ILPT - NASDAQ

Good morning, and welcome to Industrial Logistics Properties Trust's Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.

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 5 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 1/3 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, 1 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 1 remaining 1-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 4 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 cost 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 average rollup 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 matures 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 noncash 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.

[Operator Instructions] The first question comes from Mitch Germain with Citizens Capital Markets.

This is Mitch -- this is Jyoti on for Mitch. Just starting with a few questions. Thank you for providing all the details. I wanted to ask if there are any one-timers in the earnings this quarter, like a lease term fee or something on those lines?

We had 1 $750,000 remediation payment related to a scheduled termination of a lease. That's it.

Okay. Got it. And congratulations on the refi. So are you right now in discussions or looking forward to refi-ing the $1.4 billion JV 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 property 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 would -- 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.

[Operator Instructions] The next question comes from John Massocca with B. Riley Securities.

So maybe kind of -- yes, so maybe thinking about potential refinancing for the $1.4 billion of kind of floating rate cap debt, is there anything you're looking for in terms of the performance of the Mountain JV portfolio that might make that more attractive, might kind of accelerate the timing of kind of completing a refinancing there? And just maybe what are you kind of seeing in the market? Or what are you kind of seeing with the wholly owned portfolio that made closing that refinancing in June, at the right time, the right kind of period to -- the right pricing, et cetera, to be doing that transaction?

I think the refinancing of the $1.235 billion, there was more of a -- that one had a higher interest rate. And so that seemed to make the most sense in order of refinancing in terms of timing. We still have 1 year option extension left on the Mountain loan. So we have time to evaluate that. But certainly, if something attractive presents itself at the right rate and right maturity, all of those factors, then we would execute on that.

Yes. And I guess I'd just add too, John, that I mean the Mountain JV or the Mountain portfolio right now, we're at almost 100% occupied. So there really isn't anything additional that we need to do from a operational or a leasing perspective to get it primed. Again, it's just -- as Tiffany mentioned, that's really timing and it's a big endeavor to go through a refinancing, so we kind of take one at a time.

I mean is there any thought that you want to see maybe some of that 2026 lease renewal before and see how kind of -- where, I guess, rent bumps are going to go? Or is that something where the portfolio kind of is where it is in terms of how you're going to present it to the banking group as you think about refinancing?

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

Okay. And then thinking about the wholly owned portfolio, I know things can vary quarter-to-quarter, but GAAP leasing spreads on kind of the Hawaiian -- new leases in the Hawaiian portfolio were a little bit below the kind of 30% target that you put out there or kind of mark-to-market that you kind of are thinking about within the portfolio. Was there anything specific driving that? Or is it just that it's bespoke in the current quarter and may outperform next quarter, et cetera?

Yes. So for our -- I mean, if we were to break it out between new leasing and renewals, I mean, our new leasing, we had almost over 83% roll-up in rent across 2 leases. And then for the renewals, it was -- hovered around 11%. And I would say, really, what was driving that is most of those renewals were on our space leases versus our ground leases. And so just as it's a little bit nuanced because those are generally smaller tenants, anywhere from 1,500 to 6,000 square feet, and it's more traditional as how you would think of office leasing versus ground leasing. So that's really -- that's just the nuance of it.

And then -- okay. That makes sense. And then anything notable in terms of the lease-up of vacant assets, just notably the Hawaii land parcel in Indianapolis, any kind of moving pieces there that have changed since last quarter?

Yes. So nothing material. I will say, I think we've been seeing a little more activity on our Indiana property in the last several weeks. I think we have 3 active prospects in Hawaii, it's pretty much status quo. Again, that property is a lot for somebody to underwrite in terms of all the work that needs to be done there. So it's just -- it's slow.

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 Executive -- excuse me, 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.