Participants

Kevin Brady; Director, Investor Relations; Industrial Logistics Properties Trust

Yael Duffy; President, Chief Operating Officer; Industrial Logistics Properties Trust

Tiffany Sy; Chief Financial Officer, Treasurer; Industrial Logistics Properties Trust

Bryan Maher; Analyst; B. Riley FBR, Inc.

Mitch Germain; Analyst; JMP Securities LLC

Presentation

Operator

Hello, and welcome to the Industrial Logistics Properties Trust first quarter 2024 earnings conference call. (Operator Instructions) 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.

Kevin Brady

Thanks, Cindy, and good morning. Joining me on today's call are Yael Duffy, President and Chief Operating Officer; and Tiffany Sy, Chief Financial Officer and Treasurer. Today's call includes the 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, May first, 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, ILPTRE. dot com. Investors are cautioned not to place undue reliance upon any forward-looking statements.
In addition, we will be discussing non-GAAP financial numbers during this call, including normalized funds from operations or normalized FFO, adjusted EBITDA, RE and cash basis net operating income or cash basis and OI. A reconciliation of these non-GAAP figures 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.

Yael Duffy

Thank you, Kevin, and good morning. On today's call, I will review ILPT's operating and leasing performance and then turn the call over to Tiffany to provide an update on our financial results. We started the year with continued demand for our high quality portfolio, consistent with the trends we saw throughout 2023.
Supported by higher rental income same property cash basis NOI grew by 2.3% compared to the same period last year. Notably, normalized FFO increased 19% and 17% on a year over year and sequential quarter basis, respectively.
We executed new and renewal leases for nearly 2 million square feet and total occupancy reached 99%. As of March 31, 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 eight years and anchored by tenants with strong business profiles and stable cash flows. ILPT's top 10 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 first quarter, we entered 10 new and renewal leases and one rent reset for approximately 2 million square feet at a weighted average lease term of six years. This activity resulted in GAAP and cash leasing spreads of 38.3% and 25% of spectrum respectively, and reflects the strongest roll-up in rents over the last six quarters. The impact of this activity is an increase of $3.5 million in annualized rental revenue, of which 86% will be realized in 2024. These results continue to showcase our ability to generate organic cash flow growth while maintaining portfolio stability. Renewals drove 90% of our leasing activity this quarter, which highlights the continued demand for ILP. T's assets and strong tenant retention, which was 94% this quarter. Included in these results is a 5-year renewal with Accel, a subsidiary of DHL for 945,000 square feet in Rock Hill, South Carolina at a 73% roll-up in GAAP rents. This represents an increase of $2.2 million in annualized rent that will go into effect in July of 2024.
Looking ahead, 8.4 million square feet or 10.6% of ILPT's annualized revenue is scheduled to roll by the end of 2025. We are currently tracking 41 deals in our pipeline for more than 7.5 million square feet. Once executed. We expect these leases will yield an average roll-up in rent of 20% on the mainland and 30% in Hawaii. Further illustrating the strength of our portfolio.
Included in our pipeline are proposals out to multiple use users for the 2.2 million square foot land parcel in Hawaii that became available on April first. While we do not yet have a replacement tenant interest has been strong, and we hope to update you on our progress on future calls.
Before I turn the call over to Tiffany, 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. We are proud of the progress made to strengthen IOPP. sustainability practices and enhance our ESG transparency and disclosure, you can find links to the complete report as well as an ILTT. specific tear sheet on our web site at ILPT. Reed.com. Tiffany?

Tiffany Sy

Thank you, Leo. Good morning, everyone. Before I cover our first quarter results, I would like to highlight recent financing activities related to our consolidated joint venture Mountain JV in March. Now the JV exercised its first of three one-year options to extend the maturity date of its $1.4 billion floating rate loan.
As part of that extension, the JV purchased a one year interest rate cap with a silver strike rate of 3.04% for $26.2 million, slightly higher than our February guidance of $25 million.
Now turning to our first quarter results. Normalized FFO of $9.5 million or $0.14 per share increased 19.4% compared to the same quarter a year ago and 16.9% on a sequential quarter basis. Adjusted EBITDA RE of $84.4 million increased 4.6% and 1.6% compared to the same quarter a year ago and on a sequential quarter basis.
GAAP and cash basis NOI of $86.1 million and $82.2 million also increased on a year-over-year and sequential quarter basis. Improvement in each of these metrics reflects an increase in rental income driven by our strong leasing activities across the portfolio.
Interest expense of $73.2 million increased 3.5% compared to the same period a year ago and increased slightly on a sequential quarter basis. We estimate our second quarter interest expense to increase slightly with $58 million of cash interest expense, including the benefit of the cash received from our interest rate cap and $15.5 million of non-cash amortization of financing and interest rate cap costs.
Turning to our balance sheet. As of March 31, our net debt to total assets ratio was 68.6%, an improvement of 110 basis points compared to the same period a year ago. First quarter net debt coverage ratio of 12.1 times declined 70 basis points on a year over year basis, reflecting higher adjusted EBITDA RE and the continued paydown of our amortizing debt.
All of our debt is currently carried at a fixed rate or fixed through interest rate caps with a total weighted average interest rate of 5.35%, including extension option ILPT have no debt maturities until 2027. As of March 31, we had approximately $128 million of cash on hand and $108 million of restricted cash in our consolidated joint venture.
In closing, IoT is well-positioned to benefit from the demand for high-quality industrial real estate portfolio remains strong as demonstrated by an occupancy rate of 99% and investment grade tenant profile, representing 77% of annualized revenue and continued revenue momentum driven by rising rates across the portfolio.
That concludes our prepared remarks. Operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Bryan Maher, B. Riley FBR.

Bryan Maher

Thank you and good morning, Jan. And Tiffany, just a couple for me this morning. We were pretty impressed with the rent roll ups for the quarter and were wondering and I heard your commentary on the expectations for the mainland at, I think, 20% and Hawaii 30%. But are you getting any pushback from any of the tenants? How are those negotiations going on? Can you just give us a little bit more color in that regard.

Yael Duffy

And so our leasing and leasing activity has been strong. And as we mentioned that we have seen continued demand I think for us, you know, some of the renewal than even some of the new prospects is taking a little bit longer for them to transact on and just the negotiation process has been longer, but a lot of the leases are expiring were, you know, at a minimum, signed 5 years ago, sometimes 10 years ago. So we do continue to expect that we'll still see meaningful roll-ups just because the markets have shifted so significantly since when they signed their original leases.

Bryan Maher

Maybe for Tiffany, you and I know that the cap cost was a little bit higher than you expected, [$26 million over $25 million]. And I know that October is kind of a lifetime away.

Tiffany Sy

Based today, do you have any thoughts on what that cap might cost when we get to the fall and based on today's forward looking information, we would expect the cap to call the low $30 million for the October cap forecast and you're sitting on a decent amount of cash.

Bryan Maher

I mean, is there any expectation to utilize any of that or is the goal just to harbor cash to get through these cap costs?

Yael Duffy

Yes, I think we're planning we're not planning to do anything, but the whole that cash for the time being, as you mentioned, we have caps on that. We'll need to buy as well as be in a position to address any expansion needs of our tenants. And so we just want to provide ample flexibility for ourselves.

Bryan Maher

And just last for me, there's been a couple of articles out there recently on the Inland Empire in California, you noted some weakness there. I know that you don't have anything in California, but are you seeing any markets where you do operate where there's been some softening in them in demand?

Yael Duffy

No, I think there's been some new product coming online. I think coming out of COVID, I think there was some projects that were delayed and are just starting to deliver. And so we are seeing some new product and competition potentially specifically, I guess in one market I would say is the Indianapolis area.
But I think as tenants evaluate their costs associated with relocating and the disruption to their business, we have been seeing them continue to be interested in renewing versus relocate. But I think we do think that when I see a short term blip on the supply, given where interest rates are now we haven't been seeing too many new projects coming out of the ground.

Bryan Maher

Okay. Thank you. That's all for me.

Yael Duffy

Thanks, Bryan.

Operator

(Operator Instructions)
Mitch Germain, Citizens JMP.

Mitch Germain

Good morning and congrats on the quarter. And I just wanted to make sure I think you recognize some percentage rent, I believe from some of your Hawaii tenants in the first quarter. Should we is there any sort of what kind of fluctuation we should consider in our model when it comes from 1Q to 2Q or is this kind of a upside that was realized this quarter? It was clean and it should flow through for the rest of the year?

Tiffany Sy

You're right, we did have some percentage rent that was recognized during the quarter, but that was offset in some other one-time noise. So they can cancel each other out. So I feel like this is a good run rate currently.

Mitch Germain

Great. Tiffany, while I have you, I just couldn't hear specifically what you were discussing when it came to interest expense, I recognize you've got on the big refi on the hedge that you purchased. Can you just go over what your prepared comments were with regard to how we should think about forecasting interest expense in 2Q? I know you've got some amortization that flows through. Correct?

Tiffany Sy

Yes, that's right. So apologies for not being able to hear me. So we expect $58 million of cash interest expense. That includes the cash that we would receive related to our cash and then $15.5 million of non-cash amortization of both deferred financing costs and also amortization of cap costs.

Mitch Germain

Great. That's super helpful. Thank you. When you're talking about your deal pipeline, I think you referenced it was over 7 million square feet of 7.5. So does that I think you said there were multiple offers out for the Home Depot space or that it should we consider like, you know, [4 million plus of that 7.5 is just on that one spin out or is it okay now, how should I think about].

Yael Duffy

Yeah your handle the seven, the [7.5 less than the 2.21]. And even if we have multiple prospect, we only counted once in our pipeline.

Mitch Germain

Great on the rental Yes. Sorry, go ahead.
So I was going I was curious like I'm sure you track this quarter of a quarter. Like how do you look at kind of your success rate so you've been given you've been kind enough to provide this pipeline for a while now. I'm curious in terms of kind of how should we think about the percentage of this pipeline actually kind of being finalized to an actual lease?

Yael Duffy

Yes. So it's a good. We usually do talk about what's in advanced stages of negotiation. So I would say for new deal for, we have about, I think, about 10% in advanced stages of negotiation. And then on the renewal side, it is closer to 30% in advanced stages.

Mitch Germain

That's super helpful.

Yael Duffy

Yes, which means it's either an alkali or in final form of a lease document is how we classify.

Mitch Germain

Yes, great. And then I think you guys have done a great job in terms of transparency toward the Home Depot space. But I looked I couldn't see anything in my notes. Is there anything that should be pointed out when you look at your expiration schedule for the back part or the next three quarters or maybe even next year that we should be aware of, maybe like a known move out or some sort of one-time circumstance that should be pointed out?

Yael Duffy

Yes. So besides the of the Hawaii land parcel that we've talked about, there is one other property that's about 600,000 square feet in Indianapolis that we expect to get back on at the end of June. So those are the two major known vacates. And besides that, we're feeling pretty good. And, you know, there's always some ins and outs in Hawaii, but usually those get released pretty quickly.

Mitch Germain

Yes, you had referenced that one last quarter as well. So I wish. I think it was more than that or anything other than that one. But that's super helpful. Thank you guys so much.

Yael Duffy

Thank you.

Tiffany Sy

Thank you.

Operator

Brian mayor of B. Riley FBR.

Bryan Maher

Thanks. Just following up on Mitch's question on that 600,000 square feet, meaning the app from Apple as you guys have leads for that property currently? Is that out in the market, you know, what are your expectations that that could go dark and for how long?

Yael Duffy

So we have been marketing in for a while now we have had some proposals, but nothing that's far enough advanced to be excited about. I would assume that it might be vacant for it may be up to a year.

Bryan Maher

Thank you.

Operator

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

Yael Duffy

Thanks for joining us today and your continued interest in ILPT.

Operator

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