Industrial Logistics Properties Trust (ILPT) 2021 Q1 法說會逐字稿

Good morning, and welcome to Industrial Logistics Properties Trust First Quarter 2021 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kevin Barry, Manager of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today. With me on the call are ILPT's Chief Executive Officer, John Murray; Chief Financial Officer, Rick Siedel; and Chief Operating Officer, Yael Duffy. In just a moment, they will provide details about our business and our performance for the first quarter of 2021, 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, Tuesday, April 27, 2021, 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 can also be found on our website.

With that, I will now turn the call over to John.

Thank you, Kevin. Good morning, everyone, and thank you for joining us. I'll provide a quick overview of first quarter performance, and then Yael and Rick will run through the details of portfolio statistics, leasing activity and financial results.

We began 2021 with earnings growth, solid leasing activity and the commitment to acquire a high-quality distribution property. First quarter normalized FFO per share increased to $0.47 from $0.46 in the prior year quarter or 2.2% growth. We executed new and renewal leases for 620,000 square feet, achieving 16% growth. And portfolio occupancy remained healthy at 98.6%. Also, earlier this month, our Board decided to maintain our regular quarterly distribution to shareholders of $0.33 per share.

Our acquisition strategy is to invest in modern, high-quality, diversified assets with stable cash flows and strong rental growth markets. We are primarily focused on well-located properties in the top 30 industrial markets as well as properties that offer expansion opportunities with access to developable land. While development will not be a primary driver of ILPT's growth in the near term, we continue to evaluate the potential to build or expand on vacant land in our portfolio. In the meantime, acquisitions will likely be the primary driver of growth.

In March, we agreed to buy a newly built 358,000 square foot Class A industrial building near the Rickenbacker intermodal terminal and airport in Columbus, Ohio, for $31.5 million. The property is 100% leased to a high-quality credit tenant for approximately 7 years and includes 25 acres of land that can support future expansion of over 100,000 square feet. The purchase price reflects a 4.6% cap rate.

We have an active pipeline of attractive acquisition targets and the capacity to fund portfolio growth with more than $550 million of liquidity and moderate leverage. During the first quarter, we submitted letters of intent for 9 properties with a combined value of more than $540 million. The competition for e-commerce industrial properties remains aggressive, especially for newer buildings, long-term leased to credit tenants, which ILPT targets for its portfolio, with cap rates currently averaging below 5%.

Now I'll turn the call over to the Yael to review ILPT's operating results for the quarter.

Thanks, John, and good morning, everyone. I'll begin with an overview of ILPT's portfolio and then summarize our leasing activity for the first quarter. As of March 31, 2021, ILPT's portfolio consisted of 289 warehouse and distribution properties in 31 states, totaling approximately 35 million square feet that were 98.6% leased.

Our mainland portfolio includes 63 properties in 30 states totaling 18 million square feet. Mainland occupancy improved to 100% at quarter end. The balance of the portfolio is comprised of 17 million square feet of industrial land and properties in Hawaii that were 97% leased.

ILPT's top 20 tenants represent 46% of total annualized rental revenues with Amazon, FedEx and Restoration Hardware representing approximately 10%, 5% and 3% of total annualized rental revenues, respectively. Investment-grade rated tenants or subsidiaries of investment-grade rated parent entities make up more than half of our mainland revenues.

Looking at the total portfolio, more than 70% of revenue comes from those investment-grade rated tenants or subsidiaries or from our secure Hawaii land leases. The total portfolio has a weighted average remaining lease term of approximately 9 years.

During the first quarter, we achieved strong leasing results, which is reflective of our proactive approach of engaging in early renewal discussions 18 to 24 months ahead of lease expiration. First quarter leasing activity included 23 new and renewal leases for 620,000 square feet, of which 18% were for leases scheduled to expire in 2022 and 2023. In total, rental rates were 16% higher than prior rates, with an average lease term of 12 years and commitments for leasing capital of $0.45 per square foot per lease year.

We signed 21 leases in Hawaii for 443,000 square feet at rental rates that were 19% higher than prior rates, with an average lease term of 14 years. On the Mainland, we leased our last remaining vacancy of approximately 60,000 square feet for a 5-year term to achieve 100% occupancy. Additionally, we reached an early termination agreement with a tenant in Minnesota that was experiencing financial hardship.

We recognized a $507,000 termination fee and simultaneously executed a 10-year lease with a new tenant at a 9% roll-up in rent. Looking ahead, near-term expirations are minimal with approximately 1% of total annualized rental revenue scheduled to expire this year. As such, we continue to focus on lease expirations in the coming years as approximately 30% of ILPT's portfolio is scheduled to roll by the end of 2024.

In 2022, over 9% of total annualized revenue is rolling, mainly driven by Hawaii, where 13.6% of annualized revenue is up for renewal. Our real estate services and asset management teams are proactively engaging with tenants to maximize rent growth and minimize any potential downtime.

Beyond 2022, expirations on the Mainland will drive most of our leasing activity. We are encouraged that several tenants have begun to engage in early renewal discussions and expect negotiations to continue in the coming quarters.

Our current pipeline consists of 67 deals for 4.4 million square feet across the portfolio, including 57 deals for 2.1 million square feet in Hawaii and 10 deals for 2.3 million square feet on the Mainland.

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

Thanks, Yael, and good morning, everyone. Our rental income and substantially all of our expenses decreased year-over-year following the deconsolidation of the 12 properties in our joint venture during the fourth quarter of 2020.

Total portfolio same-property cash basis NOI for the first quarter decreased less than 1% year-over-year, excluding the $507,000 of lease termination income we recognized during the quarter that Yael discussed a moment ago.

From a property-type perspective, we reported modest growth in our Mainland properties, as occupancy returned to 100%, and a 2.2% decrease in same-property cash NOI in Hawaii due to slightly lower occupancy year-over-year combined with 1 lease we amended in order to give the tenant additional free rent as they were delayed getting the permits required to improve the land due to COVID-19.

This same-property performance, along with decreases in general and administrative expense and interest expense and including our share of FFO from the unconsolidated joint venture contributed to first quarter normalized FFO of $30.7 million or $0.47 per share compared to $0.46 per share in Q1 of last year. Adjusted EBITDA for the quarter came in at $40.5 million, and we ended the quarter with debt-to-EBITDA of 5.2x, which is more than 2 turns lower than what we reported a year ago.

Our property portfolio had minimal capital requirements during the first quarter. We spent approximately $1.1 million on capital expenditures, primarily related to leasing costs and building improvements at a handful of properties.

Earlier this month, we declared our regular quarterly distribution to shareholders of $0.33 per share, which is unchanged from the prior level and represents an annualized dividend yield of approximately 5.4% based on yesterday's closing price. Our dividend remains well covered at a normalized FFO payout ratio of just north of 70%.

As of March 31, we had $559 million of total liquidity, including cash on hand of $26.1 million and availability on our revolving credit facility of $533 million.

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

(Operator Instructions) Our first question is from Bryan Maher with B. Riley Securities.

Just a couple of questions for me. When we look at the EBITDA and FFO generated from the JV in the first quarter, would you consider that to be a decent run rate for our modeling going forward?

Thanks, Bryan. That's a good question. Yes, I mean, this is a full quarter of JV activity, and I don't think there was anything particularly unique or interesting in the JV this quarter. So I think that's fair from an FFO and EBITDA perspective.

Great. And Rick, while I got you, do you guys have an outlook for CapEx for 2021?

Well, we typically don't provide guidance, but I would tell you that for Q2, we expect it to be a tick higher than Q1. Just from a seasonal perspective, there's some parking lot improvements, some concrete work, some rooftop units that will likely replaced. So Q2 is probably in the $2 million to $3 million range, I would expect it on the higher end.

Okay. And maybe for Yael. How are the discussions going? First of all, congratulations on getting ahead of the lease expirations and renewals. But how are the discussions going with tenants, particularly in Hawaii, as you try and drive rate higher, particularly in light of what they've experienced as a market in 2020?

That's a good question. We've actually haven't gotten any pushback on the rents because I think the tenants know that this is market, and there really is such a scarcity of available land that if they want to continue operating on these parcels that they need to pay the market rent.

So I think with some of the renewals the tenants might be asking for maybe a month or 2 of free rent, which we might not have previously granted. But besides, the concessions have been minimal, and the tenants are agreeing to the increased rents.

Okay. And maybe for John or Yael, when you guys look at acquisitions, what's going on with construction and new industrial assets with kind of the crescendo of e-commerce and industrial uplift in 2020? Not that it's going to go down, but we certainly saw much more demand in 2020. What are you guys seeing with cap rates? I think you mentioned maybe below 5%. And I was a little surprised with the 4.6% cap rate on the Columbus property.

My guess is that you probably got paid a little bit lower of a cap rate because of the land that came with it. But how are you thinking about the market and putting in so many bids and coming away with just 1 asset for $30 million. Can you shed a little light on that?

Sure. Thanks, Bryan. Yes, I mean, there continues to be development of new properties. But generally, the absorption has been healthy as well. And it's a very desirable real estate form today, and not just typical industrial players chasing transactions, net lease REITs that traditionally haven't invested in industrial properties are investing there, high net worth individuals are investing and all the traditional players are still after transactions. So we've seen a number of transactions where the properties have traded below a 4% cap. And there's no point in investing in properties where you're going to be running in place or going backwards.

So we've had a number of transactions this quarter where we've bid in the first round and then just not chased the transaction into the second round, even though we were invited by the brokers because the price expectations were just too aggressive. The property that we did agree to buy in Columbus is attractive to us because it's a solid credit for the tenant. There's development potential. The market rental growth in that southeast section of Columbus has been in excess of 5% for at least 5 years now. And so it's got great access to one of the most active cargo airports in the country and great access to a Norfolk Southern intermodal center that can take double-stacked trailers from the port of Norfolk in less than a day.

So we feel that, that's a very strong -- I think it's the 13th largest market in the country, and we feel pretty good about that market. So that's why we're willing to pay an aggressive cap rate there.

(Operator Instructions) The next question is from Jamie Feldman with Bank of America Merrill Lynch.

Sticking with CapEx. I was just hoping you guys could provide a little more color on the elevated leasing costs in the quarter.

And then also, can you just talk about what your cash leasing spreads are? I'm just trying to better understand like deal economics. I think you provide GAAP only.

Yes. Jamie, so the CapEx this quarter, we had -- as you know, typically, the leasing on the Mainland is -- includes tenant improvements and leasing commissions, which we usually don't have in Hawaii. So we did that one deal in Minnesota, where we backfilled the expiring lease. And so that deal had $1.50 per square foot per lease year, so that was kind of the driver of the elevated $0.45 per square foot this quarter.

And then as you said, we usually just disclose really our spreads based on GAAP, but I guess, for your modeling purposes, you could model high-single digits for cash spreads would be appropriate.

That's what they were in the first quarter or that's what you're thinking for the rest of the year?

That's what they were for the first quarter. Most of our leases that we're doing on the Mainland have between 2% and 2.5% rent growth, and in Hawaii, 2.5% to 3%. That's what we've typically seen.

Okay. All right. That's helpful. And then I guess just kind of following up to a prior question, but just thinking about how you get deals done. I mean, are you willing to get a little more creative here in terms of, I don't know, whether it's new markets or different property types or just to kind of to keep growing the business and growing the platform. I mean any thoughts about potential style drift to find opportunities given cap rates are so low and competition is so high for the core assets you're looking at?

That's a good question, Jamie. We talk about that or consider that topic a lot internally. And we have been willing to look at properties that maybe aren't in top 25 markets, but because it's a good newly built property or because the rent growth is strong in those markets, we have been looking a little bit outside of our box.

We could go into tertiary markets and Class B and C buildings, but at the end of the day, getting a high-yield today on lesser-quality real estate isn't a good long-term strategy. So we're avoiding going down that rathole.

We are looking at where we may have excess land, where we could develop properties, not just within ILPT's existing relationships, but even across the RMR platform, where there may be excess land. So you may see over time a little bit more development from us than you've seen historically. But our focus is going to remain on quality real estate first as we look at different ways to achieve higher yields. But it is something that we are looking at trying to figure out new ways because sub-5 cap rates are tough to make work.

Okay. That's helpful. And so just to confirm the development you're talking about, is that warehouse development or that could be other property types?

It'll be, yes, industrial warehouse properties.

It's all industrial warehouse. And what about other stuff that's tangential? I mean I saw this morning, I think TPG is putting up a -- it's port business, kind of port operating business. I know like RMR got into the truck stop business years ago. I mean do you guys think about other types of platforms that could still be kind of industrial-focused under this entity?

I would say at the present time, we're not considering that type of modification to our business plan. I never say never. You're right, we have diversified over time in the RMR Group, and that's likely to continue. But within ILPT, I don't see anything on the horizon.

The next question is from Tom Catherwood with BTIG.

John, a question for you on the joint venture portfolio. You -- obviously, it's been up and running for a couple of months here. But you had mentioned during past calls that there is the opportunity to put some assets into that joint venture going forward. How do you think of that as a source of capital as you're kind of looking at more deals or even buying within that portfolio, especially at the lower cap rates and being able to kind of juice your returns with some fees there?

Well, we do think that the joint venture is a useful potential source of capital -- equity capital for our growth. And from time to time, we do evaluate properties that are in the portfolio that might be a good fit for our joint venture partners.

And so -- and we're in regular discussions with the joint venture partners about our existing properties as well as potential acquisitions. So I think although our share price has improved, we're still quite a ways away from where it makes sense to issue common equity. So it's still much more attractively priced equity to use the joint venture for equity capital, where we can get that at -- essentially at net asset value.

So in the near term, I would expect that we would consider some sales of -- or contribution of properties that we currently own to the joint venture. And we could close -- we could acquire properties and close into the joint venture, too, if we do enough homework upfront. So I wouldn't rule that out, although we're not working on anything like that currently.

Excellent. I appreciate that, John. And then question on in assets in the joint venture portfolio. It looks like you extended a lease from maybe the 2024 expiration out to 2030. Didn't see any leasing mentioned though. Was that just kind of picking up the Amazon renewal in Indiana from the prior quarter? Or is that something new?

No, we -- Tom, this is Yael. We did a 10-year renewal with Procter & Gamble in Ohio. And so that extended the lease. We just didn't -- as it's deconsolidated, we don't -- we didn't talk about the leasing in the JV.

Got it. Understood. And kind of one follow-up on kind of leasing. I know last quarter, you mentioned that of the 2 leases expiring in 2021, you were in active negotiations with the tenants. Any kind of updated thoughts on that or any progress on that front?

Yes. Both of them are actually in LOI status right now. So we're working through the lease amendments.

The next question is from Jason Idoine with RBC Capital Markets.

I was wondering if you could touch on maybe where some of those potential development opportunities are located. And how those opportunities would compare with kind of the core markets that you're targeting with acquisitions?

We have excess land on properties in a variety of different markets. One, this excess land on the property we're presently pursuing in Columbus. The property we acquired in Kansas City late last year has excess developable land, and we have other properties around the country that do as well. And we're currently looking at a parcel that had formally been a travel center in the Dallas industrial market for possible development as well. So they're all over.

Got it. And then I was just going to follow on. Do you guys have any, I guess, see-through into what type of yield would be reasonable to expect to develop at in this market?

No, I think it's market by market, and it depends on the size of the building that can be developed or in some cases, it may be expanding existing buildings. So I'd be reluctant to give you a specific rate other than to say it would be better than buying.

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 today.

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