Industrial Logistics Properties Trust (ILPT) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Industrial Logistics Properties Trust Fourth Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Olivia Snyder, Manager of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are ILPT's President, John Murray; and Chief Financial Officer, Rick Siedel. In just a moment, they will provide details about our business and our performance for the fourth quarter of 2018. We will then open the call to your questions.

First, I would like to note that 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, Wednesday, February 20, 2019, 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 numbers during this call, including normalized funds from operations, or normalized FFO, and cash-based net operating income, or cash-based NOI. A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distribution, or CAD, are available in our supplemental operating and financial data package, which also can be found on our website. And now I will turn the call over to John.

Thank you, Olivia. Good morning, everyone, and welcome to the fourth quarter earnings call for Industrial Logistics Properties Trust, or ILPT. This is my first earnings call as President of ILPT. I'm enthusiastic about the outlook for this company and our opportunities to create value for our shareholders.

This morning, we reported fourth quarter normalized FFO of $25.9 million or $0.40 per share. As of the end of the fourth quarter, ILPT's portfolio consisted of 270, primarily warehouse and distribution properties, with 29.5 million square feet located in 26 states. Approximately 58% of ILPT's annualized revenues came from 16.8 million square feet of industrial land located on the island of Oahu in Hawaii. Our mainland portfolio consisted of 44 buildings or 12.7 million square feet located in 25 states that were 100% leased, with an average lease term of approximately 8 years as of quarter-end.

During the fourth quarter, we continued to execute on our business plan, with strong leasing activity and mainland acquisitions. We entered new and renewal leases and completed rent resets for a total of approximately 1.9 million square feet, at rents that were 23.7% higher than prior rents for the same space. The average lease term for new and renewal leases was 14.4 years, and leasing capital per square foot per lease year was $0.06. Including rent resets, leasing capital per square foot per lease year was approximately $0.01.

Portfolio occupancy as of the end of the fourth quarter was 99.3%, unchanged from last quarter, and down from 99.9% for the prior year. We have no near-term lease expirations on the mainland, with only 0.3% of total annualized rents expiring this year and less than 2% expiring by the end of 2020.

Moving to Hawaii. We have 478,000 square feet of leases for $1.9 million of total annualized rent scheduled to expire during 2019 in addition to 1.8 million square feet for $5.9 million of annualized rent that is scheduled to reset. Nearly 50% of our Hawaiian leases mark-to-market either through rent resets or as leases roll over, over the next 5 years. We continue to be encouraged by our leasing results, and our expectation is that rents will continue to increase in Hawaii due to the unique characteristics of these properties.

Moving on to acquisitions. As previously discussed, during the fourth quarter, we acquired 1 property in Maple Grove, Minnesota and 1 land parcel in Ankeny, Iowa, both of which were discussed in detail on our third quarter earnings call. Since year-end, we have remained active and recently announced the 10-year $650 million mortgage financing on a portfolio of our Hawaii properties, which Rick will discuss in a few minutes, as well as 2 large portfolio acquisitions. Last week, we agreed to acquire a portfolio of 8 properties, with an aggregate of approximately 4.2 million square feet for a purchase price of $280 million at a GAAP cap rate of 6% and a current cash cap rate of 5.8%. We have closed on 7 of the 8 properties, one is still in due diligence, but expected to close in the next 60 days. This portfolio is located in the Indianapolis and Cincinnati market areas, is 100% leased to 10 tenants and has a weighted average remaining lease term of 4.4 years, a weighted average building age of 13 years and a weighted average clear height of 34 feet. Approximately 59% of annualized rental revenue from this portfolio is paid by investment-grade-rated tenants, including Amazon, Whirlpool, Cummins and Stanley Black & Decker. Last week, we also entered an agreement to acquire a portfolio of 18 properties, with an aggregate of approximately 8.7 million square feet for a purchase price of $625.3 million at a GAAP cap rate of 6.4% and a current cash cap rate of 5.9%. This portfolio is located in 12 states, is 100% leased to 13 tenants and has a weighted average remaining lease term of 9.4 years, a weighted average building age of 9 years and a weighted average clear height of 33 feet. Approximately 74% of annualized rental revenues from this portfolio is paid by investment-grade rated tenants, including Amazon, Procter & Gamble, UPS and FedEx. This acquisition is expected to close in the next 60 days.

I think Rick will note this again in his comments, but over 70% of the purchase price of these 2 portfolio transactions was or will be funded with proceeds of a $650 million loan that effectively unlocked some of the hidden value in our Hawaii industrial land. Including these 2 portfolios, we have acquired over $1 billion of high-quality industrial properties since our IPO last January. We remain confident that demand for our properties will continue to be supported by the growth of e-commerce and logistics industries and the strength of the nationwide industrial market.

I'll now turn the call over to Rick Siedel to provide details on this quarter's financial results.

Thanks, John, and good morning, everyone. Normalized FFO for the fourth quarter of 2018 was $25.9 million or $0.40 per share. Adjusted EBITDA for the quarter was $30.9 million. Our quarterly dividend of $0.33 per share continued to be well covered with a comfortable payout ratio of 82.5%. Total revenues for the fourth quarter of 2018 increased by $2.7 million to $42.1 million, representing a 6.8% increase over prior year results. This increase primarily reflects our acquisition activity as well as lease renewals and rent resets on our Hawaii properties. Same property cash NOI increased by 1.2% over the prior year, primarily as a result of contractual rent increases and leasing activity across the portfolio, partially offset by increased nonrecoverable expenses, which included rent reserves for our Hawaii tenant in default, along with real estate taxes and security costs.

General and administrative expenses for the fourth quarter totaled $2.9 million or just under 20 basis points of our total assets as of year-end, which was substantially lower than the year-ago quarter, which included costs related to preparing the company to go public. Our recurring capital expenditures for the quarter totaled $3.4 million. The majority of these expenditures were leasing capital, specifically tenant improvements that we will recover over the lease term and lease commissions related to our mainland lease extension. We've finished the year with $413 million outstanding on our revolver, resulting in debt-to-EBITDA of 3.7x. As John briefly mentioned earlier, on January 29, we announced the 10-year $650 million mortgage financing at 4.31% on a select portfolio of 186 of our Hawaii properties, containing an aggregate of approximately 9.6 million square feet or about 57% of our total square footage in Hawaii. The properties are almost all situated between the Honolulu Central Business District, the airport and the seaport. The loan was financed at around 45% loan-to-value based on the appraised value of more than $1.4 billion. The net book value of these properties on our balance sheet was less than $500 million at year-end, signaling the tremendous growth and value of this portfolio since it was acquired in 2003. We believe this transaction highlights the underappreciated value and quality of our Hawaiian assets and provides us with low cost, fixed-rate capital to fund the external growth John discussed. Proceeds from the mortgage were used to repay all outstanding borrowings under our $750 million unsecured revolving credit facility as well as to partially fund the portfolio acquisitions John discussed earlier. In the few days since we announced the 2 recent acquisition agreements, we have heard investor concerns about our leverage level and fear about equity issuances or asset sales. We do not plan to run at this leverage level forever, but we are comfortable with it at this level because we have a stable, predictable and growing cash flows and a well-covered dividend. We may, in the future, seek an investment-grade rating, but ILPT is still a new company and relatively small versus its peers. We don't plan to seek investment-grade rating in 2019, and, accordingly, are comfortable with higher leverage levels, which will allow for greater accretion and more flexibility to increase our dividend once the transactions close.

One last thing to mention before Q&A. We wanted to remind everyone that shortly before year-end, select income REIT distributed all 45 million shares of ILPT that it owned to its shareholders. We are optimistic with the elimination of a 70% controlling shareholder and a related significant increase in our public float, ILPT may begin to trade at multiples more in line with our industrial REIT peers.

That concludes our prepared remarks Operator, we're now ready to take questions.

(Operator Instructions) Our first question comes from Bryan Maher with B. Riley FBR.

A couple of quick questions. On the back of the supplemental, you do have the list of all the properties that ILPT has. When might we get the list of the properties that are being acquired here in the first quarter?

Bryan, we would typically plan to file that with the next supplemental, but we will be filing an 8-K with the purchase agreements. I'm trying to think if the list is included in the agreements, I believe it is, but we'll look at that information out there.

That will be great. Because that's one of the biggest questions I've been getting from investors is what exactly did you buy. The second question I have is, how were these properties sourced? Was it brokered? Or how did you come across that?

The 8-property, $280 million transaction came through brokers. The CCIT II 18-property acquisition was privately sourced. It was an off-market transaction.

And then suffice it to say, given your comments on investor concerns that have been relayed to you as it relates to leverage, at this point in time, should we expect a material slow down in acquisition activity for at least the next couple of quarters, while you digest these transactions and leverage comes down a bit? How should we think about that for modeling purposes?

Yes. I think we are opportunistic. We have raised a substantial amount of debt capital through the loan on the Hawaii properties. One of the transactions came to our attention in the early stages of that financing. And so we didn't -- we weren't planning to do this volume of acquisitions as quickly as it turned out that we did. So I think it's reasonable to expect that you'll see very little in the way of acquisition -- additional acquisitions from us for the next couple of quarters. We'll be focused on getting these properties only -- 7 of the 8 in 1 portfolio have closed and the others are -- will close in the next month or 2. So we're going to be focused on that and not as much on acquisition activity.

And then just lastly, when you think about the split with the company between Hawaii and mainland, whether you want to look at it as NOI or annual revenues, how are you guys looking at that split between pre these 2 acquisitions and post these 2 transactions? And should we continue to expect future transactions being predominantly, if not all, mainland?

Bryan, I would say, the easiest way to look at it before we've fully integrated the properties and filed the pro formas related to it and everything else, is probably revenue. And we're essentially expecting a bit of a flip. I think we've got it just under 60%, and it will be mainland, as compared to where we were previously with 60% in Hawaii. We would love to buy more properties in Hawaii. It's a market we know well. It's a strong market, but there's not a lot of ground that comes up for sale. So for that reason, we've expect -- we've always expected most of our acquisition opportunities to come on the mainland. And we are just as excited about mainland opportunities because, again, the long-term trends in e-commerce, we think, are fantastic and are going to drive rents higher for industrial space. But the one other thing I would say just about the properties that we've added, we've always said that our Hawaii properties were incredibly secure because of the structure of the ground leases. And even though we've increased our exposure to mainland, we've picked up a bunch of really great credit quality tenants, so our percentage of investment-grade on the mainland goes up after these acquisitions from around 49% to around 59%. So we've upgraded the credit quality of our mainland tenants. And overall, when you factor in the Hawaii lease land and all the investment-grade rated tenants and subs and investment-grade rated tenants, our overall portfolio only changes about 1% or so. So from 73.5% to 72% and change. So overall, we didn't really dilute the credit quality at all, which is tough when you factor in how strong our Hawaii properties are. So overall, we feel really good about the portfolio and are excited to see it grow.

(Operator Instructions) Your next question comes from Michael Carroll with RBC Capital Markets.

Could you guys talk a little bit about just how you plan on delevering the balance sheet? I know that you said you're comfortable with these levels here in the near future. But how long are you willing to run at these levels? And what's the plans to get leverage back down to your target of what, 6 5?

Sure. We really don't feel like there's any special pressure to delever quickly. We think that as the value of these 2 portfolios is demonstrated and the additional cash flow becomes evident, that we're hopeful that our share price will appreciate. But we could wait until next year before thinking about delevering. In the meantime, we're generating a lot of cash flow. I think, probably, the portfolio would naturally delever itself, with no real capital raises in 3 or 4 years. So we think that there are opportunities. We think there was a lot of unlocked value in the Hawaii portfolio, which we unlocked in the secured financing that we did earlier. We think there are maybe opportunities if the share price doesn't react positively, over time, that we have a lot of very high-quality mainland properties, and we could access equity through potential joint venture opportunities or structures like that. So -- but we're not actively engaged with anybody to evaluate that because, right now, the focus is on getting these 2 transactions closed and focusing on the balance of the year with -- and where our dividend goes.

And are you willing to sit on the sideline not deploying any additional capital in the acquisitions until you bring leverage a little bit lower? Is that kind of the plan right now, and letting that cash flow to delever your balance sheet?

I mean, we'll always keep an eye on the acquisitions market, and I think if we saw something that was too much to pass up, that never say never on completely shutting down, but I don't expect that you'll see acquisitions from us for the next couple of quarters, at least. And so I'd say, yes, we are comfortable with that. I mean, we've -- the initial reactions from some investors were that this is too much growth, too fast. So it's a little bit surprising that you're wondering if we can hold back now. But I think that yes, we need to focus on getting these 2 transactions closed and absorbed into our portfolio. So -- and we're comfortable doing that. It's been more than 50% growth of our asset base, so I think that, that's a pretty substantial amount of growth, so I don't think anyone would fault us if we don't have additional acquisitions this year.

And then, at what point do you pursue a joint venture? Is that a few quarters down the road if you don't see the stock price react the way you want? Do you start those discussions in the next few quarters? Or when do those happen?

We don't have a specific plan yet, so it's probably too early to answer that question, but I think we wouldn't probably get going on that type of a possibility for a couple of quarters, and my guess, it would be several quarters a year before something like that came to fruition, if it's an avenue we actually go down.

Okay. And then can you provide some color on the Hawaiian lease renewal that occurred in the fourth quarter? I'm assuming that was an early renewal from the 2019 expiration. And if that's the case, when does that lease actually commence?

The leasing activity this quarter, it did include a fairly large parcel out in the Campbell estate or the Western properties there. I think that was effective January 1, so we'll see the roll-up immediately.

Okay. And then, Rick, can you provide an update on American Tire Distributors? I think that the processes played out, I'm assuming all your leases have been affirmed. Is that correct?

That is correct. So they lease 5 properties from us. They were one of our larger tenants at about 3% of annualized rents. They again filed the prepack bankruptcy. They did a debt equity swap, and they've assumed all 5 of our leases. So we feel pretty good about it. They remain current on rent and, again, it worked out kind of the way we hoped it would.

Okay, great. And how much term do you have left on those leases?

There's a fair amount of term left, I believe. I don't have it in front of me. Last quarter, I was prepped on all of that stuff and had gone property by property, but now that it's much less of a focus, I don't recall of the top of my head. But there's still a good amount of term left, and they're all in strong markets. I believe our teams thought we could possibly roll up rents if we needed to retenant them. So again, we feel really good about those properties.

This concludes our question-and-answer session. I would like to turn the conference back over to John Murray for any closing remarks.

Thank you. We're very pleased with our financing in Hawaii that highlights and unlocks the value and quality of these unique assets, and we look forward to the meaningful earnings impact from our latest acquisitions in future quarters. Thank you, everyone, for joining today's call.

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