Industrial Logistics Properties Trust (ILPT) Earnings Call Transcript & Summary

Good morning, and welcome to Industrial Logistics Properties Trust First Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call 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 first 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, April 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. On today's call, I will provide a brief overview of our portfolio, summarize our first quarter leasing activity and outline our key areas of focus for the year ahead. Then Marc will discuss the specifics of our Mainland portfolio and leasing pipeline. From there, Tiffany will review our financial results and outlook. We started the year with continued demand for our high-quality portfolio of industrial and logistics properties consistent with the trends we saw throughout 2024. Cash basis NOI grew by nearly 2% compared to the same period last year and normalized FFO increased 43% year-over-year and 52% on a sequential quarter basis. We executed over 2.3 million square feet of total leasing activity with occupancy of 94.6%, reflecting a sequential quarter increase of 20 basis points. As of March 31, 2025, ILPT's portfolio consisted of 411 distribution and logistics properties in 39 states totaling 60 million square feet. Our well-diversified portfolio is further highlighted by our unique Hawaii footprint consisting of 226 properties, totaling 16.7 million square feet. Our portfolio has a weighted average lease term of 7 years and is anchored by tenants with strong business profiles and stable cash flows. ILPT's top 10 tenants account for 47% of our annualized rental revenues, and more than 76% of our annualized revenues come from investment-grade rated tenants or from our secure Hawaii land leases. Turning to leasing activity. During the first quarter, we signed 13 new and renewal leases plus 1 rent reset for over 2.3 million square feet at a weighted average lease term of 6 years. This resulted in GAAP and cash leasing spreads of 18.9% and 9.8%. This activity will increase ILPT's annualized rental revenue by $2.9 million, of which 57% has yet to be realized. Our Mainland Properties accounted for nearly 80% of our renewal activity this quarter, which Marc will provide detail on shortly. Within our Hawaii portfolio, we signed 492,000 square feet of renewals, including rent resets at rental rates that were 18.2% higher than prior rents with a weighted average lease term of 4.9 years. These results underscore the value of our properties, showcasing our ability to generate organic cash flow growth, while also maintaining portfolio stability. Turning to our goals for the year ahead. Like most industry participants, we are monitoring the evolving landscape surrounding global tariffs. While it remains uncertain how these developments may impact tenant demand and the overall leasing environment, we believe ILPT's portfolio of high-quality assets with its diversified tenant roster is well positioned to withstand some short-term volatility. As such, our focus remains on maximizing mark-to-market growth opportunities, maintaining strong tenant retention and leasing the vacancies within our portfolio, specifically, the 2.2 million square foot undeveloped land parcel in Hawaii and a 535,000 square foot property in Indianapolis. Another long-term area of focus is evaluating opportunities to improve our balance sheet and reduce leverage. Accordingly, in 2025, we may pursue options to refinance our existing debt and evaluate strategic property dispositions to accomplish these goals. I will now turn the call over to Marc.

Thank you, and good morning. As Yael mentioned, we executed over 2.3 million square feet of total leasing during the first quarter. The Mainland accounted for over 1.8 million square feet or 79% of the total leasing. Renewals made up the majority of this activity and included leases with Packaging Corporation of America in Colorado, Refresco Beverages in South Carolina, Sherwin-Williams in Illinois and Ulta Beauty in Indiana. New leasing totaled 437,000 square feet across 3 properties. These results include a 250,000 square foot lease for property in Indiana that expired on March 31, 2025. We subsequently entered into a new lease with a replacement tenant at a 45% roll-up in rent and with no downtime. Additionally, this quarter, we leased 2 properties that had been vacant since the first quarter of 2023. Looking ahead, only 4.3 million square feet or 5.6% of ILPT's total annualized revenue is scheduled to roll by the end of 2026. As we have previously mentioned, we initiate renewal discussions at least 18 months in advance as decision time lines have lengthened for many tenants. We believe this early engagement provides ample opportunity to maximize tenant retention and also mitigates risk by running dual paths and preparing properties for re-leasing should a tenant decide to vacate. We are currently tracking 32 deals in our pipeline for more than 7.4 million square feet. We anticipate a near-term conversion of 500,000 square feet, which 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 30% in Hawaii, further illustrating the strength of our portfolio. Before I turn the call over to Tiffany, I want to highlight the recent publication of the RMR Group's sustainability report. The report provides comprehensive insights to accomplish into accomplishments and data regarding our managers' commitment to long-term sustainability goals. We are proud of the progress made to strengthen ILPT's sustainability practices and enhance our transparency and disclosure of initiatives. You can find links to the complete report as well as a supplement specific to ILPT on our website at ilptreit.com. I will now turn the call over to Tiffany.

Thank you, Marc. Good morning, everyone. Last night, we reported ILPT's financial results for the first quarter of 2025. Normalized FFO of $13.5 million or $0.20 per share increased nearly 43% compared to the same quarter a year ago and 52% on a sequential quarter basis. This exceeded the high end of our guidance by $0.02, driven by percentage rent revenues and recovery of bad debt in Hawaii. We ended the quarter with NOI of $87.5 million, cash basis NOI of $83.8 million and adjusted EBITDAre of $85.3 million, each representing increases on both a year-over-year and sequential quarter basis. Interest expense decreased to $69.8 million or by $3.4 million compared to the same quarter a year ago, reflecting the decrease in interest rate cap costs over the past year. As we discussed during our last earnings call, our consolidated joint venture purchased an interest rate cap in February in connection with the extension of its $1.4 billion floating rate loan for $15 million or $11 million less than the cap purchased in 2024. We expect our interest expense for the second quarter of 2025 to decline to approximately $68.5 million, with $60 million of cash interest expense, net of the cash we received from our interest rate caps and $8.5 million of noncash amortization of financing and interest rate cap costs. Turning to our balance sheet. As of March 31, cash on hand was $108 million and restricted cash was $129 million. Our net debt to total assets ratio was 68.7% and our net debt coverage ratio was 11.9x, representing a 50 basis point improvement on a sequential quarter basis and driven by the increase in adjusted EBITDAre for the quarter. As a reminder, all of our debt is currently carried at a fixed rate or fixed through interest rate caps with a weighted average interest rate of 5.53% as of March 31. Including extension options, ILPT has no debt maturities until 2027. In closing, we are off to a strong start to the year with solid financial performance and steady demand for our high-quality industrial real estate. Based on the leasing activity, both Yael and Marc mentioned earlier and our expectations for interest expense, we expect normalized FFO for the second quarter to be between $0.19 and $0.21 per share. This guidance includes a onetime benefit of $0.01 per share related to a required remediation payment for a scheduled lease termination. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] And our first question will come from Mitch Germain with Citizens Bank.

Thanks for the increased transparency on interest and earnings run rate. To that end, I think, Tiffany, you mentioned a bad debt recovery in the first quarter. Can you provide some details around what the financial impact on the model was?

Sure. It was around $750,000.

And that's in revenues right now?

Yes, it is.

Great. Marc, I think you mentioned some lengthened time lines, and I'm curious if you -- or maybe it was Yael, I apologize. But I'm curious if you can provide some perspective around what you're seeing real time in the leasing environment.

Yes, Mitch. We are still seeing elongated leasing time lines. Tenants with renewals into '26 and '27 in many cases are looking to start that process earlier. There are more people involved in that lease decision process. And so as we work through that process, we want to make sure that we're providing us enough time to mitigate risk. And if we get a sense that there might be a potential vacancy, then we start running dual path and start marketing the property for prospective new tenants at the same time.

That's helpful. And then maybe provide -- can you provide some perspective on -- I think there are 2 real notable vacancies. Obviously, there's Indianapolis in the Mainland. And then there was that large 2 million square foot space in Hawaii. Obviously, I'm assuming they're both in the leasing pipeline today. I'm curious how the traffic levels are for both of those sites right now.

Mitch, I'll start and then Marc can add any color. So for Hawaii, we have seen activity. We have a couple of proposals out. We have had a couple of prospects not materialize, one due to -- we had some credit concerns about the tenant and then another one was having some trouble getting the funding it needed to develop the parcel. And I know there's a lot of attention on this site, given that it's such a huge impact to our occupancy, it's about 3.6%. But I just would like to caveat that the annualized rental increases that we got this quarter from our leasing was $2.9 million, which is actually more than the revenue we got from that parcel when it was leased. So just to put it in perspective, I mean, I know there's a lot of attention on it, but it really is immaterial from an annualized revenue perspective. And then for the Indianapolis property, we were pretty far along in lease negotiations with the tenant for half the building. It ended up not materializing and we are actively marketing it. And we have some proposals out, but nothing that's far enough along.

That's helpful. And then while I have you, Yael, I think this is the first time you seem to have a bit more conviction about leverage reduction. Obviously, it seems like the economics around refis are a bit more favorable today than they've been over the last 24 months. That makes sense to me. But tell me what's driving your motivation to now beginning the effort to sell properties? And are these going to be within a joint venture? Are they assets that are on your balance sheet? Could it include Hawaii? Is there anything -- I'm sure you're going to tell me all options are on the table, but is there anything you can provide as to, a, why now? And b, what could this look like as the process begins to materialize?

So all along the way, we have been -- we do get a lot of unsolicited offers for properties within our portfolio. And so we evaluate those on a case-by-case basis. And I think we've mentioned this before that it's tricky for us, just the way our debt is structured that we need to be able to -- for it to make sense to release it from the debt pools. But we have been seeing some of the unsolicited offers we've been getting have now been from owner users. And so those are usually at a higher valuation. And I think that's kind of where some of our optimism around selling assets is coming from. Just I think as tenants evaluate their long-term business plans, they would rather own their real estate versus lease it. So I think there might be opportunity there. And then, again, I think for Hawaii, that land is precious. They aren't making any more land in Hawaii. So I think even though it's taking us some time to lease it, I think we feel good on the long-term plan for that parcel. So I don't know necessarily that we're looking to sell that at least today. And then I think the third question was around joint ventures. And right now, there isn't anything active on a joint venture perspective.

[Operator Instructions] Our next question will come from John Massocca with B. Riley Securities.

So just kind of as it pertains to like first quarter versus kind of what you're expecting in second quarter, was I right in hearing that basically both quarters have roughly $0.01, maybe kind of back of the envelope math of kind of onetime positive impact?

This quarter had $0.02 and next quarter, we're forecasting $0.01.

Okay. So I guess maybe what's kind of the moving pieces that gets to the low end of the 2Q guidance, just given -- I mean you're going to lose $0.01 potentially in onetime impact, but just anything else kind of that could act as a headwind?

Unforeseen. It depends on leasing activity. We have a pretty good handle on what our leasing activity will be. But the low end it allows for some activity there that maybe we weren't expecting. And then also, you never know you could have increases in operating expenses or things like that onetime things that we may have. So hopefully, that's helpful.

And then bigger picture, just anything you're hearing from tenants in terms of the impact of tariffs, whether that be on utilization? I know you talked a little bit -- it's not a new trend that's taking longer to make decisions on renewals. But anything else on that kind of front, whether it be renewals or selling of assets just that's being impacted potentially by some of the tariff noise?

It's interesting. I think generally, we anticipate that the tariffs will probably be good for tenant demand for us. But where we really have seen a positive momentum is as tenants look -- we've had a couple of tenants that were out in the market exploring either relocating or build-to-suit opportunities. And I think there's some hesitation around the impact tariffs might have on construction costs. And so I think as they've evaluated those decisions, they've decided that it makes sense to just stay in place. And so if anything, we're getting higher tenant retention because of it, at least in the short term. That's really the most meaningful impact we've seen.

Okay. And then in kind of a similar vein, as I think about the Hawaii portfolio, obviously, the Hawaiian economy is very reliant on inbound travel. But just how exposed big picture do you think your portfolio is to kind of inbound travel if we see a pullback, particularly in international travel, how would you kind of anticipate that flowing through the economics of your Hawaii assets?

I would say very minimal. Our tenant base in Hawaii are generally serving the -- like the economy are not really related to tourism or more -- these are industrial zone land. So they're really servicing the tenant -- the people in Hawaii versus relying on tourism. We saw this a lot during COVID where travel -- there were so many travel restrictions. And I think there's a lot of concern how that would impact our tenants, and it really did not have an impact. So...

With no further questions, this will conclude 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.

Thank you for joining our call. We look forward to seeing many of you at the upcoming NAREIT Conference in June. Please reach out to Investor Relations if you are interested in scheduling meeting with ILPT. Thank you.

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