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Q4 2023 Industrial Logistics Properties Trust Earnings Call


Bryan Maher; Analyst; B. Riley FBR, Inc.

Tom Catherwood; Analyst; BTIG

Mitch Germain; Analyst; JMP Securities LLC



Good morning, and welcome to the Industrial Logistics Properties Trust fourth quarter 2023 financial results conference call. All participants will be in a listen only mode. (Operator Instructions)
Please note this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Yael Duffy, President and Chief Operating Officer; and Tiffany Sy, Chief Financial Officer and Treasurer. Today's call includes the 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 today's 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 ILPT's beliefs and expectations as of today, February 21, 2024, and actual results may differ materially from those that we project 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, ILPT. 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 FFO, adjusted EBITDA, RY. and cash basis, net operating income or cash basis NOI, a reconciliation of these non-GAAP figures to net income is available in our financial results and supplemental information presentation, which can be found on our website.
And with that, I will turn the call over to Yael.


Thank you, Steven, and good morning. On today's call. I will begin with an overview of ILPT's portfolio summarize leasing activity for 2023 as well as the fourth quarter and look ahead to our 2024 lease expirations and objective from there, I will turn the call over to Tiffany to discuss our financial results.
As of December 31, 2023, ILPT's portfolio consisted of 411 warehouse and distribution properties in 39 states totaling approximately 60 million square feet, which includes 16.7 million square feet of industrial land and properties in Hawaii.
Since ILPT's inception in 2018, ILP. team has maintained portfolio occupancy over 98% and this quarter was no exception and 98.8%. ILPT's portfolio has a weighted average remaining lease term of 8.1 years, anchored by tenants with strong business profiles and well recognized brands that continue to benefit from e-commerce that acts as our largest tenant, representing 29.7% of annualized revenue, followed by Amazon and Home Depot at 6.7% and 2.1% of total annualized revenues, respectively.
ILPT's top 10 tenants account for nearly half of total annualized rental revenues and 77% of our revenues come from investment-grade rated tenants or subsidiaries or from our secure Hawaii land leases. During 2023, we entered 56 new and renewal leases and four rent resets for 5.4 million square feet, which is in line with 2022 leasing volumes, same-property NOI and same-property cash basis, NOI increased 3.3% and 4.5% compared to the prior year. Rents were 20.5% higher than prior rental rates for the same space. The impact of this activity is an increase of $7.4 million in annualized rental revenue, of which more than 40% will take effect in 2024.
During the fourth quarter, we entered 15 new and renewal leases and one rent reset for 1.5 million square feet at a weighted average lease term of 6.7 years. This activity resulted in GAAP and cash leasing spreads of 19.7% and 11.2%, respectively.
Renewals drove most of our leasing accounting for 80% of total activity, which reinforces our strong tenant retention Included in these results are three renewals with better our largest tenant for over 158,000 square feet at weighted average lease spreads of 19%.
Also this quarter, we sold two properties, both of which were unencumbered for an aggregate sales price of $25.2 million excluding closing costs. Proceeds were used to enhance our liquidity which as of year end now includes unrestricted cash of $112 million.
As we have discussed on prior calls, we expect future disposition opportunities to be limited given our ability to transact is dependent on pricing and the impact to our operating metrics and debt covenants.
Looking ahead, 10.1 million square feet or 12.2% of ILPT's annualized revenue is scheduled to roll by the end of 2025. Included in these expirations is the 2.2 million square foot land parcel in Hawaii that Home Depot had agreed to lease from us before exercising its termination right in 2023.
We have been actively marketing the site. And while we have seen interest, we do not expect to have a replacement tenant ahead of the March 31, lease expiration. Given the historical low vacancy and continued rise in asking rents in Hawaii, we assess we will see a meaningful roll-up in rents once we identify a tenant for the site.
Turning to our leasing pipeline. We are currently tracking 26 deals in our pipeline for more than 4.8 million square feet. We anticipate a near-term conversion of 30% of our pipeline, given that 1.5 million square feet of current activity is in advanced stages of negotiation or lease documentation. Once executed. We expect these leases will yield an average roll-up in rent of 20% on the mainland and 30% in Hawaii, further illustrating the strength of our portfolio as we head into 2024.
I would like to reiterate that we believe there is continued opportunity to generate organic cash flow growth and reduce leverage, which has declined from 13.1 times to 12.3 times over the last year. Accordingly, we are focused on tenant retention, maximizing mark to market rent growth opportunities and reducing operating expenses.
I will now turn the call over to Tiffany.

Thank you, Yael, and good morning, everyone. Starting with our financial results for 2023 from a full year perspective, normalized funds from operations was $31.5 million compared to $76.2 million in the prior year. Adjusted EBITDA RE was $328.3 million, an increase of 13.7% compared to our 2022 results. And cash basis NOI was $324.4 million, an increase of 11.6%.
For the fourth quarter. We ended the year with normalized funds from operations of $8.1 million or $0.12 per share. Adjusted adjusted EBITDA RE of $83.1 million and cash basis NOI of $81.5 million, all of which were in line with the previous quarter's results, both increasing compared to the same quarter of 2022.
Additionally, as Joe mentioned earlier, we sold two properties during the quarter, generating proceeds of $25.2 million, excluding closing costs and a gain on sale of $2.7 million. Interest expense was flat on a sequential quarter basis at $73 million. We estimate our first quarter interest expense to remain at that level with $66 million of cash interest expense, including the benefit from our interest rate caps and $7 million of non-cash amortization of financing costs.
Turning to our balance sheet. As of December 31, our net debt to total assets ratio was 68.4% compared to 69.7% a year ago. And our net debt coverage ratio declined to 12.3 times compared to 13.1 times on a year-over-year basis, driven by the improvement in our adjusted EBITDA RE and the continued paydown of our amortizing debt all of our debt is currently carried at a fixed rate for fixed through interest rate caps with a total weighted average interest rate of 5.47%, including extension options by RBC has no debt maturities until 2027.
In March, we intend to exercise our first extension option on the $1.4 billion floating rate loan held by our consolidated joint venture in connection with the extension we required to replace the existing interest rate cap. Based on today's pricing, we expect to pay approximately $25 million for the cap. As of December 31st, we had approximately $112 million of cash on hand and $133 million of restricted cash in our consolidated joint venture.
In closing, we will continue to evaluate offer opportunities to reduce our leverage and build liquidity. However, we currently have no plans to market properties for sale. Our portfolio remains strong with nearly full occupancy investment grade tenants and rising rents across our portfolio. We expect the ILDT. will continue to benefit from the demand for its high quality industrial real estate. That concludes our prepared remarks. Operator, please open the lines for questions.

Question and Answer Session


We will now begin the question and answer session. (Operator Instructions)
Bryan Maher, B. Riley FBR.

Bryan Maher

Thank you and good morning. Maybe sticking with the taps for a second, definitely. So $25 million to replace the tax. So let's divide that by four quarters. So $6 million a quarter I'm assuming is how we're going to amortize that over the upcoming year, et cetera? And does that keep you at that current 6.17% rate or the rate change?

The rate changes based on what we expect the new strike rate to be and so it would be less than 6%. Currently, we expect that strike rate to be [3.04%. So 3.77 is our spread plus the 3.04. And so by the first, it's where very simple thing].

Bryan Maher

Okay, great. That's helpful. Thank you. Maybe let me circling back to the asset sales, the two that were done in the quarter with those marketed properties where they inbound calls with their common denominator there. And as we look out to 2024. I heard your comments on not to expect much in the way of asset sales, but but what are you thinking is it one property is five, somewhere in between.

Bryan. And so for the two dispositions, one was actually an eminent domain taking on for our property in North Carolina. And the Department of Transportation is using it to the property and the structure to expand the highway.
And then the other one was our development in Mesquite, Texas. And so we had been marketing the property for lease and we got an offer on from another group as part of that process. And then as far as dispositions in 2024, I think it would be safe to assume that there will be none. I think as we've talked about, there's really a lot of on a lot we need to consider when we consider selling properties right now.
And part of it is we need to release to release the property from the collateral pool and needs to be the greater of 115% of the allocated loan value or 100% of the net sale proceeds and the value of the properties today versus one we closed on the loan. I think we all know that the market has shifted and so on I don't know that the math works. So I think at least for the time being unless something some great offer comes along, I don't think we're actively marketing anything.

Bryan Maher

Okay. Thanks and just two more quick ones for me, maybe for Tiffany. As you think about 2024 and the de-leveraging over the past year from low thirteens to 12 three and organic cash growth from rent roll-ups. Where do you think that that number ends up at the end of 2024, barring anything unusual happening?

And that's a good question. We do have the continued amortization of the amortizing debt that we have. That's about $250 million of debt in the in our consolidated joint venture, we pay upwards of $4 million a quarter on that. So we will have that natural kind of organic deleveraging happening.
The other component, like I said in in the presentation, is adjusted EBITDA RE And so with the rent roll up and we don't really give forward looking guidance, but we would expect it to continue to naturally decline. I'm not sure whether or not whether or not a number to say whether or not I feel like I'm not sure we'll see that same level of deleveraging, but because there is the factor related to adjusted EBITDA are you like I said, we're not really giving up guidance there, but we do expect to continue to decline.

Bryan Maher

So I didn't mean to put you on the spot there, just last for me. And maybe I'll you think about your lease expirations for this year and your pipeline on the demand in general for your product? Suffice it to say you and I don't want to put words in your mouth, but you wouldn't expect occupancy this year to dip below [98.5] with you?

Well, I think the parcel in Hawaii while it's not a significant portion of our annualized revenue, it's actually less than 1%. It does account for over 3% of occupancy. So until we lease that parcel up I think in Q2, we will expect to see some occupancy probably around 95%.

Bryan Maher

But that's a temporary. And B, how comfortable do you think about you are with that property being it released by the third quarter.

We aren't far enough along with any one prospect. So I think it would be aggressive to think that we'll have at least by the third quarter, but hopefully if not in Q4 than hopefully early in 2025, it is a large parcel and WALT is a unique opportunity for us.
A tenant It also you need to find the right person who is willing to take a 2.2 million square foot parcel. I think it is going to take up a little time of your.

Bryan Maher

Thank you very much.

Thank you.


Tom Catherwood, BTIG.

Tom Catherwood

Thank you and good morning, everyone. Yes, maybe going back to one of Brian's questions on asset sales. I think you had one that was under contract in 3Q that went back into the operating portfolio this quarter. If my memory serves me correctly, what was the change within that transaction? And I believe that building out a lease that expires this June, is that correct?

That's correct. And so that actually fell out of diligence on because we were having some delays getting the property release from the debt and so that Qinnan just wasn't willing to wait.

Tom Catherwood

Got you. And that's again, as of June, that 500 plus thousand square foot lease expires as well. So we should include that in our occupancy expectations?

Correct market, we're marketing that property. But again, we don't have anything far enough along that we think we'll have a replacement tenant before the lease expires.

Tom Catherwood

Got it. And then on the caps, thank you for the heads up on the $25 million for the $1.4 billion loan. When we look out to October, you have the $1.2 billion plus loan extension coming up, we would assume that would also be in that $20 million range.
And you mentioned organic delevering really through you know, EBITDA and cash flow and all that, but it seems to us like all of your cash available after distributions are going to go to these caps this year is our math generally in line there are we all face?

So I mean, we do have we are building up our cash reserves. So I mean, if we have more than 20 we're anticipating $25 million for the caps. We'll still have excess goods liquidity.

I agree with that.

Tom Catherwood

And then if we look at the earnings breakdown by portfolio that you have on page 20 of the sup. The Hawaii portfolio is obviously the key driver of earnings within Mainland generating negative both FFO and cash. Would you consider spinning off the Hawaii assets to unlock value for shareholders? Or is that not even on the table?

That's not on the table. I mean, I think if anything, we understand the value of Hawaii. So maybe down the line, we could think about a joint venture for those properties. But there's no there's no plans to spin that off.

Tom Catherwood

Got it. That's it for me. Thanks, everyone.


Mitch Germain, JPM Securities.

Mitch Germain

Thank you. On I think you guys had mentioned the two properties that were sold were unencumbered. So I'm curious, are there any other properties that you own that are unencumbered?

We have two others.

Mitch Germain

So potentially could sell them, Yes, we want to be optimistic. Okay.

Yes. We could we have a large parcel in Hawaii that's unencumbered. So that would that could be some unlock value down the line if we needed to it's long-term at least, right now and producing solid analyze. So it hasn't been considered.

Mitch Germain

Got you. Okay. Great. On the Home Depot, I know it's a pretty interesting opportunity given the size, but is it potential to divide and possibly tried to increase the population of on leasing that could occur for that space?

Yeah, it would mean we could easily divided it easily into at least two parcels and we have been thoughtfully marketing that that's an option, so we aren't opposed to that.

Mitch Germain

Okay, great. I think would give us a little noise in the JV line on the earnings statement as writing that we need to be aware of there.

You mean the equity in earning debt, although consolidate JV, we measure that on a fair value basis of the what you're seeing there is a reflection of the change in the fair value.

Mitch Germain

Got you. Okay. And just want to make sure I got you said that the pipeline of leasing around 5 million square feet and around a little less than a third of that is on in sort of late stages, though, is that the way to think about it.

Exactly. Yes.

Mitch Germain

Okay. So is there a how how is there a way to like think about the breakdown of that space for new versus renewal?

Yes. So of the 26 deals on 10 of them are for new prospects and the remainder for renewals and 66% of them and advanced stages relates to the renewal activity.

Mitch Germain

Okay. I know you don't give guidance, but if we have Home Depot and moving out in March end of March and the other lease of the property that was potentially for sale to let's say, to the tenant and move out happening in midyear. I know you do have headwinds associated or sorry, tailwinds associated with you're rents, but is it safe to say same-property results are likely to come in, you know, well below where they ended this year.

Yeah. I guess I just I want to reiterate for the for the Home Depot parcel again, it's a large parcel, but a very small fraction of ILPT's annualized is less than 1%. So it won't have a meaningful impact. It will have a impact to occupancy but not to the results.

Mitch Germain

Great. Thank you.


Thank you. 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 today and your interest in ILPT.


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