Industrial Logistics Properties Trust (ILPT) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Industrial Logistics Properties Trust Second Quarter 2020 Earnings 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 Chief Operating Officer, Yael Duffy. In just a moment, they will provide details about our business and our performance for the second quarter of 2020, 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, Wednesday, July 29, 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. Now I will turn the call over to John.

Thank you, Olivia. Good morning, and welcome to ILPT's Second Quarter 2020 Earnings Call. COVID-19 has had a tremendous negative impact on our economy, including most commercial real estate and changed how we conduct business. However, industrial properties remain highly sought after due to surging e-commerce sales, retailers exploring new delivery services and storage options and a renewed focus on domestic supply chain independence. Given how this virus has expedited the e-commerce evolution and powerful long-term demand trends, leading industry experts are providing optimistic forecasts for continued strength in industrial real estate fundamentals over the coming years, including healthy levels of both net absorption and overall rent growth. Supported by these industry tailwinds, we believe ILPT is positioned to perform well, both through this recession and as the economy -- economic recovery unfolds.

As Yael and Rick will discuss later on the call, despite a challenging economic backdrop, we were pleased to deliver strong second quarter results, including same-property cash NOI growth of 3.4% year-over-year, normalized FFO growth of 2.5% year-over-year, strong rent collections and almost 2 million square feet of leasing activity with a 23% roll-up in rent and average lease term of more than 20 years. We believe that ILPT is well positioned to navigate any near-term challenges caused by COVID-19 and capture long-term growth for the following reasons. First, nearly 80% of our revenues come from logistics properties used for warehouse and distribution purposes. Second, on the mainland, 84% of revenue comes from tenants that produce or provide goods and services that are deemed essential. And many of our tenants, including our largest 2 tenants, Amazon and FedEx, are critical to sustaining a resilient supply chain. Third, in Hawaii, 80% of revenue comes from tenants deemed essential. While some small businesses in Hawaii may struggle with a slow recovery in tourism, we believe that our Hawaiian land is some of the best industrial use real estate on the island of Oahu, where the state capital of Honolulu is located and where 90% of the goods consumed in Hawaii are imported. As a result, we believe the irreplaceable nature of this portfolio will continue to drive its value and demand.

Fourth, approximately 75% of ILPT's rent comes from investment-grade rated tenants, subsidiaries of investment-grade rated parent entities or Hawaii land leases. On the mainland alone, 62% of rent comes from investment-grade rated tenants or subsidiaries of investment-grade rated parent entities. Fifth, our portfolio is well diversified across geography and industry groups, with limited outsized exposure to any 1 market or industry. Finally, our balance sheet is strong with more than $460 million of liquidity, no near-term debt maturities and a well-covered dividend.

We continue to evaluate opportunities to grow our portfolio but have not made any acquisitions this quarter. Strong performance of industrial real estate during this pandemic has continued to attract capital looking for deployment opportunities. As such, competition has been strong and cap rates continue to hold steady, especially for newer, long-term leased credit tenant buildings, which ILPT targets for its portfolio. I'll now turn the call over to Yael to discuss market dynamics, leasing activity and the status of rent deferrals.

Thank you, and good morning. As John mentioned, industrial real estate demand continues to be supported by the tailwinds of e-commerce, consumer products and 3PL and transportation industries. ILPT's portfolio benefits from a strong diversification across industry groups with 17% exposure to e-commerce, 20% to consumer products and 15% to 3PL in transportation, including household names such as Amazon, Procter & Gamble, General Mills, Nestlé and FedEx. As such, we believe that the nature of ILPT's business and the strength of our portfolio will allow us to successfully manage the ongoing economic disruptions caused by COVID-19 as evidenced by our strong leasing activity this quarter and an active lease pipeline.

Despite market conditions and an existing portfolio occupancy of 98.8%, this quarter, ILPT executed 1.9 million square feet in leasing renewals and resets, all of which were in Hawaii. Of the 15 deals, 10 were renewals totaling approximately 314,000 square feet at rents that were 26.6% higher than prior rates with an average lease term of 23.6 years and commitments for leasing capital and concessions of only $0.04 per square foot per lease year. In contrast to other real estate sectors, where tenants have generally been interested in short-term extensions given the uncertainty of market conditions, our tenants in Hawaii committed to longer lease terms at strong rents with annual market increases and minimal concessions.

The balance of our leasing activity consisted of rent resets totaling 1.6 million square feet at rents that were 21.4% higher than prior rents. In April, we completed a rent reset that carried over from 2019 with a tenant that leases approximately 1.2 million square feet for $2 million of annualized revenues. We were able to avoid arbitration and achieved a roll-up in rent of approximately 8%. Excluding this, the remaining resets were completed at a 30.9% roll-up in rent.

Due to the proactive efforts of our real estate services and asset management teams, all rent resets scheduled for 2020 are now complete. As of June 30, the majority of 2020 lease expirations have been addressed, with only 72,000 square feet or $646,000 of annualized revenue outstanding. As such, we have turned our focus to mainland expirations in 2021 for approximately 2.5 million square feet or 5.9% of total annualized rent is set to expire, and Hawaii expirations in 2022 where 2.4 million square feet or 8.3% of total annualized rent is set to expire.

The team has established a comprehensive and strategic plan to address these expirations in a way that will maximize market-to-market rent growth while minimizing potential downtime and capital costs.

Our current leasing pipeline of 4.5 million square feet includes 85,000 square feet that could absorb vacant space across the portfolio. We anticipate a near-term conversion of 35% of our pipeline, given that roughly 1.5 million square feet of current activity is in advanced stages of negotiation or lease documentation.

Turning to rent collections and rent deferrals. After taking into consideration granted rent deferrals to certain tenants, 97% of contractual rent due was collected in Q2 and July is trending in line with prior months. ILPT's top 20 tenants have all paid their July rent obligations. During our Q1 earnings call, we reported that ILPT had granted rent deferrals to 37 tenants totaling approximately $2.1 million, representing approximately 6.5% of annualized rent. As of July 27, the numbers have grown modestly to 42 tenants, totaling approximately $2.8 million for the month of April through September, which represents 7.8% of annualized cash rent. In aggregate, these deferrals represent 2.4% of the contractual cash revenue over that period. To-date, no rent has been forgiven or abated.

We are committed to working with our tenants to support their long-term success and position ourselves as a landlord of choice. While rent deferral requests have significantly subsided as the economy began to reopen in June and July, the extension of the 14-day quarantine order through the end of August in Hawaii may negatively impact small businesses that rely on tourism, resulting in additional requests in August and September. To-date, we have not seen an acceleration in deferral requests but we are closely monitoring tenant activity, especially in Hawaii. 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. As John mentioned, total portfolio same-property cash basis NOI for the second quarter increased 3.4% over the prior year. This growth was the result of a 3.5% increase on the mainland and a 3.3% increase in Hawaii. The mainland increase was primarily driven by contractual rent steps and the expansion completed in 2019 that we've discussed on prior calls. The increase in Hawaii was the result of leasing activity, the recognition of percentage rent and some collections of amounts previously reserved for, partially offset by increased real estate tax and insurance expenses.

This same-property NOI growth, along with our other results, contributed to second quarter normalized FFO of $30.6 million or $0.47 per share, up 2.5% year-over-year. Adjusted EBITDA for the quarter was $46.9 million, up 6.3% year-over-year. In May, we prepaid a $48.8 million mortgage and currently have no debt maturing until our credit facility in December of 2021, which is subject to 2 6-month extensions at our option. As of June 30, we had approximately $33 million of cash on hand and $430 million of availability on our revolving credit facility. We ended the quarter with a consolidated net debt-to-EBITDA ratio of 7.2x. Excluding the debt and EBITDA related to the joint venture, the rest of the portfolio was at 6.3x debt-to-EBITDA.

We continue to work towards expanding our joint venture, and it may be possible for ILPT to further reduce our leverage this summer if we are successful in negotiating to bring a second partner into the venture. If these JV assets are deconsolidated upon selling a second equity stake, leverage, including our pro rata share of the unconsolidated joint venture would be below 6x. This JV may also provide ILPT the opportunity for continued growth with equity capital raised at net asset value.

In the meantime, we remain confident that our current liquidity and financial profile supports our ability to operate our business effectively and securely.

Our portfolio continues to have minimal capital requirements. We spent just under $1.1 million on capital expenditures during the second quarter. The majority of the improvements related to 2 of our mainland properties, 1 for a roofing project and the other for restroom renovations and upgraded lighting throughout the facility. Earlier this month, we declared our regular quarterly distribution shareholders, unchanged from the prior level. This $0.33 per share dividend results in a normalized FFO payout ratio of just over 70%. As we have said before, our Board evaluates the dividend at every meeting and has been reluctant to raise it due to our current dividend yield relative to our peers.

We are encouraged by ILPT's second quarter results and continue to believe that our business will withstand the current economic challenges caused by the COVID-19 pandemic, with a strong balance sheet and portfolio stability supported by a resilient and growing industrial sector. That concludes our prepared remarks. Operator, please open up the line for questions.

(Operator Instructions)

Our first question is from Bryan Maher of B. Riley FBR.

So just a couple of questions. I was hoping, John, maybe you could drill down a little bit more on the acquisition opportunities or lack thereof. Is there fewer opportunities out there or just fewer that are meeting your underwriting criteria because cap rates have stayed so low?

Bryan, it's a good question. We have been actively bidding on acquisition opportunities, but we're -- we've been more conservative about where cap rates -- where we think cap rates should be. And in certain markets for certain tenants, the pricing has been more aggressive than we were willing to go. So we've -- we're feeling pretty good about a couple of opportunities we're chasing currently. But we've made it to the final round on a handful of opportunities and not been selected as the winning bid. So it's very competitive. We don't feel comfortable paying for cap rates below 5% currently, so we've been drawing the line.

Got it. And then can you talk a little bit about new supply in your markets? I mean, clearly, that would be ex Hawaii, but what are you seeing on the mainland? Anything that concerns you about competitive new supply in the markets where you operate?

I mean, there is new supply in various markets, but I think that the net absorption has been high. And so -- and vacancy rates remain low. I think nationwide, they're probably -- they're around 5%. So we feel that the tailwinds of e-commerce, in particular, but others onshoring more manufacturing and keeping higher inventories of certain key supplies, those are all things that are going to continue to benefit us. And so supply growth really is -- we don't feel is a big concern right now.

Great. And then just last for me. On the second potential JV partner for the mainland assets, what is the hold up there? Is it mainly kind of a COVID-driven inability to do due diligence? Is it something else? And do you think that, that's something that can happen in the back half of 2020?

I mean I think we said in the script that we're hopeful that this quarter, we get -- this third quarter, we close with the second partner. I think the delays have -- some of it has been getting the legal documentation squared away and that's coming down to the final stages. Some of it has been delays because of the pandemic in allowing the partner's diligence teams to travel. It's very complicated. Even when the markets are open, depending on where the markets are, you may not be able to get back to the market where you live if you go some place to do diligence. So it's -- there's a lot of logistics involved in conducting diligence these days. But we're confident that we'll get it done this year.

The next question comes from Jason Idoine of RBC Capital Markets.

I was wondering if you could touch on where the $700,000 of newly deferred rents and also the unpaid and undeferred rents are coming from. Could you point to either the mainland portfolio or the Hawaiian portfolio and if there's any specific industries?

Jason, this is Yael. So we have had most of the new deferrals are for tenants in Hawaii. As we've mentioned, these are just smaller businesses that rely heavily on tourism. But we feel confident that once we're able to -- once tourism opens up again and the quarantine -- the 14-day quarantine is lifted, their businesses will be able to rebound. I think most of the deferrals have been, in general, have been in the biggest bulk of it for us has been in the automotive industry. I think we mentioned last quarter that we had given almost $1 million of rent deferral to American Tire Distributors. And those -- there are 5 locations on the mainland for us.

Okay, got it. And then how much revenue from the deferrals are you guys recording? And what about of the 3% of undeferred and uncollected rent, how much did you guys record of that?

So the 97% collections number excludes tenants -- sorry, it includes tenants that we don't record revenue on. Our denominator is based on our monthly billings, and that would include amounts that we don't record as revenue because we're not confident we'll collect. The difference between what we do book for revenue and that denominator is about 1%. So collections, as a percent of revenue, are closer to 98%. And to-date, we've had $2.3 million of the $2.8 million already passed, so it's in our accounts receivable and we'll collect that in the future. The team does an evaluation each period and concluded that those rents will be collected, and therefore, it hasn't impacted our numbers.

Okay. And then last question for me. I know last quarter, you guys gave a breakdown of the deferrals. Looking forward over the next several months, I was wondering if you guys could provide an update on that now that you have $700,000 of new deferrals. Just a useful data point.

Yes. So 11% is related to July and then it significantly drops off in August just to 2% and September is less than 1%. So as Rick said, most of it is behind us already.

Operator

The next question is from Aaron Hecht of JMP Securities.

Wondering if you've seen enough property transactions at this point to get a read on cap rate trends. Obviously, interest rates have been going down. Wondering if we're seeing a corresponding decline in cap rates at this point for mainland type properties.

We're seeing cap rates at least hold steady for the stronger tenants' last-mile e-commerce type facilities, they may even be getting a little bit more aggressive, so dropping below 5% for quality buildings that are new and well-located for tenants like Amazon, their cap rates are in the 4s. So I think they're at least holding steady and maybe getting slightly more aggressive in certain markets.

Got you. And I think in your first round of joint venture, the cap rate was 5.8%. Do you think this next round will be somewhat similar to that? Or has the valuation proposition changed to a degree?

The valuation proposition for the second partner, I mean they're entering at the same valuation as the prior partner. So then together, we'll all evaluate investment opportunities going forward to make sure that we all agree that they meet our investment considerations, that we're getting the appropriate returns.

Okay. And then the 5.6% of mainland leases that turn in 2021, sorry if I missed this. Any thoughts on where those rents are sitting today compared to the market rates?

So based on our current pipeline, we're all hoping to see an increase of approximately 4% to 5% over expiring rents.

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

Thanks, everyone, for joining us today. We believe our tenant base is strong and our assets have a long runway for demand. We are optimistic about the resilience of our sector moving forward. We'd like to thank our teams for their continued hard work. Wish you all health and wellness going forward. Thanks.

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