Q2 2020 Griffin Industrial Realty Inc Earnings Call

[music].

Good morning, and welcome to Griffin Industrial Realty's second quarter 2020 earnings webcast.

This webcast is listen only and there'll be no question and answer session.

It is now my pleasure to turn the program over to Michael games on President and CEO of Griffin.

Good morning, and thank you for logging into our inaugural earnings webcast.

As always we appreciate your interest in Griffin.

Today, I'll provide a general overview and our CFO Anthony <unk> will provide some details on the second quarter numbers.

As with the expanded statistics in our second quarter Leashing released in June.

This call is an effort to provide more information to our investors.

And the same thing I'd also like to announce that we've hired actually mancuso piece, though as our director of IR and capital markets.

Actually will be joining our team later this month and brings very relevant experience, having previously led the IR and capital markets team at Gramercy property Trust prior to its acquisition by Blackstone in 2018.

We're looking forward to her contributions as we continue to build out our IR platform and grow the business.

Now before diving into our performance since we'll be making forward looking statements. We ask that you listen to the following disclaimer.

Please note that some statements during this call a forward looking statements as defined and within the Safe Harbor rules under the Securities Act as 1933 <unk> Securities Exchange Act of 930 full up and private Securities Litigation Reform Act of 1995, including statements regarding our business plans and expected timing of those plans.

We expect it impacts at Cobiz 19 on our business and market expectations.

Forward looking statements in the earnings press release, along with our remarks I made as of today and we undertake no duty to update them, whether as a result of new information future or actual events or otherwise such statements involve known and unknown risks uncertainties and other factors, including those directly and indirectly related to the outbreak into the ongoing.

Our own a virus pandemic another important risk factors contained in our most recent form 10-K and form 10-Q's that may cause actual results to differ materially from our expectations.

Please note that our conference call today will contain financial measures such as leasing in Hawaii and cash leasing in Hawaii that our non-GAAP measures you can find a reconciliation of our GAAP financial statement results through these non-GAAP financial measures in our earnings release, and then our form 10-Q that we filed yesterday, which are available on the investor pay.

Each of our website at Www Dot Gryphon industrial dotcom.

Thank you Anthony first let me say that we hope all of you in your families are safe and well.

Coven 19 pandemic has created an unprecedented challenges across our country since March of this year.

We remain sensitive to its ongoing impacts to our investors our tenant and our colleagues.

Especially like to thank the Griffin team, which is shown great resilient adaptability and dedication is they've worked through this recent operating environment.

Our company is whether the current challenges of covert 19 fairly well so far.

Throughout the pandemic essentially all of our logistics tenants have remained and continue operation and most seem to be back to relatively normal operating levels.

We have remain busy as well during the most recent quarter, we entered into several new leases in renewals grew our industrial leasing in Hawaii and entered into an agreement to purchase land for development in the Lehigh Valley of Pennsylvania.

And they will provide more details, but we collected essentially all the rent due over the past few months.

And with the somewhat improved current business environment tenant rent payments have returned to normal.

That said, we remain cognizant of the virus, especially in light of its recent growth in the sunbelt, including Charlotte in Orlando, where we have properties and the impact of potential rebounding cases could have on our markets and tenants.

We believe our portfolio has held up well through the pandemic to date as we have modern flexibly designed warehouses.

These buildings cater to tenants generally ranging from 20000 square feet to over 300000 square feet operated in a wide range of industries.

Many of our tenants are national or global companies in our facilities are critical to their or their respective customers mission supply chains and overall operations.

The largest industries represented by our tenants include third party logistics providers several of which are global organizations and whose underlying customers often are large stable businesses.

We also have exposure to the automotive sector, including aftermarket parts distribution from major automakers.

As well as national tire distribution firms, including a leading ecommerce provider of tires.

Other major tenant industries include general industrial uses and building products.

Each of the four markets in which we currently have properties, Connecticut, The Lehigh Valley, Charlotte and Orlando.

I have several drivers if demand, including local multi market and regional distribution.

Our facilities are well located within these markets to meet our tenants varied needs from quick turn local delivery to traditional warehouse distribution to light manufacturing.

As noted in our second quarter leasing release, excluding our two recently completed spec buildings in Charlotte and our March acquisition in Orlando or industrial warehouse portfolio is 99.7% leased.

We have no material lease expirations for the balance of 2020, having previously announced the leasing of our largest expected vacancy of 200000 square feet and the Lehigh Valley.

Most of the leases completed this past quarter or expansions by existing tenants into adjacent spaces.

<unk> relocation from within our portfolio.

We have a keen focus on maintaining or a properties to a high standard and establishing strong tenant relationships.

We believe the reward from this is that our existing tenants choose to grow with us.

As an added benefit these transactions typically require lower leasing costs and no downtime as compared to transactions involving a new tenants.

With respect to our current vacancies the largest as across the two spec buildings, we completed in the Concord Submarket of Charlotte during last year's fourth quarter.

Got it has been one of the most active submarkets in Charlotte over the past year in terms of absorption and we completed two leases fairly quickly after completion of those buildings.

This left 42000 square feet vacant in one building 136000 square feet remaining vacant in the other.

The covert 19 pandemic has halted most tenant activity for the past few months and while leasing activity has picked up somewhat recently.

The current surged the virus in the region may further slow the lease up of space in the future.

As a result, we have pushed out our expectations for when the two buildings become fully stabilized.

Well there are a number of available spec buildings and the greater Charlotte market. The Concord Submarket has fewer direct competitive availabilities and we continue to believe our buildings are well designed and located to meet tenant demand.

Our other vacancy is 51000 square feet in the 68000 square foot building in Orlando that we acquired in March.

We are completing an extensive renovation of that vacant space as the prior to it used to facility for a specialized manufacturing process.

We expect to have this work completed by August.

After studying the Orlando market and making it one of our targets for expansion. We have quickly amassed a three building portfolio of over 275000 square feet and we will continue to seek further opportunities in this market.

We remain very positive on Orlando's long term fundamentals the recognize the recent spread of covert 19 in Florida and the regions heavy dependence on tourism and conventions can lead to softness in the near term.

Well, we currently do not have any material vacancy in our Lehigh Valley in Connecticut portfolios, we continue to monitor market activity in absorption.

After the law in the spring during the height of the pandemic in those regions market activity has improved and we believe landlords have limited availability and continue to expect rents at pretty cool if it levels.

We're especially pleased to note that in Connecticut, similar to other major industrial markets. There has been an uptick in activity in absorption by large credit tenant seeking delivery locations to service the sizable local population.

We believe this bodes well for our properties when we availability in that market.

Next I would like to move onto our development pipeline, which includes a 520000 square foot three building development in the north Submarket in Charlotte and a 103000 square foot building and they'll be high valley.

With our currently high valley portfolio fully leased and the continued relative strong performance of that market, we intend to commence preliminary site work on the Lehigh Valley building in the near future.

This work will represent less than 15% of total project costs will position us to commence vertical construction as soon as we deem it prudent to do so.

We note that this is a manageable expense and the initial site work is typically the cause of the most significant potential delays and delivering a complete it building.

With respect to the Charlotte development, we've not yet the term at a commencement date for the site work.

Now turning to potential acquisitions.

There, maybe some near term headwinds in industrial warehouse demand due to weakness in the overall economy impacts from the pandemic.

We believe that the logistics sector will perform well over the medium and long term.

We believe the sector will continue to benefit from the acceleration of the growth in E commerce optimization of supply chains, an increase need for buffer inventories and redundancies.

But if it has a strong platform in place to benefit from the current favorable long term tailwinds in the logistics sector.

We remain active in looking for acquisitions of both buildings and land for development.

We'll continue to focus on our existing markets and select new regions were strong fundamentals in growth potential.

And we will concentrate on properties that support last mile regional and multimarket distribution within those markets.

Well, we are seen as well as reports from brokers and competitors pricing for industrial assets and land for development has not really change versus pre pandemic levels, given how well the sector has fared thus far.

A number of acquisitions in the industrial sector have been completed over the past few months brokers are now actively marketing various buildings portfolios and development sites for sale.

Her Griffin well pricing of industrial assets may not have changed we expect to continue to see opportunities and certain investors have halted or reduce their capital allocations for industrial development.

Industrial owners look to rebalance their portfolios and geographical exposures and owner occupiers may seek liquidity from their real estate and a tougher operating environment.

Since the end of the second quarter, we have signed an agreement to purchase land that is expected to support 150000 square feet of industrial warehouse development in the Lehigh Valley.

Very high value remains a top tier industrial market with continued strong fundamentals due to its advantageous location near major population centers.

We believe the say we have under agreement is one of the few remaining properly zoned industrial sites within the core Lehigh Valley area.

What was it on the site is subject to a number of contingent fees, including the completion of our due diligence and receipt of entitlements.

This opportunity adds to our development pipeline in a market that we expect to perform strongly into the future.

You do not anticipate closing until the back half of 2021 and upon closing we expect construction will take at least another nine months.

We're hopeful that we will be well beyond the impacts of covert 19 by then and that this project as well as our other projects under development pipeline will be delivered into a market benefiting from the industrial Tailwinds I described above.

With that I'll turn it over to Anthony.

Thanks, Michael I'll provide a bit more detail on our second quarter financial results known that the impact of the coping 19 pandemic on the general economy spend most of the quarter.

Starting with rental action, we collected essentially 100% of April rent and 99% of May and June rent as previously disclosed in the first several weeks after the onset of the coldest 19 pandemic in March equipment received rent relief requests from tenants, representing 22% of total monthly rent.

Well it has not finalized agreements with the three tenants with Red leaf request remain outstanding.

On the current discussions with these tenants.

The anticipated amount directly granted in total would equate to less than 1% of brings total annual rent.

All other requests for rental equal either denied by Griffin well the tenants it's true that requests.

They're not received any new rent movie from quest since the end of April.

We continue to monitor the pandemic spread owning each region strengthening in two of our markets into southeast and the potential for resurgence elsewhere as well as any pressure that these changes could create for our tenants in the future.

Our industrial portfolio was 94.3% leased at the end of the second quarter I was stabilized portfolio, which excludes the to spec building in North Carolina and on like acquisition in Orlando was 99.7% leased.

During the quarter. The most significant transaction was the expansion of an existing threepl penny and be Lehigh Valley from 100000 square feet to 300000 square feet.

And then our new England transporting industrial park in Connecticut, a pharmaceutical company that has made a significant investment in space expanded from 89000 square feet to a total of 148000 square feet.

And our second quarter leasing released we provided additional statistics on these leases, notably that we achieved a weighted average rent growth on a straight line basis of 21.4% on a cash basis of 8.1%.

Additionally, just a major new leases in the second quarter, where expansions the leasing cost for the new leases were out or relatively low at 89 cents per square foot per year.

We believe that we're making good progress on our 2021 lease renewal discussions thus far having recently signed a lease extension for 39000 square feet in New England trade what that was originally scheduled to expire in February of 2021.

We also have a few larger leases that expire towards the end of 2021, which are not likely to be you asked until later this year or early next year.

Our industrial warehouse cash leasing in Hawaii was 5.47 million for the second quarter up 11.1% from last year second quarter.

I feel warehouse cash leasing in Hawaii benefited from the addition of the three acquisitions in the Orlando Fla market.

The lease up and one of the spec building in North Carolina and to a lesser extent improved occupancy in the existing portfolio, notably the lease up of referenced most recently completed.

Building and the Lehigh Valley and increases in rental rates.

Industrial warehouse cash leasing in Hawaii was negatively impacted by delay into rent commencement of at least Lehigh Valley due to a pandemic related work stoppage in that state during March and April.

I will now touch briefly on our office flex portfolio office flex properties make up 9% of our portfolio by square footage and we expect that percentage to continue to decrease as you grow our industrial warehouse portfolio.

In addition, we previously announced our attention you sell our multi storey office buildings, which comprised 3.5% of our total square footage.

After commencing at initial marketing if it is offering was put on hold due to the cold and 19 pandemic.

We are working with our broker to evaluate went to bring these buildings back to market.

The percentage of our office flex portfolio that is least declined to 65.2% as are the ended the second quarter from 71.7% at the end of the first quarter.

Part of the decline results from the relocation and expansion of an office flex tenant into one of our warehouse buildings in new England Trayport. In addition to two leases that expired and were not renewed.

We anticipate that our office flex properties will remain challenged especially as companies rethink their space needs as result of the pandemic.

We reported a general and administrative expenses of 2022nd quarter of 2.4 million up approximately $600000 funding 2019 second quarter.

Approximately $150000 of the hygiene age batches were attributable to non cash expenses for stock options and the company's deferred compensation plan.

The balance on the increase in DNA expenses can be attributed to the legal and consulting costs associated with our intention conversion to where we ever needed business changes.

Previously disclosed that we expect these costs to total approximately 1 million for the year and we incurred approximately $400000 of these costs into second quarter and said $570000 into six month period.

We mange, our intention to live births, where we as previously announced but we will continue to evaluate box market conditions and our financial performance determine whether to Walter These plans.

Interest expense and the second quarter totaled 1.9 million, which is up from 1.6 million in last year's second quarter decrease was due to higher balances on our evolves and a net increase in mortgage debt of approximately 15.4 million increase in mortgage that you laid into a 15 million dollar financing on two buildings and the Lehigh Valley.

A portion of which was used to repay smaller maturing will undergo 3.2 million on one of those buildings.

We also plays a 6.5 million dollar mortgage on the first building we acquired in Orlando, which we paid 5.9 billion that had been borrowed on our acquisition revolving credit line to help fund that purchase.

In March of this year added out of an abundance of caution related to the covert 19 pandemic, we drew down 10 million of the 19.5 million available under our revolving credit line with Webster Bank.

We did that utilize any of these proceeds and subsequently we pay the entire amount borrowed before the end of the second quarter.

We also had 4.1 million drawing on our acquisition credit line at the end of the second quarter that we use in February for a portion of the purchase price of our second Orlando building.

Subsequent to the ended the second quarter, we repaid the amount outstanding on our acquisition you Bob I want to be close on a permanent mortgage loan a 5.1 million with an effective interest rate of 3.5% on that Orlando building.

Including our recent financings our weighted average cost of debt was approximately 4.21% as at the end of the 2022nd quarter.

Our capital expenditures for the second quarter totaled 2.5 million.

Capital expenditures included 1.8 million intended and building improvements related to leasing of which 1.1 million was for at least first generation space.

We also spent zero point threemillion for the final construction cost payments on the two Charlotte spec buildings.

Additionally, in the second quarter, we spend 5.7 million for the acquisition of the approximately 60000 square foot building in Orlando.

In terms of disposition activity, our previously announced sale of the Metro Atlanta Tween National Land Preservation group of 5.4 million of net proceeds continues to progress through the approval process for the various local land use commissions and state agencies that will fund the purchase.

This year will remain subject to several contingencies, including the sponsor weighing all the necessary funding, but at this transaction when seats as planned we expect the closing some pine and 2021.

Well 280 acres of undeveloped land East Grand Me I Wonder is on a slower path. Unlike me will not occur until 2022 at the earliest.

As we previously indicated the sale agreement for 27 acres of land and then or an industrial warehouse you just was terminated as the ultimate tenant other property put its plans on hold.

Lastly, we previously disclosed that attended and a 165000 square foot industrial building in Connecticut had an option under leased to purchase the building from US the tenant did not exercise its purchase option, which expired on June 1st and then building remains under lease through March of 2024.

As of the ended the second quarter, we had approximately 23 million in liquidity comprised of 4 million of cash on hand at over 90 million available on our revolver on top of that amount. We have an additional 15 million available on our acquisition we have our adjusted to the previously mentioned you payment related to our Orlando acquisition.

We have very limited limited near term debt maturities, our revolvers aspire in September of 22 anyone I'm going the opposite to east extend each of them for an additional year.

The only other debt maturity prior to 20 to 25 consists of an approximately 4.1 million dollar mortgage on our two multi storey office buildings.

I also want to discuss our overall leverage metrics.

As we develop most of our portfolio over time, rather than through recent acquisitions. We believed that the book value of our buildings, which reflects substantial accumulated depreciation is significantly below their market value on an aggregate basis.

We also have land holdings that we also believe I were significantly more than book value and generate little earnings. Additionally, we recognize that due to our current size. Our DNA expenses comprised a much larger percentage of leasing in Hawaii than our peers.

Leave we have most of the infrastructure in place to support future growth of our portfolio and expect to leverage these expenses going forward.

The combination of these factors impact our book value and an income based leverage metrics.

We believe that debt to enterprise value, which currently stands at approximately 37% they useful metric to evaluate our leverage.

This concludes our second quarter earnings call. Thank you for your interest.