speaker
Conference Operator
Operator

Good morning and good day. Welcome to Industrial Logistics Properties Trust's fourth quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 Matt Murphy, manager of Investor Relations. Please go ahead.

speaker
Matt Murphy
Manager of Investor Relations

Good afternoon. Joining me on today's call are ILPT's President and Chief Operating Officer, Yael Zuffi, 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 security laws. These forward-looking statements are based on ILPT's beliefs and expectations as of today, February 19, 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, or SEC, 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 A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website. With that, I will now turn the call over to Yael.

speaker
Yael Duffy
President and Chief Operating Officer

Thank you, Matt, and good afternoon. On today's call, I will begin with an overview of our portfolio, summarized leasing activity for 2024 as well as the fourth quarter, and look ahead to our objectives for 2025. I will then turn the call over to Mark, who will provide further detail into leasing within our mainland portfolio as well as our pipeline. Then Tiffany will review our financial results and provide guidance on normalized FFO. As of December 31, 2024, ILPT's portfolio consisted of 411 distribution and logistics properties in 39 states totaling approximately 60 million square feet. Our strategically diversified portfolio is highlighted by our unique Hawaii footprint consisting of 226 properties totaling more than 16.7 million square feet. Our consolidated occupancy at year end was .4% in line with our third quarter results. Our portfolio carries a weighted average lease term of seven years and is anchored by tenants with strong business profiles and stable cash flows. ILPT's top 10 tenants account for 48% of our total annualized rental revenues, and nearly 77% of our annualized revenues come from investment, grade-rated tenants, or from secure Hawaii land leases. We finished the year with strong demand for our high-quality portfolio, consistent with the trends we saw throughout 2023. For the full year, we entered 58 new and renewal leases and one rent reset totaling 6.1 million square feet at weighted average rental rates that were .2% higher than prior rental rates for the same space. The impact of this activity is an increase of $8.2 million in annualized rental revenue, of which 41% has not yet been realized and will take effect in 2025 or beyond. These results showcase our ability to generate organic cash flow growth while maintaining portfolio stability. During the fourth quarter, we completed 731,000 square feet of leasing at rental rates that were .3% higher than prior rents for the same space and had a weighted average remaining lease term of 10.5 years. Hawaii accounted for all of our new leasing, 148,000 square feet at rental rates that were 43% higher than prior rents and had a weighted average lease term of 21.3 years. Meanwhile, lease renewals on the mainland accounted for 98% of our renewal activity this quarter, which Mark will provide additional detail on shortly. These results highlight the value of our Hawaii portfolio, our ability to realize -to-market rent growth through leasing, and continued strong tenant retention. As we look ahead to 2025, we remain focused on leasing our vacancies, specifically the 2.2 million square feet land parcel in Hawaii that became vacant in April and a 535,000 square foot property in the East Submarket of Indianapolis, which became vacant in July. Together, these vacancies have negatively impacted our earnings in the second half of the year, reducing occupancy by .6% and accounting for a loss of 1.8 million in quarterly rental revenues. As we have mentioned on prior calls, leasing efforts are underway and we are in active discussions with tenants for both locations. While we have experienced robust leasing in Hawaii historically, this site is unique due to its undeveloped 50-acre size. Accordingly, as one would expect, prospective tenants are conducting extensive diligence to understand the feasibility of operating on the site and the costs associated with its development. In Indianapolis, while we have seen strong tour and proposal activity, we face significant competition as new buildings come online. We remain optimistic that both locations will be leased in 2025. I will now turn the call over to Mark.

speaker
Mark Crone
Vice President

Thank you and good afternoon, everyone. As Yael mentioned, we executed 731,000 square feet of leasing during the fourth quarter, which includes three renewals on the mainland, totaling 571,000 square feet in Reno, Nevada, Waco, Texas, and Roanoke, Virginia. In aggregate, these renewals represent a weighted average rental rate increase of 38.7%, with a weighted average lease term of eight years and were completed with minimal lease concessions. Looking ahead, 6.3 million square feet, or .7% of ILTT's annualized revenue, is scheduled to roll by the end of 2026. We are engaging in renewal discussions with our tenants at least 18 months in advance to best understand their space needs. We believe this is especially important today as we have seen decision and lease negotiation timelines lending. To that end, we are pleased to share that as of today, we have already addressed nearly 1.8 million square feet of our expirations, reducing ILTT's lease expirations to 4.5 million square feet through 2026, or just .4% of total annualized revenue. Furthermore, our total leasing pipeline remains robust as we are currently tracking 28 deals for more than 6.5 million square feet, including tenants for the two vacancies in Hawaii and Indianapolis that Yael mentioned earlier. Before I turn the call over to Tiffany, I want to highlight the recent results of the RMR Groups Kinkley Survey, which was completed on our behalf. For those unfamiliar with the survey, it is the trusted industry benchmark in tenant satisfaction and is used to assess property performance and identify areas for improvement. Our portfolio exceeded the Kinkley benchmark in every category, including management satisfaction, leasing satisfaction, renewal intentions, and overall satisfaction. Additionally, 34 properties received the Kinkley Excellence Award, which recognizes properties that outperform the index benchmark for overall satisfaction. These results highlight the value of RMR as our manager and its ability to deliver outstanding property management services for our tenants. Now I'll turn the call over to Tiffany.

speaker
Tiffany Tsai
Chief Financial Officer and Treasurer

Thank you, Mark. Last night, we reported financial results for the year and quarter ended December 31, 2024. Starting with our annual results, we closed out the year with normalized FFO of $35.4 million, or $0.54 per share, representing an increase of .1% compared to 2023. NOI increased by .6% to $341.2 million, and CashBase's NOI increased by .5% to $329.2 million, while adjusted EBITDA RE increased by .2% to $335.6 million. For the fourth quarter, we reported normalized FFO of $8.9 million, or $0.13 per share, an increase of approximately 10% on both a sequential quarter and prior year basis. Compared to the same quarter in 2023, fourth quarter NOI decreased by .8% to $84.2 million, and CashBase's NOI remained relatively flat at $81.6 million. Adjusted EBITDA RE decreased by .1% to $82.2 million. As we discussed during our last earnings call, we exercised the first of our one-year extension options for our $1.2 billion floating rate loan in October of 2024. As part of the extension, we purchased a one-year interest rate cap for $17 million, with a silver strike rate of 2.78%, replacing our previous cap with a rate of 2.25%. Our fourth quarter interest expense declined by $2.2 million to $71.7 million, reflecting the new interest rate cap. As of December 31, cash on hand exceeded $130 million, and restricted cash held by our consolidated joint venture was over $110 million. Our net debt to total assets ratio was 68.6%, and our net debt coverage ratio was 12.4 times, each of which were relatively flat compared to the fourth quarter of 2023. As a reminder, all of our debt is currently carried at a fixed rate or is fixed through interest rate caps, with a weighted average interest rate of .51% as of December 31. Including extension options, ILBT has no debt maturities until 2027. Heading into 2025, in March, our consolidated joint venture will exercise the second of its one-year extensions for its $1.4 billion floating rate loan, which requires an interest rate cap to be purchased. In connection with the exercise of its first extension option in March 2024, our consolidated joint venture purchased a cap for $26 million. Last week, we purchased a cap with a silver strike rate of .1% for the second extension for $15 million, or $11 million less than the previous cap. Including the impact of the new interest rate cap, we expect our interest expense for the first quarter of 2025 to decline to approximately $70 million, with $59 million of cash interest expense netted the cash we receive from our interest rate caps, and $11 million of non-cash amortization of financing and interest rate cap costs. In closing, ILBT is anchored by quality assets, strong tenants, and stable cash flows. Based on the leasing activity both Yael and Mark mentioned earlier, and our expectations for interest expense, we expect normalized FFO for the first quarter of 2025 to be between $0.16 and $0.18 per share. That concludes our prepared remarks. Operator, please open the lines for questions.

speaker
Conference Operator
Operator

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Mitch Germain with CitizensJMP. Please go ahead.

speaker
Mitch Germain
Analyst at CitizensJMP

Thank you guys. Maybe Tiffany, what's the biggest variance from your four-queue earnings to one queue that's driving some of the per share upside? Is it just interest expense? I think you get some percentage rent as well, like a one-time, one-queue. What are the main variables that are changing quarter over quarter? That

speaker
Tiffany Tsai
Chief Financial Officer and Treasurer

percentage rent is not factored in. We're not considering that. That's not an amount that stays the same period over period, so

speaker
Mark Crone
Vice President

we would

speaker
Tiffany Tsai
Chief Financial Officer and Treasurer

consider that non-recurring. But there's two things. It's interest expense, but it's also some of the leasing that Yael and Mark were mentioning. In addition to that, we did have some bad debt in this quarter, in Q4, and that was less than a million dollars, which we wouldn't expect to be recurring. That's part of

speaker
Mitch Germain
Analyst at CitizensJMP

the reason the leasing pipeline was down. I think it was over 8 million last quarter. Obviously, you executed some deals in four-queue, but I'm curious if there is a broader change in the environment that you're seeing. Is it just really seasonality? Anything that you could attribute that to?

speaker
Yael Duffy
President and Chief Operating Officer

Hi, Mitch. Actually, it really would have been 8 million. It would have been 8 million still. It's just in Mark's prepared comments, he mentioned that subsequent to year end, we've already completed 1.8 million, so we just removed that from our pipeline for these purposes. If you add the 6 plus the 1.8, we'd be right about the 8 million.

speaker
Mitch Germain
Analyst at CitizensJMP

What is your percentage of execution on that pipeline? I'm sure you're tracking it over time. How is that working out for you guys?

speaker
Yael Duffy
President and Chief Operating Officer

It's been pretty consistent. Again, as Mark mentioned, it's taking us a little longer to get deals over the finish line, but generally, once it makes it to an LOI, we're pretty successful in getting it to lease execution.

speaker
Mitch Germain
Analyst at CitizensJMP

Great. Obviously, it seems like, I believe, you had a bankruptcy that you noted last quarter. It appears that you're going to be keeping those spaces, but you kind of left open the potential for some rent modifications. How are your discussions ongoing? I know you can't share that much, but is there some sort of date in which there should be some validity as to what specifically how that situation will play out?

speaker
Yael Duffy
President and Chief Operating Officer

Yeah, I think they, so I'm assuming you're talking about American Tire. I think they have a date out there of sometime in May, and from what we know today, they haven't rejected any of our leases. We don't believe they will, but again, there's still time. But I think they've reached out initially to start discussions about potential restructures. I think at this point, we're not open to those conversations. We feel really good about these properties. They're kind of a sweet spot of size, generally about 125,000 square feet in five very distinct markets that don't compete with each other. So I think we feel good that American Tire wants to be at these locations, and we're going to hold their feet to the fire.

speaker
Mitch Germain
Analyst at CitizensJMP

Great. That's it for me. Thank you.

speaker
Conference Operator
Operator

This concludes 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.

speaker
Yael Duffy
President and Chief Operating Officer

Thank you for joining us and your interest in ILPT.

speaker
Conference Operator
Operator

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

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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