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Industrial Logistics Properties Belief (NASDAQ:ILPT) Q2 2023 Earnings Convention Name July 26, 2023 10:00 AM ET
Firm Individuals
Stephen Colbert – Director, IR
Yael Duffy – President and COO
Brian Donley – CFO
Convention Name Individuals
Bryan Maher – B. Riley Securities
Mitch Germain – JMP Securities
Camille Bonnel – Financial institution of America
Michael Carroll – RBC Capital Markets
Operator
Good day, and welcome to the Industrial Logistics Properties Belief Second Quarter 2023 Monetary Outcomes Convention Name. All contributors will probably be in a listen-only mode. [Operator Instructions] Please notice, this occasion is being recorded.
I would really like now to show the convention over to Stephen Colbert, Director of Investor Relations. Please go forward, sir.
Stephen Colbert
Good morning. Becoming a member of me on right now’s name are Yael Duffy, President and Chief Working Officer; and Brian Donley, Treasurer and Chief Monetary Officer. As we speak’s name features a presentation by administration adopted by a question-and-answer session with analysts.
Please notice that the recording and retransmission of right now’s convention name is prohibited with out the prior written consent of the corporate. Additionally notice that right now’s convention name accommodates forward-looking statements inside the which means of the Non-public Securities Litigation Reform Act of 1995 and different securities legal guidelines.
These forward-looking statements are based mostly on ILPT’s beliefs and expectations as of right now, July twenty sixth, 2023 and precise outcomes might differ materially from people who we venture. The corporate undertakes no obligation to revise or publicly launch the outcomes of any revision to the forward-looking statements made in right now’s convention name.
Further info regarding components that might trigger these variations is contained in our filings with the Securities and Alternate Fee, or SEC, which will be accessed from our web site, ilptreit.com or the SEC’s web site. Buyers are cautioned to not place undue reliance upon any forward-looking statements.
As well as, we will probably be discussing non-GAAP monetary numbers throughout this name, together with normalized funds from operations or normalized FFO, adjusted EBITDA and cash-based web working revenue or money foundation NOI. This quarter, we’re additionally introducing our calculation of money accessible for distribution or CAD.
A reconciliation of those non-GAAP figures to web revenue is obtainable in our supplemental working and monetary information package deal, which will be discovered on our web site.
And with that, I’ll flip the decision over to Yael.
Yael Duffy
Thanks, Stephen and good morning. On right now’s name, I’ll evaluation ILPT’s working and leasing efficiency after which present an replace on our disposition exercise earlier than turning the decision over to Brian to debate our monetary outcomes.
As we enter the second half of the yr, we stay inspired by the continued demand for ILPT’s high-quality portfolio and the power within the industrial actual property — in actual property fundamentals.
Within the first six months of 2023, we signed 32 leases totaling greater than 3.1 million sq. ft at weighted common rental charges that have been 23% increased than prior rental charges for a similar house.
The impression of this exercise is a rise of $4.8 million in annualized rental income, of which greater than half will take impact within the second half of 2023 or in 2024. These outcomes, together with a tenant retention price of 87%, showcase our means to generate natural money move development whereas sustaining portfolio stability.
As of June thirtieth, 2023, our portfolio, which consists of 413 warehouse and distribution properties, achieved 99.1% occupancy, representing a 40 foundation level enhance sequentially.
Through the quarter, we executed 17 new and renewal leases and three hire resets for practically 2 million sq. ft at a weighted common lease time period of 8.9 years. This exercise resulted in GAAP and money leasing spreads of 29.6% and 10.2%, respectively.
Highlighted in these outcomes is the sturdy exercise inside our Hawaii portfolio. With a market emptiness price below 1%, robust tenant demand and minimal new building within the pipeline, we’ve been in a position to make the most of mark-to-market alternatives.
We executed 855,000 sq. ft of leasing in Hawaii at weighted common rental charges that have been 41.7% increased than prior rents, together with 5 new leases totaling 195,000 sq. ft at will increase in hire of 62.2%.
Leasing in our wholly-owned Mainland portfolio was additionally robust with complete leasing of roughly 428,000 sq. ft together with 1 new lease and three renewals at weighted common roll-ups in hire of fifty% and 36%, respectively.
Wanting forward, 12 million sq. ft or 16% of ILPT’s complete annualized income is about to run out by way of 2025. We consider there may be ample alternative to extend money flows in line with the 30% roll-up in GAAP rents we achieved over the previous 12 months.
Turning to transactions, among the many most ceaselessly requested questions we obtain is once we anticipate to renew our disposition program to cut back leverage. Based mostly on what we’re seeing firsthand and thru discussions with brokers, we consider the market has slowly begun to thaw as buyers search for alternatives to deploy capital. We persistently obtain unsolicited affords for the high-quality properties in our portfolio.
Nonetheless, given we aren’t a distressed vendor, it is not so simple as discovering a purchaser. As we consider every alternative, our means to transact relies on pricing and the impression to our monetary place.
For every provide we might obtain, we examine the potential transaction value to the allotted mortgage quantity below our debt agreements and make sure that we are able to keep the required debt service protection ratios.
Moreover, potential tax beneficial properties and the impression to our general liquidity must be thought of. As such, disposition alternatives have been restricted on this difficult gross sales market.
Given these obstacles, we’re blissful to report that we at the moment have three properties, two which might be encumbered totaling 762,000 sq. ft below settlement to promote for an combination gross sales value of $65.3 million.
We hope to proceed to enhance our monetary place with extra disposition alternatives. Nonetheless, we anticipate exercise to be restricted within the short-term.
I am going to now flip the decision over to Brian.
Brian Donley
Thanks, Yael and good morning everybody. Beginning with our consolidated monetary outcomes for the second quarter of 2023, normalized funds from operations was flat on a sequential foundation of $0.12 per share, a decline in comparison with the prior yr quarter, primarily because of our increased curiosity expense incurred below our floating price debt devices.
Money accessible for distribution in Q2 was $9.8 million, and adjusted EBITDAre was $81.3 million for the quarter. Our leasing exercise generated will increase in money rents for our comparable portfolio of $1.8 million or 2% per yr, year-over-year.
Nonetheless, our hire development was partially offset by working expense will increase, which resulted in a web 50 foundation level enhance in complete portfolio same-property money foundation NOI for the second quarter.
Comparisons of same-property GAAP NOI have been negatively impacted by a $3.4 million write-off however beneath market lease legal responsibility within the prior yr quarter associated to a lease termination.
Curiosity expense elevated $24.6 million in comparison with the prior yr quarter, excluding the impression of the amortization of bridge mortgage prices acknowledged within the prior yr. This quarter, we executed on a money out refinancing inside our consolidated three way partnership.
We entered a brand new $91 million mounted price interest-only mortgage secured by 4 properties that bears curiosity at 6.25% and used a part of the proceeds to repay 4 amortizing loans with a complete principal stability of $35.9 million.
Consequently, our present estimated quarterly curiosity expense run price is roughly $73 million, consisting of $60 million of money curiosity expense and $13 million of non-cash amortization of financing prices, together with present rate of interest caps.
Turning to our stability sheet. Together with extension choices, ILPT’s weighted common debt maturity is 5.5 years with no maturities till 2027. As of June thirtieth, our complete debt both carry a hard and fast price or was mounted by way of rate of interest caps for complete weighted common rate of interest of 5.46%.
As Yael talked about, we’ve three wholly-owned properties below settlement on the market of $65.3 million. Assuming these transactions shut, $42 million of the proceeds from two of the properties will probably be used to repay a portion of the $1.2 billion floating price CMBS mortgage.
The quantity to re-lease a property from the collateral pool below this mortgage is the better of 115% of the allotted mortgage worth below our debt settlement or the online gross sales proceeds. We additionally want to take care of the general debt service protection ratio that was in place when the mortgage was underwritten.
For these inclinations, ILPT can transact without having to contribute more money to take care of the mortgage covenants. So, we at the moment have $71.7 million of money available in addition to $138.7 million of restricted money in our consolidated three way partnership.
We proceed to search for alternatives to construct our money reserves. Accordingly, the proceeds from the sale of the 1 unencumbered asset will probably be held to additional improve our liquidity.
In closing, our portfolio stays robust with an distinctive tenant roster, close to full occupancy, and rising rents throughout our portfolio and we anticipate that ILPT will proceed to profit from business demand for high-quality industrial actual property.
That concludes our ready remarks. Operator, please open the road for questions.
Query-and-Reply Session
Operator
Thanks. We’ll now start the question-and-answer session. [Operator Instructions]
The primary query comes with Bryan Maher with B. Riley Securities. Please go forward.
Bryan Maher
Thanks. Good morning Yael and Brian. Only a couple for me this morning. After we take into consideration the asset gross sales and constructing money reserves and paying down some debt, how large of a possibility do you assume that, that’s over the following couple to few quarters?
Yael Duffy
Good morning Bryan. I believe we’re reviewing alternatives as they arrive. Two of the properties on the disposition listing got here by way of our leasing efforts. One of many properties is vacant and the opposite quickly to be vacant, so we have not launched a proper disposition marketing campaign. And so we’re persevering with to judge pricing and our portfolio and see what different alternatives we’ve. So, I haven’t got a quantity so that you can venture.
Bryan Maher
And I think that if you chip away at this debt with some asset gross sales over the following, for instance, 12 to fifteen months earlier than the primary extensions could be due on a few of your variable price debt, that, that is going to doubtlessly decrease the price of future caps wanted to get these extensions achieved.
Perhaps Brian, you possibly can discuss for a second, if we have been to sit down right here right now and need to redo these caps to get the extensions, what the associated fee is perhaps relative to what you needed to pay final yr? Just a few broad stroke concepts.
Brian Donley
Positive Bryan. And I believe we talked about this final quarter and it is — shopping for an rate of interest cap, it is a very risky instrument. The pricing modifications week to week, day after day. And I believe final quarter, I might need quoted one thing round $50 million.
And we seek the advice of with varied consultants on this that the deal in caps and our present estimate right now on the $1.4 billion floating price debt might be anyplace from $17 million to $20 million if we have been to purchase that very same cap. So, once more, it modifications with the wind, so it is crucial for us to proceed to construct money reserves.
However to your different level, sure, if we have been to chip away on the debt and repay significant quantities, the price of that cap would additionally decline as a result of it is based mostly on the principal — the notional quantity of principal debt that you take — that you simply’re capping.
Bryan Maher
And simply possibly two extra fast ones for me. On the hire roll-ups, I imply, these have been fairly juicy roll-ups for the second quarter. Yael, what do you assume it could be for the complete yr? After we look again at 1Q, once we take into consideration 2Q, do you may have one thing in your thoughts for what you assume it’s for all of 2023?
Yael Duffy
I believe we’re hoping that it is someplace between 25% to 30% for the yr on a GAAP foundation.
Bryan Maher
Okay. And simply my final query. The Blackstone deal to promote $3.1 billion in warehouses and industrial property to Prologis, if you take a look at that transaction, does it look like extra of a one-off on the a part of Blackstone to boost capital relative to a few of the capital that is been known as away from them in BREIT, et cetera? Or is there one thing else happening there because it pertains to demand for property? And that is all for me. Thanks.
Yael Duffy
I believe industrial, generally, together with multifamily, might be essentially the most in-favor asset class. So, if buyers need to deploy capital, I believe it is in a kind of classes. So, I believe it is promising for the economic panorama. I believe that deal was an enormous deal.
And in talking with brokers, we’re seeing — they’re seeing that extra one-off offers are coming into the market however they have not seen the larger portfolio. So, I believe time will inform, and I believe everyone is sort of searching for September to get right here and see what that brings as a result of typically, the summer season is sluggish.
Bryan Maher
Thanks.
Yael Duffy
Thanks.
Operator
Subsequent query comes with Mitch Germain with JMP Securities. Please go forward.
Mitch Germain
Hello, good morning. I am making an attempt to know a few of the places and takes in your same-property development. And regardless of a few of these fairly wholesome hire spreads that you’re getting on these leases, your revenues are solely up from prior yr about lower than 1% however your working expense is up considerably extra.
So, I am simply making an attempt to know sort of when does this upside in rents start to materialize and have a significant impression in your rental revenue?
Yael Duffy
Sure. Good morning. So, I believe a few of these roll-ups, we have had this traditionally. We’re doing — we’re not seeing the money impression immediately as a result of we’re doing offers forward of lease expiration.
And so for the actions we have achieved up to now this yr, I believe virtually two-thirds will probably be within the latter half of the yr and into 2024. So, I believe that is impacting a few of the development, and we’re not seeing it this quarter.
I believe additionally so far as the bills go, I believe some — we’ve some very refined tenants that once they negotiate their leases, they put caps in for the way a lot bills can get handed again for upkeep and repairs and so I believe there’s a little little bit of leakage on the expense aspect.
Mitch Germain
Okay. After which with regard to your expirations within the again half of the yr, is there something that — of notice that we should always pay attention to? I imply, you’ve got had virtually a 90% retention price up to now. So, is there any sort of deliberate move-outs that we should always pay attention to?
Yael Duffy
So, we all know of two recognized vacates within the second half of the yr. Each of these properties even have fairly good exercise on them. One has assigned LOI, and the opposite, I believe we have traded a few proposals with potential tenants. So, there is not something that ought to be a needle mover in 2023.
Mitch Germain
Okay, cool. I respect the additional shade when it comes to sort of recommend sort of the place mark-to-market goes. How ought to we take into consideration that, although, if we like bifurcate Mainland versus Hawaii?
Yael Duffy
Sure. So, as you already know, Hawaii has at all times been actually robust for us. And so I believe 30% to 40% roll-ups in Hawaii going ahead are — wouldn’t be stunning, I believe 30% on the conservative aspect.
On the Mainland, we had actually good leasing outcomes this quarter, virtually 40% on the Mainland from a GAAP perspective and even on the money perspective, it was 30%. I believe it actually relies upon market-to-market. I believe we’ve some areas like Memphis, South Carolina that we have been seeing large roll-ups in hire and others which have been single digits. So, I believe 10% might be a superb estimate for the Mainland.
Mitch Germain
Thanks.
Yael Duffy
Thanks.
Operator
Thanks. The following query comes with Camille Bonnel with Financial institution of America. Please go forward.
Camille Bonnel
Hello, good morning. Simply following up on, Yael, your response to an earlier query about how just like the leasing unfold impression, you will see that begin to observe by way of within the again half of this yr.
Are you able to simply communicate to why, like, you assume tenants are keen to resume their leases up to now upfront? I believe in some circumstances, you’ve got been signing leases like 18 months-plus, which actually differs out of your — a few of the friends’ methods out there at the moment?
Yael Duffy
Sure. So, I believe in Hawaii typically, the tenants are extra of they, sort of, wait till the final minute typically as a result of they’re smaller tenants, and simply they’re sort of operating their enterprise and so they haven’t got an entire group targeted on their leasing efforts.
I believe for the Mainland, these are massive properties which might be crucial to the tenant’s enterprise. And they should be sure that if they will not have the ability to do a renewal with us and we won’t come to phrases, they will have to maneuver their operations.
And in the event you’re 1 million sq. ft, it is actually exhausting to attend six months out if you must relocate and construct all of the infrastructure once more. So, that’s, I believe, typically why we’re beginning negotiations early.
Plus we additionally wish to have a sign if a tenant will not be going to resume, we wish to restrict our downtime as a result of by the point you rent a dealer, begin advertising and marketing it, if you must do any work to multi-tenant the property doubtlessly, that takes time and we’re making an attempt to restrict our downtime.
Camille Bonnel
That is useful. And what are you seeing when it comes to market hire development significantly within the Mainland US?
Yael Duffy
About 10%. Once more, it relies upon market-to-market. Some are increased, some are somewhat bit decrease however we’re persevering with to have — we have been in a position to proceed to push rents.
Camille Bonnel
And has that modified? As a result of I believe that 10% is on an annual foundation. So, have you ever seen any change sequentially?
Yael Duffy
No. What we have been seeing extra is that tenants are taking somewhat longer to decide and I do not know if that is simply the impression of the summer season. Folks typically, it is a sluggish time for leasing as a result of individuals are on trip. However no, we have not seen it — tenants pushing again.
Camille Bonnel
All proper. And lastly, do you may have any replace on the curiosity across the house in Hawaii that Residence Depot was going to absorb 2024?
Yael Duffy
Sure. So, we have formally launched it at first of the month, and we have gotten numerous inbound calls, largely from Mainland tenants trying to sort of have a presence in Hawaii. So, we really feel optimistic that we’ll have the ability to get that re-leased forward of the March 2024 lease expiration.
Camille Bonnel
Thanks.
Yael Duffy
Thanks.
Operator
The following query comes with Michael Carroll with RBC Capital Markets. Please go forward.
Michael Carroll
Sure. Are you able to rapidly contact in your financing methods? I suppose what is the reasoning for issuing the $90 million of secured debt and repaying the smaller balances which might be excellent in debt?
I believe it was like $30 million that you simply repaid. It appeared like that $30 million was going to run out in 2020 — or in 2030 timeframe. So, was it only a method so that you can get more money or was that the entire objective of that the rationale why you are keen to surrender that decrease rate of interest debt?
Brian Donley
Hey Michael, thanks for the query. Sure, that is precisely proper. It was a possibility to really enhance our money move. The coupon and the curiosity expense on our revenue assertion will go up due to the speed differential.
However once more, it isn’t — a brand new mortgage is interest-only versus amortizing principal funds over these different mortgages, so it was a approach to seize some money in addition to enhance ongoing money move accessible to the corporate. So, that was the thought course of there.
Michael Carroll
Okay. After which on the asset gross sales that you simply introduced, I suppose how a lot NOI from these properties have been generated in 2Q? I do know you stated 1 was vacant and 1 was quickly to be vacant. However once we’re our fashions, I imply, I suppose what was the trailing cap price on these property that we are able to assume sort of flows out of the run price estimate going ahead?
Yael Duffy
So, one of many properties is our improvement venture in Mesquite, Texas, in order that additionally had no money move related to it. And the opposite one, as I discussed, was a small property that was previously leased to FedEx that was additionally not money flowing.
And the opposite one is in Indiana. It was a much bigger property, 535,000 sq. ft that was scheduled to be vacant in June of 2024, and we had about $3 million in NOI for that property.
Michael Carroll
Is that an annualized quantity or quarterly?
Yael Duffy
Sure, annualized, sure.
Michael Carroll
After which Yael, if you begin potential asset gross sales, I do know you stated earlier that you have not began a course of but to promote properties. I imply, do you must begin occupied with pursuing one thing like that earlier than the rate of interest caps expire? Or are you keen to sort of proceed to kick the can down the highway, ready for a greater market earlier than you even take into consideration bringing properties to the market to promote?
Yael Duffy
Sure, we’ve no urgency. We really feel that we’ve the money reserves to purchase the caps with what we’ve right now, the money available right now. So, I believe we’ll be affected person till we get a greater sense that the capital gross sales market has actually opened.
Brian Donley
Sure. We wish to be certain we truly de-lever, however with any transaction and as we kind of outlined in our ready remarks, there are a number of concerns earlier than we’re keen to really pursue a transaction and analysis is every part.
Michael Carroll
And what do you must see so that you can be keen to convey property to the market? I imply, do you must see rates of interest stabilize or do you must see them truly begin to tick decrease from this level?
Yael Duffy
I believe it is extra simply to know what the market is. I believe there’s nonetheless value discovery. I do know the Blackstone deal was a giant one nevertheless it was additionally a one-off and so I believe we’re sort of ready to simply get extra information.
Michael Carroll
Okay. All proper. Thanks.
Yael Duffy
Thanks.
Operator
Thanks all. This concludes our question-and-answer session. I want to flip the convention again over to Yael Duffy for any closing remarks. Please go forward.
Yael Duffy
Thanks for becoming a member of us on the decision right now and hope to talk with lots of you quickly.
Operator
This convention has now concluded. Thanks for attending right now’s presentation. Chances are you’ll now disconnect.
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