Industrial Logistics Properties Trust (ILPT) 2019 Q4 法說會逐字稿

Good morning, and welcome to the Industrial Logistics Properties Trust Fourth Quarter 2019 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; Chief Financial Officer, Rick Siedel; and Vice President, Yael Duffy. In just a moment, they will provide details about our business and our performance for the fourth quarter and year ended December 31, 2019, followed by a question-and-answer session with sell-side analysts.

First, I would like to 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, Monday, February 24, 2020, 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, adjusted EBITDA and cash-based net operating income or cash basis 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, and welcome to ILPT's Fourth Quarter and Year-end 2019 Earnings Call. We are pleased to report solid performance for the fourth quarter with normalized FFO of $29.7 million or $0.46 per share and a same-store cash basis NOI increase of 5.5% year-over-year.

Additionally, we announced 2 exciting transactions to start 2020. Last week, we entered into agreements related to a $680 million joint venture that we have been working towards since mid-2019. We formed this joint venture with an Asian institutional investor to own a portfolio of 12 industrial properties containing 9.2 million square feet, which were predominantly acquired by ILPT in 2019 as part of 2 large portfolio acquisitions. The investor will contribute approximately $108 million for a 39% equity interest in the new venture, and ILPT will retain the remaining 61% equity interest. We closed the joint venture with 11 properties, and the investor will initially contribute approximately $82 million. The venture also assumed $350 million of existing secured debt on the portfolio. A 12th property and $57 million of additional associated debt is expected to be contributed later, subject to certain conditions. We'll use the proceeds to reduce outstanding borrowings under our revolving credit facility. The property valuations represent a 5.5% cap rate on cash NOI.

ILPT remains in discussion with an additional institutional investor and currently expects this investor may also acquire a 39% equity interest in the JV in coming quarters, allowing ILPT to further reduce leverage while retaining an ownership stake in this high-quality portfolio. We believe this transaction, once again, underscores the value of ILPT's industrial properties. It also highlights the valuation disparity between the public market's valuation of ILPT and private capital's valuation. Importantly, this JV provides ILPT the opportunity for continued growth with private equity capital raised at approximately net asset value.

Also in February, we acquired an 820,000 square foot distribution facility in Goodyear, Arizona, for $72 million. This Class A property is 100% leased to Amazon with a remaining lease term of 5.8 years. The property is in Phoenix's West Valley, which provides easy access to the I-10 Freeway into Southern California. Additionally, the property is within 0.25 mile of the future Arizona 303 Loop, which will provide improved access throughout the Phoenix metro area. The purchase price reflects a 5.2% cap rate.

On previous calls, we told you we plan to increase the number of independent trustees on ILPT's Board and that we had engaged Korn Ferry to assist us in that process. Last week, Laura Wilkin and Kevin Phelan were appointed as new independent trustees, increasing the size of our Board to 7 with 5 independent trustees, 2 of whom are women. Ms. Wilkin is currently a senior adviser at Boston Consulting Group. She has held senior leadership positions focused on supply chain and logistics at various companies, including Petco, Walmart, Gap, Levi Strauss and LVMH Sephora. Mr. Phelan is currently co-Chairman of the Boston office of Colliers International, a full-service commercial real estate firm, where he started the capital markets group. Mr. Phelan has since financed billions of dollars of commercial real estate transactions across the U.S. Mr. Phelan is also active in several not-for-profit organizations. Neither Ms. Wilkin nor Mr. Phelan will serve on any other Boards within the RMR Group companies.

I'll now turn the call over to Yael to discuss our leasing activity.

Thanks, John, and good morning, everyone. At the end of the fourth quarter, ILPT's portfolio consists of 300 warehouse and distribution properties in 30 states, totaling 42.9 million square feet that were 99.3% leased. Our Mainland portfolio included 74 properties in 29 states, totaling 26.2 million square feet that were 100% leased. Approximately 41% of ILPT's annualized rental revenues come from 16.8 million square feet of industrial land and properties located in Hawaii. Our top 3 markets after Hawaii are Indiana, Ohio and Virginia, representing approximately 10%, 9% and 5% of ILPT's total annualized rental revenues, respectively. At year-end, our top 3 tenants were Amazon, FedEx and Procter & Gamble, representing approximately 14%, 4% and 4% of total annualized rental revenues, respectively. Investment-grade rated tenants or subsidiaries of investment-grade rated parent entities make up 61% of our Mainland revenues. Looking at the entire portfolio, nearly 3/4 of revenues come from those investment-grade rated tenants or subsidiaries or from our secure Hawaii land leases.

Leasing activity was strong in the fourth quarter, totaling 1.4 million square feet at rents that were 16.9% higher than prior rents with an average lease term of 8.5 years and commitments for leasing capital and concessions of only $0.12 per square foot per lease year. With little near-term lease roll, most of our leasing activity are 1.1 million square feet was associated with early renewals for leases expiring in 2020 through 2023. On the Mainland, we completed 757,000 square feet of lease renewals at rents that were 14.5% higher than prior rents with an average lease term of 7.2 years and capital commitments of $0.14 per square foot per lease year. Q4 is the first quarter since ILPT went public that we had meaningful Mainland leasing activity. We are pleased with both the results and our strong tenant retention in this competitive market.

In Hawaii, we entered 3 new leases for approximately 161,000 square feet at rents that were 34.2% higher than prior rents with an average lease term of 17.4 years and capital commitments of just $0.06 per square foot per lease year. We also completed 1 rent reset for 105,000 square feet that resulted in a roll-up of rent of 39.9%. As we have previously discussed, we are working through an agreement with a tenant in Hawaii that leases approximately 1.2 million square feet for $1.9 million of annualized rent that was scheduled to reset in 2019. We expect to finalize negotiations in the coming weeks.

As we look forward to our upcoming lease expirations, we are encouraged by what we have accomplished in 2019. Portfolio leasing for the year totaled more than 2.6 million square feet with a roll-up in rent of 20.1%, an average lease term of 9.5 years and capital commitments for new and renewal leases of $0.13 per square foot per lease year. Near-term expirations are minimal in 2020 with only 0.2% of annualized rents scheduled to expire on the Mainland and 1.3% in Hawaii. As such, we are focusing our efforts on 2021 and 2022 and have already begun discussions with multiple tenants and anticipate maintaining our strong leasing momentum in the new year.

Turning to capital expenditures. We spent $3.1 million in recurring capital predominantly associated with building improvements on the Mainland for roof, boiler and parking lot replacement. Additionally, in the fourth quarter, we spent $5.1 million of redevelopment capital and successfully completed the 194,000 square foot Toro expansion. We finished the project on schedule and under budget, with a total capital investment of $14.6 million. With Toro's 15-year commitment, the expansion project results in an incremental return on cost of 7.9% and increased rents of approximately $1 million beginning in 2020.

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

Thanks, Yael, and good morning, everyone. Normalized FFO for the fourth quarter of 2019 was $29.7 million or $0.46 per share, up 15% from $25.9 million or $0.40 per share for the fourth quarter of 2018. Adjusted EBITDA for the quarter was $44.6 million, up 44% year-over-year. Our quarterly dividend of $0.33 per share continues to be well covered with a payout ratio of 71.7%.

Total rental income for the fourth quarter of 2019 increased by $20.1 million to $62.2 million, representing a 48% increase over prior year results. This increase primarily reflects our acquisition activity as well as increases from leasing and rent resets but also includes some activity worth highlighting for the quarter.

In Hawaii, we recognized percentage rent of $1 million which has historically been recognized in the first quarter of each year. We've amended this tenant's lease, establishing an annual floor for percentage rent of $1 million per year, which, going forward, we will recognize ratably throughout the year with any favorable adjustments recognized in the fourth quarter. Offsetting this, a small number of tenants in Hawaii fell behind in their payments, and we reduced revenue to reserve for amounts outstanding in Q4. This included $900,000 of cash rents receivable and $1.3 million of straight-line rents receivable.

Total portfolio same-property cash basis NOI increased by 5.5% over the prior year with a 5.9% increase in Hawaii and a 5% increase on the Mainland, primarily due to contractual rent increases in Hawaii and the Toro expansion project Yael mentioned previously.

General and administrative expense for the fourth quarter totaled $4.1 million, up $1.1 million year-over-year, and depreciation expense was $18 million, up $10.4 million year-over-year. These increases are attributable to our acquisition activity in 2019.

Interest expense in the fourth quarter increased by $10 million year-over-year to $14.6 million, primarily due to higher debt balances. We finished the quarter with $310 million outstanding on our revolving credit facility.

As John mentioned, last week, we entered into agreements related to a joint venture transaction and will receive approximately $108 million in proceeds, which will be used to pay down our revolver, reducing net debt to adjusted EBITDA by approximately 0.6x. We are pleased to reduce leverage, and we'll continue to explore opportunities to expand the venture through additional investments or with additional institutional partners.

That concludes our prepared remarks. Operator, please open up the line for questions.

(Operator Instructions) Our first question is from Michael Carroll with RBC Capital Markets.

This is Jason on for Mike. Just wondering how you will be deploying capital into the future given the current leverage targets and where you guys have set.

I think that our focus, as we indicated in the press release and then our -- the text of our script, we're still working on adding an additional partner to the joint venture. And so I think that when it comes to -- we're always watching the acquisitions market and seeing what types of products are available and in what markets. But I think we're going to be fairly disciplined until we feel like we finalized the joint venture with both partners and then we'll assess the capital markets and whether we'll grow using the private capital or other capital. So that remains to be seen as time wears on.

Jason, this is Rick. The one thing I would add, just kind of taking John's comments a step further, if we do bring in a second JV partner, that will have more than the 0.6x reduction in leverage that the first JV partner had. I believe, if we have 2 39% partners, we would likely deconsolidate the assets, and these JV properties are on the books with about 60% loan-to-value. So it would -- just taking our share of those assets instead of consolidating them would bring our overall leverage down closer to 6x.

Okay. And how large would you be looking to grow the JV fund ultimately?

I don't think we have any particular limits. I mean we don't anticipate adding much from our existing portfolio into the joint venture. The plan would be to use this, to take advantage of the joint venture to grow our portfolio, and so I don't think we have any particular limits set by ILPT or by any -- either of our -- either our current partner or the partner we're seeking to add.

The next question is from Matt Boone with B. Riley FBR.

Just to start off

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added to the JV?

I'm sorry. Could you say that again? You cut out.

Sorry. Yes, yes. Timing regarding when the 12th property is expected to be added to the JV. I was curious if there's any detail that you could provide there?

We think it will be within the next month. We're hopeful it'll be within the next month. There's just some administrative -- mostly administrative things that need to be accomplished with lenders, so we don't think it will take long.

Okay. And then turning to acquisitions. Just to clarify, those are going to probably be more opportunistic in the near term with the focus being on reducing the leverage. Is that correct?

Yes. I mean I think -- I guess we think of those as 2 separate things. The adding to the joint venture with -- by adding another partner will help significantly in the leverage reduction process. And then we will be -- yes, mostly opportunistic in terms of what we may acquire, but we do intend to continue our growth once the partners are finalized in the venture itself.

Okay. One last one for me. Can you just remind us what your long-term target leverage level is?

Sure. We had said that we've hoped to be between 6 and 7. Previously, we thought we might be a little bit lower, but the cost of equity is still fairly high for us. If we look back at 2019, we increased FFO per share by $0.15 or about a little over 9% versus the prior year, and we haven't really seen the favorable reaction in stock. So at this point, we'll grow a little slower or we'll grow with some private capital and continue to do things that are good for ILPT's shareholders.

The one thing we should probably bake in -- I mean, we've had great results this year, kind of in line with what we would have expected. The comment that I made in prepared remarks about the percentage rent is worth noting because, historically, that's been recognized in Q1. So just thinking forward to next quarter, we're going to kind of come out of the gate down about 4%. So that's something that will need to be modeled in. But for the most part, the properties continue to perform really well. We've always said that our Mainland assets should grow cash NOI between 0.5% and 1% a year. We did that. And similarly, Hawaii should generally grow around 3% or so per year, we've had a couple of tenant issues here and there related to real estate taxes and some other costs that have increased, but we think the long-term viability of those properties is still really strong. They are really special real estate. And again, we're going to continue to execute and be opportunistic with acquisitions to try to grow FFO and CAD.

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 very much for joining us on the call today. We look forward to seeing you soon. Thanks.

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