Q3 2024 Industrial Logistics Properties Trust Earnings Call
Speaker Change: Good morning and welcome to the Industrial Logistics Property Trust 3rd quarter, 2024 financial results conference call.
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Speaker Change: After today's presentation, there will be an opportunity to ask questions.
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Speaker Change: is not, the current has been more forward.
Speaker Change: I would like to talk with you all about the call over to Mr. McCarthy, Manager of Investor Relations. Please go ahead.
Jordan McCarthy: Thank you, Jordan. Good morning. Joining the on-states call our IELPP president and chief operating officer, Yael Duffy. Chief financial officer, and treasurer Tiffany Sy, and vice president Mark Crone.
Jordan McCarthy: Today's call includes a presentation by management, followed by a question and answer session with analysts.
Jordan McCarthy: Please note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.
Jordan McCarthy: Also, please note that today's conference call contains four living statements within the meaning of the Private Security Litigation Reform Act of 1995 and other securities laws.
Jordan McCarthy: These four looking statements are based on ILPT's beliefs and expectations as of today, October 30, 2024, and actual results may differ materially from those that we project.
Jordan McCarthy: 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.
Jordan McCarthy: Additional information concerning factors that could cause those differences is contained in our findings within the Securities and Exchange Commission, or SEC, which can be accessed from our website, ILPTREACH.com.
Jordan McCarthy: Investors are cautioned not to place under-reliance upon any forward-looking statements.
Jordan McCarthy: In addition, we will be discussing non-GAAP financial measures during this call, including funds from operations, or FFO, adjusted EBITDA RE, and cash-basis net operating income, or cash-basis NOI.
Jordan McCarthy: A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website. With that, I will now turn the call over to Yael. Thank you, Melissa, and good morning.
Yael Duffy: On today's call, I will start with a high-level update on our portfolio and third-quarter operating performance before handing it over to Mark to discuss our leasing achievements. From there, Tiffany will review our financial results.
Yael Duffy: We remain encouraged by the continued demand for ILPT's high-quality portfolio and the strength in industrial real estate fundamentals.
Yael Duffy: We delivered strong results in the third quarter, with year-over-year growth in key metrics, including FFO and cash basis NOI.
Yael Duffy: Given many of our leases have contractual escalations and we have illustrated a track record of capturing rent growth through our leasing efforts, we believe there is embedded opportunity to drive organic cash flow growth.
Yael Duffy: As of September 30, 2024, ILPT's portfolio consisted of 411 distribution and logistics properties in 39 states, totaling approximately 60 million square feet.
Yael Duffy: Our strategically diversified portfolio is highlighted by our unique Hawaii footprint consisting of 226 properties totaling more than 16.7 million square feet.
Yael Duffy: Our portfolio carries a weighted average lease term of eight years and is anchored by tenants with strong business profiles and stable cash flows.
Yael Duffy: ILPT's top 10 tenants account for nearly half of our total annualized rental revenues and 77% of our annualized revenues come from investment grade rated tenants or from our secure Hawaii land leases.
Yael Duffy: Last week, American Tire Distributors, our fourth-largest tenant representing 1.6% of ILPT's annualized revenues, filed voluntary Chapter 11 proceedings as it contemplates a restructuring agreement with an ad hoc group of its lenders.
Yael Duffy: American Tire has publicly indicated that it will continue to operate across its nationwide distribution network.
Yael Duffy: Within our portfolio, all rent obligations have been paid and the five properties they lease from us are being fully utilized.
Yael Duffy: At quarter end, our consolidated occupancy was 94.4%, a slight decrease from the second quarter.
Yael Duffy: primarily due to the previously disclosed 535,000 square foot property located in the east sub market of Indianapolis that became vacant in July.
Yael Duffy: Leasing this vacancy along with the 2.2 million square foot parcel in Hawaii that became vacant on April 1st are among our top priorities.
Yael Duffy: Also impacting our GAAP NOI results this quarter is a $1.3 million non-cash charge resulting from the early termination of one tenant, which leaves two parcels within our Hawaii portfolio.
Yael Duffy: After the end of the quarter, we were able to execute a new lease with a replacement tenant for one parcel, and are negotiating a lease for the other parcel, both at average roll-ups and rent of 48%.
Yael Duffy: These results continue to highlight the scarcity of land, persistent demand, and value of our Hawaii real estate.
Speaker Change: In the third quarter, strong relationships with key tenants, such as FedEx, drove much of our leasing momentum as we executed over 2.7 million square feet of leasing at weighted average rates that were 7% higher than prior leases, with a weighted average lease term of five and a half years, which Mark will provide more detail on momentarily.
Speaker Change: We intend to continue capitalizing on the attractive operating environment to deliver favorable leasing outcomes.
Speaker Change: While near-term expirations are minimal, with approximately 4.5% of total annualized revenues scheduled to expire through 2025.
Speaker Change: We plan to address expirations in a way that will maximize mark-to-market rent growth while minimizing potential downtime and capital costs.
Speaker Change: Lastly, earlier this month, ILPT announced that it would maintain its quarterly cash dividend at a penny per share.
Speaker Change: In recent months, we have been frequently asked when we expect to increase our dividend. We recognize the value of the dividend to our investors, and it is a topic that we discuss regularly at both the management and board level.
Speaker Change: However, as ILPT does not have a credit facility, we feel it is important that we have ample liquidity and financial flexibility to address future leasing costs, capital expenditures, and obligations under our debt agreement before increasing the dividend level.
Speaker Change: With that, I'll turn the call over to Mark.
Mark Crone: Thank you and good morning everyone. As Yael mentioned, our third quarter leasing activity totaled more than 2.7 million square feet.
Mark Crone: which was highlighted by 13 renewals with our largest tenant FedEx encompassing over 2 million square feet across eight states at average lease term of 5.1 years and a gap roll-up in rent of 4.5 percent.
Mark Crone: This mutually beneficial renewal provided ILPT with cash flow security with no leasing concessions in the form of free rent or tenant improvements.
Mark Crone: In return, FedEx was able to secure strategic locations within its network as it continues to execute on its optimization plan it announced in April of 2023.
Mark Crone: Since we acquired Monmouth Real Estate Investment Corporation in February 2022, we have executed 33 leases with FedEx totaling nearly 3.8 million square feet.
Mark Crone: Furthermore, over 94% of our FedEx portfolio and the associated $121 million in annualized revenue is secure given it is long-term lease with expirations in 2027 and beyond.
Mark Crone: We believe this reinforces ILPT and RMRS commitment to fostering strong tenant relationships, addressing our tenants' needs, and being a landlord of choice.
Mark Crone: We also executed renewals with tenants in key markets, including a 302,000-square-foot burla renewal in Charleston, South Carolina, and a 125,000-square-foot renewal in Columbus, Ohio.
Mark Crone: In aggregate, these two renewals represent an average gap rent increase of 18% with a weighted average lease term of 6.4 years.
Mark Crone: Nearly all of our remaining 2024 expirations have been addressed, with only 79,000 square feet set to expire.
Mark Crone: As we look ahead to 2025 and 2026,
Mark Crone: 6.9 million square feet or 9.5% of ILPT's total annualized revenue is set to expire.
Mark Crone: We are currently tracking 39 deals for over 8.3 million square feet, of which 3.2 million square feet, or 38%, is in advanced stages of negotiation or lease documentation. Now, I'll turn the call over to Tiffany.
Tiffany Sy: Thank you, Mark, and good morning, everyone.
Tiffany Sy: Yesterday, we reported third quarter SFO of $8.1 million, or $0.12 per share, representing an increase of 1.5% compared to the same quarter in 2023.
Tiffany Sy: Third quarter NOI decreased by 0.7%.
Tiffany Sy: to $84.7 million and cash basis NOI increased by 1.1% to $82.5 million compared to the same quarter in 2023, while adjusted EBITDA RE increased by 0.9% to $83.9 million.
Tiffany Sy: In October 2024, we exercised the first of our three one-year extension options for a $1.2 billion floating rate loan.
Tiffany Sy: As part of the extension, we purchased a 1-year interest rate cap for $17 million with a SOFR strike rate of 2.78%, replacing our previous cap with a rate of 2.25%.
Tiffany Sy: The cost of this cap was less than previously expected as a result of the Fed's interest rate cut in September. Additionally, the lender allowed for the higher strike rate based on the strong performance of the property securing the loan.
Tiffany Sy: We expect that further interest rate cuts will lower the cost of any caps that we may purchase in the future and provide us more flexibility as we evaluate opportunities to reduce leverage.
Tiffany Sy: During the third quarter, we paid $58.8 million of cash interest expense, net of the cash we received from our interest rate caps, and recognized $15.1 million of non-cash amortization of financing and interest rate cap costs.
Tiffany Sy: We expect our four-quarter interest expense to decline from $73.9 million to approximately $72 million, reflecting the impact of the new interest rate cap.
Tiffany Sy: Turning to our balance sheet.
Tiffany Sy: As of September 30th, our net debt-to-total-assets ratio was 68.1%, an improvement of 40 base points compared to a year ago, while our net debt coverage ratio declined to 12.1 times from 12.3 times in the third quarter of 2023.
Tiffany Sy: Total cash, excluding $101 million dollars of restricted cash, was approximately $154 million dollars.
Tiffany Sy: We expect to use this cash to fund future leasing obligations and provide us with greater flexibility when evaluating our financing options, which may include purchasing interest rate caps in the future. As a reminder, including extension options, ILBT has no debt maturities until 2027.
Tiffany Sy: Looking ahead, we expect that our strategic leasing approach will continue to result in strong tenant retention and generate stable cash flows that support our operations and deleveraging efforts. That concludes our prepared remarks. Operator, please open the line for questions.
Tiffany Sy: Thank you.
Speaker Change: We will now begin the question and answer session. To ask a question you may press star, then 1 on your telephone keypad. If you are using.
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Speaker Change: The first question comes from Brian Maher with B. Reilly FBR. Please go ahead.
Brian Maher: Great, thank you and good morning. Just a few for me today. I just wanted to drill down a little bit more on the interest rate cap cost. So with $17 million, I think we had been modeling for like $27.5 just to be conservative.
Speaker Change: But you're going to pay a higher interest rate. And, you know, rough calculations may be...
Speaker Change: So kind of 17 plus 6 is 23, so still below what we were thinking, but can you talk about how you were thinking about the tradeoff in pricing versus interest rate?
Speaker Change: Sure. Also, good morning.
Speaker Change: So our interest rate for this particular loan is going to increase to 6.71% and our weighted average for ILPTs that overall will be around 5.5%. Our lender...
Speaker Change: determines the strike rate on our cap based on required debt servants coverage ratio and so as I said in a prepared remarks
Speaker Change: based on the performance of the properties that
Speaker Change: secure the loan, you know, they allowed for a higher strike rate of 2.78%. So, we were actually pretty pleased to be able to save some upfront costs with that $17 million price tag. Effectively,
Speaker Change: we are able to defer interest rate payments and so we will pay interest as it comes due but that's how we thought about that. We were pleased to save up front costs.
Speaker Change: Okay, kind of what I thought. Moving on to leasing Hawaiian Indianapolis, Yael, I think you said, or maybe Mark, 2025.
Speaker Change: Can you be a little bit more granular there? Is it, you know, second quarter? Is it third quarter? You know, I know you want to be conservative, but you know, it's a pretty wide gap for modeling purposes.
Speaker Change: Yeah, hi Brian. I think...
Speaker Change: The reality is, especially for the Hawaii land parcel, there's just a lot of diligence that any prospective tenant will have to do to evaluate what it's going to cost them to execute on their business plan for that.
Speaker Change: parcels. So while we're having discussions, a lot of it depends on the timeline for the tenants.
Speaker Change: So I would say the second half of the year for 25 would be probably more most realistic for Hawaii and then for Indianapolis I think we could be able to be in a position probably in the first half of 25.
Speaker Change: Okay
Speaker Change: And so the American Tire commentary that you made, I'm assuming based upon what you said that there are no expected vacates there, correct me if I'm wrong, and are there any known vacates that we should know about over the next 12 months?
Speaker Change: From what we know today on American Tire we expect them to, I mean they're utilizing the properties and we expect that they won't reject the leases but again it's very early they just made the announcement last week and then there are there's nothing else material from a known vacate perspective.
Speaker Change: Do they have the ability in the bankruptcy process to, I'm sure they probably do to some degree, to request a lower rent rate? And if they did, could you tell them to, you know, go pound sand and, you know, vacate?
Speaker Change: Yeah, I mean, you know, as part of their bankruptcy proceedings, I think they can come and try to negotiate with the landlord and it would be our decision if we want to do that.
Speaker Change: I guess I would just note, you know, American Tire has been in this position before. They filed for bankruptcy in 2018 and actually leased.
Speaker Change: these same properties from us, and they didn't reject the leases at that time and have since renewed all of them. So there's we take some comfort in that as well.
Speaker Change: Okay, just two more quick ones for me. You know, as it relates to the Mountain JV, I know there's a 39% JV partner and
Speaker Change: as it stands now, and I'm sure we could probably back into them roughly, but do you have the numbers on what Net-Zeta EBITDA would move to should you be able to deconsolidate that JV?
Speaker Change: There are a lot of factors that we would have to consider, so we don't have exact numbers that we would share at this point.
Speaker Change: Okay, and then just last for me, you know, yeah, I know you talked a little bit about the dividend we also get a lot of questions on your dividend with CAD running at 70 cents on a
Speaker Change: Tremblay four-quarter bases. I don't know that anybody that I've spoken to on the buy side
Speaker Change: It's looking for any whopper of a dividend, but to simply take it up from four cents to a dime or something around there is maybe $6 million a year. Dividend payments, when you're sitting on whatever, 154 million of cash and CAD expected to be roughly...
Speaker Change: $0.70 on a go-forward basis. So if I could just throw that out there. We do get a lot of questions on that. I don't think anybody's asking for some big whopper of a dividend pre-MOMMET, but...
Speaker Change: something to reflect the improving overall positioning of ILPT, I think would be really welcomed by the investment community. That's all for me.
Speaker Change: Thanks Brian
Speaker Change: Thank you. Bye.
Brian Maher: Thank you.
Speaker Change: again ladies and gentlemen if you have a question please press star then 1
Speaker Change: The next question is from Mitch Germain with Citizens JMP. Please go ahead.
Mitch Germain: The change quarter over quarter, is that entirely...
Mitch Germain: Non-cash, is that the way to think about it?
Speaker Change: That's not a...
Speaker Change: Not entirely non-cash, so I guess to give a little bit more perspective or a little bit more transparency, so we're expecting our cash interest expense to be $60 million and then the non-cash to be $12 million.
Speaker Change: so what will happen is our cash interest expense will increase.
Speaker Change: will decrease. And that is twofold. That's based on the cap amortization, but that's also we have some deferred financing costs that are running off. They've fully amortized as of September 30th. So we get a benefit from that. Hopefully that's helpful.
Speaker Change: and that's helpful and the lower cap has nothing to do with the higher
Speaker Change: swap rate, correct? You said that swap rate is determined by the lender, so it's not like you traded a lower cap for a higher amount. Is that the way to think about it?
Speaker Change: That's correct. I want to make sure I'm
Speaker Change: It's the same notional amount. Also, the cap was $17 million, but it was at $278. Replacing something was at $225, which was at a higher...
Speaker Change: You know amount that you paid for the rate caps. That's right. There was a reflection of that's right The lower amount being the you know that it it rised. Okay You're right. There's a piece of that as well
Speaker Change: under consideration right now. Assuming that only includes Hawaii once and then if so I'm just curious about you know kind of
Speaker Change: How many users are circling the wagon and is it all full site or is there a discussion around breaking it up?
Speaker Change: Hi Mitch, you're right so we only include within the $8.8 million we only include the $2.2 million once and so far the conversations we've been having have been with tenants for the entire parcel.
Speaker Change: Okay.
Speaker Change: Great. And then last one for me, I mean, you know, it looks like the rate environment to become a bit more accommodating on a forward basis, which obviously helps your balance sheet, but, you know, is it a time for the firm to start considering asset sales again?
Speaker Change: and, you know, kind of where does that potentially sit?
Speaker Change: So, you know, we have been, we do get a lot of inbound unsolicited offers and we are evaluating all of them.
Speaker Change: as they come in.
Speaker Change: remind, and I feel like I'm a broken record about this, but, you know, to release properties from our debt, we have several different covenants that we need to look at to make it accretive. So that is also something we're up against.
Speaker Change: understood. Does that suggest that
Speaker Change: One-off sales are more difficult or does that suggest that portfolio sales are more difficult as you look to unwind some of those covenants?
Speaker Change: I don't think one is more is more difficult than the other. I think it really depends on the assets and where they in which loan pool they sit.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session.
Speaker Change: I would like to turn the conference back over to Yael Duffy.
Speaker Change: Chief Operating Officer and President for any closing remarks.
Yael Duffy: Thank you for joining us today. Have a good day.
Yael Duffy: Thank you.
Yael Duffy: [music]
Yael Duffy: Firefighters
Speaker Change: Oct. 12th, 1850 October 5th, 1850 October 6th, 1850 October 7th, 1850 October 8th, 1850 October 9th, 1850
Speaker Change: and Dwayne Mitchell They're all tough Happy Holidays
Speaker Change: Thanks for watching!