Q1 2022 Indus Realty Trust Inc Earnings Call
Good morning, and welcome to induce Realty Trust's 2022 first quarter earnings Conference call.
This call will be followed by a question and answer session.
They add yourself into the queue for questions going anytime over the course of this call by pressing Star then one on your keep them.
In addition to regularly available earnings materials in this and this has also published a supplemental presentation, which is available on its website at www dot in this Archie dot com under the investors tab.
This conference call will contain forward looking statements under federal Securities laws, including statements regarding future financial results. These statements are based on current expectations estimates and projections as well as management's beliefs and assumptions forward looking statements are not guarantees of performance and actual operating result.
<unk> may be affected by a variety of factors for a list of those factors. Please refer to the risks listed in the company's most recent 10-K filing.
As updated by its quarterly report on Form 10-Q, and subsequent quarters. Additionally, first quarter results press release and supplemental presentation contain additional financial measures such as NOI core <unk> and EBITDA.
That are non-GAAP financial measures.
Company has provided a reconciliation to those measures in accordance with regulation G and item 10 E.
Of regulation S K.
Speakers. This morning are Michael games on and this and this is CEO , who will cover recent activity market conditions and update you on our pipeline. He will be followed by John Clark The company's CFO , who will cover the first quarter results in detail.
The prepared remarks, the lines will be opened up for your questions with that I'll turn the call over to Michael.
Good morning, everyone and thank you for your continued interest in E&S.
2022 is off to a great start for our company.
We continued to achieve strong results with our current portfolio, 100% leased and our acquisition and development pipeline, adding new projects that will deliver strong returns on investment and grow our cash flow.
At the same time, we recognize the uncertainty that the current geopolitical climate high rates of inflation rising interest rates and continuing supply chain disruptions create to the United States economy, and the capital markets.
Despite these potential challenges the logistics sector continues to perform extremely well with widespread demand across our markets from a diverse group of tenants.
Ongoing difficulties with the supply and availability of goods increased fuel and labor costs and our continued drive to reduce delivery times create broad based long term tailwind in demand for logistics space.
This need is driven not just by pure play e-commerce companies, but by a diverse range of industries seeking to improve their supply chain efficiencies.
Industries, including industrial manufacturers and distributors omnichannel retailers and consumer packaged good companies health care and pharmaceutical companies amongst others.
Our recent lease signings, including expansion in Charleston, and becoming a major industrial manufacturer.
Walgreens, which leased which lease space in the Lehigh Valley for pharmaceutical distribution.
And a major home improvement retailer taking space in Charlotte for same day delivery of building materials to job site.
And as I, just mentioned all of our investment grade.
This strong demand coupled with low vacancies and limited supply in the market tenants simply have very few options for space in any of our geographic markets.
As an example, subsequent to quarter end, we addressed our largest 2022 lease exploration with a renewal in the Lehigh Valley.
This leaves us with a $30 billion market cap investment grade global three P. L servicing a very large investment grade multinational client in that space.
This tenant was paying somewhat above our Lehigh Valley average rent as a result of a shorter term renewal. They did a couple of years ago.
With essentially no alternative space within the market the renewals the renewal terms had no concessions.
Initial rate nearly 40% above the in place rent.
We do not see the warehouse supply situation changing meaningfully for the next several quarters.
2021 year and deliveries were significantly below at the beginning of that year's forecast and we expect the same to happen in 2022.
In the first quarter, approximately 86 million square feet delivered according to CBRE, which annualized is well below the 2022 forecast and also is below current demand.
Challenges on the delivery front and include delays in receiving permits and final entitlements.
Well as in the availability of construction input.
In response to these challenges and to take advantage of this expected supply and demand imbalance over the past couple of quarters. We've targeted acquisitions that had short term leases in place or partially leased as well as added to our pipeline of forward purchases.
We also proactively ordered materials and built in more improvements into our development to make them move in ready upon delivery.
More broadly and thinking about in this and in the current environment I feel really good about where we sit today.
Including the acquisition scheduled in our pipeline we've expanded from four markets at the start of 2021 to seven by early next year.
These markets have multiple drivers of demand across a broad base of industries.
The Lehigh Valley, and Hartford logistics market service, very large population quarters with significant economic output and spending power vs.
Markets are advantageous locations for regional distribution with very high barriers to entry.
Our southeast markets continue to benefit from tremendous population and economic growth.
And our experienced population growth leads to housing starts new business formation, and the increased need for medical commercial retail and hospitality offerings.
This in turn drives increase in demand for logistics space last mile local and regional distribution.
Additionally, the south east benefits from the growth in manufacturing I mentioned, Cummins earlier, which has a large presence in Charleston.
I would note in the Carolinas there'd been a series of major facilities opened or announced including for the production of EV vehicles batteries beverages pharmaceuticals, and furniture amongst others.
Well, we don't know when these large scale manufacturing plants, our tenant supply those nearby facilities lastly, in the south eastern markets land for industrial anywhere near the population center is increasingly scarce and he's as these fast growing metros continue to sprawl.
As a result industrial competes for sites with residential commercial retail and other uses.
And when people want to live and work they don't really want industrial.
So we are really pleased with our current holdings, which are difficult to replicate locations.
Next I'll touch on our internal growth our current in place annual Escalations averaged approximately 3%.
Our recent leases have averaged above that with 3.5% to 4% becoming more typical across our markets.
Also have a significant mark to market rent in our existing portfolio, which we conservatively estimated at approximately 23% on a cash basis.
We expect this mark to market to continue to increase due to upward pressure on rents and the quality of our portfolio.
We think this is a particularly strong number given that our portfolio has grown quickly over the last couple of years, giving us a larger percentage of leases with her with recent commencement.
While we do not have significant tenant rollover in the near term our development of forward purchase pipeline will continue to benefit from the rising rate environment.
Speaking of our pipelines and external growth, we have one 9 million square feet and approximately 225 million and investment in our current acquisition and development pipelines.
We estimate the initial stabilized yields on this pipeline to be in the mid 5% range, which is meaningfully above current market cap rates and this assumes a 95% occupancy on specs spec space, which effectively lowers the yields by about 25 basis points.
More importantly, we expect these investments to deliver strong returns on investment over time.
We believe rents and yields will increase given these properties quality and locations.
For both our acquisition and development pipelines, we take a conservative view on rates that said, we do expect meaningful rent growth due to scarcity of supply.
The increase in replacement costs due to inflation and growth in land prices.
Completion of this pipeline will occur throughout 2022, and enter 2023 with each node in our supplement.
We typically assume 12 months of lease up on our project completion or closing of a value add acquisition with no leases in place upon the delivery of our spec developments.
We are excited to add a new project to our development pipeline this quarter.
91000 square foot warehouse in the Lehigh Valley.
Valley continues to perform extremely well and this site is in our core infill established business Park with excellent highway access.
The site has most of its entitlements in place and we hope to close on this land later this year upon receipt of the final approvals.
In terms of our existing pipeline, we expect to receive the CFO for a four hour two thirds leased 103000 square foot project in the Lehigh Valley in a few weeks our two building Orlando project Landstar logistics is on track to deliver later in the third quarter and we are seeing excellent pre leasing interest.
We also expect to deliver our Hartford, Connecticut project that is two thirds pre leased towards the end of the third quarter.
We have users expression of interest for the balance of that space now that we have commenced putting up the walls. Lastly, we've commenced the construction of our next project in the Lehigh Valley at 206000 square foot warehouse, we expect will deliver in 2023.
Turning to acquisitions, we're very pleased with the pipeline of building purchases we have under agreement.
We believe all of these projects are amongst the best located in their respective markets and those with near term deliveries are attracting good tenant interest.
These forward purchases provide a strong complement to our own development activities and leverage our existing capabilities and market knowledge and importantly, our efforts to secure these properties are paying off in the current environment.
With this pipeline, we do not have any risk with respect to construction cost inflation, because we have a fixed purchase price, but we will continue to benefit from market rent growth as.
As an example, using are using current market rent.
We expect the yield on the Charlotte acquisition, and our forward pipeline to be more than 100 basis points above our initial underwriting and there are still several quarters of potential rent growth until this property delivers.
We are announcing today that we are in contract to purchase a fully leased 205000 square foot last mile portfolio, and the Orlando and Palm Beach market.
These properties are in irreplaceable locations with essentially no new development nearby where you're <unk>.
Particularly excited to have our first properties in the South Florida market.
We believe the current in place rents are more than 15% below the current market.
We expect to capture that rent spread as tenants roll over time.
Our team continues to do an excellent job of evaluating sourcing opportunities many of which are off market and lightly marketed and we remain active in evaluating and diligently and land sites and properties to add to our pipeline.
We recognize the current uncertainty due to the economic and geopolitical news wherever you similar periods in the past to create value for our company.
For example in the spring of 2020, we put under contract the land for Landstar logistics. After another group dropped due to the onset of the COVID-19 pandemic.
With our target of strategy, we are prepared to seize upon select opportunities that may arise from any current uncertainty.
As part of our preparation we have the capital structure in place to support this growth in.
In addition to the $126 million of cash on our balance sheet, we put in place a $150 million delayed draw term loan.
Part of an expansion of our credit facility.
None of our planned mortgage repayments with a term loan and cash we have all the capital in place to fund our current acquisition and development pipelines with some dry powder.
And for any future opportunities beyond that amount, we have substantial additional borrowing capacity under our revolving line of credit. In addition to any other capital we may source.
Lastly, but most importantly, I want to thank the in this team for their continued hard work and exceptional performance it.
It is through their efforts, we achieved our results and are in a strong position for future success.
With that I'll turn it over to John for the financial review.
Thanks, Michael.
Just starting with some of the headline figures.
F F O for the first quarter was $4 million.
That's a 66% increase over the comparable quarter of the prior year.
Core F. S O benefited the most from growth in NOI NOI.
NOI was $8 7 million for the first quarter, that's up nearly 30% from the prior year's first quarter.
Growth was driven principally by the impact of acquisitions during 2021.
Including the addition of the Charlotte build to suit that we placed in service of October of last year as well as increase in occupancy and the value add acquisitions and previously delivered spec developments.
As Michael noted as of March 31st our occupancy is 100% both in total and for our stabilized in service portfolio.
Yeah.
<unk> for 2022 first quarter was $3 4 million compared to 1.9 million for the first quarter of 2021.
With our limited recent tenant rollovers are second generation leasing costs were relatively low this quarter. We also had a low level of maintenance capex expenditures.
We expect about $1.3 million in maintenance Capex spread over the next three quarters that includes about 600000 for a roof replacement with about 80% of that cost expected to be incurred in the second quarter.
In March we announced that we had commenced a process to fully exit our remaining office flex portfolio.
These assets are reported as held for sale and operating results are recorded as discontinued operations for all the periods that we present.
As a result, our core F F. L. A S. S O N O I and other financial measures exclude these assets.
The office Flex portfolio is unencumbered and once sold the proceeds will be used for the acquisition and development pipeline that Michael spoke about.
We've received good interest from prospective buyers in a rather short period of time and marketing the portfolio and.
And we anticipate will be under contract before two key was done and will complete a sale sometime in the second half of this year at a price that's above the GAAP net book value.
Cash same property NOI for 2022 first quarter was up.
Up eight 9%.
With the comparable versus the comparable 2021 period.
Cash same property NOI benefit the most from the burn off of free rent on first generation space.
For the last several quarters, our same property pool is 100% leased and we expect to have very few new leases in the same property pool during 2022.
This will make for tougher comparisons over the course of this year at the same time the same property pool represented about 75% of our total cash NOI for the 2002 first quarter and as our acquisition and development activity ramps up a larger and larger percentage of our total portfolio is not going to be covered by the same store Matt.
Eric.
Wrapping up just a few things on the income statement interest expense decreased about 230000 that principally reflects an increase in capitalized interest, which just corresponds to the increase in the development activity.
G&A expenses were $2 9 million for the 2022.
Our first quarter, which is essentially flat from the corresponding prior year quarter.
Excluding noncash mark to market change.
Excluding the noncash mark to market charge related to the nonqualified deferred compensation plan G&A expenses would have been $3 2 million.
The 2022 first quarter numbers include a reversal of an accrual for capital base state taxes that we no longer will pay because of our REIT election.
That was about 170000, and that's been mostly offset by about 175000 in expenses related to the continued build out of our financial systems and accounting platform.
Overall, we're expecting to incur about 350000 in costs related to the accounting system project. This year.
I'll next turn to the balance sheet, our liquidity at the end of the first quarter was $226 4 million that reflects $126 4 million in cash plus the undrawn capacity on our credit facility.
As Michael mentioned subsequent to quarter end, we amended our credit agreement and added $150 million delayed draw term loan to the existing 100 million dollar revolving credit facility.
Based on our current leverage the term loan has a floating rate equal to 115 basis points over sofa.
We elected to swap to fix this to an effective rate of 4.15%.
Currently there's no amounts drawn on the term loan, but we expect to repay about $62 million in mortgages at the end of May with the first draw that we will do on the term loan.
The remainder of the term loan remains available to fund acquisitions and developments as well as repay other mortgage debt.
Yeah.
This credit facility now has an accordion feature that enables us to increase the borrowing to up to $500 million. We're very pleased with this transaction as it significantly increases our financial flexibility, while maintaining a conservative debt to enterprise value ratio.
And with the mortgage Paydowns, we will unencumber, a number of assets, which will increase our borrowing base.
With the repayment of the $62 million of mortgage debt from the first draw on the term loan other than an outstanding $26 million construction loan on the chart Charlotte build to suite will have no debt maturities for five years.
But also just like to make a quick note on the balance sheet regarding the strength of our tendency credit or.
Our collection experience is and has been excellent counts.
Accounts receivable is less than $1.6 million and is comprised of current balances due from tenants.
In this quarter's release, we provided some additional earnings guidance information for the second quarter and full year.
Please note that these assumptions only include what is identified in our acquisitions and development pipeline schedules that were in our press release.
And I do not include the Florida portfolio acquisition that we announced today, because we're still completing our diligence.
For the 2002 second quarter, we estimate G&A, excluding the mark to market charge for the nonqualified deferred comp plan will be slightly higher than Q1, 2022 with a slight increase in non cash stock based compensation versus the first quarter.
Last year, we began issuing stock compensation with a three year vesting period and the impact of annual grants start in the second quarter of each year.
We estimate interest expense will be comparable to Q1 2022.
And we do not expect a significant change in our current debt outstanding.
Yeah, and we plan to make the initial $60 million drawdown on our new term loan in Q2 with the proceeds going to extinguish near term mortgage debt maturities.
And the average borrowing cost of the debt that we're going to extinguish is essentially the same as the effective rate on the term loan.
Our interest expenses net of capitalized interest in the first quarter, we capitalized about 350000 of interests and it's fair to say with the development activity will continue to capitalize about the same amount of interest next quarter.
For the full year, we estimate full year NOI from continuing operations at 35% to $38 million. This narrows the range of guidance provided at year end of 34 to 38 million.
Yeah.
NOI from continuing operations excludes the office flex portfolio, which we had put up for sale.
And historically that portfolio had generated about 1.1 million in NOI annually.
We estimate G&A, excluding the mark to Mark charged for the nonqualified deferred comp plan to range between 13 million and $13 6 million, which.
Which is consistent with the G&A guidance, we provided in Q4 earnings and included in that figure is approximately 1.8 million of noncash stock compensation.
Also for the full year, we estimate interest expense of approximately six to $6 5 million or I'm, sorry, $6 6 million. This assumes the first draw down on the term loan and <unk> of 2022 of $60 million.
Second draw on the term loan during the fourth quarter of $30 million, which will fund the acquisition pipeline and development spend.
The remaining draw down on the term loan will likely occur in 2023 not in 2022.
Based on our development activity quarterly we expect we'll capitalize interest at a quarterly rate that is similar to Q1 2022.
With that I'll, just turn it back over to Michael.
Yeah. Thank you John as I said earlier 2022 is off to a great start.
And we remain optimistic that we are well positioned to capitalize on the current environment, while remaining focused on our strategy for growing cash flow net asset value and most importantly shareholder value.
That concludes our prepared remarks, and I'll turn it back over to Chad, our operator to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And the first question will come from Dave Rodgers with Baird. Please go ahead.
Hey, good morning, everybody I'm, Michael I wanted to just talk about some of the growth opportunities and avenues that you have in front of you you talked about both the acquisition pipeline.
As well as development, but I guess as you see that unfolding over the next couple of quarters do you have a sense for where each one of those goes in and do you have the capacity on the development side to take on more and more so maybe a lot in there, but what I'm trying to gauge the difference in the acquisition and development pipelines as you see the year progressing.
Yeah. Thanks, Dave.
Good to catch up with you again.
Yeah, we think there's opportunities in both you know what I'd say is nearer term yeah were still actively looking for land as you know we've done a lot of development in our history, we kind of think that's kind of our core mindset, even when we think about buying.
Buying buildings and so we're continuing to look for really good development sites in the markets that we're targeting.
You know Theres always things, we're looking at starting to do due diligence on and we think theres a lot of exciting opportunities potentially down the road there, but all of that's going to take time, you know entitlements. These days are taking depending on the market in nine months to 18 months. So in terms of any impact on our square footage you know those are going to be a little bit.
They're out but.
But we are actively looking at and we do have the capacity to take on those projects because again, they all kind of stagger a little bit between due diligence entitlement process and that actually developing them.
And we've we bolt or we also bolstered our team internal team on the construction development side.
People over the last couple of years, and we just hired someone about it.
Month ago as well so we feel really good there, but we also see there's really good acquisition opportunities.
We mentioned the one in Florida that we're very excited about that we announced today, which are last mile assets really irreplaceable locations, we think theres a good mark to market ramp, we'll realize over time as leases roll.
And are thrilled to have that and we think there'll be increasingly some additional opportunities as we move forward through the year, I think being a well capitalized company that controls its own capital without external committees and other things I think puts us in a good position and maybe what a little bit more of an uncertain capital market environment.
Great. That's really helpful. And then maybe on the pipeline of some of the forward deals that you've done there has been a little bit of a push back into some of those transactions in terms of stabilization or closing that.
Is that just a function of construction in and have you guys thought about bringing some of those in house to control that process a little bit better.
Yeah. So I think on the latter question, it's really a deal with kind of these other developers. So I don't think it's really an opportunity to bring in house and as you alluded to I think that the timing is really driven by a series of things that I think everyone's sort of experiencing it in really the construction space and particularly in the industrial space.
Which has just been delays and what I comment on as you know a number of these forward transactions are with probably a couple of the largest industrial merchant builders in the country.
And there are G sis or some of the largest general contractors in the country for industrial and they're facing some of the same delays in materials, but in all honesty and some of the delays for a couple of the projects are brought on the front end.
As an example in Charleston.
The developer it's taken them after they've had all their approvals and submitted for a building permit it's taken seven months to get a building permit to do the vertical construction. So the site works been done and completed and they've recently received the building permit but just an example of that it's many different factors that are causing these delays.
And it's kind of a widespread across yeah across the industry. You know, we're managing it where we can as I mentioned at.
Once you are undergoing construction, we're certainly putting in a lot of the spec improvements into the buildings. So they are ready we've preordered equipment that if for example, it can't be used on a certain development. We can relocate it to another development for example, a dock levelers used kind of in the loading docks. Those now have a fairly significant lead time, but they are somewhat.
Moveable so we've ordered those in advance so we have them ready for move in space. So.
There had been a little bit of delays, we think they're all manageable. We think some of some of the construction timing timelines may start to come in a little bit we're hearing some materials have better availability, but.
There's other things that get pushed out as well.
Well I guess the good news is rents go up that whole time hopefully the last question for me on the rent front year, 23% cash Mark to market. I think is what you said in your prepared comments you know please correct me if I'm wrong on that but that's a nice improvement from where you've been so I guess can you talk about it is that kind of a consistent trend that we should see across the.
Our portfolio in the coming quarters and next year as you think about some of these roles or any particular outliers that we should be looking for.
Yeah. So I did say, 23% and I think it's just a factor of the market now we try to be reasonably conservative.
In sort of forecasting brands, the market's really dynamic and really accelerating over the last three to six to nine months in terms of rent growth.
So yeah, we tried to make sure we're seeing deals officially being done at the levels that we're using that we think are comparable deals as opposed to relying on kind of what.
Indicative rents might be our asking rents might be so we tried to really focus on that and I think we're just getting more and more data points of where rents are being deals are being done at and therefore, we're adjusting of our mark to market. Accordingly, I mean, some of it's based on our own deals we're doing but obviously, we don't have that many leases rolling in any particular quarter.
A year or so so we are relying on proven deals it's pretty much across our portfolio. We're seeing rents continue to grow all the markets are short space all have.
Low vacancy, we think that's going to sustain our growth is going to sustain for the next couple of quarters as I alluded to.
Yeah, I think there's a big pipeline of deliveries, but I think timing of those based on the comment you just made about even our own forward pipeline.
Those continue to get pushed out for certain projects. So we think the rent growth environment Marines really robust yeah. We expect to see continued improvement in our mark to market and we think that's kind of driven across markets and as I mentioned out of forwards as I kind of said in my prepared remarks, we think we're in a great position because we don't really.
Any of the cost inflation and as rents continue to grow it just it just continues to increase our initial underwriting yields on those projects.
Great. Thanks, Michael.
Thanks, Dave.
And the next question will be from Connor Seversky from Baron Berg. Please go ahead.
Good morning out there thanks for having me on the call you guys already answered a lot of my questions, but I'm just thinking about the shift in development margins the expectations from Q4 to Q1 and in the footnote you guys state that Youre, assuming class eight cap rate ranges for the current markets and that the costs are fixed in the contract. So I'm wondering if this slight shift in margins is due to.
A change in those cap rate expectations or is it driven by timing or just rolling into new projects into the pipeline. Thanks.
I think it's really just the mix of.
Projects that are in the pipeline and costs have shifted a little bit amongst those so I don't think the movement in the margin was too high I think it was a couple of percent. So I think it really was just a mix we did add one new project, but probably being conservative because it's new and a little bit far off.
A little bit further out into the development pipeline as well.
But again I think the the movement overall is fairly small so I think it's more just a slight mix and reallocating some cost than any real change in cap rate outlook or yield outlook on the projects.
Okay. Thanks for that and then and then just thinking in terms of some of the commentary from earnings that had some pressure on the industrial Reits in general I mean in terms of leasing expectations going forward do you expect a shift in the tenant base at all or are different.
Types of tenants different business segments, pulling back where others may be seeing the same kind of demand for industrial space.
Yeah, I mean, I think it's obviously there was an announcement by one of the biggest takers of industrial space over the last couple of years, a couple of weeks ago that they did.
It seemed to have an impact on the sector.
I think in one thing I'd say and I think all our peers, obviously, if their earnings a couple of weeks ago, but I think we all had seen Amazon slowing and frankly, it pull way back earlier in kind of the quarter.
Yeah earlier sort of so the first quarter, everyone is sort of seen Amazon pull back in demand was really really strong from a whole variety of tenants. So I think it's logical if amazon's pulling back by E. Commerce broadly just because they're a big piece of it maybe shrinking I think our other peers commented on that as well just not shrink.
Overall, the shrinking as a percent of the demand.
But I think what we're seeing is a couple of different things one continued omnichannel retailers bolster their e-commerce efforts.
I describe kind of what do you call it low.
Instead of the home improvement change at Lowe's and home depot doing a lot of kind of last mile delivery facilities best buy again, we've seen in the market doing a lot of that you know some of the other retailers you know for example, Macy's announced a one 4 million square foot build to suit in the Charlotte market for E Comm.
So we think there's all the other players catching up to what Amazon's kind of built in done over the last couple of years continues to be a really strong driver.
But what we've seen if you look at our tenant roster, even our top 10 tenants. That's in our supplement we always had a very very diverse group of tenancy. So so whether it's industrial type supply tires are three pls it support consumer product companies and health care companies those all species.
<unk> are really active and what we've seen a lot of them focus on it's really shortening their delivery times and that's been a focus for a couple of years that kind of that one that day of waiting three or four days for apart from your for your automotive supplier that just doesn't cut it anymore. They want to have two day delivery across the country in a week.
We have a tenant.
In Charlotte, that's one of the biggest distributors of Briggs <unk> Stratton engines, and they expanded their number of facilities exactly for that reason they needed to have two day delivery and I think with the continued inflation trends, we're seeing in the market with wages availability of drivers fuel costs, one way for all of these.
Companies to reduce their supply chain costs is to have more widely distributed warehouse facilities.
That's a big savings. So we continue to see a drive for shorter times and saving money and so we're seeing continued widespread.
Demand across a lot of factors.
So we think even with.
The slowdown that Amazon said theyre going to have in there are absorption yeah, theyre, taking a space in the next while.
All the other sectors have been have been picking up and focus a lot on supply chain efficiencies, which we think is very bullish for the sector.
Got it that's helpful color and a lot to chew on I'll leave it there. Thank you.
Thanks.
And the next question is from Jon Nicodemus from BTG. Please go ahead.
Hello, Good morning, everyone. Just wanted to ask what's more colors surrounding the last mile industrial assets in Orlando and Palm Beach, just curious what exactly last mile. It looks like in those two markets and then how the tenant base and rent growth potential for last mile compares to the remainder of assets in those two markets. Thanks.
Yeah, So yeah, I think as a general comment on our portfolio.
You know, we do have different assets that we say alright last mile infill regional and sometimes it's the asset sort of the same. It's just a question of what the tenant inside its doing so.
So in reality, they are not dramatically different than some of our other assets. For example, the two buildings in Orlando are very similar to a couple of other buildings, we own in Orlando, one that is fully leased to iron mountain, which is fairly local shredding paper storage.
Shredding and everything else.
And that's already a 100000 foot tenant in our portfolio the two Orlando assets.
Yeah sort of similar type of park fully built out very close into Orlando. The tenants in that are sort of your what I would call. Your classic kind of not e-commerce, but last mile tenants. One is a building product supplier that again has.
Delivering construction goods to nearby construction sites. The other is safelight auto glass as a tenant in that portfolio again local auto glass as an example.
One in Palm Beach again, there there are buildings that.
Or just located really where there's very little industrial.
The card usage actually for an auto parts importer, its kind of a specialized auto parts company.
The company grew up in the area. This is their site, but next door in adjacent or sort of more what you would consider a typical last mile type delivery of.
Food product electrical contractors and things like that so.
I don't think they are wildly different than some of the other assets in our portfolio. They just yeah. That's the location and that's that use it.
If that answers your question.
No definitely does Michael really appreciate that and then last for me no with the.
Renewal that came in in April .
And just address the bulk of your expirations for this year saw 2023 looking pretty late as well I think there was just six leases expiring I'm. Just curious if you had any sort of an early read on known move outs or renewals for next year. Thank you.
Yeah, no not not a ton of of early really to get into 2023 ones are still pretty far out what I'd say in 2022, I think there's about three <unk>.
Left yeah, I think we're in discussions for one of them. One is the building in Charlotte that we bought.
Early this year, where the tenant had a short term.
Lease there.
Yeah. We are actively looking that tenant may or may not stay we don't really have a good good read it's a large European.
Conglomerate that typically moves slowly so we are looking to backfill that space we think.
Again, the market is very tight there theres a lot of tenant activity. So so we think we'll do really well back filling that if that's the direction. We go.
And that's kind of in August .
July August lease exploration, and then really the only other exploration in 'twenty 'twenty. Two is about 63000 feet I believe which is actually the tenant that would more than doubling their space and going into the pre leased building that's going to deliver later in the quarter they need that 63000 square feet for overlap so the reality.
That space, even though the lease comes up they're going to stay over as part of kind of the the pre leasing of the newbuild and they're gonna stay over in that space into 2023, So we're not even going to get that space back likely until sometime in the first or early second quarter of 2023.
Great. Thanks, so much Michael I really appreciate all the color today.
Right. Thank you.
And the next question is from Emmanuel Korchman from Citi. Please go ahead.
Good morning, everyone.
Just maybe sticking to that the recent Charlotte acquisition.
So if I just quickly Google to address it it looks like you've got your marketing docks and.
It was built in 2019, but it doesn't look like it was ever occupied until I guess this conglomerate.
Mentioned occupied it though that's unclear because some places you say it was never occupied in others. It has a short term lease.
I guess, if I'm right and it wasn't occupied sort of AD delivery why not we're hearing everywhere that you have supplies tightened its so easy to leased industrial why would this building in particular not have leased.
More quickly unless I'm just wrong in my analysis.
Yeah. So I think this building yeah again I don't know.
The data exactly you know I think in effect they really deliberate late 2019 early 'twenty 'twenty are theirs.
There's been a turn in the company that's and it has been in it for more than a year I'd say, so it kind of delivered at the start of Covid or just you know right before COVID-19 hit.
I think Charlotte was a market during COVID-19 that there were a lot of deliveries in 2019 early you know sort of 2019 early 'twenty 'twenty I think we bought another building in Charlotte If you remember a 400000 foot building that delivered sort of similarly and was half leased when we bought it and we you know fairly quickly.
Leased up the second half.
In <unk> or early.
Early 'twenty in middle to late 2021, and so I think there was a number of deliveries in Charlotte Covid happened I think Charlotte certain markets kind of turned on kind of three to five months. After the onset of COVID-19 with kind of the scramble for last mile Health care and other things was kind of that initial onset in 2020.
And I think.
In Charlotte that happened a little bit later, we saw that through the market.
And then 2021 things got very active in Charlotte.
And like I said the building we bought was half leased in that we bought it and fully leased it and very quickly a lot of buildings that were kind of 200 to 400000 square feet that had vacancy at the start of 2021, all got absorbed really quickly and when we bought the other building the 400000 foot building with 200000 feet vacant we saw you know trim.
This activity a number of buildings, we thought we'd see a competitive building seem to be absorbed and we'd be in a great position and that worked out with that with that deal. So I know if theres anything particular to this building I think the Charlotte market had a decent number of deliveries I think it slowed in COVID-19 like most market stayed for a while Charlotte like certain markets were a little bit.
You know it took a little bit while to get back into gear, but frankly, it's been super active in D C and in Charlotte and that market has done really well. So I don't think Theres anything building specific I think that was sort of the history of the Charlotte market for the last couple of years.
Thank you and the next question will come from Mitch Germain with JMP Securities. Please go ahead.
Yeah, Hi, good morning.
Pro forma.
So you're paying down some debt.
With the term loan.
With that specifically being paid down like how should I think about the pro forma balance sheet after that transaction.
So Mitch we're gonna message shot clock, we're gonna take out the first.
For mortgages that we would have on our maturity schedule.
We'll take that out and in May so it basically will satisfy all of our near term mortgage maturities.
About 67 million.
It doesn't touch the construction loan or is that part of that no. We're not we're not going to touch the construction loan is a pretty inexpensive borrowing for us. So at least for now we're not we're not going to touch that one.
Got you and if I consider I think you guys are baking in about 3.5% growth in our NOI quarter over quarter is that really just a function of there's just not as much activity that.
Is it kind of happened since the start of the year, how should I think about.
That forecast.
Yeah, I think I.
Thank you you hit it you know again, if you look at what we've leased up.
And when the new deliveries are happening you know we've had a little bit as our schedule shows a couple projects with slight delays so kind of from first quarter second quarter other than kind of natural growth in certain rents.
There's not a huge amount of new buildings are new leasing that's hitting.
Versus the first quarter, Yeah, we do think we're going to be adding projects.
The second half of the year as well as kicking in in terms of the rent growth from renewals and other things that will start to impact.
Later in the year as well.
Great and then I didn't Miss you didn't.
We havent disclosed the price of the Orlando Palm Beach assets right.
No. We are since we are still haven't finished due diligence the seller requested that we don't give the purchase price.
Or too much specific about it in general what I'd say is that cap rates, you know more or less in line with kind of the past couple.
Full year leased a building acquisitions, we've done you know for.
Within the ballpark of where those are.
Got you and then last question for me the office Flex sale you seem to be positive on the activity. So far in fact that its under unencumbered certainly helps but you know has has.
The buyer pool that you're talking to changed at all versus what maybe your expectations, where because of some of the.
That market volatility.
Yeah, I'll take that John I think that the buyer pool has been quite good we really haven't seen a change versus our expectations going into it.
Launched it.
Think mid March or third week of March or so we kind of hit the market.
And we don't really we haven't seen any really any drop off in.
In the buyer pool or changed into what we expected and I think we've been probably.
A little bit more pleasantly surprised with the level of interest in a number of buyers again I'll caveat that its a relatively small sale. The book values I think six and a half plus million. We think we'll do decently better than book value, but it is still relatively small cell, but we've been pleased with what we've seen so far.
Thank you so much.
Thank you.
The next question is from Brian Holland with Ages capital. Please go ahead.
Good morning, and thanks for taking my questions.
Sure. Good morning, local officials in markets that you that you were in reacting to kind of this increased demand for industrial space are they making it more difficult to build or is finding properly zoned land the primary hurdle to increase supply.
Yeah, Yeah, I think I think it's both in your question, which is most.
Areas, where we're looking to put industrial it's increasingly harder to do one the sites properly zoned sites just aren't aren't really there and available for the most part in in kind of the best locations. So you're really working to find good opportunities to do that but you kind of hit it on the first part a lot of talent.
Are pushing back or had been pushing back you know in the Lehigh Valley I think its been a five or six year evolution of increasingly more difficult and restrictive zoning requirements I don't believe in any of the townships in kind of the two counties that make up the core Lehigh Valley market that you can develop industrial by right I think it's a special use.
Our conditional use a special exception or conditional use in every township a couple of the cities are a little bit easier, but that's a pretty small piece of it.
So that's very difficult and in other markets. We're in you know, whether it's Connecticut markets, we're not in like Southern New Jersey Theres increasingly.
Increasing opposition to more and more industrial.
And so they've just make it a little bit harder to get the approval. So I think that's why everything we own. We think is really valuable and we think over time, it's going to continue to increase in value because everything is being pushed further and further away from where populations are in the most advantageous locations to distribute because people. It's a NIMBY issue people.
I don't want it in their backyard much as they want two hour delivery. They just don't want it to come from next to their house and so it.
It is a challenge, but there are sites you can find them and we're working through.
They say it we actually did a build to suit for Amazon on was a rezoning we did in Charlotte a certain markets are a little bit easier than others, but they're all getting more difficult.
The first development, we did in Charlotte was an area in north East of Charlotte in that market that region now has sort of a moratorium on spec building.
It's allowed but you can't get sewer capacity allocated to your site without having a tenant and justifying the number of jobs. So there's all kinds of roadblocks that are up and make it increasingly difficult, which again, we think that if you can find the land and entitle it as well as existing properties will continue to increase in value.
Thanks for that color last one for me kind of a macro question do you think we are at the beginning of a much more longer cycle of U S companies onshoring and overall, how many years.
Before supply matches demand in these sort of price increases normalize in your opinion.
Yeah, again, I would say that this ends up being more in my opinion and some of this is outside my core area of expertise. What what is that manufacturing is is look I think companies. It takes a lot of investment and in time to figure out your you're most efficient manufacturing.
Footprint and how to do it so I think there clearly seems to be a trend over time to at least have more distributed manufacturing. So you are not reliant on.
One port or one region that may or may not go into lockdowns. It seems logical what I'd say is we are seeing manufacturing growth in markets, where in some of that onshoring or some of that just general growth in the U S economy hard to tell you know again I'll go back to Charlotte, where Theres a form of Philip Morris.
They are underutilized a couple thousand acre site.
<unk> had lots of excess land and Philip Morris 20 years ago closed it down in the last couple of years that site, which is which is close to a couple of buildings, we own three buildings, we own in Charlotte in the Charlotte market.
<unk> has attracted a huge number of manufacturing and it includes an Asian kitchen cabinet manufacturer that relocated there to produce kitchen cabinets.
Local to be closer to obviously, where the end uses.
Red Bull has played a major beverage manufacturing facility there ball Corp.
To help supply that Red Bull facility, but also to supply. The region then put a can manufacturing facility. There. Most recently, Eli Lilly announced a couple of billion dollar investment in a pharmaceutical plant there so.
I don't think a lot of thats reassuring other than maybe the furniture company, but it is just showing good manufacturing growth in the markets. We're in.
In terms of kind of thinking longer term in supply and demand.
I think it's hard to predict when that evens out I think it's kind of just a general macroeconomic question I think E. Commerce is going to continue to grow as a share of consumer spending I think obviously after a.
Unusual burst in 2020 in 2020 one.
Retail general bricks and mortar retail is probably growing a little faster in 2022, then 2021 and that's what the data shows but it just seems ecommerce is going to continue to grow I mentioned, the macys investment other things, but again I think companies are going to continue to focus on their supply chains and supply chain efficiency and we think that continues to be.
A longer term tailwind and coupled with some of the comments earlier about supply delay in construction is going to continue for at least the next 12 to 18 months.
May normalize after that but I think it's going to still be a fairly slow development process used.
It used to be a couple of years ago, you could start a building started the site work can be done in nine months today. It takes you a year to get certain components to begin with so you're really looking at 12 to 15 months plus the front end is taking longer as I mentioned permitting and entitlement time. So we still think the supply is going to be chasing supply is going to be.
Slower to deliver then than it than in the past that will continue so I think there's still a lot of really strong demand drivers out there I think supply is going to continue to have struggled to meet that in the near term I think you know it's difficult to predict what the overall economy will do but.
General economic growth pushes industrial if housing continues to grow that's going to drive industrial.
And so we think theres just many levers that.
And that will continue to provide underlying demand whether you know 15, 20% rent growth, it's probably not sustainable for five years in a row, but it it feels pretty good for the next couple of quarters for sure.
Thank you.
And once again, if you'd like to ask a question. Please press Star then one.
The next question is a follow up question from Emmanuel Korchman from Citi. Please go ahead.
Hey, John one for you just how much work have you done and where are you in the process of moving up the accounting system to allow you to report sort of closer to the peer group here, we are into the I don't know.
Feels like the 18th week of earnings for me, though were not that fine but it.
Where are you on the progress of getting the numbers out to us sooner.
Thanks, Manny for the question we.
We are we went live with the accounting system. This quarter. So this this wasn't the quarter for us to to move things up.
But we had we had really good success from it and the team is pretty excited about our moving earnings calls up a little bit. So hopefully we can we can shorten that timeline for you two keywords requeue.
Thanks very much.
And thank you ladies and gentlemen.
With no more questions. This concludes and this royalty trusts 2022 first quarter earnings conference call. We thank you for joining us and enjoy your weekend take care.
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