Industrial Logistics Properties Trust

Good morning and welcome to the Industrial Logistics Properties Trust's second quarter 2024 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 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 Brady, Director of Investor Relations. Please go ahead.

Thanks, Nick. Good morning. Joining me on today's call are ILPT's President and Chief Operating Officer, Yael Duffy, Chief Financial Officer and Treasurer, Tiffany Tsai, and Vice President, Mark Crone. Today's call includes a presentation by management, followed by a question and answer session with analysts. Please note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also, please 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 31, 2024, 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, ILTTREITs.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 EBITDA RE, and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our earnings presentation, which can be found on our website. With that, I will turn the call over to Yael.

Thank you, Kevin, and good morning. Before we start, I would like to welcome Mark Crone, who joined ILPT as our vice president on June 1st. On today's call, I will start with an overview of our portfolio, review second quarter leasing results and upcoming lease expirations, before turning the call over to Tiffany to review our financial results. As we enter the second half of the year, we remain encouraged by the continued demand for ILPT's high-quality portfolio, which has benefited from solid leasing activity and organic cash flow growth. Compared to the same period last year, cash basis NOI increased 2.6% and normalized FFO increased 18.1%. In the first half of 2024, we signed 26 leases totaling 2.6 million square feet at weighted average rental rates that were 30.5% higher than prior rental rates for the same space. The impact of this activity is an increase of $4.2 million in annualized rental revenue, of which more than $3.4 million has yet to be realized. given the effective dates are in the second half of 2024 or in 2025. As of June 30, 2024, ILPT's portfolio consisted of 411 warehouse and distribution properties in 39 states, totaling approximately 60 million square feet, which includes 16.7 million square feet of industrial land and properties in Hawaii. ILPT's portfolio has a weighted average remaining lease term of 7.9 years, anchored by tenants with strong business profiles and stable cash flows. ILPT's top tenants account for nearly half of our total annualized rental revenues, and 77% of our revenues come from investment-grade rated tenants or from our secure Hawaii land leases. During the quarter, we entered 15 new and renewal leases for approximately 628,000 square feet at a weighted average lease term of 6.8 years. This activity resulted in gap in cash leasing spreads of 15.8% and 7.8% respectively. Leasing in our wholly owned mainland portfolio was strong with total renewal leasing of approximately 432,000 square feet at weighted average roll-ups and rent of 9.6%. We continue to benefit from mark-to-market opportunities within our Hawaii portfolio, where market vacancy is 1% and there has been minimal new construction. We executed 11 leases at weighted average rental rates that were 23.8% higher than prior rents, including two new leases totaling 73,000 square feet, increases in rent of 43.5%. As we have long telegraphed, this quarter we saw the impact of the 2.2 million square foot land parcel in Hawaii that became vacant on April 1st as occupancy declined to 95.4%. While the property accounted for 3.7% of total occupancy, it represents less than 1% of ILPT's annualized rental revenues. We are actively marketing the site for lease. Looking ahead to ILPT's upcoming lease expiration. For the remainder of 2024, 1.3 million square feet, or 3.1% of ILPT's annualized revenue is set to expire. In July, a 535,000 square foot property in the east submarket of Indianapolis, previously leased to a beverage distributor, became vacant. This tenant accounted for approximately 90 basis points of ILPT's occupancy and 1% of ILPT's annualized revenue, or $4 million. Accordingly, this move out will impact our results in the second half of the year. As we look ahead to 2025 and 2026, 8.4 million square feet, or 12.8% of ILPT's total annualized revenue is set to expire. Our leasing and asset management teams are proactively engaging in renewal discussions with these tenants. As conversations progress, we expect to benefit from our proven track record of strong tenant retention and reputation as a landlord of choice. Our leasing pipeline remains active. We are tracking 36 deals for over 7 million square feet, of which 2.5 million square feet, or 35%, is in advanced stages of negotiation or lease documentation. Included in our pipeline are proposals for the Hawaii land parcel and the Indianapolis property that I mentioned earlier, and we will update you on our progress as discussions evolve. Before I turn the call over to Tiffany, I would like to reiterate that we believe there is continued opportunity to generate organic cash flow growth and reduce leverage, which has declined from 12.7 times to 11.9 times over the last year. As such, we remain focused on tenant retention, maximizing mark-to-market rent growth, and continuing to evaluate opportunities to reduce operating expenses. Tiffany?

Thank you, Yael. Good morning, everyone. Yesterday, we reported second quarter normalized FFO of $9 million, or 14 cents per share, representing an increase of 18.1% compared to the same quarter in 2023. Gap and cash basis NOI were $86.3 million and $82.9 million, increasing by 2.2% and 2.6% year over year, while adjusted EBITDA RE of $85.1 million increased 4.6 percent compared to the same quarter a year ago. As we look towards the third quarter, it's worth noting that approximately $1 million of non-recurring GAAP and cash basis revenues related to one-time fees and bad debt recoveries were included in our second quarter results. Interest expense of $73.6 million increased by $1.8 million compared to the same period a year ago. and approximately $400,000 on a sequential quarter basis. During the second quarter, we paid $58.3 million of cash interest expense, net of the cash we received from our interest rate cap, and recognized $15.3 million of non-cash amortization of financing and interest rate cap costs. We expect our third quarter interest expense to remain in line with the second quarter. Turning to our balance sheet, as of June 30th, Our net debt to total assets ratio was 68.2%, an improvement of 60 basis points compared to a year ago, while our net debt coverage ratio improved by 80 basis points to 11.9 times, driven by an increase in adjusted EBITDA RE and the paydown of our amortizing debt. All of our debt is currently carried at a fixed rate or is fixed through interest rate cap, with weighted average rate of 5.35%. As of today, we intend to exercise the first of our three one-year extension options on our $1.2 billion loan maturing in October 2024. Including extension options, ILPT has no debt maturities until 2027. As of June 30th, total cash was approximately $260 million, including $112 million of restricted cash, representing total cash growth of approximately $50 million over the past year. We expect to use this cash to pay for a replacement interest rate cap on our $1.2 billion loan and to fund future leasing obligations. In closing, ILPD's portfolio continues to benefit from rising rental rates, overall high tenant retention, and investment grade rated tenant profile, and is well positioned to support our strategic objectives. That concludes our prepared remarks. Operator, please open the lines for questions.

We'll now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Brian Maher with B. Reilly FBR. Please go ahead.

Thank you, and good morning. a couple for me today. On the Home Depot and Indianapolis properties, that was some helpful information on your leasing pipeline, and I understand both are in the advanced stages. But from a modeling standpoint, where would you advise that we possibly slot that in? Could it be as early as the fourth quarter, or is it more like first half of 2025?

I would conservatively model the second half of

And why would it take so long?

We aren't in, so we, while we have proposals out for both sites, we aren't in advanced negotiations with any one tenant quite yet. And by the time we negotiate a lease and document it, it'll probably take some time.

Okay, and then maybe for Tiffany, when you have this, you know, the upcoming extension in October, has there been any changes, you know, given the interest rates have declined since we last spoke on an earnings call, to your thoughts on what the cap cost might be?

Right now, we're expecting the cost to be between $25 and $30 million.

And when might that actually be executed?

I would say very close to September 30th.

Okay. And then given your current progression on leverage, assuming there's not some deleveraging transaction via adding a JV partner or some asset sales, what should we think about the pace of deleveraging? Should it be similar over the upcoming 12 months to what we saw over the past 12 months?

I think that's a fair estimate, yes.

Okay. And then just last for me, and I know, Yaya, you're going to be able to answer some of that, but, I mean, your cash position is decent, especially when you think about, you know, paying for the cap at 25 to 30 million. You know, I know you have some, you know, tenant stuff that you have to do, but has the board given any thought to ratcheting up the dividend even a little? I mean, the dividend payout ratio when you look at CAD and CAD payout ratio, you know, is really conservative. You know, is the board giving any consideration to that at all at this time?

So we do discuss it at each of the board meetings, and currently the plan is just to continue to preserve cash to run the business.

Okay, thank you. That's all for me.

Thanks, Brian.

Again, if you have a question, please press star, then 1. The next question comes from Mitch Germain, private investor. Please go ahead.

Oh, interesting. I got a new job. So, Yael, I wanted to talk about the leasing pipeline question. And just some of the, you know, kind of ins and outs. You were at 7.5 million square feet last quarter. Seems like it's down a bit. Is that the way to think about it? It's at 7 million square feet? Or did I mistaken what you said?

So it was 7.5 million square feet last quarter, but we also did execute 628,000 square feet of new leasing, of leasing this quarter. So that gets back to... So there is some ins and outs as we execute leasing.

Right, right, right. That's kind of what I was asking in terms of, you know, kind of what's the kind of execution rate on that, on the pipeline historically?

So we executed what was in the seven and a half. So it's a net positive of 150,000 square feet of new pipeline from one quarter to the next.

Okay, great. And then I guess your commentary suggested you had a proposal out last quarter on the Hawaii space. Is it safe to say that that kind of fell through and now it's kind of back out there, or are you still under negotiations with, you know, that customer and maybe even others as well?

So we only account for the square footage one time, so we do have multiple proposals out for the Hawaii land parcels, one for the entire site and then a couple for half the site. And so we're kind of negotiating, but not far enough to say that we have an LOI yet. The Hawaii parcel, I'm sorry, no, I think part of the reason it's going to take a little while, there's just a lot of diligence to do for any tenant who's going to take that Hawaii parcel. It's a big piece of land, and I think for a tenant to undertake it, they have a lot of homework to do before they commit.

Walking 2 million square feet is not an easy task. And then Indy went dark at the on July 1 or was it July 31st? I just can't remember.

The Indianapolis property, it was, they actually held over for a couple days, so in early in July.

Basically July 1 is the safest way to think about it, right?

Correct, yep.

Okay, great. And then last one for me, you know, obviously we're in this period where, you know, Discussion around rates cuts is gaining momentum, call it. How is your team viewing the potential to possibly refinance some of the existing debt? Is it something where you're just going to kind of let the market settle and see kind of where things go? Or do you look to maybe take an advantageous view of toward potentially locking in more favorable rates, you know, kind of nearer term? How do you kind of see the playbook there?

So we are evaluating. Before we would ever exercise a cap, we're evaluating if it's beneficial to refinance instead. So that analysis is ongoing.

Great. Thank you.

Thanks, Mitch.

This concludes our question and answer session. I would like to turn the conference back over to Yael Duffy for any closing remarks.

Thank you everyone for joining us on the call today.

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