Good morning, and welcome to the Industrial Logistics Properties Trust's fourth quarter 2023 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Colbert, Director of Investor Relations. Please go ahead.
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, February 21, 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, 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 EBITDAre, 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.
Thank you, Stephen, and good morning. On today's call, I will begin with an overview of ILPT's portfolio, summarize leasing activity for 2023, as well as the fourth quarter, and look ahead to our 2024 lease expirations and objectives. From there, I will turn the call over to Tiffany to discuss our financial results. As of December 31, 2023, ILPT's portfolio consisted of 411 warehouse and distribution properties in 39 states, totaling approximately 60 million sq ft, which includes 16.7 million sq ft of industrial land and properties in Hawaii. Since ILPT's inception in 2018, ILPT has maintained portfolio occupancy over 98%, and this quarter was no exception at 98.8%.
ILPT's portfolio has a weighted average remaining lease term of 8.1 years, anchored by tenants with strong business profiles and well-recognized brands that continue to benefit from e-commerce. FedEx is our largest tenant, representing 29.7% of annualized revenue, followed by Amazon and Home Depot at 6.7% and 2.1% of total annualized revenues, respectively. ILPT's top 10 tenants account for nearly half of total annualized rental revenues, and 77% of our revenues come from investment grade rated tenants or subsidiaries, or from our secure Hawaii land leases. During 2023, we entered 56 new and renewal leases and four rent resets for 5.4 million sq ft, which is in line with 2022 leasing volumes.
Same Property NOI and Same Property Cash Basis NOI increased 3.3% and 4.5% compared to the prior year. Rents were 20.5% higher than prior rental rates for the same space. The impact of this activity is an increase of $7.4 million in annualized rental revenue, of which more than 40% will take effect in 2024. During the fourth quarter, we entered 15 new and renewal leases and 1 rent reset for 1.5 million sq ft at a weighted average lease term of 6.7 years. This activity resulted in GAAP and cash leasing spreads of 19.7% and 11.2%, respectively. Renewals drove most of our leasing, accounting for 80% of total activity, which reinforces our strong tenant retention.
Included in these results are three renewals with FedEx, our largest tenant, for over 158,000 sq ft at weighted average lease spreads of 19%. Also this quarter, we sold two properties, both of which were unencumbered, for an aggregate sales price of $25.2 million, excluding closing costs. Proceeds were used to enhance our liquidity, which, as of year-end, now includes unrestricted cash of $112 million. As we have discussed on prior calls, we expect future disposition opportunities to be limited, given our ability to transact is dependent on pricing and the impact to our operating metrics and debt covenants. Looking ahead, 10.1 million sq ft, or 12.2% of ILPT's annualized revenue, is scheduled to roll by the end of 2025.
Included in these expirations is the 2.2 million sq ft land parcel in Hawaii that Home Depot had agreed to lease from us before exercising its termination right in 2023. We have been actively marketing the site, and while we have seen interest, we do not expect to have a replacement tenant ahead of the March 31st lease expiration. Given the historical low vacancy and continued rise in asking rents in Hawaii, we expect we will see a meaningful roll-up in rents once we identify a tenant for this site. Turning to our leasing pipeline. We are currently tracking 26 deals in our pipeline for more than 4.8 million sq ft. We anticipate a near-term conversion of 30% of our pipeline, given that 1.5 million sq ft of current activity is in advanced stages of negotiation or lease documentation.
Once executed, we expect these leases will yield average roll-ups in rent of 20% on the mainland and 30% in Hawaii, further illustrating the strength of our portfolio. As we head into 2024, I would like to reiterate that we believe there is continued opportunity to generate organic cash flow growth and reduce leverage, which has declined from 13.1x to 12.3x over the last year. Accordingly, we are focused on tenant retention, maximizing mark-to-market rent growth opportunities, and reducing operating expenses. I will now turn the call over to Tiffany.
Thank you, Yael, and good morning, everyone. Starting with our financial results for 2023. From a full year perspective, normalized funds from operations was $31.5 million, compared to $76.2 million in the prior year. Adjusted EBITDAre was $328.3 million, an increase of 13.7% compared to our 2022 results. Cash Basis NOI was $324.4 million, an increase of 11.6%. For the fourth quarter, we ended the year with normalized funds from operations of $8.1 million, or 0.12 per share.
Adjusted EBITDAre of $83.1 million and Cash Basis NOI of $81.5 million, all of which were in line with the previous quarter's results, while increasing compared to the same quarter of 2022. Additionally, as Yael mentioned earlier, we sold two properties during the quarter, generating proceeds of $25.2 million, excluding closing costs and a gain on sale of $2.7 million. Interest expense was flat on a sequential quarter basis at $73 million. We estimate our first quarter interest expense to remain at that level, with $66 million of cash interest expense, including the benefit from our interest rate caps and $7 million of non-cash amortization of financing costs. Turning to our balance sheet.
As of December 31, our net debt to total assets ratio was 68.4%, compared to 69.7% a year ago, and our net debt coverage ratio declined to 12.3 times, compared to 13.1 times on a year-over-year basis, driven by the improvement in our Adjusted EBITDAre and the continued paydown of our amortizing debt. All of our debt is currently carried at a fixed rate or is fixed through interest rate caps, with a total weighted average interest rate of 5.47%. Including extension options, ILPT has no debt maturities until 2027. In March, we intend to exercise our first extension option on the $1.4 billion floating rate loan held by our consolidated joint venture. In connection with the extension, we are required to replace the existing interest rate cap.
Based on today's pricing, we expect to pay approximately $25 million for the cap. As of December 31st, we had approximately $112 million of cash on hand and $133 million of restricted cash in our consolidated joint venture. In closing, we will continue to evaluate opportunities to reduce our leverage and build liquidity. However, we currently have no plans to market properties for sale. Our portfolio remains strong, with nearly full occupancy, investment-grade tenants, and rising rents across our portfolio. We expect that ILPT will continue to benefit from the demand for its high-quality industrial real estate. That concludes our prepared remarks. Operator, please open the line for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then two.
At this time, we will pause momentarily to assemble our roster. Our first question comes from Bryan Maher of B. Riley Securities. Please go ahead.
Thank you, and good morning. Maybe sticking with the caps for a second, Tiffany.
Yeah.
$25 million to replace the cap. Let's divide that by four quarters. $6 million a quarter, I'm assuming, is how we're gonna amortize that over the upcoming year?
That's right.
Does that keep you at that current 6.17% rate, or does the rate change?
The rate changes based on what we expect the new strike rate to be. So it would be less than 6%. Currently, we expect that strike rate to be 3.04%. So 2.77 is our spread plus the 3.04, so 5.81 is where we think we'll be.
Okay, great. That's, that's helpful. Thank you. Maybe circling back to the asset sales, the two that were done in the quarter, were those marketed properties? Were they inbound calls? Was there a common denominator there? And as we look out to 2024, I heard your comments on, you know, not to expect much in the way of asset sales, but what are you thinking? Is it 1 property? Is it five? Somewhere in between?
Hi, Brian. So for the two dispositions, one was actually an eminent domain taking for a property in North Carolina. The Department of Transportation is using it to the property and the structure to expand the highway. And then the other one was our development in Mesquite, Texas, and so we had been marketing the property for lease, and we got an offer from another group as part of that process. And then, as for dispositions in 2024, I think it would be safe to assume that there will be none. I think as we've talked about, there's really a lot of a lot we need to consider when we consider selling properties right now, and part of it is, you know, we need to release the property from the collateral pool.
It needs to be the greater of 115% of the allocated loan value or 100% of the net sale proceeds. You know, the value of the properties today versus when we closed on the loan, I think we all know that the market has shifted, and so, I don't know that the math works. So I think, at least for the time being, unless something, some great offer comes along, I don't think we're actively marketing anything.
Okay, thanks. And just two more quick ones for me. Maybe for Tiffany. As you think about 2024 and the deleveraging, you know, over the past year from, you know, low 13s to 12.3 and, you know, organic cash growth from rent roll-ups, where do you think that number ends up at the end of 2024, barring anything unusual happening?
That's a good question. You know, we do have a continued amortization of the amortizing debt that we have. That's about $250 million of debt in our consolidated joint venture. We pay upwards of $4 million a quarter on that. So we'll have that natural kind of organic deleveraging happening. The other component, like I said, in the presentation, is Adjusted EBITDAre. And so with the rent roll-ups, you know, we don't really give forward-looking guidance, but we would expect it to continue to, you know, naturally decline. I'm not sure whether or not, or I don't—I'm not, I'm not going to say whether or not I feel like...
I'm not sure we'll see that same level of deleveraging, you know, because there is the factor related to adjusted EBITDAre. Like I said, we're not really giving guidance there, but we do expect it to continue to decline.
All right. Sorry, I didn't mean to put you on the spot there. Just, just last for me and maybe for Yael. You know, when you think about your, your lease expirations for this year and in your pipeline, and the demand in general for your product, you know, suffice it to say, you and I don't want to put words in your mouth, but you wouldn't expect occupancy this year to dip below 98.5%, would you?
Well, I think the parcel in Hawaii, while it's not a significant portion of our annualized revenue, it's actually less than 1%, it does account for over 3% of occupancy. So, until we lease that parcel up, I think in Q2, we will expect to see, occupancy probably around 95%.
But that, A, is temporary, and B, how comfortable do you think that you are with that property being, you know, re-leased by the third quarter?
We aren't far enough along with any one prospect, so I think it would be aggressive to think that we'll have it leased by the third quarter, but hopefully, if not in Q4, then hopefully early into 2025. It is a large parcel, and while it's a unique opportunity for a tenant, it also you need to find the right person who is willing to take a 2.2 million sq ft parcel. So I think it-
Got it.
It's gonna take us a little time.
Okay. Thank you very much.
Thank you.
Again, if you would like to ask a question, please press Star, then one. Our next question is from Tom Catherw ood with BTIG. Please go ahead.
Thank you. Good morning, everyone. Yeah, I'll maybe going back to one of Brian's questions on asset sales. I think you had one that was under contract in 3Q that went back into the operating portfolio this quarter. If my memory serves me correctly, what was the change within that transaction? And I believe that building had a lease that expires this June. Is that correct?
That's correct. So that actually fell out of diligence, because we were having some delays getting the property released from the debt, and so the tenant just wasn't willing to wait.
Gotcha. And then, and that's again, as of June, that 500,000+ sq ft lease expires as well, so we, we should include that in our occupancy expectations?
Correct. We're marketing that property. But again, we don't have anything far enough along that we think we'll have a replacement tenant before the lease expires.
Got it. Then on the caps, you know, thank you for the heads up on the $25 million for the $1.4 billion loan. When we look out to October, you have the $1.2 billion plus loan extension coming up. We would assume that would also be in that $20 million range. And, you know, you mentioned organic delevering through, you know, EBITDA and cash flow and all that, but it seems to us like all of your cash available after distributions are going to go to these caps this year. Is our math generally in line there, or are we off base?
So, I mean, we do have, we are building up our cash reserves, so, I mean, if we have more than 20... If we're anticipating $25 million for the caps, we'll still have excess-
Yeah.
-liquidity.
I agree with that.
Gotcha. And then if we look at the earnings breakdown by portfolio that you have on page 20 of the sup, the Hawaii portfolio is obviously the key driver of earnings, with the mainland generating negative both FFO and CAD. Would you consider spinning off the Hawaii assets to unlock value for shareholders, or is that not even on the table?
That's not on the table. I mean, I think if anything, we understand the value of Hawaii, so maybe down the line, we could think about a joint venture for those properties, but there's no plans to spin that off.
Got it. That's it for me. Thanks, everyone.
Thanks.
The next question is from Mitch Germain of Citizens JMP Securities. Please go ahead, sir.
Thank you. I think you guys had mentioned the two properties that were sold were unencumbered. So I'm curious, are there any other properties that you own that are unencumbered?
We have two others.
Potentially could sell them if you wanna be optimistic?
We could.
Okay.
Yep, we could. We have a large parcel in Hawaii that's unencumbered, so that would, that could be some unlock of value down the line if we needed to. It's long-term leased right now and producing solid NOI, so it hasn't been considered.
Gotcha. Okay, great. The Home Depot, I know, it's a pretty interesting opportunity given the size, but is it potential to divide and possibly try to increase the population of, leasing that could occur for that space?
Yeah, it would make. We could easily divide it easily into at least two parcels. We have been softly marketing that that's an option, so we aren't opposed to that.
Okay, great. I think there was a little noise in the JV line on the earnings statement. Is there anything that we need to be aware of there?
You mean the equity in earnings?
Yeah. Yeah.
Of the unconsolidated JV? Yeah, we measure that on a fair value basis, so what you're seeing there is reflection of the change in the fair value.
Gotcha. Okay. Just wanna make sure I got... You said that the pipeline of leasing around 5 million sq ft and around a little less than a third of that is in sort of late stages. Is that the way to think about it?
Exactly. Yep.
Okay. So is there a way to, like, think about the breakdown of that space for new versus renew?
Yeah. So of the 26 deals, 10, 10 of them are for new prospects and the remainder for renewals. And the 66% of, the in advanced stages relates to the renewal activity.
Okay. I know you don't give guidance, but if we have Home Depot and moving out in March, end of March, and then that other lease of the property that was potentially for sale to, it looks like to the tenant, a move-out happening in mid-year. I know you do have headwinds associated, or, sorry, tailwinds associated with your rents, but is it safe to say same property results are likely to come in, you know, well below where they ended this year?
Yeah, I guess I just. I want to reiterate, for the, for the Home Depot parcel, again, it's a large parcel, but a very small fraction of ILPT's annual- it's less than 1%, so-
Mm-hmm.
It won't have a meaningful impact.
Okay.
It'll have a-
Great
... impact to occupancy, but not to the results.
Great. Thank you.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Yael Duffy, President and Chief Operating Officer, for any closing remarks.
Thank you for joining us today and your interest in ILPT.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.