Q4 2024 Industrial Logistics Properties Trust Earnings Call
and John Floyd.
and Yael Duffy. Thank you.
Good morning and good day and welcome to
Industrial Logistics Properties Trust's fourth quarter 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.
Speaker Change: Good afternoon. Joining me on today's call are ILPT's President and Chief Operating Officer, Yael Duffy, Chief Financial Officer and Treasurer, Tiffany Sy, and Vice President, Marc Krohn. Today's call includes a presentation by management, followed by a question and answer session with analysts.
Speaker Change: Please note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.
Speaker Change: Also, please note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other security laws.
Speaker Change: These four looking statements are based on ILPT's beliefs and expectations as of today, February 19, 2025, and actual results may differ materially from those that we project.
Speaker Change: 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.
Speaker Change: 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, ILPTREIT.com.
Speaker Change: Investors are cautioned not to place undue reliance upon any forward-looking statements.
Speaker Change: In addition, we will be discussing non-GAAP financial measures during this call, including normalized funds from operations, or normalized FFO, adjusted EBITDA RE, and cash basis net operating income, or cash basis NOI.
Speaker Change: A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website.
Speaker Change: With that, I will now turn the call over to Yael. Thank you, Matt, and good afternoon. On today's call, I will begin with an overview of our portfolio, summarize leasing activity for 2024 as well as the fourth quarter, and look ahead to our objectives for 2025.
Speaker Change: I will then turn the call over to Marc, who will provide further detail into leasing within our mainland portfolio as well as our pipeline. Then Tiffany will review our financial results and provide guidance on normalized FFO.
Speaker Change: As of December 31, 2024, ILPT's portfolio consisted of 411 distribution and logistics properties in 39 states totaling approximately 60 million square feet.
Speaker Change: Our strategically diversified portfolio is highlighted by our unique Hawaii footprint consisting of 226 properties totaling more than 16.7 million square feet.
Speaker Change: Our consolidated occupancy at year-end was 94.4% in line with our third quarter results.
Speaker Change: Our portfolio carries a weighted average lease term of 7 years and is anchored by tenants with strong business profiles and stable cash flows.
Speaker Change: ILPT's top 10 tenants account for 48% of our total annualized rental revenues and nearly 77% of our annualized revenues come from investment grade rated tenants or from secure Hawaii land leases.
Speaker Change: We finished the year with strong demand for our high-quality portfolio, consistent with the trends we saw throughout 2023.
Speaker Change: For the full year, we entered 58 new and renewal leases and one rent reset totaling 6.1 million square feet at weighted average rental rates that were 18.2 percent higher than prior rental rates for the same space.
Speaker Change: The impact of this activity is an increase of $8.2 million in annualized rental revenue, of which 41% has not yet been realized and will take effect in 2025 or beyond.
Speaker Change: These results showcase our ability to generate organic cash flow growth while maintaining portfolio stability.
Speaker Change: During the fourth quarter, we completed 731,000 square feet of leasing at rental rates that were 39.3% higher than prior rents for the same space and had a weighted average remaining lease term of 10 and 1⁄2 years.
Speaker Change: Hawaii accounted for all of our new leasing 148,000 square feet at rental rates that were 43% higher than prior rents and had a weighted average lease term of 21.3 years.
Speaker Change: Meanwhile, lease renewals on the mainland accounted for 98% of our renewal activity this quarter, which Marc will provide additional detail on shortly.
Speaker Change: These results highlight the value of our Hawaii portfolio, our ability to realize mark-to-market rent growth through leasing, and continued strong tenant retention.
Speaker Change: As we look ahead to 2025, we remain focused on leasing our vacancies.
Speaker Change: specifically the 2.2 million square land parcel in Hawaii that became vacant in April and a 535,000 square foot property in the east sub market of Indianapolis which became vacant in July.
Speaker Change: Together, these vacancies have negatively impacted our earnings in the second half of the year, reducing occupancy by 4.6% and accounting for a loss of $1.8 million in quarterly rental revenues.
Speaker Change: As we have mentioned on prior calls, leasing efforts are underway and we are in active discussions with tenants for both locations.
Well, we have experienced robust leasing in Hawaii historically.
Speaker Change: This site is unique due to its undeveloped 50-acre size. Accordingly, as one would expect, prospective tenants are conducting extensive diligence to understand the feasibility of operating on the site and the costs associated with its development.
Speaker Change: In Indianapolis, while we have seen strong tour and proposal activity, we face significant competition as new buildings come online.
Speaker Change: We remain optimistic that both locations will be leased in 2025. I will now turn the call over to Marc.
Marc Krohn: Thank you and good afternoon everyone. As Yael mentioned, we executed 731,000 square feet of leasing during the fourth quarter, which includes three renewals on the mainland, totaling 571,000 square feet in Reno, Nevada.
Waco, Texas and Roanoke, Virginia.
Marc Krohn: In aggregate, these renewals represent a weighted average rental rate increase of 38.7% with a weighted average lease term of 8 years and were completed with minimal lease concessions.
Marc Krohn: We are engaging in renewal discussions with our tenants at least 18 months in advance to best understand their space needs.
Marc Krohn: We believe this is especially important today as we have seen decision and lease negotiation timelines lengthen.
Marc Krohn: To that end, we are pleased to share that as of today, we have already addressed nearly 1.8 million square feet of our expirations.
Marc Krohn: Reducing ILPT's lease expirations to $4.5 million square feet through 2026 for just 6.4% of total annualized revenue.
Marc Krohn: Furthermore, our total leasing pipeline remains robust as we are currently tracking 28 deals for more than 6.5 million square feet, including tenants for the two vacancies in Hawaii and Indianapolis that Yael mentioned earlier.
Speaker Change: Before I turn the call over to Tiffany, I want to highlight the recent results of the RMR Groups Kingsley Survey, which was completed on our behalf.
Speaker Change: For those unfamiliar with the survey, it is the Trusted Industry Benchmark in Tenant Satisfaction and is used to assess property performance and identify areas for improvement.
Speaker Change: Our portfolio exceeded the Kingsley benchmark in every category, including management satisfaction, leasing satisfaction, renewal intentions, and overall satisfaction.
Speaker Change: Additionally, 34 properties received the Kingsley Excellence Award, which recognizes properties that outperformed the index benchmark for overall satisfaction.
Speaker Change: These results highlight the value of RMR's R-Manager and its ability to deliver outstanding property management services for our tenants.
Now, I'll turn the call over to Tiffany.
Tiffany Sy: Thank you, Marc. Last night, we reported financial results for the year and quarter ended December 31st, 2024.
Tiffany Sy: Starting with our annual results, we closed out the year with normalized FFO of $35.4 million, or $0.54 per share, representing an increase of 12.1% compared to 2023.
Tiffany Sy: NOI increased by 0.6% to $341.2 million, and cash basis NOI increased by 1.5% to $329.2 million, while adjusted EBITDA RE increased by 2.2% to $335.6 million.
Tiffany Sy: For the fourth quarter, we reported normalized FFO of $8.9 million, or $0.13 per share, an increase of approximately 10% on both a sequential quarter and prior year basis.
Tiffany Sy: Compared to the same quarter in 2023, fourth quarter NOI decreased by 0.8% to $84.2 million and cash basis NOI remained relatively flat at $81.6 million.
Adjusted EBITDA RRE decreased by 1.1% to $82.2 million.
Tiffany Sy: As we discussed during our last earnings call, we exercised the first of our three one-year extension options for a $1.2 billion floating rate loan in October of 2024.
Tiffany Sy: As part of the extension, we purchased a one-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: Our fourth quarter interest expense declined by $2.2 million to $71.7 million, reflecting the impact of the new interest rate cap.
Tiffany Sy: Turning to our balance sheet, as of December 31st, cash on hand exceeded $130 million and restricted cash held by our consolidated joint venture was over $110 million.
Tiffany Sy: Our net debt-to-total-assets ratio was 68.6%, and our net debt-coverage ratio was 12.4 times, each of which were relatively flat compared to the fourth quarter of 2023.
Tiffany Sy: As a reminder, all of our debt is currently carried at a fixed rate or is fixed through interest rate caps, with a weighted average interest rate of 5.51% as of December 31st.
including extension options. IOPT has no debt maturities until 2027.
Tiffany Sy: Heading into 2025, in March, our consolidated joint venture will exercise the second of its three one-year extensions for its $1.4 billion floating rate loan, which requires an interest rate cap to be purchased.
Tiffany Sy: In connection with the exercise of its first extension option in March 2024, our Consolidated Joint Venture purchased a cap for $26 million.
Tiffany Sy: Last week, we purchased a cap with a SOFR strike rate of 3.1% for the second extension for $15 million, or $11 million less than the previous cap.
Tiffany Sy: Including the impact of the new interest rate cap, we expect our interest expense for the first quarter of 2025 to decline to approximately $70 million.
Tiffany Sy: With $59 million of cash interest expense, net of the cash we receive from our interest rate caps, and $11 million of non-cash amortization of financing and interest rate cap costs.
Tiffany Sy: In closing, ILPT is anchored by quality assets, strong tenants, and stable cash flows.
Tiffany Sy: Based on the leasing activity both Yael and Marc mentioned earlier, and our expectations for interest expense, we expect normalized FFO for the first quarter of 2025 to be between $0.16 and $0.18 per share. That concludes our prepared remarks. Operator, please open the lines for questions.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Mitch Germain with Citizens JMP. Please go ahead.
Mitch Germain: Thank you guys. Maybe Tiffany, what's the biggest variance from your four Q earnings to one Q that's driving some of the...
Mitch Germain: Is it just interest expense? I think you get some percentage rent as well, like a one-time, you know, 1Q. Like, what are the main variables that are changing quarter over quarter?
That percentage rent is not factored in.
Mitch Germain: We're not considering that. That's not an amount that stays the same period over period, but we would consider that.
non-recurring.
Mitch Germain: But there's two things, so it's interest expense, but it's also some of the leasing that Yael and Marc were mentioning. But in addition to that, we did have some bad debt in this quarter, in Q4, and that was less than a million dollars.
Mitch Germain: which we wouldn't expect to be recurring. So that's part of the POP.
Mitch Germain: The leasing pipeline was down. I think it was over $8 million last quarter.
Mitch Germain: Obviously, you executed some deals in 4Q, but I'm curious if there is a broader change in the environment that you're seeing? Is it just really seasonality? Anything that you could attribute that to?
Speaker Change: Hi Mitch, actually it isn't it really would have been eight million it would have been eight million still it's just in Marc's prepared comments he mentioned that
Mitch Germain: Subsequent to year-end, we've already completed 1.8 million, so we just removed that from our pipeline for these purposes. So if you add the 6 plus the 1.8, we'd be right about the 8 million.
And what is your...
Speaker Change: You know kind of percentage of execution on that pipeline how you know, I'm sure you're tracking it over time How is that, you know kind of working out for you guys?
Speaker Change: It's been pretty consistent. Again, as Marc mentioned, it's taking us a little longer to get deals over the finish line, but generally once it makes it to an LOI, we're pretty successful in getting it to lease execution.
Great.
Speaker Change: Obviously, it seems like, I believe, you had a bankruptcy that you noted last quarter.
Speaker Change: some rent modifications. Um, you know, how are your discussions ongoing? I know you can't share that much, but...
Speaker Change: Um, you know, is there some sort of date in which there should be some validity as to what, specifically, how that situation will play out?
Speaker Change: Yeah, I think they, so I'm assuming you're talking about American Tire, I think they have a date out there of sometime in May, and from what we know today, they haven't rejected any of our leases, we don't believe they will, but again,
There's still time, but I think.
Speaker Change: They've reached out initially to start discussions about potential restructures. I think at this point, we're not open to those conversations. We feel...
Speaker Change: really good about these properties. They're kind of a sweet spot of size, generally about 125,000 square feet and
Speaker Change: in five very distinct markets that don't compete with each other so I think we feel we feel good that American Tire wants to be at these locations and we're gonna
Hold their feet to the fire.
Great. That's it for me. Thank you.
Yael Duffy: This concludes our question and answer session. I would like to turn the conference back over to Yael.
Duffy, President and Chief Operating Officer for any closing remarks.
Thank you for joining us and your interest in ILPT.