Industrial Logistics Properties Trust (NASDAQ:ILPT) Q1 2024 Earnings Call Transcript

Industrial Logistics Properties Trust (NASDAQ:ILPT) Q1 2024 Earnings Call Transcript May 1, 2024

Industrial Logistics Properties Trust  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Industrial Logistics Properties Trust First Quarter 2024 Earnings Conference Call. [Operator Instructions] This event is being recorded. I would now like to turn the conference over to Kevin Brady, Director of Investor Relations. Please go ahead.

Kevin Brady: Thanks, Cindy. Good morning. Joining me on today’s call are Yael Duffy, President and Chief Operating Officer; and Tiffany Sy, Chief Financial Officer and Treasurer. Today’s call includes a presentation by management followed by a question-and-answer session with analysts. Please note that the recording and retransmission of today’s conference call is prohibited without the prior written consent of the company. Also, please 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, May 1, 2024, 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, Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial numbers during this call, including normalized funds from operations or normalized FFO, adjusted EBITDAre and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income is available in our earnings presentation, which can be found on our website.

Yael Duffy: Thank you, Kevin, and good morning. On today’s call, I will review ILPT’s operating and leasing performance, and then turn the call over to Tiffany to provide an update on our financial results. We started the year with continued demand for our high-quality portfolio, consistent with the trends we saw throughout 2023. Supported by higher rental income, same-property cash basis NOI grew by 2.3% compared to the same period last year. Notably, normalized FFO increased 19% and 17% on a year-over-year and sequential quarter basis, respectively. We executed new and renewal leases for nearly 2 million square feet and total occupancy reached 99%. As of March 31, 2024, ILPT’s portfolio consisted of 411 warehouse and distribution properties in 39 states, totaling approximately 60 million square feet, which includes 16.7 million square feet of industrial land and properties in Hawaii.

ILPT’s portfolio has a weighted average remaining lease term of 8 years anchored by tenants with strong business profiles and stable cash flows. ILPT’s top 10 tenants account for nearly half of our total annualized rental revenues and 77% of our revenues come from investment-grade rated tenants or from our secure Hawaii land leases. During the first quarter, we entered 10 new and renewal leases and 1 rent reset for approximately 2 million square feet at a weighted average lease term of 6 years. This activity resulted in GAAP and cash leasing spreads of 38.3% and 25%, respectively, and reflects the strongest roll-up in rents over the last 6 quarters. The impact of this activity is an increase of $3.5 million in annualized rental revenue, of which 86% will be realized in 2024.

These results continue to showcase our ability to generate organic cash flow growth while maintaining portfolio stability. Renewals drove 90% of our leasing activity this quarter, which highlights the continued demand for ILPT’s assets and strong tenant retention, which was 94% this quarter. Included in these results is a 5-year renewal with Exel, a subsidiary of DHL for 945,000 square feet in Rock Hill, South Carolina at a 73% roll-up in GAAP rents. This represents an increase of $2.2 million in annualized rent that will go into effect in July of 2024. Looking ahead, 8.4 million square feet or 10.6% of ILPT’s annualized revenue is scheduled to roll by the end of 2025. We are currently tracking 41 deals in our pipeline for more than 7.5 million square feet.

Once executed, we expect these leases will yield average roll-ups in rent of 20% on the mainland and 30% in Hawaii, further illustrating the strength of our portfolio. Included in our pipeline are proposals out to multiple users for the 2.2 million square foot land parcel in Hawaii that became available on April 1. While we do not yet have a replacement tenant, interest has been strong and we hope to update you on our progress on future calls. Before I turn the call over to Tiffany, I wanted to make you aware of the recent publication of The RMR Group’s Annual Sustainability Report. The report highlights insights, accomplishments and data regarding our managers’ commitment to long-term ESG goals. We are proud of the progress made to strengthen ILPT’s sustainability practices and enhance our ESG transparency and disclosure.

You can find links to the complete report as well as an ILPT specific tear sheet on our website at Tiffany?

Tiffany Sy: Thank you, Yael. Good morning, everyone. Before I cover our first quarter results, I would like to highlight recent financing activities related to our consolidated joint venture, Mountain JV. In March, Mountain JV exercised its first of 3, 1-year options to extend the maturity date of its $1.4 billion floating rate loan. As part of that extension, the JV purchased a 1-year interest rate cap with a SOFR strike rate of 3.04% for $26.2 million, slightly higher than our February guidance of $25 million. Now turning to our first quarter results. Normalized FFO of $9.5 million or $0.14 per share increased 19.4% compared to the same quarter a year ago, and 16.9% on a sequential quarter basis. Adjusted EBITDAre of $84.4 million increased 4.6% and 1.6% compared to the same quarter a year ago and on a sequential quarter basis.

GAAP and cash basis NOI of $86.1 million and $82.2 million also increased on a year-over-year and sequential quarter basis. The improvement in each of these metrics reflects an increase in rental income driven by our strong leasing activities across the portfolio. Interest expense of $73.2 million increased 3.5% compared to the same period a year ago and increased slightly on a sequential quarter basis. We estimate our second quarter interest expense to increase slightly with $58 million of cash interest expense, including the benefit of the cash received from our interest rate cap, and $15.5 million of noncash amortization of financing and interest rate cap costs. Turning to our balance sheet. As of March 31, our net debt to total assets ratio was 68.6%, an improvement of 110 basis points compared to the same period a year ago.

The first quarter net debt coverage ratio of 12.1x declined 70 basis points on a year-over-year basis, reflecting higher adjusted EBITDAre and the continued paydown of our amortizing debt. All of our debt is currently carried at a fixed rate or fixed through interest rate caps with a total weighted average interest rate of 5.35%. Including extension options, ILPT has no debt maturities until 2027. As of March 31, we had approximately $128 million of cash on hand and $108 million of restricted cash in our consolidated joint venture. In closing, ILPT is well positioned to benefit from the demand for its high-quality industrial real estate. The portfolio remains strong, as demonstrated by an occupancy rate of 99%, an investment-grade tenant profile representing 77% of annualized revenue and continued revenue momentum driven by rising rates across the portfolio.

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