Earnings call: ILPT maintains dividend amid mixed Q3 financials

ILPT ( Industrial Logistics Properties (NASDAQ:ILPT) Trust) held its earnings call to discuss the third quarter financial results of 2024, revealing a mixed performance with a slight increase in funds from operations (FFO) but a decrease in net operating income (NOI).

The company’s executives, including President Yael Duffy and CFO Tiffany Sy, highlighted the maintenance of the quarterly cash dividend and the strategic handling of lease expirations and debt maturities.

The occupancy rate of ILPT’s extensive portfolio, which includes a significant presence in Hawaii, dipped slightly to 94.4%. Despite the bankruptcy filing of American Tire Distributors, ILPT expects no lease rejections, and leasing discussions in Hawaii and Indianapolis are anticipated to conclude in 2025.

Key Takeaways

ILPT reported a 1.5% year-over-year increase in FFO, reaching $8.1 million, or $0.12 per share.
NOI saw a marginal decline of 0.7%, settling at $84.7 million.
The portfolio’s occupancy rate is at 94.4%, with over 2.7 million square feet of leases executed.
Quarterly cash dividend is maintained at $0.01 per share, with no debt maturities until 2027.
Interest rates for new loans have risen, but ILPT has secured $17 million in upfront savings.
Leasing discussions for properties in Hawaii and Indianapolis are expected to conclude by 2025.
American Tire Distributors’ bankruptcy is not expected to lead to lease rejections.
The company is considering unsolicited asset sale offers, weighing the implications of debt covenants.

Company Outlook

ILPT plans to strategically address lease expirations to maximize cash flow.
Dividend policy reflects a focus on liquidity and financial flexibility.
Interest rate for new loans set at 6.71%, with a weighted average of 5.5%.
Leasing discussions in key markets are ongoing, with conclusions projected in 2025.

Bearish Highlights

NOI experienced a slight decrease compared to the previous year.
Occupancy rate has decreased marginally from the previous quarter.
Valuation disconnect exists between ILPT’s assets and market offers.

Bullish Highlights

FFO has increased slightly year-over-year.
Significant lease renewals, including with FedEx (NYSE:FDX), indicate continued demand.
No lease rejections are anticipated from American Tire Distributors despite bankruptcy.

Misses

The company missed opportunities to increase dividends due to a focus on preserving cash reserves.

Q&A Highlights

Discussions on asset sales are influenced by the need to meet debt covenants.
The company is evaluating unsolicited offers for asset sales carefully.
Interest expenses are projected to be $60 million, with noncash expenses at $12 million.

In summary, ILPT’s third-quarter performance showed resilience despite a slight decrease in occupancy and NOI. The company is maintaining a conservative approach to its dividend policy and is strategically planning for lease expirations and debt maturities. While the bankruptcy of a tenant poses potential risks, ILPT’s management remains confident in their leasing strategy and asset management. The company is also assessing unsolicited offers for asset sales, ensuring any decisions align with their financial strategy and obligations.

InvestingPro Insights

To complement ILPT’s recent earnings call discussion, InvestingPro data provides additional context for investors. As of the last twelve months ending Q3 2024, ILPT’s revenue stood at $440.7 million, with a modest growth of 1.36%. This aligns with the company’s reported slight increase in funds from operations (FFO) during the earnings call.

InvestingPro Tips highlight that ILPT is currently trading at a low Price / Book multiple of 0.41, which could indicate that the stock is undervalued relative to its assets. This is particularly relevant given management’s comments on the valuation disconnect between ILPT’s assets and market offers.

Another InvestingPro Tip notes that ILPT’s liquid assets exceed short-term obligations, which supports the company’s focus on maintaining financial flexibility as discussed in the earnings call. This liquidity position may provide some reassurance to investors concerned about the company’s ability to manage its debt and operational costs.

It’s worth noting that while ILPT has maintained its dividend, the current dividend yield is 1.02%, reflecting the conservative approach mentioned in the earnings report. The stock’s performance has been mixed, with a significant 62.03% return over the last year, but a 23.49% decline over the past three months, which aligns with the company’s cautious outlook and strategic considerations regarding asset sales and market conditions.

For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for ILPT, providing a deeper understanding of the company’s financial health and market position.

Full transcript – Industrial Logistics Properties Trust (ILPT) Q3 2024:

Operator: Good morning and welcome to the Industrial Logistics Properties Trust Third Quarter 2024 Financial Results Conference Call. All participants will be in the listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Melissa McCarthy: Thank you, Dawrin. Good morning. Joining me on today’s call are ILPT’s President and Chief Operating Officer, Yael Duffy; Chief Financial Officer and Treasurer, Tiffany Sy; and Vice President, Marc Krohn. Today’s call includes a presentation by management, followed by a question-and-answer session with analysts. Please note that the reporting 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, October 30th, 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, ilptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial measures during this call, including funds from operations or FFO, adjusted EBITDAre and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website. With that, I will now turn the call over to Yael.

Yael Duffy: Thank you, Melissa, and good morning. On today’s call, I will start with a high-level update on our portfolio and third quarter operating performance before handing it over to Marc to discuss our leasing achievements. From there, Tiffany will review our financial results. We remain encouraged by the continued demand for ILPT’s high-quality portfolio and the strength in industrial real estate fundamentals. We delivered strong results in the third quarter with year-over-year growth in key metrics, including FFO and cash basis NOI. Given many of our leases have contractual escalations and we have illustrated a track record of capturing rent growth through our leasing efforts, we believe there is embedded opportunity to drive organic cash flow growth. As of September 30th, 2024, ILPT’s portfolio consisted of 411 distribution and logistics properties in 39 states, totaling approximately 60 million square feet. Our strategically diversified portfolio is highlighted by our unique Hawaii footprint consisting of 226 properties, totaling more than 16.7 million square feet. Our portfolio carries a weighted average lease term of eight years and is 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 annualized revenues come from investment-grade rated tenants are from our secure Hawaii land leases. Last week, American Tire Distributors, our fourth largest tenant, representing 1.6% of ILPT’s annualized revenues filed voluntary Chapter 11 proceedings as it contemplates a restructuring agreement with an ad hoc group of its lenders. American Tire has publicly indicated that it will continue to operate across its nationwide distribution network. Within our portfolio, all rent obligations have been paid and the five properties they lease from us are being fully utilized. At quarter-end, our consolidated occupancy was 94.4%, a slight decrease from the second quarter, primarily due to the previously disclosed 535,000 square foot property located in the East submarket of Indianapolis that became vacant in July. Leasing this vacancy along with a 2.2 million square foot parcel in Hawaii that became vacant on April 1st are among our top priorities. Tour and proposal activity for the sites has increased and we are optimistic that both will be leased in 2025. Also impacting our GAAP NOI results this quarter is a $1.3 million non-cash charge resulting from the early termination of one tenant which leased two parcels within our Hawaii portfolio. After the end of the quarter, we were able to execute a new lease with a replacement tenant for one parcel and are negotiating a lease for the other parcel, both at average roll-up in rent of 48%. These results continue to highlight the scarcity of land, persistent demand and value of our Hawaii real estate. In the third quarter, strong relationships with key tenants such as FedEx drove much of our leasing momentum as we executed over 2.7 million square feet of leasing, a weighted average rates that were 7% higher than prior leases with a weighted average lease term of 5.5 years, which Marc will provide more detail on momentarily. We intend to continue capitalizing on the attractive operating environment to deliver favorable leasing outcomes. While near-term expirations are minimal with approximately 4.5% of total annualized revenue scheduled to expire through 2025, we plan to address expirations in a way that will maximize mark-to-market rent growth while minimizing potential downtime in capital costs. Lastly, earlier this month, ILPT announced that it would maintain its quarterly cash dividend at $0.01 per share. In recent months, we have been frequently asked when we expect to increase our dividend. We recognize the value of the dividend to our investors and it is a topic that we discuss regularly at both the management and board level. However, as ILPT does not have a credit facility, we feel it is important that we have ample liquidity and financial flexibility to address future leasing costs, capital expenditures and obligations under our debt agreement before increasing the dividend level. With that, I’ll turn the call over to Marc.

Marc Krohn: Thank you, and good morning, everyone. As Yael mentioned, our third quarter leasing activity totaled more than 2.7 million square feet, which was highlighted by 13 renewals with our largest tenant, FedEx, encompassing over 2 million square feet across eight states at average lease term of 5.1 years and a GAAP roll-up in rent of 4.5%. This mutually beneficial renewal provided ILPT with cash flow security with no leasing concessions in the form of free rent or tenant improvements. In return, FedEx was able to secure strategic locations within its network as it continues to execute on its optimization plan it announced in April of 2023. Since we acquired Monmouth Real Estate Investment (NYSE:MNR_OLD) Corporation in February 2022, we have executed 33 leases with FedEx totaling nearly 3.8 million square feet. Furthermore, over 94% of our FedEx portfolio and the associated $121 million in annualized revenue is secure, given it is long-term lease with expirations in 2027 and beyond. We believe this reinforces ILPT and RMR’s commitment to fostering strong tenant relationships, addressing our tenants’ needs and being a landlord of choice. We also executed renewals with tenants in key markets, including a 302,000 square foot early renewal in Charleston, South Carolina, and a 125,000 square foot renewal in Columbus, Ohio. In aggregate, these two renewals represent an average GAAP rent increase of 18% with a weighted average lease term of 6.4 years. Nearly all of our remaining 2024 expirations have been addressed with only 79,000 square feet set to expire. As we look ahead to 2025 and 2026, 6.9 million square feet or 9.5% of ILPT’s total annualized revenue is set to expire. We are currently tracking 39 deals or over 8.3 million square feet, of which 3.2 million square feet or 38% is in advanced stages of negotiation or lease documentation. Now I’ll turn the call over to Tiffany.

Tiffany Sy: Thank you, Marc, and good morning, everyone. Yesterday, we reported third quarter FFO of $8.1 million or $0.12 per share representing an increase of 1.5% compared to the same quarter in 2023. Third quarter NOI decreased by 0.7% to $84.7 million and cash basis NOI increased by 1.1% to $82.5 million compared to the same quarter in 2023, while adjusted EBITDAre increased by 0.9% to $83.9 million. In October 2024, we exercised the first of our three one-year extension options for a $1.2 billion floating rate loan. As part of the extension, we purchased a one-year interest rate cap for $17 million with a SOFR strike rate of 2.78%, replacing our previous cap with a rate of 2.25%. The cost of this cap was less than previously expected as a result of the Fed’s interest rate cut in September. Additionally, the lender allowed for the higher strike rate based on the strong performance of the property securing the loan. We expect that further interest rate cuts will lower the cost of any caps that we may purchase in the future and provide us more flexibility as we evaluate opportunities to reduce leverage. During the third quarter, we paid $58.8 million of cash interest expense, net of the cash we received from our interest rate caps and recognized $15.1 million of noncash amortization of financing and interest rate cap costs. We expect our fourth quarter interest expense to decline from $73.9 million to approximately $72 million reflecting the impact of the new interest rate cap. Turning to our balance sheet. As of September 30th, our net debt to total assets ratio was 68.1%, an improvement of 40 basis points compared to a year ago, while our net debt coverage ratio declined to 12.1 times from 12.3 times in the third quarter of 2023. Total cash, excluding $101 million of restricted cash was approximately $154 million. We expect to use this cash to fund future leasing obligations and provide us with greater flexibility when evaluating our financing options, which may include purchasing interest rate caps in the future. As a reminder, including extension options, ILPT has no debt maturities until 2027. Looking ahead, we expect that our strategic leasing approach will continue to result in strong tenant retention and generate stable cash flows that support our operations and deleveraging efforts. That concludes our prepared remarks. Operator, please open the lines for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher: Great. Thank you and good morning. Just a few for me today. Just wanted to drill down a little bit more on the interest rate cap costs. So with $17 million, I think, we had been modeling for like 27.5%, just to be conservative, but you’re going to pay a higher interest rate and rough calculations maybe $6 million on that $1.2 billion whatever. So kind of $17 million plus $6 million is $23 million. So still below what we were thinking. But can you talk about how you were thinking about the trade-off in pricing versus interest rate?

Tiffany Sy: Sure. Good morning. So our interest rate for the particular loan is going to increase to 6.71% and our weighted average for ILPT’s that overall will be around 5.5%. Our lender determines the strike rate on our cap based on required debt service coverage ratio. And so as I said in the prepared remarks, based on the performance of the properties that secure the loan, they allowed for a higher strike rate of 2.78%. So we were actually pretty pleased to be able to save some upfront costs for that $17 million price tag. Effectively, we are able to defer interest rate payments. And so we will pay interest as it comes due, but that’s how we thought about that. We were pleased to save upfront costs.

Bryan Maher: Okay. That’s kind of what I thought. Moving on to leasing Hawaii and Indianapolis. Yael, I think you said or maybe Marc, 2025, can you be a little bit more granular there? Is it second quarter? Is it third quarter? I know you want to be conservative, but it’s a pretty wide gap for modeling purposes.

Yael Duffy: Yes. Hi, Brian. I think the reality is especially for the Hawaii land parcel, there’s just a lot of diligence that any prospective tenant will have to do to evaluate what it’s going to cost them to execute on their business plan for that parcel. So while we’re having discussions, a lot of it depends on the timeline for the tenants. So I would say the second half of the year for ’25 would be probably most realistic for Hawaii. And then for Indianapolis, I think we could be able to be in a position probably in the first half of ’25.

Bryan Maher: Okay. And so the American Tire commentary that you made, I’m assuming based upon what you said that there are no expected vacates there. Correct me if I’m wrong. And are there any known vacates that we should know about over the next 12 months?

Yael Duffy: So from what we know today on American Tire, we expect them to, I mean, they’re utilizing the properties and we expect that they won’t reject the leases. But again, it’s very early, they just made the announcement last week. And then there are — there’s nothing else material from a known vacate perspective.

Bryan Maher: Do they have the ability in the bankruptcy process to, I’m sure they probably do to some degree to request a lower rent rate. And if they did, could you tell them to go pound sand and vacate?

Yael Duffy: Yes, I mean as part of their bankruptcy proceedings, I think they can come and try to negotiate with the landlord and it would be our decision if they want to if we want to do that. I guess I would just note American Tire has been in this position before. They filed for bankruptcy in 2018 and actually leased these same properties from us and they didn’t reject the leases at that time and have since renewed all of them. So there’s — we take some comfort in that as well.

Bryan Maher: Okay. Just two more quick ones for me. As it relates to the Mountain JV, I know there’s a 39% JV partner and if you were to get another partner to onboard, so you’re north of 50%, you can deconsolidate that. Maybe for Tiffany, have you guys run the numbers as it stands now. And I’m sure we could probably back into them roughly, but do you have the numbers on what net debt to EBITDA would move to should you be able to deconsolidate that JV?

Tiffany Sy: There are a lot of factors that we would have to consider. So we don’t have exact numbers that we would share at this point.

Bryan Maher: Okay. And then just last for me. Yael, I know you talked a little bit about the dividend. We also get a lot of questions on your dividend with CAD running at $0.70 on a trailing four quarter basis. I don’t know that anybody that I’ve spoken to on the buy side is looking for any whopper of a dividend, but to simply take it up from $0.04 to a dime or something around there is maybe $6 million a year dividend payments when you’re sitting on, whatever, $154 million of cash and CAD expected to be roughly $0.70 on a go forward basis. So if I could just throw that out there, we do get a lot of questions on that. I don’t think anybody is asking for some big whopper of a dividend pre-Monmouth, but something to reflect the improving overall positioning of ILPT, I think would be really welcomed by the investment community. That’s all for me.

Tiffany Sy: All right. Thanks Brian.

Operator: Thank you. [Operator Instructions] The next question is from Mitch Germain with Citizens JMP. Please go ahead.

Mitchell Germain: Good morning. Thanks. Tiffany, I just want to understand the interest expense forecast. The change quarter-over-quarter, is that entirely noncash? Is that the way to think about it?

Tiffany Sy: It’s not entirely noncash. So I guess to give a little bit more perspective or a little bit more transparency. So we’re expecting our cash interest expense to be $60 million and then the noncash to be $12 million. So what will happen is our cash interest expense will increase some to cover the difference between the 2.25% and the 2.78% strike rate. But then our noncash amortization will decrease. And that is twofold. That’s based on the cap amortization, but that also, we have some deferred financing costs that are running off. They’ve fully amortized as of September 30th. So we get a benefit from that. Hopefully, that’s helpful.

Mitchell Germain: And that’s helpful. And the lower cap has nothing to do with a higher swap rate, correct? You said that swap rate is determined by the lender. So it’s not like you traded a lower cap for a higher amount. Is that the way to think about it?

Tiffany Sy: That’s correct. I want to make sure I’m understanding your question. It’s the same notional amount.

Mitchell Germain: Cap was $17 million, but you’re — it was at 2.78% replacing something was at 2.25%, which was at a higher amount that you paid for the rate caps. I didn’t know there was a reflection of the lower amount being the — that it rised, okay.

Tiffany Sy: You’re right. There’s a piece of that as well.

Mitchell Germain: Yes. Okay. Great. And then I think Marc talked about what 8 million or so square feet under consideration right now. Assuming that only includes Hawaii once. And then if so, just curious about kind of how many users are circling the wagon. And is it all full sight or is there a discussion around breaking it up?

Yael Duffy: Hi, Mitch. You’re right. So we only include within the 8.8 million, we only include the 2.2 once. And so far the conversations we’ve been having have been with tenants for the entire parcel.

Mitchell Germain: Okay. Great. And then last one for me. I mean it looks like the rate environment to become a bit more accommodating on a forward basis, which obviously helps your balance sheet, but is it a time for the firm to start considering asset sales again? And kind of where does that potentially sit?

Yael Duffy: So we have been — we do get a lot of inbound unsolicited offers and we are evaluating all of them as they come in. We have found that there’s still been a little bit of a disconnect between what we think the properties are worth and what somebody is willing to pay for, but it is something we are constantly evaluating. But I guess I will just remind and I feel like I’m a broken record about this, but to release properties from our debt, we have several different covenants that we need to look at to make it accretive. So that is also something we’re up against.

Mitchell Germain: Understood. Does that suggest that one-off sales are more difficult or does that suggest that portfolio sales are more difficult as you look to unwind some of those covenants?

Yael Duffy: I don’t think one is more difficult than the other. I think it really depends on the assets and where they — in which loan pool they sit.

Mitchell Germain: Thank you.

Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Yael Duffy, Chief Operating Officer and President for any closing remarks.

Yael Duffy: Thank you for joining us today. Have a good day.

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

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