Industrial Logistics Properties Trust

Good morning and welcome to the Industrial Logistics Properties Trust second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kevin Berry, Director of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. With me on the call are ILPP's President and Chief Operating Officer, Yael Duffy, and Chief Financial Officer, Rick Seidel. In just a moment, they will provide details about our business and our performance for the second quarter of 2022. followed by a question and answer session with sell-side analysts. First, I would like to 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, Wednesday, July 27, 2022, 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, or SEC, which can be accessed from our website, ilptweek.com, or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP numbers during this call, including normalized funds from operations, or normalized FFO, adjusted EBITDA, and cash-based net operating income, or cash basis NOI. A reconciliation of these non-GAAP figures to net income and the components to calculate cash available for distribution, or CAD, are available in our Supplemental Operating and Financial Data Package, which also can be found on our website. With that, I will now turn the call over to Yael.

Thank you, Kevin, and good morning. Before I review ILPT's performance for the second quarter of 2022, I would like to start by discussing the announcement earlier this month that we have temporarily reduced ILPT's quarterly cash dividend. We recognize the value of the dividend to our investors and the decision was not made lightly. As you know, earlier this year, ILPT closed on the strategic acquisition of Monmouth Real Estate Investment Corporation. would significantly enhance ILPT's scale, tenant base, and geographic diversity. As we discussed on our call last quarter, our long-term financing plan predominantly included property sales and the sale of an additional equity interest in ILPT's consolidated joint venture. However, as interest rates have increased at rates significantly higher than projected, It has led to a meaningful deterioration in real estate market conditions with buyers seeking steep discounts on marketed properties or, in many cases, walking away from transactions. As we are not a distressed seller, we have made the decision to remove the 30 Monmouth properties totaling 4.9 million square feet from the market and plan to reengage in marketing efforts when debt and capital markets normalize. Additionally, we have paused discussions with potential partners for the Mountain Industrial Joint Venture. We continue to believe in the strength of these properties and the robust industry tailwinds underpinning demand for our real estate. Accordingly, we plan to remain disciplined when considering future sales of properties or equity interests to ensure that we maximize value. As it is taking us longer than we originally expected to complete our long-term financing plan, we felt it was prudent to temporarily reduce the dividend to provide us with short-term flexibility. The reduction of the dividend preserves approximately $20 million of cash flow per quarter, which will enhance the nearly $300 million of cash we had on hand at the end of June. Additionally, it provides us time to evaluate alternatives to repay our bridge facility. These alternatives may include entering longer duration debt, exploring additional joint venture opportunities with properties where fixed rate debt is already in place, and asset sales. To be clear, ILPT continues to operate business as usual, and all leasing efforts and capital projects are progressing as scheduled. Now turning to portfolio fundamentals and operating results. As of June 30, 2022, ILPT's consolidated portfolio included 412 warehouse and distribution properties in 39 states, totaling approximately 60 million square feet with occupancy of nearly 99%. The total portfolio has a weighted average remaining lease term of approximately nine years, with 78% of our revenues coming from investment-grade tenants or subsidiaries or from our secure Hawaii land leases. During the second quarter, ILPT continued to benefit from favorable operating trends, which included record leasing activity of 3.9 million square feet at weighted average rental rates that were 61.3% higher than prior rental rates for the same space. Normalized FFO per share was 43 cents and same store cash NOI grew 2.6% year over year. We executed eight new leases for approximately 2.7 million square feet and an average roll-up in rents of 104.7% and 22 lease renewals for approximately 1 million square feet and an average roll-up in rents of 29.1%. In total, new and renewal leasing yielded a weighted average roll-up of 82.8%. New leasing activity was driven by two leases with Home Depot in Hawaii for approximately 2.5 million square feet and an average roll-up in rents of 110.3%. By way of background, last year Home Depot submitted a request for proposal for an 84,000 square foot ground lease for its retail operations. As discussions progressed with the RMR Group's property and asset management teams, a strategic opportunity emerged with Home Depot committing to a larger retail footprint of nearly 300,000 square feet, as well as a 2.2 million square foot parcel, which will serve as a warehouse and distribution hub. We are thrilled to expand our relationship with Home Depot, an A-rated investment-grade tenant across three states and totaling 3.4 million square feet. Home Depot ranks as our third largest tenant, representing 5.7% of ILPT's lease square footage and 4.4% of annualized revenues. Renewal leasing activity included five lease extensions with FedEx for approximately 396,000 square feet at an average roll-up in rents of 17.2%. I highlight this as I believe there is a misconception in the market that all FedEx leases are above market, which we do not believe to be true. As we work through the portfolio and see firsthand the intense market demand and record low vacancy in the markets which our properties are located, we continue to achieve roll-ups in rent as these leases expire. We spent $3 million on recurring capital expenditures, including $2.6 million, or just 7 cents per square foot per lease year, attributable to tenant improvements and leasing commissions. Additionally, we spent $7.1 million on development activity, predominantly related to multiple parking lot expansions for FedEx. As a reminder, by partnering with FedEx on these projects, there is an opportunity for ILPT to grow rents ahead of natural lease expirations while achieving a return on capital of 8% to 10%. Now turning to our leasing opportunities. Given all we have accomplished over the last year, with nearly 100 leases signed totaling 7.1 million square feet, Only 2.2% of total annualized revenue is set to expire during the second half of 2022. As such, our focus is on addressing lease expirations in the upcoming years where approximately 22% of ILPT's portfolio is scheduled to roll by the end of 2025. We believe there is ample opportunity to maximize mark-to-market rent growth and increase cash flows consistent with the 39% roll-up in rents we achieved over the past 12 months. Our leasing pipeline includes 33 deals for approximately 4 million square feet, and we anticipate a near-term conversion of approximately 25% of our pipeline, given that roughly 1 million square feet of current activity is in advanced stages of negotiation or lease documentation. Before turning the call over to Rick, I wanted to make you aware of the recent publication of the RMR Group's Annual Sustainability Report. The report highlights insights, accomplishments, and data regarding our managers' commitment to long-term ESG goals. Also, for the first time, there is a sustainability supplement focused specifically on ILTT. We are proud of the progress made to strengthen ILPT sustainability practices and enhance our ESG transparency and disclosure. You can find links to the complete report as well as the ILPT sustainability supplement on our website at ILPTREIT.com. I'll now turn the call over to Rick to review our financial results.