properties on the disposition.
Less.
Came through.
Our leasing efforts I'm one of the properties are they getting the other soon to be vacant. So we haven't launched a formal disposition campaign and so we're continuing to evaluate pricing and our portfolio and see what other opportunities. We have so I don't have.
Have you know a number for you to perfect.
And I suspect that when you chip away at that with some asset sales over the next let's say 12 to 15 months before the first extensions would be due on some of your variable rate debt that that's going to potentially lower the cost.
Future caps needed.
To get those extensions done maybe Brian you can talk about for a second you know if we were to sit here today and have to redo those caps to get the extensions you know what the cost might be relative to what you had to pay last year, just just some broad stroke ideas.
Sure Brian Thanks.
We talked about this last quarter.
Buying an interest rate cap.
It's a very volatile instrument the pricing changes.
Week to week day to day, and I think last quarter I might have quoted something around $50 million.
We consult with their various experts on this.
Our current estimate today.
On the on the $1 4 billion floating rate debt could it be anywhere from $17 million to $20 million. If we were to buy that say, it's absolutely again it changes with the wins so it's very important for us.
To continue to build cash reserves, but to your other point, yes, if we were to chip away at the debt and repay.
Yes meaningful amount the cost of that cap would also decline because it's based on the principle the notional amount of principal debt that youre, taking good that youre Kathryn.
And just maybe two more quick ones for me on the rent roll ups I mean those are pretty.
Yeah, Juicy roll ups for the second quarter, what do you think it would be for the full year. When we look back at when we think about two Q do you have something in your mind for what you think it is for all of 2023.
I think we're hoping that it's you know somewhere between 25% to 30% for the year.
On a GAAP basis.
Okay and just my last question the Blackstone deal to sell 3.1 billion and in warehouses and industrial asses the pro largest.
When you look at that transaction does it seem like more of a one off on the part of Blackstone to raise capital relative to you know some of the capital Yeah, theres been called away from them and be read et cetera.
Or is there something else going on there as it relates to demand for assets and that's all for me. Thanks.
You know I think industrial in general along with multifamily is probably the most in favor asset class. So if investors are looking to deploy capital I think it's been one of those categories. So I think.
It's promising for the industrial landscape.
I think that deal you know it was a huge deal and you know in speaking with brokers, we're seeing they're seeing that you know more one off deals are coming into the market, but they havent seen the big our portfolio. So I think time will tell and I think everybody kind of.
Looking for you know September to get here and see what that brings because generally the summer is slow.
Okay. Thank you.
Yeah.
Next question comes with Mitch Chairman with G. M. P Securities. Please go ahead.
Hi, good morning.
I'm trying to understand some of the puts and takes in your same property growth.
And despite some of these pretty you know healthy rent spreads that you are getting on these leases.
Your revenues are only up from prior year about less than 1%.
But your operating expense is up significantly more so I'm just trying to understand kind of when does this upside in rents begin to materialize in.
Have a meaningful impact on your rental income.
Yeah. Good morning. So you know I think some of these rollouts. We've we've had that historically were doing were not seeing the cash impact right away because we're doing deals ahead of lease expiration. So you know for the activity. We've done so far this year I think almost two.
<unk> will be in the later half of the year and into two.
2024.
So I think that's impacting some of the growth and we're not seeing it you know this quarter am I think also you know as far as the expenses, though I think some we have some very sophisticated tenants that when they negotiate their leases they put caps and for how much.
<unk> expenses can get passed back from maintenance and repairs and so I think there is a little bit of leakage on the expense side.
Okay and then.
With regards to your explorations in the back half of the year is there any thing that of note that we should be.
Aware of I mean, you've had almost a 90% retention rates. So far so was there any kind of plan move outs that we should be aware of.
So we know of them too to known Vacates in the second half of the year both of those properties actually have pretty good activity on that one has a signed LOI and the other I think we should trade at a couple of proposals with prospective tenants. So there isn't anything that should be.
All over.
Right right. Okay cool I appreciate the extra color in terms of kind of suggest you know kind of where mark to market is going.
How should we think about that though if if we like bifurcate.
Mainland versus Hawaii.
Yeah. So you know as you know Hawaii has always been really strong for us and so I think.
You know, 30%, 40% roll ups in Hawaii.
Going forward or would not be surprising I think you know 30% on the conservative side I'm on the mainland. We had you know really good leasing results this quarter.
Now.
It's 40% on the mainland from a GAAP perspective, and even on the cash perspective, it was 30.
30%.
I think it really depends market tomorrow market to market I think we have some areas like you know Memphis, South Carolina that we've been seeing huge roll ups in rent and others that have been you know single digits them. So I think 10% is probably a good.
Estimate for the mainland.
Thank you.
Do you.
Thank you. The next question comes with Camille go now with Bank of America. Please go ahead.
Hi, Good morning, I'm just following up on yeah. All your response to an earlier question about how like the leasing spread impact you'll you'll see that start to <unk>.
Follow through in the back half of this year can.
Can you just speak to why like you think tenants are willing to renew their leases. So far in advance I think in some cases, you've been signing leases like 18 months, plus which really differs from your some of the peers strategies in the market currently.
<unk>.
Yeah. So I think in Hawaii generally the tenants are more or are they kind of wait till the last minute generally because there are smaller tenants in there.
You know, it's just they're kind of running their business and they don't have you know a whole team focused on their leasing efforts.
I think for the mainland you know these are large.
Property that are very important to the tenant's business and you know they need to make sure that if they're going to not be able to do a renewal with us and we can't come to terms, they're going to have to move their operations and you know if you're a million square feet, it's really hard to wait six months out if you have to.
You know relocate and build all the infrastructure again, so that is I think generally why we're starting negotiations early plus we also want to have an indication if a tenant is not going to renew we wanted to limit our downtime because by the time you hire a broker start marketing it.
You need to do any work.
No.
Multi tenant the property potentially that takes time and we're trying to limit our downtime.
That's helpful.
And what are you seeing in terms of market rent growth, particularly in the mainland U S.
About 10%.
Again, it depends market to market you know some are higher some are little bit lower but are continuing to be you know have been able to continue to push rents.
And has that changed because I think that 10% is on an annual basis. So have you seen any change sequentially.
No I think they know what we've been seeing more as the tenants are taking a little longer to make a decision and I don't know if that's just the impact of the summer you know people generally this is a slow time for leasing because people are on vacation, but no. We haven't seen we haven't seen it.
Tenants pushing back.
Alright, and lastly, do you have any update on the interim.
Interests around the space in Hawaii that home depot was gonna taken 24.
Yeah. So we've officially launched it at the beginning of the month and we've gotten a lot of inbound calls.
Mostly from mainland tenants looking to kind of have a presence in Hawaii. So we feel optimistic.
That will be able to get that released ahead of the March 2024 lease exploration.
Thank you.
Thank you.
The next question comes with Michael Carroll with RBC capital markets. Please go ahead.
Yeah can you quickly touch on your financing strategies I guess, what's the reasoning for for issuing the $90 million of secured debt and repaying. The the smaller balances balances are outstanding and that I think it was like $30 million that you repaid.
Looked like that $30 million was going to expire in 2020 or in 2030 timeframe.
So it was just a way for you to get more cash or was that the whole goes down and the reason why you're willing to give up that lower interest rate debt.
Hey, Michael Thanks for the question, Yes, that's exactly right. It was an opportunity to actually improve our cash flow.
The coupon and the interest expense.
Steven will go up because of the rate differential but again, it's not the new loan is interest only versus amortizing principal payments over those other mortgages, so as a way to capture some cash.
Well as improve ongoing cash flow available to the company. So that was the thought process there.
Okay.
And then on the asset sales that you announced I guess, how much NOI from those properties were generated in into Q. I know you said one was vacant and one was soon to be vacant, but when we're looking at our models I mean.
What was the the trailing cap rate on those assets that we cannot assume kind of flows out of the run rate estimate going forward.
So one of the properties is actually is our development partner.
Project in Mesquite, Texas, though that also had no cash flow associated with it and the other one as I mentioned was a small property that was formerly leased to Fedex. It was also not cash flowing.
And the other one is in Indiana.
Bigger property and 535000 square feet that was scheduled to be vacant in June of 'twenty, four and we had about $3 million and NOI for that property.
Is that an annualized number or a court in New York.
Yes annualized.
And then you know when you start looking at potential asset sales I know you said earlier that you haven't started a process yet to sell properties. I mean, do you need to start thinking about pursuing something like that before the interest rate caps expire or are you willing to kind of kind of continue to kick the can down the road I'm waiting for a better mark.
Before you, even think about bringing properties to market yourself.
Yeah, we have no we have no urgency you know we feel that we have the cash reserves to buy the cap with what we have today the cash on hand today. So I think we will be patient until we get a better sense of the market, but the capital markets has really opened.
Yeah, we wanted to make sure we actually we want to make sure we actually de lever, but with any transaction.
Sort of outlined in our prepared remarks, there are multiple considerations before.
We have a transaction.
Relation as everybody.
And what do you have to see if are you willing to willing to bring assets to the market. I mean, do you need to see interest rates stabilize or do you need to see them actually start to tick lower from this point.
I think it's more just to understand what the market is I think there is still price discovery I know you know the Blackstone deal was a big one but it was also a one off and so I think we're kind of waiting to just get more.
Data.
Okay Alright.
Alright, thank you.
Thank you.
Thank you all this concludes our question and answer session I would like to turn the call back over to Yale adult Duffy for any closing remarks. Please go ahead.
Thank you for joining us on the call today and hope to speak with many of you soon.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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