Industrial Logistics Properties Trust
NASDAQ:ILPT
Earnings Call Analysis
Summary
Q3-2023
In Q3 2023, ILPT's dispositions faced setbacks, with two encumbered properties out of prior agreements; one unencumbered property remains under agreement for sale at $21.5 million. The company saw growth in net operating income (NOI) with same-property NOI and cash basis NOI up by 5.3% and 6% respectively, compared to Q3 2022. ILPT's operating performance benefitted from leasing activity, resulting in $7.4 million more in annualized rental revenue. However, normalized FFO was flat at $7.9 million, and interest expenses increased to $72.9 million. Leverage improved slightly with net debt to total assets at 68.5% and no debt maturities until 2027. ILPT holds $83 million in cash and $139 million in restricted cash, signaling no immediate plans to further reduce leverage by selling assets.
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Good morning, and welcome to Industrial Logistics Properties Trust Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call 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, October 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, ilptreit.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 FFO, adjusted EBITDA 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.
With that, I'll turn the call over to Yael.
Thank you, Stephen, and good morning. Before we begin, I would like to welcome Tiffany Sy, who joined ILPT as our Chief Financial Officer and Treasurer on October 1.
On today's call, I will begin with an update on our disposition activity and then review ILPT's operating and leasing performance before turning the call over to Tiffany to discuss our financial results.
Last quarter, we reported that we had 3 properties, 2 that are encumbered under agreement to sell for an aggregate sales price of $65.3 million. We also discussed that while dispositions are challenging in this economic environment, ILPT may face additional difficulties given the property release provisions under our debt agreements.
During the diligence process, 1 property fell out of agreement as the buyer was unable to receive the required licensing needed to operate its business, and another terminated due to delays in the transaction time line. The third property, which is unencumbered, continues to be under agreement to sell for $21.5 million.
Turning to our operating and leasing performance. As of September 30, 2023, our portfolio, which consists of 413 warehouse and distribution properties achieved same-property NOI and cash basis NOI growth of 5.3% and 6%, respectively, compared to the third quarter of 2022.
We are finally beginning to see the positive impact of the 5.2 million square feet of leasing we completed over the last year. As a point of reference, the impact of this activity is an increase of $7.4 million in annualized rental revenue, which represents 2% of ILPT's total annualized revenue. With 11.2 million square feet set to expire through 2025, we believe there is continued opportunity to generate organic cash flow growth.
Turning to the quarter. We executed 12 new and renewal leases for nearly 758,000 square feet, resulting in modest GAAP and cash leasing spreads of 13.5% and 10.3%, respectively. The impact of this activity is an increase of $841,000 of annualized rental revenues. These leases have a weighted average lease term of 4.1 years, which is strategically shorter than what we typically report.
As asking rents continue to increase, we are selectively completing short-term renewals with certain tenants to take advantage of market conditions. Highlighted in our results is continued demand from ILPT's largest tenant, FedEx. We completed 3 renewals totaling 213,000 square feet in Texas, Georgia and Illinois at a roll-up in rent of 15.9%.
As FedEx works through its DRIVE program initiatives, our leasing and asset management teams have been engaged in discussions with FedEx decision makers as they work through their long-term plans. Our leasing pipeline includes 1.6 million square feet across 14 properties that is specific to FedEx with only 2 known vacates through 2024, which represents less than 40 basis points of annualized revenue.
Furthermore, over 71% of our FedEx portfolio and the associated $92 million in annualized revenue is secure, given it is long-term lease with expirations in 2027 and beyond. Leasing in Hawaii was minimal this quarter with just over 21,000 square feet. We believe this muted activity is a function of timing as our Hawaii leasing pipeline currently exceeds 3 million square feet.
Lastly, as we have communicated in the past, we are focused on improving ILPT's leverage, which has declined 1.4x since last year. However, given the ongoing uncertainty in the capital markets, any improvement in the short term will be organic. With no near-term debt maturities and a cash flowing portfolio, ILPT will continue to focus on tenant retention, maximizing mark-to-market rent growth opportunities and reducing operating expenses.
I'll now turn the call over to Tiffany.
Thank you, Yael. Good morning, everyone. Starting with our consolidated financial results for the third quarter of 2023, normalized funds from operations was flat on a sequential quarter basis at $7.9 million or $0.12 per share, a decline compared to the prior year quarter. Adjusted EBITDAre was $83.2 million, an increase on both a sequential quarter and year-over-year basis.
Our leasing activity generated increases in cash rent on a same property basis of $7.2 million or 7.4% year-over-year, partially offset by operating expense increases of $2.7 million or 12.2%, which resulted in a net 6% increase in same-property cash basis NOI for the third quarter.
Interest expense was $72.9 million for the quarter, an increase of $1.1 million sequentially and reflects a full quarter's impact of the mortgage loans we refinanced in May. Our fourth quarter estimated interest expense was approximately $73 million, consisting of $56 million with cash interest expense, including the benefit from our in-the-money interest rate cap and the $7 million of noncash amortization of financing costs.
Turning to our balance sheet. ILPT ended the quarter with a net debt to total assets ratio of 68.5% compared to 69.9% a year ago. And our net debt coverage ratio declined to 12.3x compared to 13.7x on a year-over-year basis. All of our debt is currently carried at a fixed rate or a fixed through interest rate cap, with a total weighted average interest rate of 5.47%, including extension options, ILPT has no debt maturities until 2027.
Our first extension option on the $1.4 billion floating rate loan under our consolidated joint venture occurs in March 2024, subject to the replacement of the related interest rate cap. Based on today's pricing, a replacement cap would range from $20 million to $30 million. As of September 30, we had approximately $83 million of cash on hand and $139 million of restricted cash in our consolidated joint venture.
As Yael mentioned earlier, we will continue to evaluate opportunities to reduce our leverage and build liquidity. However, we currently have no plans to market properties for sale.
In closing, while the current economic environment has its challenges, our portfolio remains compelling, that exceptional tenant roster, near full occupancy, and rising rents across our portfolio, and we expect that ILPT will continue to benefit from demand for high-quality industrial real estate like ours.
That concludes our prepared remarks. Operator, please open the line for questions.
[Operator Instructions] Our first question comes from Bryan Maher with B. Riley FBR.
Maybe sticking with the caps for a minute. Tiffany, did you say that was $28 million to $30 million or $20 million to $30 million? I didn't quite catch that.
I said $20 million to $30 million. That is based on today's pricing, but also our expectations of the strike price. So there's some range there as well.
And was that for one of the caps? Or was that for both of the 2024 caps?
That is for one of the caps.
And how does that pricing compare to the cap cost that was put on that loan back in 2022?
Well, the most recent cap that we purchased was September '22, and that was $47 million. That was out of much -- in terms of lower strike price. However, and it's also a 2-year period. It's not necessarily apple-to-apples, but I will say that pricing has slightly increased since the last time we purchased.
Okay. That's helpful. And then when we think about organic deleveraging, I think you mentioned or Yael mentioned that it's come down from 13.7x to, I think, 12.3x. Should we suspect that all else being equal, over the next 12 months, we should see a similar amount of organic deleveraging? Or do you think that moderates a little bit?
No, I think it's a good proxy for a run rate. I mean as we will continue to pay down our mortgages, it should steadily continue to decline in that fashion.
Okay. And then just maybe for Yael on the asset dispositions. I caught all what you said on the 3 going to 1. And that I think you said you weren't actively marketing properties. But are you still receiving inbound inquiries into some of your properties? And how are those progressing?
So we have been -- I will say that I think it's -- the unsolicited offers have slowed in the last quarter or so. And so with each offer that we get, we really do review if it makes sense to sell.
And I think we've talked about this on the prior, last quarter's call. But it really is -- it's hard for us to sell things out of the collateral pools, given the amount to release the property from the collateral pool must be the greater of 115% of the allocated loan value or 100% of the net sale proceeds.
And so on top of that, we also have to maintain required debt service coverage ratio. So really, we have to look at the value of the property today versus what we closed on with the value when we closed on the loan. And I think we can all agree that there's been some shift in valuations. So it's hard to make the math work.
And then if we're going to target underperforming properties for sale, it's hard to -- we have to improve our debt yield when we remove it from the collateral pool, but it's hard to sell a property that's underperforming. So there's a lot that's going into it. But if the opportunity is right and it makes sense, we'll do it, but it's been far into between.
Okay. And just maybe last for me, a quick one on the dividend. I mean when we look at the rolling 4 quarter trailing CAD being, I think it's $0.54 or so and you're paying out basically $0.04. Is there any thought to taking that dividend up even a little? Or is the focus just solely on paying down debt and keeping dry powder for cap costs?
It's the latter. Currently, we are focusing on reducing our leverage. We'd like to get it to a lower level, I mean, at least [indiscernible]. And then we can have a real, I think, discussion or consideration -- but that part...
I'm sorry. I didn't catch that. Did you say you want to get leverage down to [ 10 ] before you rethink that?
Yes. I think the Board is looking at it, Bryan. But I think right now, really, we need to have liquidity to make sure that we have liquidity to buy the caps and then also to run the business. I mean, if we have some leasing that's coming up and then if FedEx comes to us and wants to do a building expansion or a parking lot project, we want to make sure that we have the liquidity to partner with our tenants to meet their needs.
Right. But to the extent that [ 10 ] is the bogey before the Board starts to think about it, that's helpful from our standpoint as we model out the company kind of now through 2026, kind of where you hit that and where there could be thought process of a slight dividend increase, nothing crazy, but anyways, food for thought.
[Operator Instructions] Our next question comes from Mitch Germain with JMP Securities.
Can you hear me?
Yes.
You had mentioned that there were some FedEx move-outs in 2024. Are there any other known move-outs for the year?
So we have the one property that we had under agreement to sell in Indiana. That's a 535,000 square feet property and that lease expires in June of 2024. So we know that tenant is moving to a build-to-suit location. We are in discussions with them potentially for a short-term renewal because I think their construction has been delayed, but that's really the major one on the Mainland. And then, as we've talked about in the past, the parcel in Hawaii, the 2.2 million square feet, so it was previously leased to Home Depot. That one will be coming back to us at the end of Q1.
On that, I think last quarter, you had mentioned that there was some activity on that. Is there any update?
We continue to see good activity, nothing far enough along to announce, but I do -- we do feel confident that we'll be able to lease that with minimal downtime.
Okay. And the last one from me. I think you explained the shorter term on the new leasing during the quarter. Is there anything we can attribute the new lease rental changes to because that has also changed quarter-over-quarter here.
No, I think it's just in some of the past quarters, we've had really long lease terms, which have resulted in bigger GAAP rent increases. And so with the shorter waltz, we're not seeing that same robust strike increase. But I would also say, we did re-lease one property, which negatively impacted our results at a roll down in rent because we had -- it was previously leased to FedEx and it had amortizing TI, which was inflating their rent numbers. So without that property kind of, if we excluded that, we would be at 17%, 18% roll-up. So that was part of the outlier this quarter.
This concludes our question-and-answer session. I would like to turn the conference back over to Yael Duffy for any closing remarks.
Thanks for joining us. Have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.