Industrial Logistics Properties Trust Q2 FY2025 Earnings Call

Good morning. Joining me on today's call are ILPT's President and Chief Operating Officer, Yael Duffy; Chief Financial Officer and Treasurer, Tiffany Sy; and Vice President, Marc Krohn. In just a moment, they will provide details about our business and our performance for the second quarter of 2025, followed by a question-and-answer session with sell-side 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, July 30, 2025, 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, which can be accessed from our website, ilptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial measures during this call, including normalized funds from operations or normalized FFO, adjusted EBITDAre, net operating income or NOI, and cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website. I will now turn the call over to Yael.

Thank you, Matt, and good morning. Before we begin, I want to acknowledge the reports of the tsunami warning issued for Hawaii last night. Fortunately, the warning has since been lifted, and early assessment suggests there was no significant flooding. We currently expect little to no impact to our tenants or properties. ILPT reported another strong quarter and made significant progress in improving its balance sheet and positioning the company for future growth. Cash basis NOI grew by 2.1% compared to the same period last year, and normalized FFO increased 54% year-over-year. We made notable progress on our strategic priorities this quarter. First, American Tire, our fourth largest tenant, emerged from bankruptcy proceedings in May, without terminating or modifying any of its five leases with us and thereby securing $7.5 million in annualized revenue through 2029. Second, in June, we successfully refinanced our $1.235 billion of floating rate debt into $1.16 billion of fixed rate debt. And lastly, earlier this month, we announced a material increase of our quarterly dividend from $0.01 per share to $0.05. As of June 30, 2025, ILPT's portfolio consisted of 411 distribution and logistics properties across 39 states totaling 60 million square feet with a weighted average lease term of 7.6 years. Our well-diversified portfolio is further highlighted by our unique Hawaii footprint consisting of 226 properties totaling 16.7 million square feet. More than 76% of our annualized revenues come from investment-grade rated tenants or from our secure Hawaii leases. Following our robust first quarter in which we executed 2.3 million square feet of leasing, second-quarter activity totaled 171,000 square feet at a weighted average lease term of 4.8 years and a weighted average rental rates that were 21.1% higher than prior rental rates for the same space. More importantly, leasing activity year-to-date is expected to increase ILPT's annualized rental revenue by approximately $3.2 million, of which one-third has yet to be realized. Marc will provide further details on our leasing activity and pipeline shortly. Turning to our goals for the second half of the year, we remain focused on evaluating opportunities to improve our balance sheet and reduce leverage. Accordingly, as part of our recent refinancing, it was important that we were able to successfully negotiate improved terms to release properties under the new loan provision. By doing so, we'll have greater flexibility as we evaluate potential asset sales to enhance liquidity and support our broader capital strategy. That being said, we continue to believe in the strength of our properties, and we'll remain disciplined when considering future sales to ensure that we maximize value. To that end, through an unsolicited offer from an owner-user, one property was classified as held for sale at quarter end at what we believe is an attractive valuation of $50 million. A portion of the proceeds from this potential sale will be used to partially repay ILPT's $700 million fixed rate mortgage loan, which comes due in 2032. We anticipate a close in late 2025 or early 2026 and look forward to updating you on our progress on future calls. Additionally, we are closely monitoring the capital markets to evaluate opportunities to refinance our consolidated joint venture's $1.4 billion of debt. This loan matures in March 2026 and has one remaining one-year extension option, which provides us continued flexibility as we evaluate our options. Lastly, we remain committed to driving value by executing new and renewal leasing with strong economics through the second half of the year. The growth of our leasing pipeline is a testament to ILPT's portfolio of high-quality assets and diversified tenant roster. While ongoing macroeconomic uncertainty may ultimately delay tenant decision-making or hinder leasing velocity, we have not seen any weakening demand within our portfolio. We believe ILPT remains well positioned to navigate the current market conditions and capitalize on the long-term fundamentals of our industry. I will now turn the call over to Marc.

Thank you, Yael, and good morning. ILPT ended the quarter with occupancy of 94.3%, which exceeded the national industrial average by 170 basis points. We executed 171,000 square feet of leasing during the quarter, which was primarily related to renewals and achieved with minimal concessions. Over the last four quarters, we have completed nearly 6 million square feet of leasing across 57 transactions. As a result, only 2.1 million square feet, or 3.6% of our lease square footage, is set to expire in the next 12 months. As we have shared in prior quarters, we typically begin renewal discussions at least 18 to 24 months ahead of lease expiration. We believe this proactive approach and early engagement helps drive tenant retention and reduces potential downtime. These principles, along with a tenant retention rate of 86% underscore our ability to maintain portfolio stability. Today, our leasing pipeline totaled 7.8 million square feet, with more than half of the activity related to renewal discussions for leases that expire in 2026 and 2027. Through active conversations with tenants, most are choosing to renew versus relocate given the costs to move, business disruption, and economic uncertainty. Additionally, our tenants continue to invest their own capital into our properties, leading to a higher renewal probability. Furthermore, our leasing pipeline could result in positive net absorption of 3 million square feet, including early-stage prospects for our vacancies in Hawaii and Indiana. We expect these leases will yield an average roll-up in rent of 20% on the mainland and 30% in Hawaii, further illustrating the strength of our portfolio and our ability to generate organic cash flow growth. Our team remains focused on driving rent spreads, maintaining high tenant retention, and advancing the active pipeline to conversion in the second half of the year. I will now turn the call over to Tiffany.

Thank you, Marc. Good morning, everyone. Before I cover our second quarter results, I'd like to provide more detail on the refinancing that Yael mentioned earlier. Using cash on hand of $75 million, we refinanced our $1.235 billion floating rate loan into a new $1.16 billion fixed rate loan. The new loan requires interest-only payments that mature in 2030. By reducing the outstanding principal balance, eliminating the need to purchase interest rate caps, and reducing our interest rate from 6.7% to 6.4%, we expect our annual cash savings to be approximately $8.5 million, or $0.13 per share. As a result, earlier this month, we announced that our Board has raised the quarterly dividend from $0.01 to $0.05, or $0.20 per share annually. Now turning to our second quarter results. Last night, we reported normalized FFO of $13.8 million, or $0.21 per share, which was at the high end of our guidance and represents an increase of 54% compared to the same quarter a year ago. NOI was $87.6 million, and cash basis NOI was $84.7 million, each representing increases on both a year-over-year and sequential quarter basis, while adjusted EBITDAre remained relatively flat at $85 million. Interest expense decreased by $1.9 million compared to the first quarter of 2025 to $67.9 million, reflecting the impact of our lower cost interest rate cap at our consolidated joint venture purchased in March. We expect third quarter interest expense to decline to approximately $63.5 million, with $58.5 million of cash interest expense and $5 million of non-cash amortization of financing and interest rate costs. Turning to our balance sheet, we ended the quarter with cash on hand of nearly $60 million and restricted cash of just over $100 million. Our net debt to total assets ratio increased slightly to 69.9% and our net debt coverage ratio remained relatively unchanged at 12x. As a result of the refinancing, our variable debt to net debt ratio declined from 64.8% as of March 31 to 34.4% at June 30, and our interest coverage ratio increased from 1.2x to 1.3x. All of our debt is fixed with no maturities until 2029 except for our consolidated joint venture's $1.4 billion floating rate loan. This loan is fixed through an interest rate cap, and including its remaining extension option is due in 2027. As a reminder, this loan is prepayable with no penalties at any time through its maturity. Looking ahead, based on ILPT's leasing activity and the interest expense savings from our refinancing, we expect normalized FFO for the third quarter of 2025 to be between $0.25 and $0.27 per share. In closing, ILPT is actively making strides to strengthen its balance sheet and continue to benefit from demand for its high-quality industrial real estate. We believe the increased dividend strikes the right balance between delivering returns for our shareholders while maintaining sufficient capital to support our operations and continued deleveraging strategies. That concludes our prepared remarks. Operator, please open the lines for questions.

This is Jyoti asking a few questions on behalf of Mitch. Thank you for providing all the details. I wanted to inquire if there are any one-time items in the earnings this quarter, such as a lease term fee or something similar.

We had one $750,000 remediation payment related to a scheduled termination of a lease. That's it.

Okay. Got it. And congratulations on the refinancing. So are you right now in discussions or looking forward to refinancing the $1.4 billion joint venture debt as well?

We are actively evaluating options that are available to us.

Okay. Got it. And the last one from me here is that you mentioned one of the properties is held for sale. Should we expect more on those lines in the coming quarters?

We don't have anything else in the works right now, but we are evaluating opportunities. And so I could foreshadow that in the second half of the year or early 2026, there might be some additional properties that we bring to market or consider for disposition.

Got it. Congratulations on the quarter. That's all from me.

Thank you.

Thank you.

So, when considering the potential refinancing for the $1.4 billion of floating rate cap debt, is there any performance aspect of the Mountain joint venture portfolio that could enhance its attractiveness or speed up the refinancing process? Additionally, what trends are you observing in the market or with the wholly owned portfolio that led to the decision to close that refinancing in June at the optimal time and pricing for that transaction?

I think the refinancing of the $1.235 billion was driven by the higher interest rate associated with that loan, making it the most sensible time for refinancing. We still have a one-year option extension available on the Mountain loan, giving us time to assess our options. However, if an attractive opportunity arises with the right rate and maturity, we would certainly pursue it.

Yes. I would just add, John, that the Mountain joint venture or portfolio is currently almost fully occupied. Therefore, there is nothing more we need to do from an operational or leasing standpoint to prepare it. As Tiffany mentioned, it's really about timing, and refinancing is a significant undertaking, so we are approaching it one step at a time.

Is there any consideration to seeing the 2026 lease renewal in advance to understand where the rent increases might go? Or is the portfolio currently positioned as it will be presented to the banking group for refinancing?

Yes. There isn't anything material within that Mountain portfolio in terms of 2026 lease expirations. We only have 4.4% of our annualized revenue expiring in '26. So it isn't material and even less so for Mountain.

Okay. Regarding the wholly owned portfolio, I understand that results can fluctuate from quarter to quarter, but the GAAP leasing spreads on new leases in the Hawaiian portfolio were slightly below the 30% target you mentioned. Was there a specific reason for this, or is it just an outlier for this quarter that might perform better next quarter?

Yes. If we break it out between new leasing and renewals, our new leasing had over 83% rent increase across two leases. For the renewals, it was around 11%. The main factor driving this is that most of the renewals were on our space leases rather than our ground leases. This situation is somewhat nuanced because those are typically smaller tenants, ranging from 1,500 to 6,000 square feet, and reflect a more traditional view of office leasing compared to ground leasing. That's essentially the nuance of the situation.

That makes sense. Is there anything notable regarding the lease-up of vacant assets, particularly the Hawaii land parcel in Indianapolis? Have there been any changes since last quarter?

Yes. There hasn't been anything significant to report. However, we've noticed increased activity on our Indiana property in recent weeks. In Hawaii, we currently have three active prospects, but the situation remains stable. The property requires considerable work, which makes it a slow process for potential renters to evaluate it.

Okay, that's it for me.

Thanks, John.

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.

Thanks for joining today's call. Please reach out to Investor Relations if you're interested in scheduling a meeting with us. Operator, that concludes our call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.