Q3 2023 Industrial Logistics Properties Trust Earnings Call
Participants
Stephen Colbert; Director, Investor Relations; Industrial Logistics Properties Trust
Yael Duffy; President & COO; Industrial Logistics Properties Trust
Tiffany Sy; CFO & Treasurer; Industrial Logistics Properties Trust
Bryan Maher; Analyst; B. Riley FBR, Inc.
Mitch Germain; Analyst; JMP Securities LLC
Presentation
Operator
Good morning and welcome to Industrial Logistics Properties Trust third-quarter 2023 financial results conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations. Please go ahead.
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 the presentation by management followed by a question-and-answer session with the analyst. 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 obligations to revise or publicly release the results of new 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 the SEC, which can be assessed 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 the 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 begin, I would like to welcome Tiffany Sy, who joined ILPT as our Chief Financial Officer and Treasurer on October 1. On today's call, I will begin with an update on our disposition activity and then review ILPTs 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 of 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 agreements 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 ILPTs total annualized revenue. With 11.2 million square feet set to expire through 2025, we believe there's 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 what we typically report. As asking rents continue to increase, we are selectively completing short-term renewal with certain tenants to take advantage of market conditions. Highlighted in our results is continued demand from ILPTs largest tenant FedEx.
We completed three renewals totaling 213,000 square feet in Texas, Georgia, and Illinois at a roll up in rent of 15.9%. As FedEx works through its drive program initiatives, our leasing and asset management teams have been engaged in discussions 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 two known vacates through 2024, which represents less than 40 basis points of annualized rent 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 with just over 21,000 square feet. We believe this muted 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 market, any improvement in the short term will be organic with no near-term debt maturities and a cash flowing portfolio. ILPT will continue to focus on tenant retention, maximizing mark-to-market rent growth opportunities, and reducing operating expenses. I'll 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 operation was flat on a sequential quarter basis at $7.9 million or $0.12 per share and a decline compared to the prior year quarter. Adjusted EBITDAre was $83.2 million, an increase of both sequential quarter and year-over-year basis.
Our leasing activity generated increases in cash rents on a same-property basis of $7.2 million or 7.4% year over year, partially offset by operating expense increases of $2.7 million or 12.2%, which resulted in 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 and reflects a full-quarter's impact of the mortgage loans we refinanced in May.
Our fourth quarter estimated interest expense was approximately $73 million consisting of $56 million of cash interest expense, including the benefit from our in the money interest rate caps and $7 million of non-cash 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 a fixed to interest rate cap for the 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 occurred in March 2024, subjects 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 remain compelling some exceptional tenant roster near full occupancy and rising rents across our portfolio. 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 lines for questions.
Question and Answer Session
Operator
(Operator Instructions) Bryan Maher, B. Riley FBR.
Bryan Maher
Thank you. And good morning, Yael and Tiffany. Maybe sticking with the caps for a minute. Tiffany, did you say that was $28 million to $30 million $20 to $30 million? I didn't quite catch that.
Tiffany Sy
I said $20 million to $30 million that is based on today's pricing, but also our expectations of the strike price. So there's some range there as well.
Bryan Maher
And was that for one of the caps or was that for both of the 2024 caps?
Tiffany Sy
That is for one of the caps.
Bryan Maher
And how does that pricing compared to the cap cost that was put on that loan back in 2022?
Tiffany Sy
Well, the most recent cap that we purchased was September '22. And that was $47 million that we've got at much of that lower strike price; however, it is also a two-year period. So it's not necessarily apples to apples, but I hope so that pricing has slightly increased since the last time we purchased.
Bryan Maher
Okay. That's helpful. And then when we think about organic deleveraging, I think you mentioned or Yael mentioned that it's come down from 13.7 times to, I think 12.3 times. Should we suspect that all else being equal over the next 12 months, we should see a similar amount of organic deleveraging, or do you think that moderates a little bit?
Tiffany Sy
No, I think that's a good proxy for run rate. Hence, we will continue to pay down our mortgages. It should steadily continue to decline in that fashion.
Bryan Maher
Okay. And then just maybe for Yael on the asset dispositions. I caught all what you said on the three going into one. And I think you said you weren't actively marketing properties. But are you still receiving inbound inquiries into some of your properties? And how are those progressing?
Yael Duffy
So we have then. I will say that I think the unsolicited offers have slowed in the last quarter or so. And so with each offer that we get, we really do review if it makes sense to sell. And I think we've talked about this on the prior last quarter's call. But it really is. It's hard for us to sell things that have the collateral pools given the amount to release the property from the collateral pool must be the greater of 115% of that allocated loan value or 100% of the net sale proceeds.
And so on top of that, we also have to maintain required debt service coverage ratio. So really, we have to look at the value of the property today versus the value when we closed on the loan. And I think we can all agree that there's been some shift in valuations. So it's hard to make the math work.
And then, if we're going to target underperforming properties for sale, we have to improve our debt yields when we remove it from the collateral pool. But it's hard to sell a property that's underperforming. So there's a lot that's going into it, but this opportunity is right. And it makes sense. We'll do it. But it's been far and few between.
Bryan Maher
Okay, thanks. And just maybe last for me a quick one on the dividend. When we look at the rolling fourth quarter trailing CAD being, I think it's $0.54 or so and you're paying out basically $0.04. Is there any thought to taking that dividend up even a little or is the focus just solely on paying down the debt and keeping dry powder for cap costs?
Tiffany Sy
It is the latter. Currently, we're focusing on reducing our leverage. We'd like to get to a lower level, at least -- and then we could have a real discussion or considerations. But that will (multiple speakers) right now --
Bryan Maher
I'm sorry, I didn't catch that. Did you say you want to get leveraged down to 10 before you rethink that?
Yael Duffy
Yeah. I think the Board is looking at it, Bryan. But I think right now, really, we need to have liquidity to -- we make sure that we have liquidity to buy the caps and then also to run the business. If we have some leasing that's coming up and then if FedEx comes to us and wants to do a building expansion or parking lot project, we want to make sure that we have the liquidity to partner with our tenants to meet their need.
Bryan Maher
Right, but to the extent that 10 is the bogey before the Board starts to think about it, that's helpful from our standpoint as we model out the company now through to 2026. Where you hit that and where there could be thought process, a bit of a slight dividend increase, nothing crazy, but anyways, food for thought. And thank you for all those comments.
Operator
(Operator Instructions) Mitch Germain, JMP Securities.
Mitch Germain
Yeah. You had mentioned that there were some FedEx move out in 2024. Are there any other known move outs for the year?
Yael Duffy
So we have the one property that we had under agreement to sell in Indiana. That's a 535,000 square feet property and that lease expires in June of 2024. So we know that tenant is moving to a built-to-suit location. We are in discussions with them potentially for short-term renewal because I think there construction has been delayed. But that's really the major one on the mainland.
And then as we've talked about in the past, the parcel in Hawaii, the 2.2 million square feet, that was previously leased to Home Depot. That one will be coming back to us at the end of Q1.
Mitch Germain
On that, yeah, I think last quarter you had mentioned that there was some activity on that. Is there any update?
Yael Duffy
We continue to see good activity. Nothing far enough along to announce, but we do feel confident that we'll be able to lease that with minimal downtime.
Mitch Germain
Okay. And the last one for me, I think you explained the shorter term on the new leasing during the quarter. Is there anything we can attribute the new lease rental changes to because it has also changed quarter over quarter here.
Yael Duffy
No, I think in some of the past quarters, we've had really long-lease terms, which have resulted in a bigger gap rent increases. And so with the shorter WALT, we're not seeing that same robust strike increase. But I would also say, we did release one property which negatively impacted our results at a roll-down in rent because we had previously leased to FedEx and it had amortizing TI, which was inflating their rent numbers. So without that property, we excluded that, we would be at 17%, 18% rollup. So that was part of the outlier this quarter.
Mitch Germain
Sure. Got it. Thank you.
Yael Duffy
Thank you.
Operator
This concludes our question-and-answer session. I'd like to turn the conference back over to Yael Duffy for any closing remarks.
Yael Duffy
Thanks for joining us. Have a good day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
