Good morning, and welcome to Industrial Logistics Properties Trust Third Quarter 2022 Financial Results Conference Call. All participants will be in 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. To ask a question, you may press star then one on your touchtone phone. To withdraw from the queue, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Kevin Barry, Director of Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us today. With me on the call are ILPT's President and Chief Operating Officer, Yael Duffy, and Chief Financial Officer and Treasurer, Brian Donley. In just a moment, they will provide details about our business and our performance for the third quarter of 2022, 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, Wednesday, October 26th, 2022, 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 basis net operating income or cash basis NOI. A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distribution are available in our supplemental operating and financial data package, which also can be found on our website. With that, I will now turn the call over to Yael.
Thank you, Kevin, and good morning. Before we start, I would like to welcome Brian Donley, who joined ILPT as our Chief Financial Officer and Treasurer on October 1st. On today's call, I will provide a summary of our financing and de-leveraging plans and review our third quarter operating and leasing performance. Brian will then provide details on our financial results and balance sheet before we open the call to questions. In September, we closed on a $1.2 billion debt package that enabled us to fully repay the bridge loan facility used for the Monmouth Real Estate Investment Corporation acquisition. While the pricing on this debt is wider than the pricing of the bridge loan, interest rates and market spreads have continued to rise. Additionally, accordingly, we are pleased with the outcome of this transaction at this time in the debt market.
Importantly, this refinancing extended our weighted average debt maturity to over four years and provides us time and flexibility to execute on our de-leveraging plans. As we have discussed on prior calls, our plan may include relaunching the marketing campaign of the 30 properties previously identified for disposition, resuming discussions with potential partners for an equity interest in ILPT's Mountain Industrial joint venture, or exploring additional joint venture opportunities with properties where fixed debt is already in place. As we work through these strategies, we will use available proceeds to pay down debt and improve leverage. Now turning to portfolio fundamentals and operating results. As of September 30th, 2022, ILPT's consolidated portfolio included 413 warehouse and distribution properties in 39 states, totaling approximately 60 million sq ft with a weighted average remaining lease term of approximately nine years.
Occupancy at quarter end reached 99.2%, up 30 basis points on a sequential quarter basis. As we are in a time of economic uncertainty, we are encouraged that 78% of our revenues come from investment-grade tenants or subsidiaries, or from our secure Hawaii land leases. During the third quarter, we entered new and renewal leases for approximately 1.7 million sq ft at weighted average rental rates that were nearly 77.5% higher than prior rental rates for the same space, reflecting record quarterly leasing spreads. The impact of this activity is an increase of $4.8 million in annualized rental revenue, which showcases our ability to generate organic cash flow growth while maintaining portfolio stability.
We executed five new leases totaling approximately 543,000 sq ft for a weighted average lease term of 7.4 years. Included in this activity was a five-year lease for a 368,000 sq ft warehouse and distribution building in Ohio that we acquired vacant as part of the Monmouth acquisition. In under six months, we are able to leverage industry and broker relationships to lease this building to an investment grade rated tenant with minimal concessions. We signed four new deals in Hawaii totaling 175,000 sq ft at a blended roll-up in rent of 62%.
As Brian will discuss later in the call, we recorded a bad debt reserve of $1.2 million this quarter related to one tenant which leased three parcels within our Gehman portfolio in Hawaii. Almost immediately, we were able to execute new leases with replacement tenants at average roll-ups in rent of 68%. These results continue to highlight the scarcity of land, persistent demand, and value of our Hawaii real estate. Renewal activity was also strong, with nine executed leases for approximately 1.1 million sq ft, primarily on the mainland, at an average roll-up in rent of 26.1%, with a weighted average lease term of 3.7 years. As asking rents continue to increase, we are selectively completing short-term renewals with certain tenants to take advantage of market conditions.
For example, we have 760,000 sq ft scheduled to roll by the end of 2025, mainly driven by our mainland properties. Given the strength of the industrial sector, we feel confident that our active leasing pipeline will position us to maximize mark-to-market rent growth and increase cash flows. Our pipeline includes 36 deals for 3.6 million sq ft, of which roughly 1.4 million sq ft 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 40% in Hawaii, further illustrating the strength of our portfolio. I will now turn the call over to Brian to review our financial results.
Thank you, Yael, and good morning, everyone. Starting with our consolidated financial results for the third quarter of 2022, normalized funds from operations were $14.9 million, or 23 cents per share, a decline of $15.4 million compared to the prior year quarter. Adjusted EBITDAre increased approximately 85% year-over-year to $76.1 million, primarily as a result of our acquisition of Monmouth. The major drivers impacting normalized FFO over the prior year quarter was higher interest expense, partially offset by a $38 million increase in NOI, primarily from the Monmouth portfolio. Total portfolio same-property cash basis NOI for the third quarter decreased 1.9% year-over-year. This includes a negative impact of $1.2 million of bad debt reserves related to the Hawaii leases that Yael mentioned earlier.
Excluding these charges, consolidated same-property Cash Basis NOI increased 1.2%, primarily due to our leasing activity and contractual rent steps. Interest expense increased $80.7 million over the prior year quarter, including a $45.6 million increase in cash interest expense and $35.5 million of non-cash amortization of financing fees, of which $31.4 million was related to the bridge loan facility that we paid off at the end of the quarter. G&A expense increased $4.4 million over the prior year quarter, primarily as a result of our larger scale following the Monmouth acquisition. Turning to our balance sheet and financing activities. In September, we successfully closed on a $1.2 billion-dollar mortgage financing and used the loan proceeds and cash on hand to pay off borrowings under our $1.4 billion-dollar bridge loan facility.
The new financing is secured by a portfolio of 104 industrial properties totaling 18.6 million sq ft across 31 states, and is comprised of a $1.1 billion mortgage and $135 million mezzanine loan. The loans are interest-only, five-year floating rate loans with two-year initial terms and three one-year extension options, and carry a total weighted average interest rate of SOFR + 393 basis points per annum. We also entered into an interest rate cap limiting SOFR to 2.25% through October 2024, effectively fixing the interest rate on the entire CMBS loan at 6.18%. This new financing extends our weighted average debt maturity to 4.4 years and allows for a portion of the borrowings to be prepaid without penalty.
Including extension options, ILPT now has no debt maturities until 2027. As part of the loan agreements, we have maintained flexibility to repay debt as we further execute on our deleveraging priorities. Assuming short-term interest rates continue to rise and our caps remain in the money, our current quarterly cash interest expense run rate is approximately $59 million. Non-cash amortization of financing costs is projected to be approximately $6.7 million in the fourth quarter. Turning to investing activity, as previously disclosed, our consolidated joint venture acquired one of two properties that were under agreement by Monmouth for $38 million during the quarter. The JV terminated the contract for the second committed property, given the market volatility seen over the last few months.
We spent $8.5 million on capital expenditures during the third quarter, including $5 million for development costs, $2.2 million of tenant improvements and leasing costs, and $1.3 million of building improvements. Regarding the common dividend, we expect to maintain the current quarterly distribution rate of $0.01 per share to preserve liquidity and allow for short-term flexibility until we improve ILPT's leverage profile. Our financing plans are subject to market conditions, and the timeline to accomplish our goal is currently uncertain. We believe ILPT continues to own a strong real estate portfolio with an exceptional tenant roster and dependable cash flows. We look forward to providing updates on our progress in the future. 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 touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Bryan Maher of B. Riley Securities. Please go ahead.
Good morning, Yael and Brian. Couple of questions. Maybe just start with the dividend. Yael and Brian, at what leverage level, you know, once you start to deleveraging, you know, through asset sales or JVs, do you think the board would start to contemplate reinstating, you know, at least some compelling dividend?
Bryan, good morning. Good question. You know, it's something, you know, at the front of everybody's minds here. We're a REIT that's only paying a penny. You know, I think, you know, our deleveraging plans, you know, there's a lot of moving pieces and different, you know, permutations that could happen. You know, we need to get interest down a few turns. You know, we're at debt to EBITDA of over 13x right now. You know, until we're in the single digits, I don't think it's a real conversation. You know, we'll keep reviewing. The board will keep reevaluating every quarter and we'll see where we're at. It's, you know, it's not gonna happen until, you know, late 2023 at the earliest.
Okay. Maybe to that point, given what you're seeing in the marketplace and given your discussions with, you know, the JV partners that we're, you know, potentially are gonna onboard to the Monmouth assets and the sales process, I think it was like on 30 properties. I mean, what would be your best guess that you think, you know, what quarter or half year do you think you might be able to, you know, legitimately reengage with those entities to start to prune off assets? Or is it just too soon to tell?
Hi, Brian. I think it's too soon to tell. You know, I think we've been in discussions with brokers, with some of our other industrial peers, and I think everyone is just waiting for things to normalize. I know that's a subjective answer, but, you know, 40%. There's been 40% less transaction volume from Q2 to Q3. I think buyers and sellers, you know, buyers don't want to buy before they feel that the bottom's been reached, and sellers who aren't distressed aren't willing to, you know, be distressed sellers. I think the next couple of quarters, I think we'll see what the new normal is.
Okay. Just two more quick ones. Are you guys seeing any rent pushback on those increases that you're implementing?
N-none.
Okay. Lastly, maybe for Brian, you know, the OpEx, I think it was $8.4 million-$8.5 million, somewhere in there. Is that a good run rate for now until we see either, you know, asset sales or the deconsolidation of the JV?
Yeah, that's a pretty good proxy this quarter. You know, there's some, you know, seasonality type, you know, OpEx numbers in there and, you know, we do recover a large percentage of the operating costs that run through our P&L, you know. Be sure you factor that in for modeling purposes.
Okay. Thank you very much.
Again, if you have a question, please press star then one. The next question is from Mitch Germain of JMP Securities. Please go ahead.
Thank you and good morning. The Hawaii backfill, potentially credit upgrade there, is there any sort of color you can give us?
Yeah. As I mentioned, it was one tenant who leased three parcels. They actually had a natural lease expiration of October of 2022. They had wanted to. Again, they were a local player. They wanted to renew one of the three parcels, and we chose. We felt there was opportunity to re-lease to better credit tenants, which we actually were able to accomplish. Of the three parcels, one tenant leased one and another tenant leased two, and both of them were investment grade.
Great. Is there a timing differential we should be aware of?
Nope. The new leases will go into effect on November 1st.
Great. Appreciate it. Brian mentioned some flexibility on the mortgage, the new financing. I'm curious, like can you pay down the mezz? Is that kind of what you're talking about? Or can you pay down the principal of the entire. Maybe just provide some perspective on how that can work going forward.
What was negotiated is that we could repay 20% of both loans as part of that, you know, deal. That's roughly $250 million without a penalty.
With no penalty?
Correct.
Great. You guys had mentioned some color around some of the flexibility you have with regards to deleveraging. Are we just talking about the mainland or, you know, will you possibly look to, you know, capitalize on some of the Hawaii properties?
We have fixed debt in place on both the mainland and in Hawaii. I think we can be selective if we decide to go down, you know, presenting additional joint venture opportunities, either or.
Got you. That's helpful. Then last one for me, Brian. I just wanna make sure I understand the kinda one-timers this quarter. You've got the $1.2 million that gets adjusted out. There's some OpEx noise. You gave us a run rate of around $66 million or so GAAP interest for next quarter. Is that the way to think about it?
That's correct. Yeah, this quarter had the rest of the noise from the bridge loan facility, which, you know, we're adjusted out of FFO, so.
Great. Appreciate everything. Appreciate it. Bye.
Bye.
The next question is from Tom Catherwood of BTIG. Please go ahead.
Thanks, and good morning, everybody. Maybe sticking with the bad debt, I understand the $1.2 million, but obviously, if we compare to 2Q, it's down kind of $4 million on a rental revenue basis. Is that just GAAP adjustments? Is the $1.2 million just the cash bad debt, or is there something else that was dragging down that rental revenue this quarter?
Yeah, it's a great question. Q2 actually had a one-timer to the positive. It was $3.5 million of below-market lease value that was written off related to a tenant that was turning over. So Q2 was artificially inflated, and then you had the bad debt in Q3 of the $1.2 million. You know, so you sort of net those two items out and you know that's a better run rate.
Got it. I appreciate that, Brian. And then I assume the backfill, Yael, you mentioned, you know, blended 68% for those three spaces in Hawaii. I assume that was in October, so that didn't hit 3Q numbers. Is that a fair assumption?
That's it. Yep, that's exactly right.
Okay. You know, you kind of laid out the scenario, appreciate your commentary around, you know, potentially bringing 30 assets back to market, looking at additional JVs and, you know, maybe looking to doing more JVs in the fixed rate assets, but not rushing into anything because of what's going on in the market. It seems like a basic question, but how long can you wait? Is there a point in time where you say, "We need to begin to transact just to bring this leverage down?
I think we have time to be patient. I mean, we all know that the bridge was, you know, looming over us with a maturity of February 2023. You know, the fact that we were able to refinance out of the bridge, I think, again, provides us time to be patient. I don't think we're gonna, you know, prematurely do something that isn't in the best interest.
All right. Brian, how is the debt cross-collateralized? Does that kind of limit what is available to sell outright right now? Do you have some flexibility there?
We have some flexibility. I mean, there are certain parts of the portfolio that have mortgages and, you know, we'd have to look at, you know, what we could get for that in total proceeds. You know, each loan tranche of the overall CMBS, as we outlined, is inclusive of 105 assets. You know, the Mountain JV floating rate debt has its own portfolio. You know, there are options around that, you know, that we can look to to pull different levers to raise capital.
Maybe to say it another way, the 30 assets that you had first brought to market and then pulled before you did the refinancing, does the refinancing issue reduce that pool of 30 assets? Or, you know, are those still available to go out to market?
Yeah, those are still available to go to market. That's right.
Got it. Kinda last one for me, kind of thinking bigger picture strategically with the relationship with The RMR Group. In a normal operating environment, the discussion around one of the benefits of RMR is, you know, the resources, the scale. You know, you've talked often about the large funnel when it comes to seeing more acquisitions and being able to underwrite more. When it gets to a situation like this, where it's all hands on deck and trying to de-lever and trying to really manage through a challenging market and situation, what is the interaction with The RMR Group and kind of is there a benefit that that scale brings in this type of environment, not just a normal operating environment?
Yeah, I mean, I think even more so in today's environment. I mean, you know, we're in a time of economic uncertainty. I think, asset management, property management, accounting, I mean, it's all hands on deck.
Yeah, I would add to the CMBS financing was a direct correlation. You know, our banking relationships and the ability to execute on such a large transaction was a huge benefit having RMR behind us.
You do think when kind of the capital markets or the investment sales markets open back up, you'll be able to move swiftly on that front just to de-lever because of that? Is that the benefit of that relationship as well?
Absolutely.
Got it. Appreciate it all. Thanks, everyone.
Thanks.
Thanks.
The next question is from Aditi Balachandran of RBC Capital Markets. Please go ahead.
Thank you. Good morning. Just a really quick question from me. Just can you remind us what is the $100 million of the shift to cash pertaining to?
The $100 million is at the Mountain Industrial joint venture level, and that includes-
Mm-hmm.
operating cash as well as loan reserves at the JV level.
Okay, cool. That was really all I had. Thank you.
Thank you.
There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Yael Duffy for closing remarks.
Thanks, everyone, for joining us on the call today. We look forward to speaking with many of you at Nareit in the coming weeks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.