Q4 2020 Lexington Realty Trust Earnings Call

Good day and welcome to the Lexington Realty Trust fourth quarter, 'twenty, and 'twenty earnings call and webcast.

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I would now like to turn the conference over to Heather Gentry. Please go ahead.

And Beth Thank you operator, welcome to the Lexington Realty Trust fourth quarter, 'twenty, and 'twenty conference call and webcast. The earnings release was distributed this morning, and both of the release and quarterly supplemental are available on our website and the investors section and will be furnished to the SEC on a form.

8-K.

Certain statements made during this conference call regarding future events and expected results may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Lexington believes that these statements are based on reasonable assumptions, however, certain factors and risks, including those included in today's earnings press release and those described in reports that Lexington files with the FTC from time to time could cause Lexington, the actual results to differ materially from those expressed or <unk>.

Slide by such statements.

Except as required by law Lexington does not undertake a duty to update any forward looking statements.

And the earnings press release, and quarterly supplemental disclosure package Lucky.

The Lexington has reconciled all non-GAAP financial measures for the most directly comparable GAAP measure.

And he references in these documents to adjusted company of F. L refers to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis.

Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington, and historical or future financial performance financial position or cash flows.

On today's call will Eglin, chairman and CEO, Beth Boulerice, CFO and Brendan Mullinix, CIO, who will provide a recent business update and commentary on the fourth quarter results Executive Vice President of Lara Johnson and James Dudley will be available during the Q&A portion of our core I will now turn the call.

Over to well.

Thanks, Heather Good morning, everyone 2020 was an outstanding year for Lexington, and our fourth quarter results were excellent across all of our business lines and.

And the fourth quarter, we generated adjusted company funds from operations of 19 cents per diluted common share to end the year at 76 cents per diluted common share the high end of our guidance range.

Following a robust quarter of $182 million of industrial purchases and $292 million of sales our industrial exposure increased to 91% of our gross real estate assets, excluding held for sale of assets.

Portfolio operations had been very strong during the pandemic with fourth quarter cash base rent collections, averaging 99.8 per cent.

Also during the quarter leasing volume was healthy at 1.7 million square feet consolidated same store NOI was up one 6% and industrial cash renewal rents increased three 4% with overall fourth quarter cash renewal rents down roughly 2.5% do.

The office lease renewal roll Downs, we recently announced the dividend increase of 2.4% supported by our positive results throughout the year, which equates to an annualized dividend of 43 cents per common share of.

The plan is to continue growing our dividend annually.

Our company has evolved considerably over the last five years, and we have mostly transitioned out of the office sector into the industrial sector and asset class that we believe continues to have strong fundamentals and an expanding opportunity set of.

Along the way we disposed of 127 consolidated Nonindustrial assets for two and a half a billion dollars and purchased 60 industrial assets for approximately the same amount.

Without this transition our investment strategy is targeted purchases built to suits and select development opportunities and primarily warehouse and distribution assets.

And markets across the Sun belt and lower Midwest.

We had an active year on the investment side purchasing $612 million of primarily class, a industrial assets and investing $60 million into development projects.

As we near completion of our portfolio transition, we will continue to focus on acquiring and developing primarily single tenant class, a warehouse and distribution properties and our target markets.

While we expect to be active and the purchase market and we intend to allocate more capital to development opportunities in 2021 relative to 2020 and.

And our view this is the best way to achieve higher returns without compromising on quality when it comes to building characteristics markets and locations.

Just to highlight a couple of recent successes on the development side during the fourth quarter, we had value creation events and our first two development projects located in the Columbus, Ohio market.

These included selling of land position and one of our Aetna parcels to Kohl's Department stores and executing of full building lease on our Rickenbacker project. These are two great outcomes for us and we're excited about the opportunities in our development pipeline going forward, which Brendan will discuss in more detail later in the call.

Moving to sales 2020 volume totaled $433 million of predominantly non core assets at average GAAP and cash cap rates of five 8% and 5% respectively and excellent result that was consistent with our prior disposition plan forecast.

We were particularly pleased with the sale of outcome of our Dow Chemical office building and the fourth quarter as we retired a substantial amount of secured debt and deleverage the balance sheet. Additionally.

Additionally, we sold two office properties in January for approximately $20 million, while the office sales market continues to be impacted by the pandemic, we remain committed to selling our remaining office properties and in an orderly manner and we will continue to give regular updates on our progress and the forecasted sales results.

The remaining office and other asset portfolio consists of 18 properties, which generated 2020 NOI of approximately $33.5 million.

We expect to market for sale most of this portfolio and 2021, which we currently value at around $300 million.

Turning to leasing we leased over $5 2 million square feet during 2000, and 'twenty and at year and our portfolio was 98, 3% leased rep.

Representing a slight decline compared to the previous quarter, primarily as a result of the year end of lease exploration and our Statesville North Carolina industrial facility.

And we were very pleased with industrial cash based renewal rents in 2020, which increased 17, 5%.

At year end, we had $3 7 million square feet of space expiring and our single tenant industrial portfolio in 2021.

Of which we expect at least the third to be renewed with the expiring rents below market on average.

Of the remaining leases the two most significant explorations are our olive branch, Mississippi facility occupied by of Hamilton Beach through June 2021.

And our Laurens South Carolina facility occupied by Michelin through November of 2021.

The Laurens location has multiple prospects interested in the property for either lease or sale, including the potential for further extension with Michelin.

Additionally, the olive branch location is experiencing significant leasing interest from full building users, which could result and minimal downtime.

Our balance sheet remains in excellent shape with leverage at four eight times net debt to adjusted EBITDA at year, and our strong cash position forward a T M contracts retained cash flow and proceeds from dispositions provide us considerable capacity to fund future growth initiatives.

In 2020, we began building out and ESG platform for our operations, we understand the importance and doing so and have begun to establish a program that is appropriate for our portfolio given the limited control we have over many of our properties due to their net lease single tenant nature.

Our 10-K and website will contain a summary of our initiatives goals and performance and we expect to report on ESG matters going forward as our platform evolves.

To conclude and we were very pleased with our fourth quarter and 2020 of results. We have succeeded and monetize the much of our office portfolio, while constructing of high quality industrial platform.

Our focus remains on acquiring and developing well located warehouse and distribution assets and disposing of our remaining non core assets. While we will continue to experience some near term dilution as we sell these assets. We believe that industrial property is demonstrably superior in terms of long term cash flow growth.

With that I'll turn the call over to Brendan to discuss recent investments and our forward pipeline.

Thanks, well.

We had another active year on the investment from acquiring the 16 industrial properties totaling $6 6 million square feet for.

And for $612 million at average GAAP and cash cap rates of $5 four per cent and 5% respectively.

These assets have an average age of two years and and attractive weighted average lease term of eight three years. The average annual rental escalations of two three per cent.

Our overall industrial portfolio continues to be shaped with a focus on building quality age and use the versatility and targeted growing industrial logistics market and the sunbelt and lower Midwest.

Fourth quarter purchase activity was consistent with these attributes and markets.

And comprised of for warehouse distribution properties totaling one 4 million square feet and two Dallas Fort worth logistics up market as well as sub market and Phoenix and Greenville Spartanburg.

These properties all feature modern stacks good highway access and ample trailer parking with an average lease term of nine point for years and annual rental escalations of 2% or higher.

During the quarter. We also closed on and began funding of build to suit industrial project and Phoenix, which we expect to be completed and the third quarter of 2021.

Subsequent to year and we purchased three recently constructed class a warehouse distribution facility for approximately $51 million totaling 520000 square feet for.

Other adding to our holdings and the Indianapolis and Central Florida markets.

We are currently reviewing over $600 million of existing deals and the market.

Pricing continues to be very competitive and.

And as evidenced by our 'twenty and 'twenty purchases cap rates have compressed from the year ago.

While the industrial market opportunities that we are unlikely to compromise on asset quality in favor of current return.

Our increased development focus with long standing development partners and will allow for potentially greater value creation compared to purchases and complements our existing industrial portfolio.

Well I mentioned earlier that we have secured a full building lease at our 320000 square foot Rickenbacker project and Columbus late in the fourth quarter with a subsidiary of Pepsico for three years.

The base building was substantially completed this quarter.

Our expected development cost basis, and the fully completed project is estimated to be about $20 million.

We were pleased that pre leased for the full building.

And the completion had and attractive development yield.

And with anticipated stabilized GAAP and cash cap rates of seven 8% and seven 6% respectively.

Also in the fourth quarter and are at the West development site and Columbus, We sold the ground position under the $1 2 million square foot E. Commerce distribution center of at least of Kohl's Department stores, which exercise its two year purchase option for $10 $6 million.

This transaction resulted in the gain on sale of $5 $9 million.

Our shoe credit funds development project.

What day 910000 square for distribution center, and the I 85, South Submarket of Atlanta is slated for substantial completion around the end of the first quarter 2021 and is currently available for lease.

The market absorption and the Atlanta industrial market and 2020 exceeded total absorption and both 2018 and 2019.

And remains market with high user demand.

Lastly, our future pipeline includes three development projects, and which we are and late stage negotiation and due diligence.

These projects are in Indianapolis.

Central Florida, and Phoenix target markets, where we intend to continue building a larger presence.

With that I'll turn the call over to Beth to discuss financial results.

Thanks Brendan.

The company at that though for the fourth quarter was approximately $55 million for 19 cents per diluted common share.

We achieved the high and range of our 'twenty and 'twenty adjusted company at the BOE guidance at 76 cents per diluted common share.

And our 'twenty and 'twenty adjusted company at that low payout ratio with $55 six per cent and continues to provide us ample we can cash flow.

This morning, we announced 'twenty 'twenty, one adjusted company I thought the guidance and the range of 72 to 76 cents per diluted common share.

This range incorporates our commentary on dispositions investments and leasing we have made on this call.

We generated revenue of approximately $83 $3 million and the fourth quarter, which represented a slight increase compared to the same time period and 2019.

Overall in 'twenty and 'twenty gross revenues increased $4 $5 million year over year. This increase was primarily attributable to new acquisition, partially offset by sales.

Property operating expenses were relatively flat year over year, However, tenant reimbursements increased to 84 per cent for 'twenty and 'twenty compared to 72 per cent for 2019, or 2020, and G&A of $30 4 million was in line with our revised target range of $30 million to $31 million and we expect 2021 G and.

And I to be within a range of $31 million to $33 million.

Same store NOI increased one 6% primarily as a result of the 2% increase and same store industrial NOI.

Year over year, our consolidated same store lease for our portfolio decreased to 140 basis points to 97, 6%, primarily due to the year and lease exploration of our Statesville North Carolina property.

At year, and approximately 86% of our industrial portfolio had escalations with an average rate of $2 one per cent.

Our 'twenty and 'twenty rent collections were among the best and the REIT sector. We collected 99 eight per cent of cash base rents throughout the year and as of the end of 'twenty and 'twenty, we'd only granted to rent relief requests and our consolidated portfolio, which we have discussed on previous call.

Bad debt expense, but the minimal during the fourth quarter with only $212000 of bad debt expense and Kurt.

Capital markets activity during the quarter included the sale of an additional 1.1 million common shares under the for delivery feature of our ATM program.

The shares increased our forward sales contracts and two 5 million common shares for the year with an aggregate settlement price of $55 million as of year end of 'twenty and 'twenty.

Our balance sheet remains exceptionally strong with leverage and a low of four eight times net debt to adjusted EBITDA at year end.

We had substantial cash of $179 million on the balance sheet at year end.

And nothing outstanding on our unsecured revolving credit facility.

In connection with the sale of the Dow Chemical office building, we satisfied $178 $7 million of secured debt with an interest rate of four per cent.

This contributed to an increase to our unencumbered NOI and over 89% at year end.

At year end and our consolidated debt outstanding was approximately $1 $4 billion with the weighted average interest rate of approximately three 3% and of <unk>.

Weighted average term of six nine years.

With that I'll turn the call back over the world.

Thanks, Beth I will now turn the call over to the operator, who will conduct the question and answer portion of this call.

Thank you we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

And if youre using a speakerphone please pick up your handset before pressing lucky's.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Anthony and pull out with J P. Morgan. Please go ahead.

Yeah. Thanks. Good morning first question is on the development activity that you expect for 'twenty. One I think you had mentioned.

Either in the release for and your comments about spending more on development versus acquisitions can you just.

Maybe be a bit more specific on what you think the activity of will amount to this year.

Sure Tony.

You know Brendan mentioned Theres, a few projects that were working on and if those come to fruition, we could have roughly $200 million of.

Funding for development activities and in addition to whatever we're purchasing and the acquisition market.

And you'd mentioned I think the yield on Columbus was up and the high Sevens.

What do you think the you know the.

And that you're teeing up and now it looks like.

Brendan and you were kind of thoughts on that.

Yes sure.

But the the yield the vary depending on the project, but generally.

Getting development yields and the range of between five and the quarter and 6%.

And hopefully there's some conservatism there.

Our based underwriting and includes 12 months of downtime.

The which can really enhance yields when you when you leave more quickly as we did and the.

The Columbus.

Development project and released immediately.

Okay.

So I mean, the first step back.

If you spend a couple of hundred million dollars on development and it sounds like that might be a bit more than what you think you'll do on the acquisition side, but then you talked about these other assets that could be pretty high cap rate sales I mean, how should we think about that as you look out over the next couple of years.

The you are going to be.

A pressure point do you think theres enough on the development and acquisition side to offset sort of the remaining dilution to clean out the non core stuff for you know what happens there.

Well and implied in our comments and said, what's left to sell and and the office and.

You know other asset portfolio is there's likelihood of low double digit cap rate outcome.

And so you know, we we won't offset that entirely and a leverage neutral context, but are you know our leverages low we would be comfortable with it going up a little bit if theres good opportunity.

You know and the acquisition market from our perspective, we need to execute on the sale plan this year, but we can.

And we're comfortable with.

And five or 600 million dollar of investment plan.

We can still keep our leverage sort of in the mid point of of what we've indicated is a comfortable range. So you know we do have a fair amount of balance sheet capacity to take advantage of opportunity, but it's a you know at the same time, it's a competitive marketplace.

So we want to be careful and and pick our spots versus being you know predictive about acquisition volume.

Okay, and Brendan mentioned, just to the competitive competitiveness and the market and cap rate compression is there any.

And I sort of premium to be gained going either shorter duration or anything like that at this point.

Hum, Yes, I mean I.

And would say that.

Certainly the.

For the most aggressive cap rates that youre seeing would be attributable to.

And longer leases and the more primary of market. So you know the 10 year, Amazon and and a more primary market for example, so being able to underwrite the range of <unk>.

Lease durations and.

Including some sort of illustrations.

It is helpful to take advantage of the opportunity to get slightly more yields when you when you can appropriately underwrite the leasing outcomes.

Okay, and just one final detail item I, just want to make sure. The I think the 50 million and and forward equity that that's still out there that has not been brought and yet is that right.

Correct that's right.

Okay, great. Thank you.

Thanks, Tony.

Our next question comes from Sheila Mcgrath with Evercore. Please go ahead.

I guess good morning, I'm on the Ohio Rickenbacker development the yields are much higher than you're targeting on other projects. If you could just talk about what's driving that was that low land basis are doing better on wrench and.

And can you remind us if there I think there were other development opportunities at that site.

Yeah.

Hi, it's Brian and again.

Yes.

There were a couple of aspects to the to the Rickenbacker.

Leasing outcome. One is we did have a and attractive basis and.

The property.

For sure and.

In addition, we were able to lease the price.

Operating prior to complete.

Completion of our you know that.

Just around substantial completion, so we were able to take out a year of carry which is which is built into the two or other forward underwriting.

So there's there's a good yield benefit there.

In addition, and and this project the the Pepsico leases actually of robot for.

And what are its it's a three year lease, but the AR that.

And that was offset by having we had Pepsico and fund.

The bulk of the tenant improvement build out.

Which also greatly enhance our yields there.

We have that Rickenbacker project, what the where the single building project.

We Additionally have two land parcels of cross from from each other and.

And the Aetna.

And those are multi building sites.

And that we've been building out infrastructure at for the low.

Last couple of years the.

And that project.

At the outset.

It was set up to focus primarily on build to suit opportunities.

As the market over the and particularly the last couple of years of shifting away from build to suit.

And it's really been.

The dominated by high.

And I expect development and when you're talking about the generic bulk distribution product.

And.

We're evaluating essentially Ah.

Moving forward the spec project on the odd.

All of our east or west are sites there and.

And we have part.

Already developed a oh of pad on.

The west side for and 800000 and stuff.

Okay, Great and then and I think either and Wills remarks for yours, Brendan and I'm not sure who mentioned that here has a stable of development partners can you just explain to US how you know how deals are structured with the development partners did they get a fee.

Or I'm, just explain to us how it works.

Yes, well you know of course addressing for the.

The stable.

As you're as you're aware of our Lexington, and it's been very active over its history and and build to suit and frequently partnered with merchant builders on on build to suit of investments and as.

As far as our our purchase market activity of existing facilities, that's really a cat and dominated.

The sellers are very much so and that's part of the merchant builder of sellers. So we have a lot of great relationships with parts and builders all over the country and many of them are very long term relationships and that's been the focus of looking.

Looking at the partnerships moving forward.

To to develop the speculative projects.

For you know for competitive reasons, I'm, not going out and get into a whole lot of detail about the way that the sensors are structured but.

They're they're typically anywhere between.

They're they're they're typically around the 90 10 joint venture split between.

Couple of partners and operating partners.

They're typically of base.

Development and see.

And.

Around 4% and then there's.

There's a promote structure of based on.

Success.

And that's why I won't be too specific but these are structures that are very.

Very common and the and the merchant building world and and.

And it allows the Lexington to.

Get a little closer to the development yields are a lot closer I should say that instead of what we're buying and they are the <unk>.

<unk> market.

Yeah.

Okay and last question for me and just on the part.

Part of the appeal I think going forward is lowering your capital expenditure outlook by shifting to industrial if you could just give us some insight on how much capital expenditures, you're budgeting this year and either how that compared to the recent past or going forward, how much you expect that to.

The ramp the lower.

Hey, Sheila its bath good morning, Hi, Beth you know.

Hi, you know, it's a function of course of the potential leasing outcomes for the year.

The timing of the the T. I work, that's being done of course, yeah, and you know.

We are going to be coming down as we.

Condition that way from the office products into the industrial product. So you don't know at the beginning of the year I would say somewhere between 15, and 20 million of for 'twenty and 'twenty one and.

We'll have a better handle on the exact amount and as we go through the year and in general.

Cash on the Capex.

Look at 10 to 11 cents per square foot on average, but if you look back and our history.

You'll see that we were spending with $50 million a year.

And on T A's and Capex.

Capex and healthy.

So where we're looking for it to a new era of lower Capex.

Okay, great. Thank you.

Our next question comes from Craig Mailman with Keybanc capital markets. Please go ahead.

Hey, good morning.

Well just on the the 21 exploration, the bigger ones and Mississippi and South Carolina.

What are the potential mark to markets there.

Good morning, Craig.

Jay I just wanted to jump in and give you a perspective thanks.

Sure so on the where we're in a pretty competitive situation right now and on the one and Memphis I don't want to get into too much detail as to where we're at but there should not be of negative mark to market there and our expectation is depending on the outcome, but the does should go up and.

And then the of the Lawrence facility is also kind of dependent on the outcome as well we've got a couple of different opportunities there that we're pursuing including the potential renewal with the with the <unk>.

From a tenant if it's of renewal it should be flat a little bit of and increase if it ends up being multi tenant it could be.

Glad to of minor decrease and if we replace them with the with a of a large single tenant and it probably is you know a slight decrease to what they're currently paying.

And.

Alright that is.

That's helpful and then maybe for Brendan and I mean, you're you're throwing out there you know five in the quarter of 6% development yields you guys are there and there could be upside depending on downtime and other things and your underwriting but.

As you guys you know are expanding and markets that are seeing more construction overall.

I mean is that and appropriate risk adjusted return. When you guys are trading you know your equity is slightly above the six cap of at least from my numbers is that you know do you feel like you're getting.

Paid for any of that risk.

And we do Craig is that as an alternative to being in and the purchase market. It's it's the you know and and our mine of much better capital allocation.

So we're allocating more capital to developments and then we did last year.

But we're being very patient as we accumulate success in that space now of our first two projects worked out very well, we're very optimistic about the Atlanta project and then there's a few more of you know whether we commit more capital to develop the development.

And beyond that pipeline remains to be seen but but the us. It's an important part of our business, it's an opportunity to enhance our our returns.

Without you.

Chasing either weaker credits or you know all the real estate with obsolescence risk.

Yeah.

And.

And then just maybe like a bigger picture question and maybe the goes you know dovetails to my last one but you know as I look at and what you guys have done on the execution side. It's it's kind of you guys of hit what you said you were going to do right, bringing industrial and the 91% of.

The stock has clearly benefited here and when I look at valuation right you guys at least from the multiple perspective or are in the ballpark of where kind of the more focused industrial guys are but when you kind of take a step back your F. O gross your same store gross kind of T.

Trades at a discount or is not as a premium relative to peers. So I'm just kind of curious as you guys look forward and order to you know continue to chip your equity cost down towards some of those peers.

What are you guys plenty of for anything on the investment side to you'll be able to boost that growth profile going forward I'm the kind of justify continued multiple expansion.

The kind of better better compete for capital with some of your of your peers.

Well I think there's there's several things that the we're focused on and.

You know, we still view it as a priority to finish the transition to write 100% industrial and trade out of what's left of the office portfolio. I think you know that's that's a key factor for us.

We Wanna add selectively.

Two our investment pipeline and the development.

And because we think that there's a better chance for us to capture value there versus purchases and in many cases.

And then the other big thing is Oh, we have to prove the point about having the opportunity to mark our rents to market better than we have historically and that will will prove the shift and our underwriting over the last few years toward you know of modern class a warehouse and distribution properties and then.

And our target markets the.

We know we have to prove that we have made good progress in terms of positioning the portfolio. So that it has good organic organic growth as reflected by the amount of revenue that we have subject to.

Lease Escalations are.

But you know we have to prove the point, where you know all of our leasing spreads are positive when we come off lease and I think we're you know we're very optimistic on how well we can do in 2021 that we did very well last year, but we we understand that given the.

And then put a portion of our portfolio is older and as is the manufacturing assets.

You know that that some of our mark to market opportunities over the next few years won't be as robust as some of the peer companies.

Right and I guess you know.

Going to your commentary about the rent spreads like the Hamilton Beach, and Michelin and others.

And maybe you're going to get a slight uptick there and that's three per cent of your kind of industrial rents.

In aggregate I mean is there any.

Discussion about you know maybe going smaller from an asset perspective in terms of square footage or or what have you going you know and mixing in.

You know of bucket of assets with much shorter lease duration and then what you normally have to the you guys can capture that you know rent upside with maybe a little bit of of less of a risk profile to having you know these you know million square foot plus binary outcomes and some.

And you know as a way to better compete with.

Some of your peers and drive the internal growth higher.

Yeah, that's absolutely correct, we've been adding.

Other facilities for the portfolio.

Yeah and.

And we would add assets with two or three tenants in them. So they're there and you know there is a multi tenant opportunity and our target markets the debt that.

And that we're aware of that could make sense for us.

And we're not averse to buying buildings that arent fully leased either you know if there's an opportunity to capture greater yield from.

Leasing and the otherwise working and that's it.

Okay, great. Thanks.

Our next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Great. Thank you and good morning.

And just get some more color around the guidance assumptions and so I apologize if I missed it did you say what you're at what acquisition and disposition volumes were included and your outlook.

We we didn't you know we try not to be predictive about acquisition volume.

But our I think one of the disposition side. If you were modeling two to 300 million of completed sales that would be the number that we were comfortable with.

And if we can execute on one of those sales given the way our balance sheet is positioned well.

We certainly have the capacity to invest sort of for.

$5 million to $600 million and still stay within a comfortable range from a leverage standpoint.

Yeah.

Okay. Thank you and and then the right way to think about the sales as you said high single digit or high tail part of sorry, low double digit.

Cap rates versus yeah, Oh for overall, yeah overall.

And the outcomes are lumpy, though and that portfolio. So it won't be the same cap rate on everything obviously.

Okay, and then on the investment side it sounds like kind of six ish percent yields makes sense.

And that that would be high on the go on Oh and on development initiatives that could be achievable, but and in the purchase market. Most of the things that that we see that are of interest or are more of the four and a half to five area on a cash basis and.

And you know, obviously, the GAAP and GAAP cap rate would be higher.

How much higher.

It depends on on term and Escalations.

So of the five and it takes so much of that you think could be development versus acquisitions.

Yeah.

Well, we we could see at the moment committing as much as $200 million to development projects.

This year.

With with the balance of activity and and the purchase market.

Yeah.

Okay, that's helpful and the.

And then you had mentioned.

The third of the expirations.

And it will be renewals and then you mentioned two big leases, but it looks like there was actually 43 explorations and 'twenty. One if you add up the office and industrial I mean, how do we think about the rest of that group or are they so small that they are actually included and the one third and the two you mentioned are two thirds and trying to make sure.

And kind of see the full picture here.

Yes.

And I think the majority of those are yeah and Hawaii.

But do you want to take it or I can.

Yeah, No I was just gonna stay the same it is there they're the small tenants and mainly our Hawaii.

Property.

And then some smaller tenants and Antioch and.

Right. So there are six primary of industrial leases that are sort of rolling and 21, and then there there's really only one of any size left on the off the side. There are a couple of small ones, one and one retail tenant and the Philadelphia Office building and then one small tenant and our Arlington office building for.

For primarily at six industrial leases.

Okay. That's helpful.

And then.

You had mentioned two four per cent distribution growth and 20 it sounds like.

With the portfolio repositioning, maybe theres, a little bit of a drag and 21.

How do you think about the potential for growth, especially given your comments before and Capex less capex. This year is 2.4 per cent something that seems high or low and you think about kind of annual dividend growth going forward.

Yeah, I mean, our our thought is to increase the dividend of a penny of year until the taxable income it gets to the point, where it's pushing.

Against that and in favor of of more growth.

So we know where we're very comfortable.

With continuing to grow the dividend debt at that rate for the foreseeable future. We think the dividend will be among the best.

Covered.

In the space and if you think about it if if the model is retaining 50 or $60 million of your free cash flow just from reinvesting that the cash.

Capital.

And that in and of itself drives.

And dividend growth.

Yeah.

Okay. That's helpful. And then finally, I guess you've mentioned Sun.

Sunbelt lower Midwest States I mean, what what's the limiting you to that those regions.

And as you think about those regions.

Are you seeing a pick up from the re shoring and it seems to be you know of.

Target area, where maybe we see that.

Yes.

Yeah, I think generally speaking.

We want to be more targeted and our market focus so that we get more concentrated positions, we think that helps us.

Both in terms of accessing and underwriting.

And the new investments and enhancing our opportunities in those places versus being.

Much more.

Broadly geographically diversified.

And with respect to onshoring.

Let's see whether maybe Brendan or James you of a perspective and that in terms of what you're seeing.

Yeah.

Well this is Brian and then maybe I'll start and I think one of the dynamics.

Dynamics.

Really been demonstrated across the market and 2020 and and it was particularly seen in the fourth quarter is the dominance of the.

Bulk lease sale.

And.

There's the.

Clearly.

Much reported sort of level of activity by the Amazon and Amazon and a very significant piece of that but if you look at the breakdown and tenancy and the bulk space.

And at the same time, it's fairly broadly distributed and the number of its different.

Other industries, and I think that that really.

The speaks to.

And companies seeking to.

Secure their supply chain resiliency.

And the the onshoring of near shoring.

There's no debt that.

And thats out there.

And so we'll we'll lag right because of.

That will require.

The more manufacturing to the on.

And for them into the U S.

So that.

And.

Has been less of the factor but.

But we were.

Where there are certainly arguments.

For that to happen I think if you look at where you might expect that to happen.

And in the U S. I think the our geographies are very well suited.

For.

And for manufacturing in terms of the affordable Labor day skilled labor base, whether that's in the and and the.

The Midwest Pos.

Sunbelt and they're very favorable business climate.

And so I think that in terms of our geographic pockets of its very well positioned to benefit from those.

Those increases and near shoring and onshore.

James I don't know of career Hay day type stuff.

No I think you've covered it.

Okay. Thank you I appreciate your thoughts.

Our next question comes from.

Don Masako with Ladenburg Thalmann. Please go ahead.

Good morning.

Hey, John.

So I know Theres still some work to do on the office disposition side of things, but as we think of longer term about the next leg of the capital recycling strategy is the newness.

So assets out of the heavy and light manufacturing bucket.

And I guess, if that's the case, how much premium is there and the selling those assets with kind of sizable term left on the lease.

The margin would be opportunistic about the.

The harvesting value there and if you know.

If we're shrinking that portfolio.

I'm not saying that there.

And there wouldn't be some some disposition activity.

But the those assets you don't have long lease duration and they throw off a lot of free cash flow and that's right, providing and opportunity for us to read and reinvest a lot of that cash flow to support our growth plans and so.

And we you know we're not interested in and.

Parting with him at.

You know anything that's not a very full full valuation.

But I guess as you kind of talk about that being potentially the area, where you have risk of of kind of mark to market down.

And there is kind of the bid out there and the market for things that just kind of headlined industrial I mean is there any kind of incentives the kind of clear that out of the portfolios. The people have real confidence and kind of the run rate.

NOI and the portfolio today or the weed.

And we really want this cash flow, but also kind of helps support the dividend and other kind of positive thing and you'll love.

<unk> was and stuff like that.

And I think either way, it's fine for US you know, we understand that our industrialized and asset classes is extremely hot.

And you know, we're we're not averse to doing something more significant in that space. If it's you know if it's if it's.

Good for the company.

And.

So there's you know there's nothing imminent, but I do think the value of their it's probably underappreciated and the context of our current.

Share price.

Often tenant retention is extremely high there for long periods of time, it's very difficult to move manufacturing facilities and.

Often the occupancy as I said, the sticky for a long period of time and.

And and a rent negotiation with the tenant that doesn't have great option. That's often the you know a good outcome for landlord. So I I don't want of.

Overemphasize the risk around leasing outcomes.

It's been a very very good business for us.

Okay.

And then maybe talking about the office itself and others.

Standing while the kind of moving interest rates of happened very recently have you seen any change in demand from potential office buyers given some of the interest rate volatility and the boxing some people out of the market and maybe pulling them into the market and as they get worried the window for attractive funding and potentially closing.

Hi, This is the Florida I think the latter is certainly true and when you have a high quality tenancy.

The long duration lease and and you know fairly strong market. So the the activity for assets with other characteristics.

Has been intense and and and buyers seem as eager as ever to put capital out for assets like that it continues to be kind of a tale of two worlds and that buyers continue to struggle to underwrite them and pending vacancy and rollover so for assets that have the.

And that profile and markets and more challenging.

Okay.

And then one last one.

Maybe kind of the return outlook for Statesville, sorry, if I missed that earlier in the call and then you know any changes and some of the other lease expiration of that Werent talked about some of the smaller ones like Kalamazoo and Millington etcetera.

Sure so.

So on the states. So we've had we've had some activity both from a full building users and from multi tenant prospects, but theres nothing eminent at this point no. It's it's been off of exploration for less than two months since the functional building in Charlotte and we expect out of a possibly some outcome and they just take a little bit of time.

Sort of Kalamazoo, Dana's, moving out where and the process of re tenant to get with the sub tenant that they put in place.

And kind of up in the here right now we haven't solidified the terms on those yet because there's still quite of bit of term left with the Dana lease.

Millington, where we're right at the finish line to try and get a renewal done with them, which will be and increase in rent.

Let's see and then the other 2021 is the smaller building and Rockford, which is the suburb of Chicago and it's too soon to tell there, but the the tenant is fully utilizing the facility and.

And our expectation is they'll renew.

Okay. That's very helpful and that's it for me. Thank you very much.

Thanks, John.

The kind of if you'd like to ask a question. Please press Star then one of our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Hi, Thanks, just back to the Pepsico lease at Rickenbacker project.

Is there anything you can share about what they do with the facility how the utilizing it and is it bottling for manufacturing and I know they put some of Ti dollars and but just kind of maybe some color to.

Here why they only sign of three year lease.

It's the it's.

The fairly generic.

The distribution is for for for Gatorade the so.

Specialized bottling or or anything like that.

I think that the the short or at least is just a.

Uh huh.

I guess the other strategy that that the Pepsico is using it across their markets, where they are they're trying to match up lease expirations, but the other lease explorations, they have and and given the markets, which gives them more flexibility.

And from our perspective, and this case, we we were.

Comfortable and mitigating that risk.

By having the fund the.

Bulk of the Ti package.

And and you know obviously with the development and that's for very attractive as well.

That's helpful. Thanks, Brendan maybe just to stick with you.

Just looking at the 10 year Treasury yield moving higher as of late is that impacting or have you seen any impact of market pricing.

The bolt on acquisitions and also the dispositions of office.

So one and I start with acquisitions and and I think Laura.

And sort of spoke to it on the disposition side and I'm Gonna go but.

In terms of investment and that typically when and when you see moves in interest rates.

The moves on the acquisition.

The Si tend to lag.

We haven't seen.

Any noticeable change in cash.

Cap rates, yet corresponding to the moves and.

Interest rates I think that.

For those leverage buyers.

There.

I think they're also benefiting from some.

The spread compression on the lending side too that's offsetting some of the.

The base rate changes.

The total.

We remain to be seen how that may play out.

Got it and then maybe for Beth just looking at from a modeling perspective.

Is it fair to assume that the forward equity contracts are settled and the back half of the year you still have some disposition proceeds to redeploy maybe just the timing of comment on that.

Sure Todd Yeah, Yeah, we do we do have some cash now so it will it will it'll be later and we do have to settle the contract between August and November.

And so it'll be by then.

Got it.

Thank you.

This concludes our question and answer session.

I'd like to turn the conference back over the will Eglin for any closing remarks.

Thanks, Operator, we appreciate everyone joining us this morning, and I hope, you'll visit our website or contact Heather gentry, if you would like to receive our quarterly materials and in addition, as always you may contact me or the other members of our senior management team with any questions.

Thanks again for joining the call today.

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