Industrial Logistics Properties Trust Q4 FY2025 Earnings Call

Good afternoon, and thank you for joining ILPT's Fourth Quarter 2025 Earnings Call. With me on today's call are President and Chief Executive 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 quarterly results, 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, including guidance with respect to certain first quarter 2026 financial measures. These forward-looking statements are based on ILPT's beliefs and expectations as of today, February 19, 2026, 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 of 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. Lastly, we will be providing guidance on this call, including estimated normalized FFO and adjusted EBITDAre. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. I will now turn the call over to Yael.

Thank you, Kevin, and good afternoon. We ended the year with robust demand for our high-quality portfolio of Industrial and Logistics Properties, consistent with the trends we saw throughout 2025, delivering one of the strongest quarters in ILPT's history. We achieved record quarterly leasing volume, executing nearly 4 million square feet at a weighted average rent roll-up of 25.7%, marking our fifth consecutive quarter of double-digit rent growth. Normalized FFO grew 113% year-over-year and same-property cash basis NOI increased 5.2%. Our improved performance resulted in ILPT generating a total shareholder return of more than 55% in 2025, ranking us third in the U.S. across all REITs. Additionally, we made notable progress on our strategic priorities including improving our balance sheet and positioning ILPT for future growth. In June, we successfully refinanced $1.2 billion of floating rate debt into fixed rate debt, resulting in annual cash savings of more than $8 million. Shortly thereafter, we announced a material increase in our annualized dividend from $0.04 to $0.20 per share. Turning to our portfolio. As of December 31, 2025, ILPT owned 409 properties across 39 states, totaling approximately 60 million square feet with a weighted average lease term of 7 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 land leases. Consolidated occupancy at year-end was 94.5%, representing a 40 basis point increase over from the third quarter. During 2025, we completed 42 new and renewal leases and 2 rent resets totaling 7.3 million square feet. This activity is expected to generate an increase of approximately $10.6 million in annualized rental revenue, of which approximately $5.8 million or 55% has not yet commenced and will contribute to cash flow in 2026 and beyond. Additionally, we continue to expand our relationships with FedEx and Amazon, our 2 largest tenants, which accounted for 2.8 million square feet or 38% of our annual leasing volume. These results showcase our ability to realize mark-to-market rent growth through leasing and continued strong tenant retention. Looking ahead to 2026, we remain focused on our leasing priorities, specifically the 2.2 million square foot land parcel in Hawaii and a 535,000 square foot property in Indianapolis. We believe there is continued opportunity to generate organic cash flow growth and reduce leverage, which has declined from 12.4x to 11.8x over the last year. We are pleased with the strong performance and momentum we are building at ILPT, and we look forward to delivering long-term value for our shareholders. I will now turn the call over to Marc, who will provide further details into our fourth quarter leasing results within our Mainland portfolio as well as our pipeline.

Thank you, Yael. And good afternoon, everyone. During the fourth quarter, we executed nearly 4 million square feet of leasing at a weighted average lease term of 9.5 years and a roll-up in rent of 25.7%. Given the limited available space within our portfolio, renewals represented the majority of the activity this quarter, reflecting a tenant retention rate of 96%. Notable leases include 3 lease renewals totaling 2.3 million square feet with Amazon, our second largest tenant for a weighted average lease term of 11.5 years and a roll-up in rent of 26.8%, a 1.2 million square foot renewal with Restoration Hardware, our fourth largest tenant for a weighted average lease term of 7.4 years and a roll-up in rent of 29% and 3 lease renewals totaling 152,000 square feet with FedEx, our largest tenant for a weighted average lease term of 4.6 years and a roll-up in rent of 11.7%. These results are a testament to the quality of our portfolio, showcase our commitment to fostering strong tenant relationships and underscore our collaborative and strategic approach to leasing. As we look ahead, 8.8 million square feet or 11.8% of ILPT's total annualized revenue is scheduled to expire by the end of 2027, which provides meaningful embedded rent growth opportunities. Today, our leasing pipeline consists of 6.4 million square feet, of which 3.8 million square feet is in advanced stages of negotiation or lease documentation. Based on current discussions, we expect this activity to generate average rent roll-ups of approximately 20% on the Mainland and 30% in Hawaii. I will now turn the call over to Tiffany to review our financial results.

Thank you, Marc. Yesterday, we reported fourth quarter normalized FFO of $18.9 million or $0.29 per share, which was at the high end of our guidance. This represents an increase of 9% on a sequential quarter basis and 113% compared to the same quarter a year ago. Same-property NOI was $88.2 million and same-property cash basis NOI was $85.7 million, both increasing on a year-over-year and sequential quarter basis, driven by strong tenant retention and rent roll-ups. Adjusted EBITDAre totaled $85.1 million. During the quarter, we recognized $14.6 million of earnings from our unconsolidated joint venture, which was primarily driven by an increase in the fair value of the underlying real estate owned by this joint venture. Additionally, we sold 2 vacant unencumbered properties totaling 286,000 square feet for total proceeds of $3.9 million, resulting in a $1.4 million net loss. In January 2026, we paid our manager an incentive fee of $5.7 million incurred for the year ended December 31, 2025. This payment resulted from ILPT outperforming the total return of the industry benchmark over the trailing 3-year measurement period by more than 60%. Turning to our balance sheet. We ended the quarter with cash on hand of $95 million and restricted cash of $88 million. Our total net debt to total assets ratio declined modestly to 69%, and our net debt leverage ratio improved to 11.8x. As of December 31, all of ILPT's debt is either fixed rate or fixed through an interest rate cap with a weighted average interest rate of 5.43%. We continue to monitor capital market conditions as we evaluate opportunities to refinance our consolidated joint ventures' $1.4 billion floating rate loan. Including its remaining extension option, this loan does not mature until March 2027. We currently expect to exercise this extension option and purchase a related interest rate cap for approximately $4 million. Looking ahead to the first quarter, we expect interest expense to be $61.5 million, including $57 million of cash interest expense and $4.5 million of noncash amortization of deferred financing fees and interest rate cap costs. We expect normalized FFO to be between $0.29 and $0.31 per share and adjusted EBITDAre between $84 million and $85 million. In summary, ILPT ended 2025 with strong operating momentum, improving financial performance and less exposure to market and interest rate volatility. Our leasing results, stable tenant base and focus on strengthening ILPT's balance sheet have us well positioned for 2026. That concludes our prepared remarks. Operator, please open the line for questions.

The first question today comes from Mitchell Germain with Citizens Bank.

Tiffany, you were speaking a little too fast for me. What's the noncash interest amount for the quarter, I mean?

For the forecasted quarter, the amount is $4.5 million.

So $61.5 million starting out next year. Is that the way to think about it?

That's correct.

Okay. Great. I believe there was another asset that was under contract or maybe in discussion for sale. Can you provide an update there?

Mitch, yes, we had another property under LOI for about $50 million, and the tenant was actually going to be the buyer of that property, and they decided that they prefer to engage in a renewal discussion versus buy the property. So we have a signed LOI for them for a 7-year renewal now that we're negotiating.

Okay. That's helpful. Marc's talked about expirations for the next 2 years. Are there any known move-outs we need to be aware of?

Mitch, there's nothing significant to report at this time. We are making excellent progress on our expirations for 2026 and 2027 as we look beyond 2026. So we are quite satisfied with our current position.

And Marc, while I have you, are there any changes that you're making in the marketing process for the Indi and Hawaii vacancies? I know it's been north of a year that you've been sitting on them now. Have you kind of looked at possibly changing the concession package or some sort of adjustments there?

Well, I'll touch on Indi, and then I'll let Yael touch on Hawaii. But Indi, we made some really good progress, and we're actually exchanging lease comments right now. So that could be as early as next quarter that we would be in a position to maybe provide some positive news about the lease-up of that space.

In Hawaii, we are still in discussions with the same tenant we have mentioned over the last few quarters. The size of the parcel and its complexity are causing some delays, but we are optimistic about leasing it. Regarding concessions, there isn't much we can do for that specific site due to it being a ground lease. We are essentially looking for a unique tenant willing to take on such a large parcel.

Got you. I guess last one for me, Tiffany, can you explain how we transition from around $64 million or $63 million in interest expense in the fourth quarter to the forecast you just provided for the first quarter? How do we reach that point?

That's really a number of days. There were 92 days in this quarter, and there's only 90 in the next quarter.

So does that suggest that it goes up again in 2Q?

Well, it doesn't because if you consider what we think we would pay for a cap, $4 million, we'll have the impact of that in Q2, which should lower interest expense.

Your next question comes from John Massocca with B. Riley.

So maybe looking at the same-store NOI growth in the quarter, a little higher versus kind of your past 3 quarters. Was there anything specific that drove that beyond kind of leasing and addressing some of the vacancy in the Mainland portfolio? Just curious if there's any kind of cash rent coming online or anything like that, that may have caused that to be elevated relative to the last 3 quarters of the year?

So I mean, Tiffany might want to expand, but I think really the reasoning is we do a lot of our leases ahead of time. So it could be 12 to 18 months ahead of a natural lease expiration. So it does take a little while for the cash impact of the new leases to kind of hit. And so I think that's the majority of the increase.

Leasing.

Okay. And I mean, would that be something then as some of those new leases keep hitting that this level of same-store NOI growth is sustainable long term? Or is it really going to be a product of just addressing some of the maturing leases that are still left in '26 and '27?

This quarter, the impact of our leasing was about $10 million in cash growth. Most of that has not been realized yet. I would estimate that at least 50% of the growth will likely come in the latter half of '26 and into '27 when the leases we renewed this quarter take effect. Therefore, I believe that it is sustainable to expect continued growth.

Okay. And then outside of the transactions closed in 4Q and the transaction that was potentially going to be disposition but became a lease renewal. What's the outlook for disposition activity for the remainder of 2026?

I don’t see it being a significant part of our business plan, at least in the near term, but we do receive a lot of inquiries and sometimes they seem promising, leading us to investigate further. Therefore, any sales will be opportunistic but will not constitute a major element of our business plan.

Okay. And then with regards to the Mountain JV loan, it sounds like you're going to utilize the extension. But what's kind of the thought process around refinancing? How are you think about timing there? Is there something you want to see in the markets or something else kind of structurally with the JV you want to see before looking to address that refi? Just kind of curious how we should think about that.

We are currently looking into refinancing options. The positive aspect of our extension choice is that it provides us with the flexibility to take our time since there are no additional fees involved. The only requirement is to purchase the interest rate cap, which we can sell later if we refinance before the maturity date.

So, are you looking to understand the macro environment in terms of base interest rates, or is there something specific within the portfolio or the joint venture that you're waiting to assess before trying to achieve the best pricing?

No, I wouldn't say that. I think we're currently looking at macroeconomic factors and what's available to us. And these types of things do take some time, and we are aware of that.

Yes. I would like to add that the portfolio is fully leased, and we have been experiencing strong tenant retention. Even when there is a vacancy, we are able to fill it quickly. Therefore, from an operational standpoint, we are in a solid position to consider refinancing.

Okay. Lastly, how do your core markets look, especially on the Mainland in terms of competing supply? Is that a near-term concern, or given the changes in interest rates over the past couple of years, is it not really an issue going forward?

We haven't seen it be a big issue. I think the construction has slowed, and I think the vacancy increase from a macro perspective has just been new supply coming to the market. But I think tenants are realizing that it costs money to relocate and is also disruptive to their operations. So I think we've had some tenants that have looked into potential relocations and then have come back and wanted to do lease renewals.

This concludes our question-and-answer session. I would like to turn the conference back over to Yael Duffy, President and Chief Executive Officer, for any closing remarks.

Thank you for joining today's call, and we look forward to meeting with many of you at industry conferences this spring. Please reach out to Investor Relations if you're interested in scheduling a meeting with ILPT. Operator, that concludes our call.

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