Industrial Logistics Properties Trust (NASDAQ:ILPT) Q3 2023 Earnings Call Transcript
Industrial Logistics Properties Trust (NASDAQ:ILPT) Q3 2023 Earnings Call Transcript October 26, 2023
Operator: Good morning, and welcome to Industrial Logistics Properties Trust Third Quarter 2023 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations.
Stephen Colbert: 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 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 26, 2023, 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 financial numbers during this call, including normalized funds from operations or normalized FFO, adjusted EBITDA and cash basis net operating income or cash basis NOI.A reconciliation of these non GAAP figures to net income is available in our financial results and supplemental information presentation, which can be found on our website.
With that, I will turn the call over to Yael
Yael Duffy: Thank you, Stephen and good morning. Before we begun, I would like to welcome Tiffany Sy who ILPT as our Chief Financial Officer and Treasurer on October 1, 2023. On today's call, I will begin with an update on our disposition activity and then review ILPT's operating and leasing performance before turning the call over to Tiffany to discuss our financial results. Last quarter, we reported that we had three properties, two that are encumbered under agreement to sell for an aggregate sales price of $65.3 million. We also discussed that while dispositions are challenging in this economic environment, ILPT may face additional difficulties given the property release provisions under our debt agreements. During the diligence process, one property fell out of agreement as the buyer was unable to receive the required licensing needed to operate its business and another terminated due to delays in the transaction timeline.
The third property which is unencumbered continues to be under agreement to sell for $21.5 million. Turning to our operating and leasing performance. As of September 30, 2023, our portfolio, which consists of 413 warehouse and distribution properties, achieved same property NOI and cash basis NOI growth of 5.3% and 6% respectively compared to the third quarter of 2022. We are finally beginning to see the positive impact of the 5.2 million square feet of leasing we completed over the last year.As a point of reference, the impact of this activity is an increase of $7.4 million in annualized rental revenue which represents 2% of ILPT's total annualized revenue and with 11.2 million square feet set to expire through 2025, we believe there is continued opportunity to generate organic cash flow growth.
Turning to the quarter, we executed 12 new and renewal leases for nearly 758,000 square feet resulting in modest GAAP and cash leasing spreads of 13.5% and 10.3% respectively. The impact of this activity is an increase of $841,000 of annualized rental revenues. These leases have a weighted average lease term of 4.1 years which is strategically shorter than we typically report. As asking rents continue to increase, we are selectively completing short term renewals with certain tenants to take advantage of market conditions.Highlighted in our results is continued demand from ILPT's largest tenant FedEx. We completed 3 renewals totaling 213,000 square feet in Texas, Georgia and Illinois at a rollup in rent of 15.9%. As FedEx works through its drive program initiatives, our leasing and asset management teams have been engaged in discussion with FedEx decision makers as they work through their long term plans.
Our leasing pipeline includes 1.6 million square feet across 14 properties that is specific to FedEx with only 2 known vacates through 2024, which represents less than 40 basis points of annualized revenue. Furthermore, over 71% of our FedEx portfolio and the associated $92 million in annualized revenue is secure given it is long term lease with expirations in 2027 and beyond. Leasing in Hawaii was minimal this quarter which just over 21000 square feet. We believe this needed activity is a function of timing as our Hawaii leasing pipeline currently exceeds 3 million square feet. Lastly, as we have communicated in the past, we are focused on improving ILPT's leverage, which has declined 1.4 times since last year. However, given the ongoing uncertainty in the capital markets any improvement in the short term will be organic and with no near term debt maturities and a cash flowing portfolio, ILPT will continue to focus on tenant retentions, maximizing mark to market rent growth opportunities and reducing operating expenses.
I will now turn the call over to Tiffany.
Tiffany Sy: Thank you Yael. Good morning, everyone. Starting with our consolidated financial results for the third quarter of 2023, normalized funds from operations was flat on a sequential quarter basis at $7.9 million or $0.12 per share a decline compared to the prior year quarter. Adjusted EBITDAre was $83.2 million, an increase on both sequential quarter and year over year basis. Our leasing activity generated increases in cash rent on a same property basis of $7.2 million or 7.4 percent year over year, partially offset by operating expense increases of $2.7 million or 12.2%, which resulted in a net 6% increase in same property cash basis NOI for the third quarter.Interest expense was $72.9 million for the quarter, an increase of $1.1 million sequentially reflects a full quarter's impact of the mortgage loans we refinanced in May.
Our fourth quarter estimated interest expense is approximately $73 million, consisting of $56 million of cash interest expense, including the benefit from our in the money interest rate cap and $7 million of noncash amortization of financing costs. Turning to our balance sheet. ILPT ended the quarter with a net debt to total assets ratio of 68.5% compared to 69.9% a year ago and our net debt coverage ratio declined to 12.3 times compared to 13.7 on a year over year basis. All of our debt is currently carried at a fixed rate or a fixed through interest rate cap. With a total weighted average interest rate of 5.47% including extension options, ILPT has no debt maturities until 2027.Our first extension option on the $1.4 billion floating rate loan under our consolidated joint venture occurs in March 2024 subject to the replacement of the related interest rate cap.Based on today's pricing, replacement cap would range from $20 million to $30 million.
As of September 30, we had approximately $83 million of cash on hand and $139 million of restricted cash in our consolidated joint venture. As Yael mentioned earlier, we will continue to evaluate opportunities to reduce our leverage and build liquidity. However, we currently have no plans to market properties for sale. In closing, while the current economic environment has its challenges, our portfolio remains compelling that exceptional tenant roster near full occupancy and rising rent across our portfolio and we expect that ILPT will continue to benefit from demand for high quality industrial real estate like ours. That concludes our prepared remarks. Operator, please open the line for questions.
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