Good day, and welcome to the Industrial Logistics Properties Trust third quarter 2026 earnings 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone, and 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 Mr. Kevin Barry, Senior Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining ILPT's third quarter 2026 earnings call. With me on today's call are President and Chief Executive Officer, Yael Duffy, Chief Financial Officer and Treasurer, Anthony Paula, and Vice President, Marc Krohn. In just a moment, they will provide details about our business and quarterly results, 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, including guidance with respect to certain fourth quarter and full year 2026 financial measures. These forward-looking statements are based on ILPT's beliefs and expectations as of today, October 29th, 2026, 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 of Normalized FFO, cash available for distribution, or CAD, 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.
Beginning this quarter, our calculations of Normalized FFO, Adjusted EBITDAre, and CAD include estimated incentive management fees accrued under GAAP and prior periods have been recast to conform to this presentation. Lastly, we will be providing guidance on this call, including estimated Normalized FFO and Adjusted EBITDAre. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. I will now turn the call over to Yael.
Thank you, Kevin, and good morning. Before we begin, I would like to welcome Anthony Paula, who joined ILPT as our Chief Financial Officer and Treasurer on October 1st. Anthony has been with RMR for more than 15 years and brings deep real estate financial expertise to the role. We are pleased to have him on the team. ILPT's momentum continued in the third quarter with Normalized FFO increasing 42% year-over-year, primarily the result of the refinancing we completed earlier this year. Same property NOI increased 5.7%, driven by strong rent growth across the portfolio, including at our previously vacant properties in Hawaii and Indianapolis, which generated nearly $3 million of incremental NOI during the quarter. While these properties are already contributing to NOI growth, the benefit to cash NOI has yet to be fully realized.
In Indianapolis, the tenant's free rent period ended in August, and Q4 will reflect a full quarter of cash rent. In Hawaii, the new 2.2 million square foot lease includes a period of free rent, with the tenant assuming immediate responsibility for real estate taxes. As a result, same property cash basis NOI grew 1.9% this quarter, which we expect to accelerate as these rent abatement periods roll off. In addition to our strong operating performance, we have also materially strengthened our balance sheet over the past 18 months. In June 2025, we replaced our $1.2 billion floating rate loan with fixed rate financing. In addition, this past May, our Mountain JV closed a $1.62 billion fixed rate interest-only loan at 5.71%. The proceeds were used to refinance its $1.4 billion floating rate loan and retire $205 million of amortizing debt.
Accordingly, all of our debt is now fixed at a weighted average rate of 5.48% with no maturities until 2029. We are no longer exposed to fluctuations in SOFR or the cost of interest rate caps, enhancing the stability and predictability of our cash flows in today's capital markets environment. Our leasing results this quarter once again demonstrated strong demand for our properties. We completed 645,000 sq ft of leasing at GAAP rents that were 163% above prior rents with a weighted average lease term of nearly 16 years. Over the past 12 months, we have signed approximately 11 million square feet of leases at rents 35% above prior levels, and this quarter marks our eighth consecutive quarter of double-digit rent increases. Our strong operating and financial performance has translated into exceptional shareholder value creation.
Over the past three years, ILPT has delivered a total shareholder return of more than 200%, placing us among the top three performing REITs in the United States and significantly outperforming the MSCI U.S. REIT Industrial Index. Looking ahead, our priorities include capturing the embedded rent growth in our portfolio, maintaining high tenant retention, and growing our cash position to support continued de-leveraging. With a fully fixed balance sheet, a long maturity runway, and a robust leasing pipeline, ILPT is well positioned to deliver durable earnings growth and long-term value for our shareholders. With that, I will turn the call over to Marc to discuss our leasing activity and pipeline in more detail, followed by Anthony, who will review our financial results.
Thank you, Yael, and good morning. As of September 30th, 2026, ILPT's portfolio consisted of 409 properties totaling nearly 60 million square feet, with a weighted average lease term of eight years. Our cash flows are supported by a high-quality tenant base with approximately 79% of annualized rental revenues derived from investment-grade rated tenants, their subsidiaries, or our Hawaii land leases. During the quarter, we signed 645,000 sq ft of leasing at a weighted average lease term of nearly 16 years, generating GAAP and cash leasing spreads of 163% and 99% respectively. This activity adds approximately $3.5 million of annualized rental revenue, the majority of which is already in effect or will be by year-end. We ended the quarter with consolidated occupancy of 98.3%, which is an increase of 420 basis points over last year. Our leasing activity this quarter was driven by the following transactions.
In the Phoenix market, we renewed 288,000 sq ft with a beverage bottling manufacturer for 16 years at a 200% rent GAAP rollup, underscoring the market opportunity across our mainland portfolio. In Hawaii, we completed a 30-year renewal on a 214,000 sq ft land lease, resetting rent to market levels following a period of nominal rent while the tenant remediated the site. In the St. Louis market, we signed a new 100,000 sq ft lease at an 8% rent rollup re-leasing the space after only two months of downtime. Looking ahead, our lease expiration schedule is well-balanced with less than 16% of annualized rental revenues expiring through the end of 2028. Our leasing pipeline stands at 5 million square feet and roughly 90% is related to upcoming expirations with an expected weighted average rent rollup of approximately 30%.
We believe this gives us clear visibility into durable organic cash flow and positions ILPT to continue building upon the momentum we have delivered over the past year. I will now turn the call over to Anthony to review our financial results.
Thank you, Marc, and good morning, everyone. Before I review our results, I would like to walk through a change in how we present our non-GAAP financial measures. Following a review of our annual report on Form 10-K, the SEC staff provided us interpretation that incentive management fees accrued under GAAP should be included in Normalized FFO and Adjusted EBITDAre. Historically, we excluded the incentive fee in these measures and recognized the incentive fee in CAD if an incentive fee was actually paid. While we believed our prior approach was appropriate and supported period-to-period comparability, we agreed to adopt the staff's interpretation and change our presentation. Beginning this quarter, Normalized FFO, Adjusted EBITDAre, and CAD include estimated incentive management fees as they accrued under GAAP and have recast prior periods to conform. To be clear, this is a change in presentation only.
It does not affect our GAAP results or our cash flows and does not change how the incentive fee is calculated or the amount that would ultimately be payable to RMR. Because the fee is based on ILPT's total shareholder return relative to a benchmark index over a three-year period ending December 31st, the accrual will fluctuate from quarter- to- quarter with our share price. For the third quarter, Normalized FFO and Adjusted EBITDAre include $1.9 million, or $0.03 per share, of accrued incentive fees. In year- to- date, we have accrued $6.3 million, or $0.09 per share. Page seven of our earnings presentation includes a bridge between our third quarter results and previously issued guidance. We believe this bridge will assist our investors with comparability between our revised Normalized FFO and Adjusted EBITDAre calculations in prior guidance.
During the quarter, our Normalized FFO was $21.3 million, or $0.32 per share, representing a 42% increase year-over-year. Our year-over-year increase in Normalized FFO was driven by increased occupancy of 420 basis points and refinancing activity that reduced our interest expense. We are pleased with our third quarter results as NOI is ahead of the guidance we provided last quarter. As a result of our positive leasing momentum, we are increasing our full year 2026 NOI guidance at the midpoint by $2 million and narrowing our full year guidance ranges as follows: NOI of $363 million-$364 million, Adjusted EBITDAre of $344 million-$345 million, Normalized FFO of $82 million-$83 million, and Normalized FFO per share of $1.23-$1.25. As Yael mentioned, ILPT has been one of the best performing REITs from a total shareholder return standpoint over the past three years.
As a result, our full year guidance includes $8.4 million, or $0.13 per share, of incentive management fees based on the amount accrued as of September 30th. The final amount, if any, will be based on our total return relative to the benchmark index through December 31st and could differ materially from the amount accrued today. We will share our 2027 guidance on our next earnings call. As of September 30th, we had approximately $131 million of unrestricted cash. Our unrestricted cash temporarily declined sequentially due to the timing of our real estate tax and annual property insurance payments. We remain focused on growing our cash position over time through retained operating cash flow and positioning ILPT to further delever its balance sheet. Our leverage decreased year-over-year to 11.6x from 12.2x , driven by our positive leasing activity.
This leverage calculation also reflects the change in Adjusted EBITDAre described previously. As a result of our refinancing activity over the last 18 months, all of our debt is fixed, and our next maturity is not until 2029. The strong growth in rent and NOI and continued growth in cash balances over time, we are confident that our leverage will continue to decrease organically. Our recently increased dividend of $0.10 per quarter is well covered, and our focus remains on creating long-term value for our shareholders. That concludes our prepared remarks. Operator, please open the lines for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone 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 two. Our first question for today will come from Christine Chan with Citizens Bank. Please go ahead.
Hey, guys. It's Mitch here with Christine. You've got about 8% of the portfolio coming due next year. Anything that we should expect? Are there any big move-outs that are planned, or is it pretty much business as usual?
Hi, Mitch. I would say it's business as usual. Nothing material.
Great. If I think about that 5 million square foot pipeline, that's not all new. That includes some of your existing customers that you're negotiating renewals with, correct? Is that the way to think about it?
Yeah. If you look at the pipeline in totality of the 5 million square feet, about 4 million is associated with lease renewals.
Got you. Last one from me. I haven't revisited Hawaii in a while, and I'm just curious if the region is still experiencing the same type of positive leasing dynamics that we've historically seen there.
It is. The scarcity of land continues. As we get either tenants decide to move out or ground leases become available, we've been finding that there's very little downtime, three months, maybe six in a worst case scenario. Of course, the big parcel was a little bit of an outlier, just given its size. But we're continuing to see good roll-ups in rent and strong demand.
Thank you.
Thank you.
The next question will come from John Massocca with B. Riley Securities. Please go ahead.
Good morning.
Good morning.
Morning.
Looking at the occupancy, can you provide a little color maybe on why that ticked down quarter-over-quarter, and the extent it was something that is a move-out or a tenant leaving, the prospects for backfilling that space?
Sure. I can start, and Marc can give some more detail. We had one tenant vacate in the Columbus, Ohio market in July, and so we have been marketing that space. We have had good activity. It is a pretty strong market, and Marc can give you some more details on the market and our expectations on re-leasing.
Yeah, we believe that the Columbus market is a solid market. The vacancy has been ticking down quarter-over-quarter and year-over-year. Vacancy there right now is about 4.7%. Construction starts are a little bit elevated, but by the time a lot of that new product comes online, we feel pretty confident that we will have the vacancy within that pocket of the southeast sub-market, which is a really strong sub-market, leased before a lot of that new product comes online.
Okay. In the past, you have talked about not really being in the market for true de novo acquisitions, but maybe some opportunities to invest in existing properties. How is the current macro environment impacting that? Is that still something we could potentially see here over the next 12- 18 months?
We have several tenants that have expansion options within their leases. I think if we were going to be doing any development, it would come within those circumstances. I think as tenants are evaluating the cost to relocate and disrupt their businesses, it seems much more, it's an easier path to just stay in place and expand their footprints while continuing their operations. I think any big redevelopment capital will come from that. Otherwise, I don't think it's, at least currently, we don't have any acquisitions in our immediate future.
Okay. If you were to do those type of transactions, what kind of yields would you be looking for to kind of make them attractive? By which I mean developments, not de novo acquisitions.
Yeah. It's a good question. I think it'll be most likely calculated return on capital. Just where interest rates are today, I think we would need to get a healthy return. Upwards of 10%.
Okay. Does the interest rate environment change at all how you're thinking about utilizing your cash balance? Is there a point where that could get to a place where you would want to pay down debt? Do you think of the current interest rate environment, given where your debt is priced today, you kind of want to hold what you have and keep just building cash balance over time?
Yeah. Our view on our cash position is we are going to continue to retain that cash, and it is for a couple of reasons. One, it lets us naturally de-lever the balance sheet and, two, provide this optionality to yield when we have potential tenant expansions or whatnot. We like the optionality of being able to pursue those routes and have the cash on the balance sheet to address that as it comes due.
Okay. That is it for me. Thank you very much.
Thank you.
Again, if you have a question, please press star then one. Our next question will come from Craig Kucera with Lucid Capital Markets. Please go ahead.
Yeah. Hey, good morning, guys. I am trying to parse the $0.04 per share increase in straight-line rent that was booked here in the third quarter. Can you talk about how much of that was related to rent abatements and how to think about that going forward?
You are right. A lot of that is going to be related to our Hawaii lease-up. There is a free rent period that goes along with that, which we are still in. Most of the change is going to come from that one lease. We also have a free rent period for our Indianapolis lease-up. That did end in August, so we will have a full quarter of cash rent reflected in the fourth quarter.
Can you give us a sense of how much free rent was given to Indianapolis? Remind me how long the Hawaii lease-up will be free.
Sure. The Hawaii lease was 53 years. The free rent period is three years. As you might recall, this is an undeveloped land parcel, so for the tenant to be able to get the infrastructure in place, it needs to create roads, put in utilities. There is a lot of work to be done, and that is why we gave them, I would say, an outsized free rent period for the market for at least. Historically, we do not give such long free rent in Hawaii, but this is just a unique circumstance. I would also say that they are going to pay real estate taxes immediately, which is over $800,000 a year. There is upside there as well.
Okay. All right. I will try to parse through that in the queue. In the past, and this is getting in the weeds, but I just want to make sure I understand sort of the new adjustments to NFFO and AFFO. In the past, you added incentive fees back to NFFO, and then you took a cash adjustment in the first quarter of the following year. Are you going to do that and then reverse the NFFO adjustments for incentive fees, or just not make that adjustment in CAD going forward?
No. What we are going to do is, if it is recognized on the GAAP income statement, we are going to let that flow through on all of our non-GAAP metrics. So the presentation will be the same for Normalized FFO, Adjusted EBITDAre, and CAD. With CAD starting at Normalized FFO, that will naturally just have the incentive fee included within that number.
Okay. That is helpful. Thank you.
This will conclude our question and answer session. I would like to turn the conference back over to Yael Duffy, President and Chief Executive Officer, for any closing remarks. Please go ahead.
Thank you for joining today's call. Please reach out to investor relations if you are interested in scheduling a meeting with ILPT. Operator, that concludes our call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.