Q4 2019 Earnings Call

We capitalized on our long-standing relationships with developers to close on 3 select development projects while these projects are just getting underway. We are excited about expanding this Avenue of growth in our business in addition to property purchases. We believe it's valuable to further diversify our growth opportunities and build a deeper presence in certain key markets.

During the quarter.

Moving on to dispositions. We had a strong finish the year which brought total Consolidated property sales to 622 million dollars at very attractive weighted-average Gap and wage rates of 6.4% and 5.6% respectively R accelerated sales efforts over the last few years have reduced our office and other non-industrial assets to less than 20% of our total gross Book value looking at 2020. We expect to have substantial capacity to fund our investments primarily off from disposition proceeds that said we prefer to be a net acquirer this year as we were last year and it's possible that we will take advantage of capital markets opportunities as they arise like they did in 2019 to support growth objectives during the quarter. We issued 6.6 million shares through our ATM program raising net proceeds of

Approximately 71 million.

Dollars the proceeds were used primarily to fund new Investments. We have also maintained an exceptionally strong balance sheet with net debt to adjusted ebitda of 4.9 time a year end. We believe are conservative balance sheet position provides for additional flexibility. Should we need Capital as the year progresses?

Looking at our portfolio operations. We were heavily focused on executing new and extended leases over the course of the year and the effort paid off. We leased over six million square feet in 2009-10 increasing base rent over 7% the majority of our 2020 leasing expirations have been addressed and our focus is on 2021 and Beyond particularly as we work to maximize the value of future office dispositions.

Finally turning to our financial results in the fourth quarter. We generated net income of $0.33 per diluted common share and adjusted company funds from operations of twenty cents per diluted common share our 2019 adjusted company ffo of eighty cents per diluted common share was at the top end of our guidance range in connection with our earnings off this morning. We announced estimated 2020 adjusted company ffo guidance in the range of $0.74 to $0.77 per diluted common share with this guidance considers our continued Capital recycling strategy out of office and into industrial while this results in earnings dilution in the short-term. We have made tremendous strides and reposition our portfolio to focus on assets that we believe provide for capital appreciation income growth consistent cash flows and lower operating costs over the longer term.

additionally

As a result of these portfolio changes, we believe a f f o is trending positively although the trend may be impacted from time to time in the context of value-creating capital expenditures off as a result. We expect annual modest dividend growth to continue consistent with our recent dividend increase with that. I'll turn the call over to Brenden to talk more specifically about investment.

Thanks. Will we acquired six industrial Assets in the fourth quarter for 264 million dollars at weighted average Gap and cash cap rates of 5.9% and 5.5% respectively ending you're you're better than previously forecasted. These properties comprise roughly 3.7 million square feet and include a mix of bulk distribution centers in a smaller Warehouse facilities. They are primarily located within 2 Logistics markets that we've targeted for further investment, including Phoenix and greenville-spartanburg.

Discussed on last quarter's call we closed on two of the greenville-spartanburg assets early in the fourth quarter. These properties are located within an established industrial Market in a submarket close to I eighty five and the grill in Port least two two logistics companies for five years on average the properties were built within the last two years to Modern specs and together average attractive annual rental escalation of approximately 2.6%

late in the fourth quarter. We closed on a brand new class a distribution center in the same Market the facilities least to an investment-grade rated home improvement retailer for 15 years with annual rental escalations about two and half percent. We like the greenville-spartanburg logistics Market due to its positive demand drivers from tenants increased population growth high levels of absorption and easy access to interstates and the Inland port.

On last quarter's called we had also discussed a facility. We purchased in Phoenix most active stock market which is least to check Pilots for seven years with annual rental escalations or approximately two and half percent off. This property is part of a two property portfolio in which the second property least a ball Corporation for six years with average rental escalations of two and a quarter percent per annum took subsequent to the quarter in early January of this year.

In addition during the 4th.

Order we close on a distribution center in the same Logistics submarket least an e-commerce company for a long-term lease of approximately 11 years with 2% escalations. We continue to be attracted to this Market due to its growth prospects the strong labor pool and its position as a lower-cost alternative to higher price West Coast markets.

In December, we committed to the purchase of a three property industrial portfolio in a logistics of Market of Chicago.

All three properties which are different scheduled closing days or at least for approximately ten years with average annual rental escalations adjust over 2%

One of the properties close in the fourth quarter and the two others closed in January 2020.

The properties are at least two strong credit tenants Kellogg's and BMW and enjoy close proximity to I-80 and I-55.

The high eighties the market is one of Chicago's most active both distribution submarkets.

also during

Quarter, we invested roughly $15 and three new development projects in Atlanta and Columbus, Ohio. Most notable is Our Land parcel in Atlanta where we are developing approximately nine hundred thousand square feet with an estimated completion date by the end of 2020.

We also exercise our option with our development partner to purchase approximately 130 Acres across the street from our existing development project in Ohio, and we separately acquire 23.6 Acres a developable land and the Rickenbacker stock market of Columbus, Ohio.

As will mentioned we're looking to open additional Avenues of growth and expand our presence and some of our existing markets and these development project support our goals.

Finally subsequent to the quarter. We close on a newly constructed facility located in the North Fort Worth the market of the Dallas-Fort Worth Metroplex that is excellent access to I-35 South properties least two Black & Decker for close to ten years with annual rental bombs of approximately 2%

We are off to a strong start in 2020 with $195 million dollars of new industrial Acquisitions close to date and we continue actively review additional industrial opportunities in the market.

I'll now turn the call over to Laura to discuss his positions. Thanks, Brandon disposing of 175 weighted-average Gap in cash cap rates of 8.1% and 7.8% respectively these assets consisted of Six office properties three retail properties and one small number of industrial property, which generated a combined annualized noi of approximately $13 these transactions brought our total 2019 Consolidated sales team to $622 million with an additional $177 million of joint venture dispositions last year. We will continue to move toward our portfolio composition objectives in life with targeted disposition volume of two hundred fifty to five hundred million dollars at the high end of the range the targeted pool of sale assets generated approximately thirty-five million dollars a month.

quarter annualized

And was sixty-eight percent occupied at your end. Our Dow Chemical office property is included in our twenty-twenty disposition plan as mentioned last quarter. We have received it off Market expressions of interest in the Dow property and while it's still possible that it transaction will be completed off-market. We are simultaneously preparing for a marketing campaign wage 2020 disposition plan as well underway. We currently have approximately seventy-two million dollars of Consolidated assets either under contract or with an accepted offer and we are actively in the market wage several other properties. We were very pleased with our sale outcomes in 2019. And we expect to continue our study execution in twenty-twenty as we work diligently to complete the plan change our broader objective to become one hundred percent industrial with that. I'll turn the call over to James who will provide an update on Leasing

Thanks, Laura during the quarter. We executed lease extensions and new leases in excess of two million square feet with an overall lease portfolio of ninety-seven percent at quarter-end when compared to the third quarter occupancy is slightly down as a result of Michelin plan move out in Moody Alabama at the end of 2019 despite this move out our industrial portfolio remains almost 98% Lisa same store in a lie on the entire portfolio was down 1.7% as of your end and when removing single-tenant vacancy was flat approx 87% of our industrial port phone now has rental escalations, which we believe should ultimately lead to Positive same-store Growth as we continue to reduce our office Holdings execution of our twenty-twenty plan is expected to produce industrial same store. Noi growth are approximately 2% subject to vacancy and renewal outcomes.

Trailside we were pleased to see positive leasing outcomes which resulted in an increase in base and cash base rents of 28% and 8% respectively. If you recall we acquired our Mars property in Atlanta, but the short-term lease at the time of purchase last year during the quarter negotiations resulted in a five-year renewal at an 18% cash based rent increase 3% annual rental pumps. We will invest approximately nine million dollars in the property with approximately 7.5 million being amortized over the term and 7% off type of capital Improvement creates considerable near and long-term value in view of rate of return strong credit tenant and enhanced probability of renewal. We also executed a 3-year lease with our Seymour at our industrial facility in Tampa. Our previous tenant was scheduled to move out in June of 2020. We were able to re-tenant the building at an attractive rent for the market without experiencing birth.

Be down time from the expect.

Could move out lastly during the quarter the lease on our Michelin facility in Laurens, South Carolina was further extended to January of 2021.

Subsequent to quarter-end Kitchen Collection liquidated and vacated are Chillicothe, Ohio Warehouse the current sub-tenants occupy 95% of the facility and we believe that we will be able to completely back fill the vacant space.

On the office side during the quarter. We executed a ten-plus year extension with Quest Diagnostics in Lenexa, Kansas. And the property is now being marketed for sale subsequent to the quarter off. We extended our lease with New Jersey natural gas in Wall New Jersey for fifteen years with annual renewal rent starting at approximately 3 million dollars. Our plan is to sell the asset following the expiration of fifty two point five million dollar purchase option at the end of 2022. We will spend approximately 13.5 million over the next two years to secure this early lease renewal, which greatly enhances the value.

additionally our office

Property that was formerly least 200 say USA Holdings until earlier this month as a non-recourse mortgage in covering the property and is in the process of being conveyed to the lender. We continue to work diligently on 2020 lease expirations and Beyond of our remaining 320 industrial lease expirations. We are in negotiations with odw logistics for Renewal Unilever is likely to be a user buying a sale and we believe Gia this will extend their lease, but it is still too early in the year to have clear visibility on this late December 2020 expiration with that L&L. Turn the call over to Beth who will discuss Financial results.

Thanks James overall 2019 with a positive here with many notable highlights, we raise more than two hundred million dollars of equity extended the maturity dates of our revolving credit facility interest loans while lowering the applicable margin rates and satisfied a great deal of secured debt our balance sheet remains in excellent shape with low leverage and provides a great deal of flexibility as we think about finding alternatives for growth

I'm two fourth-quarter Financial results net income attributable to Common shareholders was $84 million dollars or $0.33 per diluted common share in the quarter compared to $24,000 or $0.10 per diluted common share for the same time. In 2018.

Adjusted company ffo was approximately $52 million dollars or Twenty cents per diluted common share in the fourth quarter for a total of $197 million dollars or eight thousand per diluted common share for the year our adjusted company ffo payout ratio of 51.6% at quarter-end remains extremely attractive which we believe positions us to them grow our dividend and retain Capital to fund investment opportunities.

The estimated twenty twenty adjusted company ffo guidance range of 74 to 77 cents per diluted, share that was announced today incorporates our commentary on dispositions Investments and leasing that we have made on this call.

revenues of $83 for the quarter were down when when compared to the same time period last year as a result of sales and our continued transition to becoming a one-hundred-percent single tenants just really

property operating expenses were eleven million dollars for the quarter of which 79% was attributable to tenant reimbursement.

DNA expenses were about seven million dollars in the quarter bringing total GNA for the year to just under $31. This figure was slightly better than we had anticipated and represents a slight Improvement when compared to 2018 g n a

Yes to made our twenty-twenty GNA will be within a range of $31 to $33 and we continue to explore ways to operate more efficiently.

Leasing costs and tenant improvements were approximately 6.6 million dollars in the fourth quarter bringing the 2019 total to $22 million dollars.

Looked at 2020 our budget for leasing costs and tenant improvements includes the investment of approximately thirteen to Fifteen million dollars in connection with the lease extensions for Mars and New Jersey natural gas that James discussed.

Additionally we anticipate another ten to twelve million dollars for other expenditures that support occupancy for a total of 23 to $27 for the year.

Cost for the New Jersey natural gas lease were previously budgeted for in 2021 when the lease was scheduled to expire keep in mind that leasing costs and tenant Improvement estimates are always subject to change due to a variety of factors, including the timing of the improvements and leasing activity.

Turning to the balance sheet at quarter-end. We had approximately a hundred and thirty million dollars of cash including restricted cash with nothing outstanding on our revolver leverage remained low and at quarter-end was 4.9 times and that debt to adjusted ebitda. Well, we expect fluctuations in this metric in any given quarter as we continue to move through our Capital recycling strategy sales proceeds and our Capital markets truck actions during the quarter provided the necessary funding for Investments and supported low leverage at quarter end as we'll mentioned earlier in the call. We issued an additional six point six million shares Undead ATM program during the quarter for net proceeds of seventy 1 million dollars are currently weighted average Share account is now estimated to be $261 million common shares.

at quarter-end

Our consolidated debt outstanding was approximately 1.3 billion with a weighted average interest rate of approximately 4% and a weighted average term of 7.6 years unencumbered Noy represented more than 84% of our portfolio at quarter-end with that. I'll turn the call back over to Will.

Thanks Beth. I will now turn the call over to the operator who will conduct the question-and-answer session.

Ladies and gentlemen at this time. We begin the question-and-answer session to ask a question. You may press star and then one on your telephone keypads. If you are using a speakerphone, we do ask that you please pick up your handset before pressing keys. So which are your questions you may press star into again that is star and then one to ask a question will pause momentarily to assemble the roster.

And our first question today comes from Anthony pallone from JPMorgan, please go ahead with your question.

Okay, thank you. Good morning. I guess first question, maybe for Brandon. Can you talk about just the difference in cap rates on something like Greenville with five or six years of of duration on them and say, you know BMW in in Chicago and kind of how those very

Yeah, sure. Yeah between the two it's actually fairly wide. If you look at the two smaller Greenville assets those cap rates were around two five seven years. Whereas if you have a 15-year investment-grade credit that cap rate was just above 5.

Okay, and is you're looking at the pipeline right now? Where do you kind of see the sweet spot where where you're getting paid for for the risk you're taking and we're dead Lexington can compete past.

You know it it's it's hard to slowly look at cap rate as as the only metric and we really have to to consider the long-term performance. And you know, there's there's rent base if there's escalation structure. There's there's lease duration what we have if you look at our recent activity, we we've come a long release terms.

stronger credit

And more primary markets in our in our recent activity. And in those markets we've seen cap rates be anywhere in the range for Thursday for the very best combination of those factors in today's market could be you know, as low as something around $475 to $5 and that kind of range and then as I've said in our when we just discussing the Greenville Market in in those opportunities, um, it could be in the the mid-to-upper 5 range. It's a it's a fairly wide range and and a lot of it will just depend on uh, mix of the marketplace relations in credits so often, you know, it is a wide range if if if you looked at the 475-2575 that we're talking about, but it'll sort of remained to be seen.

Okay with that sounds like that.

Should be the general zip code were thinking about for your activity in twenty-twenty. That's a yes and then just one one final question off the pie chart in the supplemental around the the escalations built into your leases. What's that look like when you roll it up in terms of, you know, just contractually across the portfolio page.

I mean the average escalation rate is about 2% Is that what you're getting at? Yeah, is that is that kind of where those piece of the pie off right exactly?

Okay, so I got thank you.

Thanks. Tony. Next question comes from Sheila McGrath from evercore is I please go ahead with your question, I guess good morning. Will you mention re categorizing wage the company to the industrial category? Just wondering if you still plan on focusing exclusively on single-tenant Industrial not multi-tenant and how you think about length of long-term and credit. Are you more focused on longer lease term and investment-grade tenants for acquisitions?

Sure.

Um, we have been uh, you know focused more on on longer leases and and higher grade credit recently. But if you look at what we've done in the last 12 months, it's been dead. You know, we've invested in some things with short at least duration that we think will turn out very well. The identity of the company is clearly in the single-tenant industrial area in that doesn't mean we wouldn't buy a building with you know, a couple of large tenants in it. It also doesn't mean that we wouldn't buy a building with one substantial tenant and some vacancy. We're we're passionate about the leasing outcomes. But you know, we're very very committed to this single-tenant industrial area. That's the strength of the franchise.

Okay, great. And then could you give us more detail on the developments are these speculative or build-to-suit and what kind of stabilized Returns on cost your forecasting? Sure, I'll take that well and development activity that we announced I guess separating the East Pole Position which is an expansion of our original project. That project is really oriented around build-to-suit. And then the two thousand projects that we announce this quarter for project in Atlanta and uh which which is underway and the plan project in the Rickenbacker stock market of Columbus those two would be back projects and in those cases starting with a slant birth.

At those are joint ventures at the project level where we're targeting development yields around 6% off and in the Rickenbacker project. We're targeting investment deals around 7. Okay, and one last question best the capital expenditure guidance that you outlined. Is it possible to roughly give us how much is from the office part of the portfolio versus the industrial?

Yeah, sure Sheila primarily. It is in the in the office area. And when we talk about the additional 10 to 12 million that in that area, it's mainly I would say about 85% in in the office.

Okay, great. Thank you.

In comes from John Guinea from stifel, please. Go ahead with your question. Great. Thank you. Nice. Nice guidance first day. Thank you. First a big picture question. You guys are in life one Penn Plaza, which I think we're NATO's renaming pain one. I know you're upset that Kmart's moving out of a hundred forty-one thousand square feet in your lower level short-lived no more. Have you found another place?

our next question

But we're looking. Okay question. What do you think of that renovation? What do you think about your what? What are you willing to pay in that building once they've turned it off to a class a property?

in that market

I got the first I should say the Chicago portfolio with this dagger closing. So two of the two of the properties and not portfolio of clothes in the first quarter off. So on average that we're fully oh was around $65 a foot. I think it's about $64. So so the one that is in fourth quarter was a little bit older building with lower clear height John, which I think you know explain the price point. Gotcha.

The the but but with new construction, we are seeing building costs increase the some of the complex at some of the other acquisition activity that you reference were were fairly brand new buildings. So some of the is newer, but there is, you know in our Market 6 p.m. To lease assets relative to construction costs for sure.

Great. Thank you. Thanks, John.

Our next question comes from John from Lautenberg down and please go ahead with your question.

Good morning.

How should we think about timing for sale of the Dow Chemical property if you guys go through a fully marketed process for that disposition?

Yeah, there's there's quite an appetite. This is Laura. Good morning. There's quite an appetite for a longer-term leases with investment-grade credit and that certainly falls into that category. So we don't expect if we go to market to have a particularly protracted process. Um, generally, uh, once marketing materials are developed and and an asset is launched. We would be in the market for roughly 30 days go through a call for offers process with multiple rounds. We expect on an asset of that quality and and essentially execution and ninety days or so or less.

Okay, and do you mean I guess what we kind of prevent that from happening essentially tomorrow. I mean, is it just you still going through and and kind of looking over potential off-market expressions of interests or yeah, we've we are we've had significant off-market interest in the asset. It is encumbered by a significant amount of debt as you likely know. So we are talking both to buyers who would buy it from clear and two folks who would be interested in acquiring it as encumbered with an assignment of the debt off understood and then on on 1701 Market Street, has there been any kind of changes in your thought process in terms of birth potentially selling that asset or

You know what your long-term plan is there.

Right. We do have a fair amount of term left on the on the lease there now in the office component as you would expect there's been significant interest in the market birth relative to what our plans are for that asset, but we're evaluating numerous, um options and opportunities there that we expect form up over the the next quarter or or two. So TBD What will what will happen with that asset this year but significant interests out there in it.

Okay, and then lastly if he's if I missed this with in Columbus, I mean what is kind of the general your general view on life where those rents are going to be on a potential renewal universe is kind of current rents.

You know, we we think Iran is below Market, but since we're in a negotiation with with the tenant, we don't, you know want to want to sort of negotiate against ourselves in a public context, but you know, I think divorce is an expensive and hopefully we can renew the lease and and raise the rents. That's it for me. Thank you very much. Once again if you would like to

Ask a question, please. Press star and then one to withdraw yourself from the question Ki you may press star into our next question is a follow-up from John Guinea from Steve Foley. Please go ahead with your follow-up. Oh, I forgot to ask Cummings in Columbus Indiana wasn't that didn't have a five million dollar purchase purchase option.

They did and did were they the ones who are paying forty-seven million or somebody else?

They purchased the building from us.

nicely done

Thank you. Bye.

And once again, if you would like to ask a question, please press star and then one.

And ladies and gentlemen at this time and showing the additional questions. I'd like to turn the comments car back over to management for any closing remarks.

We appreciate all of you joining us this morning, please visit our website or contact Heather Gentry. If you would like to receive our quarterly materials, and in addition is always you may contact me or the other members of Senior Management with any questions. Thanks again for joining the call.

Ladies and gentlemen that does end today's conference call we do. Thank you for joining today's presentation. You may now disconnect your lines.