ILPT (2019 - Q4)

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. Olivia S

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 Seidel; 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 in the same store cash basis NOI increase of 5.5% year-over-year. Additionally, we announced two exciting transactions to start 2020. Last week we entered into an agreement related to a $680 million joint venture that we've 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 predominantly acquired by ILPT in 2019 as part of two large portfolio acquisition.The investor will contribute approximately $108.3 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 will use the proceeds to reduce outstanding borrowings under our revolver credit facility. The property valuation represents a 5.5% cap rate on cash NOI. ILPT remains in discussion with an additional institutional investor and currently expect this investor may also acquire 39% equity interest in the JV in the 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. The important link this JV provides ILPT the opportunity for continued growth with private equity capital raise at approximately net asset value.Also in February, we acquired an 820,000 distribution facility in Goodyear, Arizona for $72 million. This Class A property is 100% leased to Amazon with a relating lease term of 5.8 years. The property is in Phoenix's West Valley which provides easy access to the I10 Freeway and Southern California. Additionally, the property is within a quarter mile, the future Arizona 303 Loop which will provide improved access throughout the Phoenix metro area. The purchase price reflects the 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've 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 seven with five independent trustees, two of whom are women. Ms. Wilkin is currently a senior advisor at Boston Consultant Group. She is 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 US. Mr. Phelan is also active in several not-for-profit organizations. Neither Ms. Wilkin nor Mr. Phelan will serve on any other Board within the RMR Group companies.I'll now turn the call over to Yael Duffy to discuss our leasing activity.

Thanks John and good morning, everyone. At the end of the fourth quarter, ILPT's portfolio consisted 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 rate market 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 three tenants were Amazon, FedEx and Procter & Gamble, representing approximately 14%, 4% and 4% of total annualized rental revenues respectively. Investment grade rated tenants are subsidiaries of investment grade rated parent entities make up 61% of our Mainland revenue. Looking at the entire portfolio, nearly three quarters of revenues come from those investment grade rated tenants are subsidiaries or from market share Hawaii land leases.Leasing activity were strong in the fourth quarter totaling 1.4 million square feet at rent that were 16.9% higher than prior rent with an average lease time of 8.5 years and commitments for leasing capital and concession of only $0.12 per square foot per lease year. For total near term lease roll, most of our leasing activities are 1.1 million square feet was associated with earlier renewals for leases expiring in 2020 through 2023. On the Mainland, we completed 757,000 square feet of lease renewal at rent that were 14.5% higher than prior rent within an average lease term of 7.2 years and capital commitment of $0.14 per square feet per lease year.Q4 is the first quarter since ILPT went public so 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 three new leases for approximately 161,000 square feet at rent that were 34.2% higher than prior rent with an average lease time of 17.4 years and capital commitment of just $0.06 per square foot per lease year. We also completed one 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 the 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 the finalized negotiations in the coming week.As we look forward to our upcoming lease expirations, we are encouraged by what we've accomplished in 2019. For full year leasing for the year totaled more than 2.6 million square feet with a roll-up in rent of 20.1% and average lease term of 9.5 years in capital commitment for new one renewal leases of $0.13 per square foot per lease year.Near term expirations are minimal in 2020 with only 0.2% of annualized rent scheduled to expire in the Mainland and 1.3% in Hawaii. As such we are focusing our efforts on 2021 and 2022 and have already begun discussion with multiple tenants and anticipate maintaining our strong leasing momentum in the New Year.Turning to capital expenditures. We spent $3.1 million in the current capital predominantly associated with building improvement 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 the total capital on investment of $14.6 million. With Toro's 15 year commitment the expansion project result in an incremental return on cost of 7.9% and increased rent 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, up15% from $25.9 million, or $0.4 per share from 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 continued 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 of percentage rent of $1 million per year, which going forward we will recognize ratably throughout the year with any favorable adjustment recognized in the fourth quarter.Offsetting this is a small number tenants in Hawaii still behind in their payment and we've reduced revenue to reserve for amount outstanding in Q4.This included $900,000 of cash rent receivable and $1.3 million straight-line rent 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% on the mainland primarily due to contractual rent increases in Hawaii and the total expansion project the Yael mentioned previously.General and administrative expenses 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 or 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 revolver credit facility. As John mentioned last week, we entered into an agreements related to a joint venture transaction and will receive approximately $108 million in proceeds, which will be used to pay down our revolved, reducing net debt to adjusted EBITDA by approximately 0.6x. We are pleased to reduce leverage and we will continue to explore opportunities to expand the venture through additional investment or with additional institutional products.That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions]Our first question is from Michael Carroll with RBC Capital Markets. Please go ahead.

Hi, guys. This is Jason on for Mike. Just wondering how you'll deploying capital into the future given the current leverage targets and where you guys sits at.

I think that our focus, as we indicated in the press release and in our -- the text of script, we are still working on adding an additional partner to the joint venture. And so I think that when it comes to -- we are always watching the acquisitions market and see what types of products are available and in what market. But I think we are 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 will grow using the private capital or other capital. So that's -- we tend to be seen as time goes on.

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

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

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

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

Hey, guys. Good morning. Just to start off -- added to the JV?

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

Sorry. Yes. Timing regarding when the top property is expected to be added to the JV. I was curious are there any details that you could provide there.

We think it will be within the next month or hopeful to be within the next month. There are 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 as those are two 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, right. One last one for me. Can you just remind us what your long-term target leverage level is?

Sure. We've said that we hope to be between 6 and 7. Previously we thought we might be able to a 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 little over 9% versus the prior year. And we hadn't really seen the favorable reaction in stock. So at this point we'll grow little slower or we'll grow with some by the capital and continue to do things that are good for ILPT 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 are going to kind of come out of the gate down about 4%. So that something that will need to be modeled in but for the most part the property is continuing 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 had a couple of tenant issues here and there related to real estate taxes and some other cost that have increased. But we think the long-term liability of those properties still really strong there really special real estate. And again we are going to continue to execute and be opportunistic with acquisitions to try to grow FFO and CAD.End of Q&A

This concludes our question-and-answer session. I'd 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.