Industrial Logistics Properties Trust - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered incremental operational improvement: rental income rose to $112.10M (+1.3% YoY; +0.2% QoQ), Cash Basis NOI grew 2.1% YoY, and normalized FFO/share reached $0.21, at the high end of Q1 guidance.
• Balance sheet de-risking was a focal point: ILPT refinanced $1.235B of floating-rate debt with a $1.16B fixed-rate, interest-only loan at 6.399%, trimming variable-rate exposure to 34.4% of net debt and driving approximately $8.5M annual cash savings; quarterly dividend was raised from $0.01 to $0.05 per share.
• Versus Street: revenue modestly beat ($112.10M vs $111.62M*); EPS was roughly in line/marginal miss (-$0.32 vs -$0.31*); EBITDA (S&P-defined) missed consensus (company-reported “EBITDAre” was stable), highlighting definitional differences between company and S&P metrics .
• Management guided Q3 normalized FFO/share to $0.25–$0.27 and Q3 interest expense to ~$63.5M as refinancing savings flow through; only 3.6% of leased square feet expires over the next 12 months, supporting cash flow stability.
• Near-term stock catalysts: dividend hike and refinancing savings realization; watch for Mountain JV debt strategy into 2026 and progress on asset sales held-for-sale at ~$50M valuation.

What Went Well and What Went Wrong

What Went Well

• Executed refinancing and reduced variable-rate exposure; interest coverage improved to 1.3x and variable debt / net debt fell to 34.4% from 64.8% QoQ.
• Leasing economics remained healthy: Q2 weighted-average GAAP rent change +21.1%; YTD leasing expected to add ~$3.2M annualized rent, with pipeline indicating ~20% Mainland and ~30% Hawaii roll-ups.
• Dividend reset to $0.05/share and Q3 normalized FFO/share guided up to $0.25–$0.27, reflecting confidence in savings from refinancing and stable demand.
• “We believe there is continued opportunity to generate organic cash flow growth while simultaneously evaluating opportunities to strengthen our balance sheet and reduce leverage.” — Yael Duffy, President & COO.

What Went Wrong

• EBITDA (S&P-defined) missed consensus despite company’s Adjusted EBITDAre stability, underscoring metric definition divergence; EPS was a slight miss vs consensus .
• Hawaii vacancy and certain renewals on “space leases” moderated Hawaiian spreads (renewals ~11% vs >83% for new leases); management noted continued but slow activity on large Hawaii parcel and Indiana vacancy.
• Net debt remains elevated (Net debt/total market cap ~89.8%) and leverage high (Net debt/annualized Adjusted EBITDAre ~12.0x), indicating balance sheet remains a work-in-progress despite refinancing.

Transcript

Speaker 5

Good morning and welcome to Industrial Logistics Properties Trust's second quarter 2025 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 1

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.

Speaker 0

Thank you, Matt, and good morning. Before we begin, I want to acknowledge the report of a tsunami warning issued for Hawaii last night. Fortunately, the warning has since been lifted, and early assessments suggest there was no significant flooding. We currently expect little to no impact to our tenants or properties. Industrial Logistics Properties Trust 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 five leases with us, 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. 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, Industrial Logistics Properties Trust'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 a robust first quarter in which we executed 2.3 million square feet of leasing, second quarter activity totals 171,000 square feet at a weighted average lease term of 4.8 years and at 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 Industrial Logistics Properties Trust's annualized rental revenue by approximately $3.2 million, of which one-third 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 will remain disciplined when considering future sales to ensure that we maximize value. To that end, through an unsolicited offer from an owner-user, one 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 one remaining one-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.

Speaker 4

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 four 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 leased 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 totals 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 of 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 roll-ups 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.

Speaker 3

Thank you, Marc. Good morning, everyone. Before I cover our second quarter results, I'd like to provide more details 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 and 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 EBITDA-RE remained relatively flat at $85 million. Interest expense decreased by $1.9 million compared to the first quarter in 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 non-cash amortization of financing and interest rate cap 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 12 times. As a result of the refinancing, our variable debt to net debt ratio declined from 64.8% as of March 31st to 34.4% at June 30th, and our interest coverage ratio increased from 1.2 times to 1.3 times. 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 continues 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.

Speaker 5

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 Mitchell Germain with Citizens Capital Markets. Please go ahead.

Hi, this is Mitch. This is Jodi 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?

Speaker 3

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

Okay. Got it. Thank you. Congratulations on the refi. Are you right now in discussions or looking forward to refining the $1.4 billion JV debt as well?

We are actively evaluating options that are available to us.

Okay. Got it. The last one for me here is that you mentioned one of the properties held for sale. Should we expect more on those lines in the coming quarters?

Speaker 0

We don't have anything else in the works right now, but we are evaluating opportunities. 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 for me. Thank you.

Thank you.

Speaker 3

Thank you.

Speaker 5

Again, if you have a question, please press star then one. The next question comes from John Massocca with B. Riley Securities. Please go ahead.

Speaker 6

Good morning.

Speaker 0

Good morning.

Speaker 6

Maybe thinking about potential refinancing for the $1.4 billion 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 accelerate the timing of completing a refinancing there? Just maybe what were you seeing in the market or what were you seeing with the wholly owned portfolio that made closing that refinancing in June the right time, the right period, the right pricing, et cetera, to be doing that transaction?

Speaker 3

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

Speaker 0

Yeah. 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. There really isn't anything additional that we need to do from an operational or leasing perspective to get it primed. Again, as Tiffany mentioned, it's really timing and, you know, it's a big endeavor to go through a refinancing. We kind of take one at a time.

Speaker 6

Is there any thought that you want to see maybe some of that 2026 lease renewal before and see how, kind of, you know, where, I guess, rent bumps are going to go? Or is that something where, you know, 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?

Speaker 0

Yeah. There isn't anything material within that Mountain portfolio in terms of 2026 lease expirations. You know, we only have, within all of Industrial Logistics Properties Trust, we only have 4.4% of our annualized revenue expiring in 2026. It isn't material and even less so for Mountain.

Speaker 6

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

Speaker 0

Yeah. For, I mean, if we're to break it out between new leasing and renewals, our new leasing, we had almost over 83% roll-up in rent across two leases. For the renewals, it hovered around 11%. I would say really what was driving that is most of those renewals were on our space leases versus our ground leases. Just as you know, it's a little bit nuanced because those are generally smaller tenants, anywhere from 1,300 to 6,000 square feet. It's more traditional as how you would think of office leasing versus ground leasing. That's really, I think, just the nuance of it.

Speaker 6

Okay. That makes sense. Anything notable, you know, 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?

Speaker 0

Yeah. 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 three active prospects in Hawaii. It's pretty much status quo. That property is a lot for somebody to underwrite in terms of all the work that needs to be done there. It's just slow.

Speaker 6

Okay, that's it for me. Thank you very much.

Speaker 0

Thanks, John.

Speaker 3

Thank you.

Speaker 5

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 0

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.

Speaker 5

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