Industrial Logistics Properties Tr (ILPT) Q2 2021 Earnings Call Transcript

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Industrial Logistics Properties Tr (ILPT 0.40%)
Q2 2021 Earnings Call
Jul 29, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Industrial Logistics Properties Trust Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Kevin Barry, Manager of Investor Relations. Please go ahead.

Kevin Barry -- Manager of Investor Relations

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 second 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, Thursday, July 29, 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-based 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.

John Murray -- President and Chief Executive Officer

Thank you, Kevin. Good morning, everyone, and welcome to ILPT's Second quarter earnings call. I'll begin with a brief update on ILPT's second quarter performance and then turn the call over to Yael and Rick for details on ILPT's portfolio statistics, leasing activity and financial results. We reported second quarter results that were highlighted by same property cash NOI growth and strong demand for our properties with solid leasing momentum and portfolio occupancy of 99%, up 40 basis points sequentially. We generated normalized FFO of $30.6 million or $0.47 per share, which was stable year-over-year despite the deconsolidation of our joint venture.

We executed 564,000 square feet of leases and rent resets, resulting in an average rent roll-up of approximately 18%. In June, we completed our acquisition of a high-quality industrial property in the Columbus, Ohio market area, one of the country's premier distribution corridors due to its strong rental growth in central location, providing access to nearly 60% of both the U.S. and Canadian population within a one-day drive. The building is 100% net leased to Synnex Corporation for seven years and includes excess land that can accommodate a future expansion of more than 100,000 square feet. ILPT also purchased a 14 acre parcel of land in the Dallas, Texas market during the quarter. The property is well-located less than one mile north of the Union Pacific Intermodal rail terminal with convenient access to the entire Dallas-Fort Worth market and represents an attractive opportunity for future industrial development in a market with robust leasing activity.

While development may not be a material driver of ILPT's growth in the near term, we will continue to assess the potential to build or expand on available land in our portfolio. We anticipate new acquisitions will remain the key contributor to our growth. To that end, we have a steady pipeline of additional acquisition opportunities that we continue to evaluate. We are maintaining a disciplined approach regarding potential investments as the market for industrial assets remains highly competitive, supported by strong and persistent industry tailwinds. With ample liquidity on our balance sheet, we are prepared to react quickly to opportunities that meet our acquisition criteria, complement our portfolio and enhance our ability to generate risk-adjusted returns for our shareholders. Now, I'll turn the call over to Yael to review ILPT's operating results for the quarter.

Yael Duffy -- Vice President & Chief Operating Officer

Thanks, John, and good morning, everyone. I'll begin with an overview of ILPT's portfolio and then summarize our leasing activity for the second quarter. As of June 30, 2021, ILPT's portfolio consisted of 291 warehouse and distribution properties in 32 states totaling approximately 35 million square feet. Overall occupancy increased to 99%, a 40 basis point increase compared to the prior quarter. Our mainland portfolio includes 65 properties in 31 states totaling 18 million square feet that are 100% leased. The balance of the portfolio is comprised of 17 million square feet of industrial land and properties in Hawaii. Occupancy in Hawaii was 97.8% at quarter end, a sequential improvement of 80 basis points. The total portfolio has a weighted average remaining lease term of approximately nine years.

ILPT's portfolio remains strong with a diverse roster of credit quality tenants. Our top 20 tenants represent 45% of total annualized rental revenues with Amazon, FedEx and Restoration Hardware representing approximately 10%, 5% and 3% of total annual revenue -- rental revenues, respectively. Investment-grade rated tenants or subsidiaries of investment-grade rated 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. From a geographic perspective, ILPT's top three markets after Hawaii at 51%. Our Ohio, South Carolina and Indiana representing 7%, 5% and 5% of our total annualized revenues respectively. Leasing momentum remained strong in the second quarter.

Despite portfolio occupancy of 99%, ILPT executed 564,000 square feet in overall leasing that was 17.9% higher than prior rental rates for the same space. We executed 13 new and renewal leases for approximately 485,000 square feet at rental rates that were 14.2% higher than prior rates with an average lease term of seven years and commitments for leasing capital of $0.35 per square foot per lease year. Our results reflect strong performance in Hawaii, where we signed 11 leases at a 28.5% roll-up in rent, the highest overall increase in GAAP rent in three years. The balance of our leasing activity for the quarter consisted of two rent resets for a combined 79,000 square feet in Hawaii at rents that were 37.4% higher than prior rents. Remaining near-term expirations are minimal with less than 1% of total annualized revenue scheduled to expire during the second half of 2021.

As such, our focus is on addressing lease expirations in the upcoming years as approximately 30% of ILPT's portfolio is scheduled to roll by the end of 2024. In 2022, 8.7% of total annualized revenue is rolling, mainly driven by Hawaii with 13.1% of annualized revenue up for renewal. The real estate services and asset management teams within the RMR group, our manager, are making steady progress on addressing the 54 leases set to expire in Hawaii in 2022. By understanding the needs of our tenants, RMR has established a comprehensive and strategic plan to address expirations in a way that will maximize mark-to-market rental growth while minimizing potential downtime and capital costs. Accordingly, over the past year, we have already signed leases for more than 20% of the annualized rental revenue in Hawaii that was scheduled to expire during 2022.

Beyond 2022, expirations on the mainland will drive most of our leasing activity. We have begun renewal discussions with several tenants, but remain highly focused on balancing tenant retention with lease negotiation outcomes that will generate healthy cash flow growth while maintaining portfolio stability. Our current pipeline consists of 58 deals for 4.3 million square feet across the portfolio, including 48 deals for 2.1 million square feet in Hawaii and 10 deals for 2.2 million square feet on the mainland. We anticipate a near-term conversion of 28% of our pipeline, given the roughly 1.2 million square feet of current activity is in advanced stages of negotiation on lease documentation. I'll now turn the call over to Rick to provide details on this quarter's financial results.

Richard W. Siedel -- Chief Financial Officer and Treasurer

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 second quarter increased 1.4%, driven by a 1.7% increase in Hawaii and a 1.1% increase on the mainland. The increase in Hawaii was the result of new leasing activity and rent resets combined with higher occupancy year-over-year. The mainland increase was primarily driven by contractual rent steps in our leases. This same-property performance, along with decreases in general and administrative expense and interest expense, and including our share of FFO from our unconsolidated joint venture contributed to second quarter normalized FFO of $30.6 million or $0.47 per share.

Our results were flat compared to Q2 of last year despite the deconsolidation of 9.2 million square feet in our joint venture. Adjusted EBITDA for the quarter came in at $40.9 million, and we ended the quarter with debt-to-EBITDA of 5.3 times, which is approximately two times lower than we reported a year ago. Our property portfolio had minimal capital requirements during the second quarter. We spent approximately $1.1 million on capital expenditures, including $1 million related to recurring capex for building improvements and leasing costs. Earlier this month, we declared our regular quarterly distribution to shareholders of $0.33 per share. This equates to an annualized dividend yield of approximately 4.9% based on yesterday's closing price. Our dividend remains well covered at a 70% normalized FFO payout ratio.

As of June 30th, we had approximately $537 million in total liquidity, including cash on hand of $31 million and availability on our revolving credit facility of $506 million. We are well positioned to continue to grow our industrial portfolio, increase cash flow and enhance returns to our shareholders over the long term. That concludes our prepared remarks. Operator, please open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] We take our first question from Bryan Maher from B. Riley Securities.

Bryan Maher -- B. Riley Securities -- Analyst

Good morning, a couple of questions from me and it relates to Hawaii. About a year ago, I think that there was a little bit of tenant stress for those who had kind of a hospitality-centric business. Has that effectively abated at this point with travel to Hawaii resuming? And are you seeing any pushback on rate increases as those renewals come up?

Yael Duffy -- Vice President & Chief Operating Officer

Hi Brian, not at all, actually. We've -- as you mentioned, effect starting July eight say, Hawaii took away the mandatory quarantine for vaccinated travelers. We're seeing that there's been increased air passenger counts. I think retail spending is up. So, I think our tenants are well positioned, and we haven't seen any -- I think that the land is valuable and they know it, and they're really not barking at the rental increases.

Bryan Maher -- B. Riley Securities -- Analyst

Okay. Great. And then maybe we can touch a little bit upon the land parcel you purchased in Dallas. That, combined with at least one or couple expansion potentials you have at existing sites, John or Yael, can you talk a little bit about the appetite of ILPT and the Board to pursue development on those sites, given how competitive cap rates are? And if you were to pursue that, what kind of dollars and what kind of timeline we would be looking at?

John Murray -- President and Chief Executive Officer

Well, I'll start. Yael, you can add as you prefer. We wouldn't have bought the land in Mesquite, Texas, which is in the Dallas submarket, if our Board wasn't on board with the idea of possible development. That said, it's not a huge parcel of land. So it's not going to be a very significant building in our portfolio when we decide to develop, but I think the yields you can get developing in certain markets or expanding existing properties where you have excess land are much better than the yields you can get from acquisitions today. So we are -- we -- RMR group has a development and construction group. We've built buildings in various sectors, including expanding in some of our industrial properties already, and we expect to continue to do that for some of our existing tenants. And again, I don't expect it to happen that quickly that we're developing this Mesquite property. It's -- we're doing some zoning work on it currently. So it's probably over a year away from actual moving dirt and putting up a building, but it is something we're going to continue to do.

Bryan Maher -- B. Riley Securities -- Analyst

And maybe just last for me on that note. Given how tough it is to find developed sites already at acceptable cap rate, how easy is it to find these type of development sites around the countries in high profile, strong markets like you've seen in Columbus and others. Is there a good bit of availability to continue to acquire land for development?

John Murray -- President and Chief Executive Officer

It hasn't been our primary focus to be looking for sites. Our primary focus remains on acquisitions of existing properties. So, I can only give you a partial answer on that. I can tell you that we have, as an example, TravelCenters of America. It's got sites along the U.S. Interstate highway system, outside of almost every major market in the United States. And their site -- their travel centers average 20 acres of land. So there are a number of those travel centers that have excess land that are -- that may be strategic for companies that are in the logistics space because they have ready access to the highway, ready access to a company that can help repair their trucks, fuel their trucks. So, there may be some opportunities in our existing portfolio to -- within the RMR group to find sites a little bit more easily than going after third parties.

Bryan Maher -- B. Riley Securities -- Analyst

Thank you.

Operator

[Operator Instructions] The next question is from Elvis Rodriguez from Bank of America. Please go ahead.

Elvis Rodriguez -- Bank of America -- Analyst

Good morning, thank you. I was hoping that maybe you can dive in a little bit into the 28% that you mentioned of pipeline in advanced stages. Where are the properties, potential yields and timing on closing?

Yael Duffy -- Vice President & Chief Operating Officer

So I mean, as I mentioned, we're still in negotiations. So it isn't final until it's executed. But the ones -- the 28% that I talked about are mostly in Hawaii. We have a couple of renewals that we're working on on the mainland. I would say we're expecting to see probably the 15% to 20% roll-up in rent in Hawaii as we have in the past two to three quarters. And then probably again, the mainland is a little bit less clear because it's a little earlier on in negotiations, but hopefully 5% to 10%.

Elvis Rodriguez -- Bank of America -- Analyst

Are you able to share the cash roll up-in those as opposed to the GAAP roll up?

Yael Duffy -- Vice President & Chief Operating Officer

So we report everything based on GAAP, but I mean, I guess, for your modeling purposes, we could say, I think in Hawaii, annual increases between 2% and 2.5% on the mainland and 2.5% to 3% in Hawaii.

Elvis Rodriguez -- Bank of America -- Analyst

Okay thanks. And then I know you bought the land parcel, but do you think that over the last few years, you haven't been as aggressive on acquisitions. I mean, cap rates have compressed tremendous amounts, specifically over the last year. So how are you thinking about buying land that's not sort of delivering income today but could deliver income and yield in the future versus perhaps buying assets that are actually income producing?

John Murray -- President and Chief Executive Officer

Well, the Mesquite purchase was just a couple of million dollars. So I don't think that, that's a big -- it doesn't have a material impact on our investment activity. We are aggressively pursuing acquisition activity. We just -- there are a lot of groups who are aggressively pursuing acquisition activity. So, we have our cost of capital. We're not going to buy aggressively just to run in place or to go backwards. So, when we're achieving cap rates that we think are the right risk-adjusted returns, we go as aggressively as we can, and some markets it works and in some cases, we may have less comfort because of tenant credit quality or we may have less comfort because of the amount of development and the timing of when rent renewals are coming up. And so we may not get as aggressive as other parties so you just -- you do the best you can.

Elvis Rodriguez -- Bank of America -- Analyst

Thanks John, and just one more for me. How much of cap rates moved on sort of the acquisitions that you were targeting, call it two years ago, a year ago versus today?

John Murray -- President and Chief Executive Officer

I'd say we did some deals in the sixes in 2018, 2019 time frame. And cap rates are regularly in the low fours, occasionally sub four, depending on the market. But I'd say over 200 basis points.

Elvis Rodriguez -- Bank of America -- Analyst

And then if I could just follow-up, you mentioned that some deals, you're just not comfortable with the releasing risk, potentially taking on releasing risk, but you have this RMR structure that's pretty strong and can get the leasing done. So -- and the market is pretty hot and demand is pretty robust. So, why not perhaps move out a little bit on the scale?

John Murray -- President and Chief Executive Officer

We do evaluate moving out on the scale, but perhaps, it's because we have such a good market presence around the country and that we may understand the risks and sometimes having a presence, you know the market too well, and so the perceived risk may be higher because you do know from experience what -- how long it takes to renew, what local market rents really are versus what brokers may be telling you in an offering memorandum or sales process. So I think we feel very good about the qualifications of our team, both on the asset management, real estate services side, and we put a lot of faith in the information that they provide as well as the information we get from third-party sources, and we take the risks, we think are acceptable.

Elvis Rodriguez -- Bank of America -- Analyst

Okay thank you.

Operator

The next question is from Tom Catherwood from BTIG. You may go ahead.

Tom Catherwood -- BTIG -- Analyst

Thank you and good morning everybody. Just to kind of follow-up on Elvis' question. John, your opening remarks, you kind of alluded to having a strong acquisition pipeline. And you then kind of sound a little more cautious on kind of what's happening in the market right now, which is understandable, given cap rate compression and all the interest in industrial right now, but can you kind of provide us some more color on what's in your pipeline, kind of what you're looking at, how you're sourcing deals now? And kind of what's your level of confidence that you'll be able to close on some of the deals you're looking at right now?

John Murray -- President and Chief Executive Officer

I'd rather not go into too much detail there. But we do have transactions we're pursuing that where purchase and sale agreements are being negotiated and diligence is being conducted. We have other transactions where we're -- we've advanced past the first round. I think we have one where we've gone through a buyer interview around, but have not gotten feedback yet on where we stand. So -- and then we have a long list of properties in our acquisition pipeline report where we're currently doing our underwriting. So, we have a big funnel and like every funnel, it gets narrower as you get closer to finding out if you won or lost. And so we have a few properties that we're hopeful that we'll be able to talk about in more detail on our next call when we complete them, and we have others that we're working hard on it and we'll see what happens.

Tom Catherwood -- BTIG -- Analyst

Got it. Thanks John and then, Yael, last quarter, you had mentioned bringing in some brokerage firms in Hawaii to help assist with the leasing and the reset process in 2022? And then in your prepared remarks, you mentioned kind of setting up a plan to both maximize rent upside and minimize downtime or tenant loss. Can you provide maybe a little bit more detail on kind of what the approach is there? And maybe is the approach now different than you typically do or different than you've done before in that market?

Yael Duffy -- Vice President & Chief Operating Officer

Yes. So we've -- historically, we've handled all of the renewals direct without engaging brokers, but where we have just so much volume in 2022, we devised a plan. I think we're -- the ratio is about 40% we're handling direct and 60% we've engaged third-party brokers. So, we're working with three different groups. And it's really depending on the different -- the different parts is how we've broken it up. [Technical Issues]

John Murray -- President and Chief Executive Officer

I won't comment on whether we are looking at anything like that, but it's -- generally speaking, it's just as easy to buy a large portfolio of properties at one time, than as it is to buy one or two properties individually. So whenever we become aware of an opportunity, whether it's a corporate transaction or a large portfolio transaction, we almost always it up and review with that credit committee and if necessary with our board. So it's something that we regularly evaluate.

Tom Catherwood -- BTIG -- Analyst

Thank you.

Operator

Next question is from Aaron Hecht from JMP Securities. Please go ahead.

Aaron Hecht -- JMP Securities -- Analyst

I think you made the comment that after 2022, the majority of the turn leases and rent growth will be coming out of the mainland. It sounds like value could be maximized or at least for a period of time on the Hawaii portfolio in that scenario. Any thoughts on monetization events once assets have experienced maximized NOI? Thank you.

Yael Duffy -- Vice President & Chief Operating Officer

In Hawaii, specific or.

Aaron Hecht -- JMP Securities -- Analyst

Yes. It sounds like after those 2022 leases turn that you may have hold a lot of the juice out of Hawaii?

Yael Duffy -- Vice President & Chief Operating Officer

Yes. Well, we'll have a quick break in 2023, but then we have 2.8 million square feet in 2024 rolling, which is 17.1%. So, I think Hawaii continues to really be a huge driver for us. So, I don't -- I mean, year-over-year, we're continuing to see rent growth. So, I don't think we have any appetite to do any dispositions there.

Aaron Hecht -- JMP Securities -- Analyst

Got you. Thank you.

Operator

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

John Murray -- President and Chief Executive Officer

Thank you for joining us on the call today. We look forward to seeing as many of you as possible in person at the upcoming NAREIT conference. Thank you.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Kevin Barry -- Manager of Investor Relations

John Murray -- President and Chief Executive Officer

Yael Duffy -- Vice President & Chief Operating Officer

Richard W. Siedel -- Chief Financial Officer and Treasurer

Bryan Maher -- B. Riley Securities -- Analyst

Elvis Rodriguez -- Bank of America -- Analyst

Tom Catherwood -- BTIG -- Analyst

Aaron Hecht -- JMP Securities -- Analyst

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