Q3 2020 WPT Industrial Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to W.P.T. Industrial Reeds conference call. This.
This conference call is being recorded.
Before we begin.
I remind everyone that during this conference call management may make statements that contain forward looking information this.
This forward looking information is based on number of assumptions and are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied.
We direct you to the company's earnings release Mdna EPS.
She courteous filings for additional information about these assumptions risks and uncertainties.
Now with the formalities out of the way I would like to turn the meeting over to Scott Fredrickson, Chief Executive Officer of the Reid. Please go ahead.
Thanks, Steve Good morning, and thank you for joining US with me today are Jeff get what's the reason she a bowl immense and we know the receipt.
Before we dive into our detailed results I want to provide a few high level comments on the quarter and the us industrial market more generally.
While broader uncertainty whether from COVID-19, geopolitics or otherwise continues to impact and influence the overall us economy, we've seen increasing strength in the us industry.
The market and continued cap rate compression in most of our investment markets.
As reflected in our own strong operating performance in increases in the fair value of our portfolio.
Looking ahead to the remainder of this year and into 2021, we expect to see continued positive momentum on the leasing front with discussions actively underway.
After a number of larger renewals and expansions and accelerating growth in our private capital platform with that preview I'll now turn things over to John to discuss the reeds financial results in more detail John banks.
Thanks, Scott and good morning, everyone before I begin let me remind everyone that all figures discussed today are stated in us dollars.
Total investment properties revenue for the three and nine months ended September Thirtyth increased 55.5% and 47.7% over last year, primarily due to 2019 and 2020 acquisitions with additional contributions from increases in base rent.
Three also earned management fee revenue of approximately 900000.
And and $1.3 million in the quarter and year to date, respectively. As we saw increased construction management fees in the third quarter.
Net operating income for the three and nine months ended September Thirtyth was up 52.2% and 45.0% from last year.
Same property NOI, while impacted by.
0.4% reduction in occupancy was up 1.7% and 1.8% for the three and nine months driven mainly by favorable re leasing spreads and contractual rent increases.
DNA expenses for the three and nine months, excluding any fair value adjustments were approximately 3.0 million to nine.
2.3 million.
FFO and AFFO for the quarter were up 48.7% and 43.5% respectively.
FFO and AFFO per unit or 25.3 cents per unit and 19.7 cents per unit respectively.
Both FFO and AFFO files remained.
Funny impacted by acquisitions in 2019, and 2020 increases in base rent in the legacy portfolio and by a reduction in general and administrative expenses from the prior period.
Offsetting these increases were a reduction in management fees attributable to a variation in promote income.
The reduction in occupancy and the impact.
Impact of a 41.3% increase in the weighted average number of units outstanding compared to the same period last year.
Our AC AFFO payout ratio for the quarter and year to date were 80.9% and 96.2% compared to 19.3% and 99.6% in the same period last.
Thanks.
AC AFFO payout ratio was directly affected by the timing of equity financings in October 2019 in February 2020 relative to the deployment of those equity proceeds.
At September Thirtyth, our balance sheet and liquidity position remains strong with cash on hand of $19.5 million.
Year remaining availability on the credit facility approximately $156.5 million reported leverage on our balance sheet net of cash on hand is 47.4% with a debt to adjusted EBITDA ratio of 9.0 times.
During the quarter three also completed the following notable transactions.
On August 28, the REIT sold the investment property located at 13, 17 discovery industrial part to a third party for net cash proceeds of approximately $10 million. The proceeds from the sale were used to repay indebtedness.
Also on August 28, three contributed a land parcel in eagan, Minnesota into a private capital.
Your son venture for a combination of cash and equity interest in the new venture Threed is developing a distribution building totaling approximately 200000 square feet on the property on behalf of the joint venture.
On September 3rd Threeq contributed the land land parcel in Houston, Texas into in private capital joint venture or a combination.
Joint cash and equity interest in the new venture Threed is developing an industrial buildings totaling approximately 500000 square feet on the property on behalf of the joint venture.
Following the end of the quarter to reach private capital development projects can Walton, Kentucky was sold to a third party with the Riet, receiving and promote in connection with the sale.
Well do.
Inclusive of the Walton promote and assuming that we receive no. Other promotion in 2020, we currently expect private capital fees for 2020 and up between $2.8 million in $3.3 million, depending primarily on the timing of construction management fees in the quarter.
As Scott mentioned earlier, we expect.
Our deployment activity to continue to accelerate in 2008 excuse me our development activity to continue to accelerate in 2021, and currently expect private capital fees for 2021 end up between seven and $10 million for the year.
I'll now turn things over.
So Matt provide an operations update.
Thanks, Jeff Good morning, everyone.
Similar to last quarter I'll start with some updated rent collection numbers, and then turned to quarterly leasing activity and a private capital update.
To date, we've received over 99% of contractual rents for October and November which remains.
It's consistent with Q3 Q3 collection rates.
Turning to leasing activity Threed had 260000 square feet of new leases and 1.4 million square feet of lease renewals commenced in the third quarter.
Lease renewals commencing in the quarter had a weighted average cash re leasing spread and straight line rent release.
Thing spread of 12.2% and 20.1% respectively.
We also signed approximately 700000 square feet of lease renewals in the third quarter with a weighted average cash releasing spread and straight line rent releasing spread of 15.9% and 21.3% respectively.
As.
As of September 33 had approximately 196000 square feet or 0.6% of the portfolios gross leasable area set to expire in 2020, and approximately 1.8 million square feet or 5.8% of portfolio gross leasable area set to expire in 2021 with the majority of 2021 ex.
Additions falling in the fourth quarter.
Threed also agreed to expand the parking lot for in store lean property in San Antonio, Texas, and we're in active discussions with tenants for similar parking lot expansions and lease extensions at three additional properties.
To remind everyone total cost for the door line expansion our estimate.
Expert approximately $4.5 million upon completion, which is currently estimated to be December onest of this year annual base rent will increase by approximately $459000.
And the building lease term will be extended for a total of three years to November 2030.
Threed ended the quarter with occupancy of.
28.3% and a weighted average remaining lease term of 4.5 years.
With our private capital within our private capital development pipeline three.
Threed as projects at various stages in the development process totaling approximately 4.6 million square feet.
This includes a two building project in Bayonne, New Jersey, but.
That is now 100% leased and one building in the inland Empire market that is being marketed for lease.
In addition, we have eight projects in preconstruction or construction in the Los Angeles, Phoenix, Chicago, Minneapolis, Houston Nash.
Nashville, New York, and New Jersey markets.
Next our development activity ramping up we remain focused on capital recycling initiatives to both strengthen our balance sheet and create additional flexibility to allocate capital to our growing development pipeline.
Lastly, as part of our continued focus on sustainability any USG.
The rate will be publishing our first Standalone SG report in the coming months.
And we look forward to talking more about our ongoing initiatives and reporting on our progress throughout 2021 with that I'll now turn things back to Scott to wrap up thanks.
Thanks, Matt as I said at the top of the goal there is no shortage of uncertainty in the current market and we plan to continue our proactive approach to portfolio management and our measured approach to capital allocation in.
Third term that said given the proven resilience of our portfolio throughout the global pandemic and the rapidly improving fundamentals in the U.S industrial market, we remain optimistic about the long term outlook for our business.
Thanks for your time and attention. This morning hope, you're all staying safe and healthy and we'd now be pleased to answer any questions you may have.
Many of you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to try your question. Please press Star then sue to.
At this time, we will pause momentarily to assemble the roster.
And the.
Thanks question comes from Michael can you just from a dividend.
Hi, Good morning, good morning, Eric.
Hi, congrats on the strong quarter.
Nice to hear that ramp in fee income that you guys expect next year, thanks for that guidance.
On the wall can sail from private capital pipeline was up.
Probably sold vacant or did you guys Lisa.
That was sold vacant we had completed the building and this is a little like the situation we ran into in California, a while ago. We also sold a vacant building and any time, we sell a vacant building I guess, you can assume that and rest assured it was a good outcome for our investors and our partners.
Firstly, we are happy to book of promote and there was overall a good outcome.
Okay, great. Thanks.
I think for some additional disclosure on the TV stuff and those in your slide in your deck.
Which I really appreciate that there was a number I can't remember off the collaborative somewhere in around $80 million would be the expected.
And that's over the next 12 months on the stuff Thats in construction, so would that be specifically related to.
Mansfield.
Yeah, again and Nashville.
Hi, it's actually related to a few of those projects along with the.
That doesn't make it does not include the National project.
It's really Egan, Houston, and Mansfield and it relates to the amounts that are currently under under contract with general contractors are with soft for the work being done that just part of a standard disclosure of what the what the amounts that we have contractually or were contractually obligated to fund at this point.
Right.
I think you had the obligations plus an anticipated spend over the next 12 months, which was great.
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Yes, I'm, sorry, I know as Pacific, Yes, Mike those are on those specific projects as opposed to that the greater pipeline that.
Matt Scott talked about okay.
Okay, and that would be at 100% and on top of the land value correct.
Yes, and I'd ask their respective of the amounts that we some of that will be funded through debt financing.
Yes of course, Okay, I think on your expiring disclosure the way you guys do it as it's on a net of commitments basis. So for 2021 do you have a offhand what the gross expiring.
Would have been and.
Any I mean, you could be getting good disclosure on what your leasing spreads are but just what the leasing spread is for the stuff. That's been secured for 2021 than it was at this point.
We haven't disclosed anything I mean, I think the spread information that weve that we have is out there and we've tried to chop that up in.
You're in different ways in terms of.
Commenced in the quarter versus signed in the quarter and so I think we put out in both the press release on our deck you can see the spreads from the 2021 stop I think.
What.
What remains in 2020, and I guess more generally I mean, it's really back end loaded and I think I alluded to that.
Earlier remarks, we're really focused on the bulk of the 2021 activity and renewals occurring in the fourth quarter.
So we're just getting underway on a lot of the more material ones and discussions.
Our trending positively, but it's pretty typical that we'd be on a timeline, where we'd be talking with those tenants about a year in advance that were kind of.
Our top of the critical point in those discussions that have been but Mike. If your question was.
Looking back how many leases did we have when the year started that we needed to renew and how many are left I think I I want to say, it's three or 4 million feet. Originally and now we're down just to the to the last few yes.
Yes, I know if you could circulate that around about because that would.
That would be great just in terms of the commitments that you have on renewal so far.
And then last.
The last one from me before I turn it back I know its early or your head you are working on the four Q ones, but when you look at 2022 you get to.
Fairly good chunk of leases coming due so how are you guys thinking about that internally just given where the market is the goal to.
Game of chicken, so to speak and let the market keep going in rates keep rising or you are you.
Thinking that it's a good time to start knocking on doors and negotiating blended extends.
How to time, yes, it case by case and I think I certainly think we think the market is coming to us. So I don't think we are going to go out of our way.
Played instigate lease conversations and in certain markets or for certain buildings, but it depends I think it depends on whether the tenant is approaching also or whether there is an opportunity for something.
Thats ancillary to the renewal like a parking lot expansion. For example, so I think we're taking those case by case and I think thats probably going.
Going to continue to be that the approach throughout 2021, I'm sure you'll start to see us chip away at 2022 renewals here in the in the next quarter or two if history is any indication Mike Jeff will then 2021 with a lot of the 2022 is already.
Right. Okay. That's a that's very useful color congrats on strong quarter again.
Tim I will turn it back thank you.
Thank you.
Thank you and the next question comes from Matt come back with National Bank Finance.
Hi, guys.
Sorry for the accounting nature of my questions, but Jed on straight line rent versus a free rent.
How should we think of that this.
Quarter versus sort of a run rate going forward and how will those to interact with one another.
Sure. So I'll, let me focus on the free rent piece of it. The this quarter, we had about 950000 or so of a free rent there were a couple of bigger leases that we had executed previously that had.
In in free rent out into the future one month in any particular quarter and it's always had it somewhat staggered in one of those are couple of those hit this quarter as we look out the next sort of the next year year and a half to the leases that have already been signed we don't see that number I'm currently being ahead of maybe three to $400000 at multi.
Each quarter, but as Matt talked about there are some some leases coming up and we don't know what the inducements will be that will need to provide to tenants and if that comes up but as as we've currently got a book, we expect that free rent piece to be in that like I said three to 400000 mboes each quarter.
Okay that's perfect.
Okay, and then with regard to the asset that was sold and vacancy.
Can you provide what the costs would have been that you were carrying just to get a sense as to the impact on NOI from selling that.
Yeah, we were carrying it at just add just under what we sold it for there was a small gain associated with that.
Okay.
When we saw that in terms of the impacts on I know I've heard caring guy out to get back to you on that but it was it was obviously it was vacant and so we are carrying the cost to operate it was I'm going I my.
Before without going off the cuff I'll have to get back to what that number is it's not a huge number but it was impactful in terms of the differences and Hawaii.
From Q2 to Q3.
Okay, and I mean, yes, and just comment here it was a pretty good quarter sequentially in terms of in Hawaii, and I don't think.
We were forecasting it so congrats on the quarter.
Thanks, Matt.
Thank you and the next question comes from onshore Gupta with Scotia Bank.
Good Thank you and good morning, so just on the.
Occupancy on the U.S. spotted portfolio that you acquired this year.
I remember you know you had quite a 95% occupancy.
What is the occupancy like known that portfolio.
Yes, so is it just too I guess.
You watch that that portfolio, when we put that portfolio under contract there was about a million square feet of vacancy that we knew we were going to need to deal with and while we were in due diligence. So during Q1, we actually were able to lease 500000 feet of that so we knocked off about half of it was.
We were in due diligence now obviously that free rent impacted us going forward. After we close but we didnt chopped a lot of the wood before we even closed on the portfolio. Then what you saw recently amount you was that you saw at least a 200000 square foot space in Dallas, which we had been talking about as one of the pieces that we needed to solve and.
So that one solve now so really we're down to two things we're down to 300000 feet out of 9 million square feet. Originally that still remains in Atlanta and it's the it's the other part of the 500000 square foot vacancy that we leased it's an 800000 square foot building with these 500000 feet of it there's still 300000.
One feet remaining its state of the art good space and we're confident we're going to lease it but we haven't yet so thats. The last piece of the vacant space, we need to deal with and then of course, just as a reminder, we had that I'll call. It extra bonus which was the 85 acre parcel in Dallas, where we can develop over a million square feet and we've said before and.
And we're working hard on trying to find a lead tenant or a build to suit prospect for that but we didn't put a lot of value on that when we bought the portfolio and for us that would be gravy to the underwriting.
Gotcha, So it's a balance and John Dustin so that they can get all okay.
So on balance sheet what.
It was.
What was the lease term on the.
On the easier than what were the ones.
You underwrote on that property.
Do you ever do have joint venture fingertips, where we ended up versus what we underwrote, yes wait it be the leasing the lease rate wind up ask again.
Really higher than what we underwrote it.
It was we had the tenant that came to US was I didn't have a lot of options and so we are able to operate opportunistically price up that lease adds a three year lease that is I want to say were 10% to 15% at least above where we had underwritten it maybe even higher.
Got it Okay, and then I guess you know the opposition all backed by portfolio. If I may pause influence Capex was 5.5.
So do you think you know by the end of the year or by the first quarter the.
The yield will be much higher than something around saipem, so inside to fight the mikes in there.
Well, yes, I think what we said publicly when we bought that portfolio might you was it was five five stabilizing to a five nine and so the last piece, we need to get to of course is that 300000 square foot vacancy in Atlanta, but I'd say this as Matt alluded to in his prepared remarks.
The thing that we didnt underwrite when.
Quoted those cap rates of course was all these parking lot expansions and it's a pretty good return on cost as you saw we spent 4.5 million, but we're collecting almost a 10% return on that money. So to the extent, we can offer into that portfolio into three or four of those that was gravy to the original underwriting. So there's a lot of things are turning out better than we thought.
When we can we put that portfolio under contract. So so far so good knock on wood.
Absolutely I think Kelly vento value add since you acquired that portfolio and.
And then you guys are seeing on the leads and team on the recent leasing activity I'm looking at the leasing spreads of 15% to 20% I mean these are large.
And is that a function of exciting legs.
No.
Thank you to market rents have moved up generally in some of your assets.
Well I.
Most of the figures I am seeing are showing market rents and the trick in the last 12 months have moved 6% and as you know our portfolio rents grow.
Grow on average 2% a year. So just in the last 12 months, regardless of where we started the year. We've picked up 4% are up on that on that growth in rents and from everything we're seeing and we expect the market to continue to perform going forward in the short and medium term. So we're feeling good about.
Our rents are trending and I are releasing spreads.
On a cash basis have generally been somewhere between that five and 15% and recently they have been trending closer to the 15 than the five.
Gotcha and in that context, what are you feeling about the ease of savings in 2021, I mean, any major lease coming up for the next year.
Yeah, I'll come onto it Theres a couple of larger ones that are in Q4, that's kind of what I was alluding to that otherwise nothing really of size. There. We've got a 750000 square foot lease in Columbus.
Expires really in the last day of the year and another lease that's about 200000 square feet in Central Florida.
Those are the biggest ones and they're both tucked into December so otherwise it's a.
The combination of some smaller spaces scattered throughout the year.
Got it Okay, and then just switching gears on the same value gains in the quarter, what led to that change.
I will say that begins to OE southern markets.
So the masses.
We really saw that and accrue.
Across the market across the whole use market and continued compression of cap rates and increases in leasing rates earlier. This year, we had been a little more conservative in the way we had evaluated those changes wind to make sure that they actually took hall before we.
We pushed some of those changes through our cash flow models, which are how we drive our fair values and so there was probably a little bit a catch up from what we had seen earlier in the year and primarily it was driven by like I said, just where we are seeing market movements in both cap rates and rental rates a little bit was due to individual execution at Ed sorry.
In property for most of it was market movement.
Got you okay. Thank you. Thank you guys.
Thank you.
Thank you as that does conclude the question and answer session I would like to turn the conference back over to Scott Fredrickson for any closing comments.
Okay, well, thanks again for your time and your interest.
Started WPP industrial reader realize today. It was a busy morning for you allowed abuse so to the extent you're listening to the replay if you have questions pick up the phone and give us call, we'll be happy to answer your questions at any time. Thanks again.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.