Stockholder Call -
JLL Income Property Trust Q3 2015 Earnings Call

OPERATOR
On behalf of JLL Income Property Trust, I’d like to welcome you to their third quarter 2015 earnings conference call. This call is being recorded and our audience lines are currently in a listen-only mode. [Other operator instructions.] At this time, I would like to turn the conference over to Jodi Akers, Head of Stockholder Services. Jodi, please go ahead.

Jodi Akers
Thanks, and welcome, everyone, to today’s call.

Any statements made about future results and performance or about plans, expectations or objectives are forward-looking statements. Actual results and performance may differ from those included in the forward looking statements as a result of factors discussed in the Company's annual report on Form 10-K for the year ended December 31, 2014, and in our other reports filed with the SEC. The Company disclaims any undertaking to update or revise any forward-looking statements.


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In addition, all non-GAAP financial measures discussed during this call are reconciled to their most directly comparable GAAP financial measures in accordance with the SEC rules in our Form 10-Q for the quarter ended September 30, 2015.

Links to a transcript and audio replay of this call will be posted and available on our website, www.JLLIPT.com. For further information on the Company’s performance, we invite you to review our Quarterly Report on Form 10-Q filed on November 6, 2015 and other filings which are available on the Company’s website, as well as the SEC’s website, www.sec.gov.

Now I would like to turn over the call to Allan Swaringen, President and Chief Executive Officer and Gregg Falk, Chief Financial Officer. At the conclusion of their comments, we will open the call for your questions.
 
Allan, if you’d like to begin?


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Allan Swaringen
Thank you, Jodi. Hello, everyone, and thank you for joining us for our third quarter earnings call. JLL Income Property Trust had a very productive third quarter and we are extremely pleased with our accomplishments so far this year.

Since 2012, we have raised over $640 million of new capital. We have also disposed of 21 non-strategic properties generating approximately $310 million in sale proceeds. With this capital we have acquired 25 new properties investing approximately $630 million. We also repaid or refinanced over $240 million in higher interest rate and higher loan-to-value loans. All of these activities have been consistent with our offering objectives to enable the use of real estate as a component of portfolio diversification and to achieve NAV appreciation over time. In addition, we have repurchased more than $130 million of our shares, returning capital to stockholders that desired liquidity or chose to reduce their allocations to core real estate.

JLL Income Property Trust remains the preferred daily NAV core real estate offering in the marketplace attracting more capital than nearly all of our competitors combined. We have also significantly expanded our distribution partnerships, which now spans ten different wealth management platforms representing wirehouses, private trust banks, RIA's and major national independent broker dealers.


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We continue to see strong inflows of new capital as economic and real estate market conditions are favorable. The outlook for US real estate in 2015 remains strong against a backdrop of an increasingly healthy labor market, moderate economic growth, and the expectation of rising interest rates. The preliminary estimate of second quarter GDP growth came in slightly below expectations at 2.3%, which is still an acceleration from first quarter growth. Both consumer spending and net exports picked up in Q2 confirming expectations that the economy has shrugged off some of the factors that slowed growth in Q1.

Job growth has continued at a solid rate throughout the second quarter. Year-to-date job growth has averaged 211,000 jobs a month through July, sufficient to drive continued declines in the unemployment rate, which ended July at 5.3%, a post-recession low. Moody’s Analytics predicts hiring will remain strong for the remainder of 2015, resulting in full year growth of roughly 2.8 million jobs, just below last year’s strong numbers. A robust labor market increases the likelihood that the Fed will begin normalizing interest rates.

Real estate capital markets remain very active, despite this year's greater interest rate volatility. Second quarter transaction volume came in below the first quarter’s record numbers, but was still quite strong with $87 billion of office, industrial, retail, and apartment properties traded. Valuations also continued to climb in the second quarter across a wide range of markets with cap rates near, or in some cases below, previous

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market lows. Liquidity has strengthened in secondary markets and for lower quality assets as investors search for yields amidst record low cap rates in gateway markets. Buyers with the lowest cost of capital continue to bid aggressively to win trophy properties in gateway or coastal markets.

Looking ahead, given the healthy labor market and a solid 2015 GDP forecast, real estate demand should remain strong for the balance of the year. While new construction is increasing in some markets, we expect occupancies to remain high and rents to continue growing. The potential for financial market volatility is a greater risk with the Fed still expected to begin raising interest rates. Nonetheless, our expectation is for rate hikes to be well-managed, resulting in a slow and steady increase to interest rates. This has the potential to stabilize valuations in the US commercial real estate markets, however we do not believe it will reverse recent gains or negatively impact transaction volumes.

The robust property markets, along with the tireless work of our acquisitions and asset management teams, allowed us to execute on our strategic priorities and enhance our diversified portfolio of high quality, stabilized real estate assets. I will discuss these and other Q3 activities in greater detail after Gregg gives you a recap of our financial performance. Gregg?





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Gregg Falk
Thanks Allan. Our success with active asset management, property acquisitions and strategic dispositions are reflected in our financial results and operating performance. As I highlight our quarter and year-to-date results I will discuss our key underlying drivers.

For the nine months ended 2015 we reported net income of $19.9 million or $0.36 per share. We recorded an increase of $16 million and $0.29 per share compared to the prior year. As discussed in prior quarters, the disposition of our four student housing properties that occurred in Q1 this year continues to have a positive impact on our net income. Our acquisitions of income producing properties also contributed to the increase NOI.

For Q3 we reported FFO of $6.3 million, a decrease of 11% compared to Q2 as a result of an unfavorable exchange rate at Railway Street Corporate Centre, our office property located in Calgary Canada. Our FFO per share was $0.10 compared to $0.16 in the same period last year. The decrease in per share FFO is the result of the large increase in the number of shares outstanding due to our successful continuous public offering. From December 31, 2014 our shares outstanding increased by 48% and our number of stockholders doubled.

We closely monitor AFFO as a supplemental measure of operating performance. AFFO is calculated as FFO adjusted for non-cash items and one-time non-operating expenses. Year to date AFFO was $20.8 million or $0.37 per share compared to $19.6 million or $0.43 per

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share for the same period in 2014, a 6.3% year over year increase in total AFFO and a 14% year over year decrease in per share AFFO. The increase in AFFO is principally attributed to the performance of our new acquisitions and our office properties. The decrease in AFFO is related to a large increase in the number of shares outstanding, as discussed previously.

The ongoing economic recovery and related labor market strength drove improvement in the fundamentals of each of the four main property types during the third quarter. Office and warehouse markets continue to see the largest year-over-year vacancy declines, with vacancy rates in both sectors falling 100 basis points. In our portfolio the overall office occupancy remained at 93% and compares favorably with the National office occupancy rate of X%. During September we signed Amazon Corporate LLC to an expansion and extension of their lease at Monument IV at Worldgate. The lease amendment increases their occupancy in the building by approximately 83,000 square feet and extends the lease expiration to April 2027. The lease amendment keeps the building 100% leased through April 2027. However, at Railway Street Corporate Centre, we experienced some early lease terminations dropping it's occupancy by 25 basis points from the prior quarter to 71%.

According to CBRE-EA, the National Warehouse availability has fallen to 9.9%, an availability rate now below the lowest level seen during the peak of the previous economic cycle (2005-2007). In this property type we continue to perform better than the national

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average with our industrial occupancy at 99%, a slight decrease from the prior quarter. The decrease in occupancy is the result of acquiring a 7 building industrial portfolio located near Chicago, IL, which is 92% leased. The portfolio is leased to 14 tenants in a diverse mix of industries. Of the seven buildings, only one building has vacancy.

National Retail occupancy rates rose to 93.9% during the quarter. This was another 10 basis points of occupancy increase in what has been a slow, but steady recovery for this sector. Our portfolio retail occupancy increased to 97% this quarter, in-line with the prior year. Over the last couple of years we have acquired 5 well-leased grocery-anchored community oriented retail properties, which has positively impacted the occupancy in this segment of our portfolio.

The National Apartment occupancy rate at 96.3% is the highest ever recorded for the apartment sector spurring attractive rent growth in this property type. Our apartment occupancy remained stable at 95% this quarter, in line with the National rate. We experienced strong leasing efforts for the new school term at our 2 student housing properties. Campus Lodge Tampa and The Edge at Lafayette increased by 4% and 9%, respectively, compared to the prior year. Looking ahead, accelerating construction of new apartments will make it more challenging for occupancy in this sector to continue to rise.

We feel positive about the occupancy of the portfolio remaining stable around 97% at the end of the current quarter. Our weighted average lease duration at September 30th was 6.8 years, a slight increase compared to the prior quarter. The acquisition of Whitestone

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Market, located near Austin, TX, has positively impacted our portfolio's weighted average lease duration. This retail property has an average remaining lease term of approximately 14 years with limited near term roll.

Vacancy, remains low reflecting consistently high demand in combination with continued low levels of new supply coming online spurring more rent growth now and in the near future. As a result, rent growth remains strong nationally with increases on both an annual and quarterly basis in all four property sectors.  Warehouse rents made the most progress, growing 4.7% over the past year.  Office and apartment rent growth were also both strong, at 3.9% and 3.8%, respectively, on a year-over-year basis.  Retail rent growth continues to lag as compared to the other property types; however, at 2.6% annual rent growth still outpaces annualized inflation.

Offering an attractive level of current income for distribution to our stockholders is one of our primary investment objectives. Our board of directors approved a gross distribution for the fourth quarter of 2015 at $0.12 per share to stockholders of record as of September 29th, payable on or around November 6th. This was the sixteenth consecutive quarterly dividend declared dating back to the first quarter 2012. These gross dividends were paid out to stockholders, but were reduced for share-class specific fees. We continue to offer our investors stable dividend payments fully covered by our cash flow from operations. For the rolling four quarters ended with this third quarter, our FFO to dividends

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paid coverage was 103% and our AFFO to dividends paid coverage was 106%. Our portfolio has one of the highest dividend coverage ratios in the non-listed REIT industry.

Since we launched our initial public offering in October of 2012 we have provided annualized total returns for our Class M shares of 7.6% and year to date total returns of 8.3%. At the end of the quarter our NAV per share for Class M shares was $11.10 with 3.0% realized share appreciation as a result of increasing property valuations and a positive impact from property operations. We experienced valuation increases across the portfolio with our office properties leading the way, including 111 Sutter Street, our office building in San Francisco, which is currently one of the hottest office markets in the US.

Now, I’ll hand the call back over to Allan to discuss in detail our significant accomplishments for the quarter.


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Allan Swaringen
Thanks, Gregg.

We had another strong quarter in acquisitions acquiring three new property investments and shortly after quarter end we entered into a material agreement to acquire an interest in 15 properties. Our execution on our offering strategy has enabled us to provide investors with a portfolio that continues to be well-diversified across all property types, geographic regions and underlying tenant industries as real estate markets evolve.

In July, we acquired AQ Rittenhouse, a newly constructed, 110 unit, 12-story apartment building located in downtown Philadelphia for approximately $51 million. The property is located in the trendy Rittenhouse Square neighborhood that has become a Millennial magnet in recent years. This newly constructed property features studio, one and two bedroom units with condo-quality finishes and numerous tenant amenities including a rooftop lounge and outdoor patio with unobstructed views of the Philadelphia skyline. This investment increases our exposure to the Eastern region of the United States. After purchase, we closed on financing with a $26 million, 10 year mortgage loan, that bears interest at a fixed-rate of 3.65%.

As Gregg mentioned earlier, on September 30th, we acquired O’Hare Industrial Portfolio, a 7-building, 642,000 square foot, industrial portfolio located in close proximity to

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Chicago’s O’Hare International Airport for $71.5 million. Chicago is the second largest industrial market in the U.S. at approximately 1.2 billion square feet. The O’Hare
submarket is a mature, infill submarket with excellent access to a network of highways, rail, and air transportation. The buildings were constructed in the mid-to-late 1980s, which is typical for buildings in this submarket. The portfolio is strategically located in DuPage County, a county whose more diversified tax base often provides tenants with lower total occupancy costs. With little to no available land, few new buildings have been built in this infill location in the past several years. This acquisition reflects our strategic approach to grow our industrial allocation through investments in target industrial markets like Chicago. With this acquisition, we have completed 7 new industrial investments encompassing 3.2 million square feet and totaling more than $255 million since 2013.

Also on September 30th we acquired Whitestone Market, a high quality, grocery-anchored community center located in Cedar Park, TX. Anchored by H-E-B, the leading grocer in Texas and one of the nation’s largest independent food retailers, the 145,000 square foot center is 100% leased to 17 tenants. Located at the intersection of North Austin’s main east-west artery and major north south corridor, the center has excellent drive-by visibility and convenient accessibility. Research shows that Austin’s economy is among the country’s strongest, with projected continued growth in employment, population, and retail sales. In addition to Austin’s rapid northern expansion, Cedar Park’s projected residential and economic growth should enhance the long-term outlook for this investment due to improving population density and increasing household incomes. This acquisition reflects

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our strategy to increase our portfolio’s exposure to high-quality, grocery-anchored centers in top national retail markets. With the acquisition of Whitestone Market, over the last 2 years we have invested more than $230 million in this property sector, all in targeted retail locations rated in the top-quartile of LaSalle’s proprietary ranking of more than 40,000 grocery-anchored shopping centers in the U.S. LaSalle’s criteria grades shopping centers based upon their surrounding population density, household income and trade area competition and is a strong buy signal for us as we filter through the billions of dollars of property currently coming to market.

Acquiring new properties with low leverage has allowed us to maintain our Company leverage ratio between our target range of 30% to 50%. At September 30th, our Company leverage ratio was a record low at 36%, a 10% decrease from the prior year. No existing debt matures until October 2016, giving us a weighted average remaining loan term of 6.5 years. For the quarter, our weighted average interest rate on outstanding borrowings slightly decreased to 4.3% as of September 30th.

With the 3 acquisitions this quarter we now own 37 different properties in our portfolio, comprised of 18 industrial warehouses, 6 grocery anchored retail centers, 6 office buildings, 5 apartment complexes and 2 parking garages. In total, we now own almost 7.6 million rentable square feet. At the end of Q3 our portfolio diversification by property type was 18% for Apartments, 28% Industrial, 26% Office, 25% Retail and 3% Other.


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Shortly after quarter-end, on October 30th, we entered into an agreement to acquire an approximate 28% limited partnership interest which has agreed to acquire an approximate 49% interest in entities that own 15 retail properties in the greater New York City area, the NYC Retail Portfolio. We will own an approximately 14% interest in the NYC Retail Portfolio.  The purchase price is approximately $85 million and is subject to normal closing prorations and adjustments. The NYC Retail Portfolio contains approximately 2.7 million square feet across urban infill locations in Manhattan, Brooklyn, Queens, the Bronx, Staten Island and New Jersey.  All properties are encumbered by mortgage debt that has a weighted average interest rate of approximately 4.6%, a weighted average debt maturity of approximately 6 years and a portfolio wide loan to value of approximately 48%.  The aggregate value of the NYC Retail Portfolio, including property level debt, is approximately $1.28 billion, with the Company’s 14% interest equating to approximately $179 million.  The Company expects to fund the transaction using cash on hand with closing expected to occur before year-end. 

As we grow our portfolio of diversified core properties, we remain committed to actively managing our real-estate assets to provide attractive income returns to our stockholders. Financial Advisors and Portfolio Managers are looking for increased diversification and alternative sources of income for their client portfolios and core real estate is well positioned to provide both. 


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Our target acquisitions remain well located, well leased industrial properties and grocery-anchored community oriented retail properties. If an opportunity presents itself to acquire properties outside of our target acquisitions, such as the NY Retail Portfolio, we carefully consider the risks, return and geography ensuring it is in-line with our investment guidelines and adhere to our longer-range objectives. We intend to further rebuild our multifamily allocation through acquiring conventional apartments that may provide growth to our portfolio as our economy continues to expand. We will also dispose of properties when we see better risk-adjusted returns in other property types and markets. We are very pleased with our accomplishments so far this year and are confident we can continue to add value to our portfolio and generate moderate appreciation over time for our stockholders.

Thank you for your time and attention today and I hope you found our remarks informative. Operator, we would now like to open the call for any questions.


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OPERATOR
At this time I will open the lines for your questions. [Instructions for asking questions.]
<Questions.>

OPERATOR
There are no other questions and this concludes today's call. I will hand the call back to Allan Swaringen for closing remarks. Allan?

Allan Swaringen
Thank you for joining us on today’s call, and we look forward to updating you again next quarter about our continued progress.


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