Q1 2022 TPG Inc Earnings Call
Item 10.
Regulation S K.
The company's speakers. This morning are Michael games on and this and this is CEO , who will cover our recent activity market conditions and updates on our pipeline we.
He will be followed by John Clark, the company's CFO , who will cover the first quarter results in detail.
After 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.
Continued to achieve strong results with our current portfolio of 100% leased.
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.
The 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 and 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.
Industries, including industrial manufacturers and distributors omnichannel retailers.
<unk> packaged good companies healthcare and pharmaceutical companies amongst others.
Our recent lease signings, including expansion in Charleston, and becoming a major industrial manufacturer.
Walgreens, which leases, which lease space in the Lehigh Valley for pharmaceutical distribution.
A major home improvement retailer taking space in Charlotte for same day delivery of building materials to job sites.
These tenants I just mentioned all 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 PL 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 renewal terms had no concessions and an initial rate nearly 40% above the in place rent.
We do not see the warehouse supply situation changing meaningfully for the next several quarters.
121 year and deliveries were significantly below 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.
<unk> on the delivery front include delays in receiving permits and final entitlements as well as in the availability of key construction inputs.
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 a partially leased as well as added to our pipeline of forward purchases.
We are 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 in the current environment I feel really good about where we sit today.
Including the acquisitions 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. These.
These 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 southeast benefits from the growth in manufacturing I mentioned, Cummins earlier, which has a large presence in Charleston, and I'll note in the Carolinas There've 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 own these large scale manufacturing plants, our tenant supply those nearby facilities.
Lastly, in the southeastern markets land for industrial anywhere near the population center is increasingly scarce as these fast growing metros continue to sprawl.
As a result industrial competes for sites with residential commercial retail and other users.
And when people want to live and work they don't really want industrial.
So we're 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 average approximately 3% or.
Our recent leases that average above that with three 5% to 4% becoming more typical across our markets.
We 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 our with recent commencement.
While we did 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, as 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 continued increase in replacement costs due to inflation and growth in land prices.
Completion of this pipeline will occur throughout 2022 and into 2023 with deep noted in our supplement.
We typically assume 12 months of lease up upon 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 lease towards the end of the third quarter.
We have users expressing 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 as we have a fixed purchase price, but we will continue to benefit from market rent growth.
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 and we're 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 we've used 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 eight due to the onset of the COVID-19 pandemic.
With our targeted 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 addition to the $126 million of cash on our balance sheet, we put in place a $150 million delayed draw term loan as 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 Indus team for their continued hard work and exceptional performance.
It is through their efforts that 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.
Core <unk> for the first quarter was $4 million.
66% increase over the comparable quarter of the prior year.
Core SSO benefited the most from growth in NOI.
NOI was $8 7 million for the first quarter, that's up nearly 30% from the prior year's first quarter.
Both was driven principally by the impact of acquisitions during 2021.
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 31, our occupancy is 100% both in total and for our stabilized in service portfolio.
Yes.
<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 <unk> <unk> NOI 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 <unk> is 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 was 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 metric.
Wrapping up just a few things on the income statement interest expense decreased about 230000 that principally reflects an increase in capitalized interests, which 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.
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 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 is 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.
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 Charlotte build to suite will have no debt maturities for five years.
I'd also just like to make a quick note on the balance sheet regarding the strength of our tendency credit.
Our collection experience is and has been excellent.
Receivables 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.
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.
We do not expect a significant change in our current debt outstanding.
Again, 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.
Interest expenses net of capitalized interest in the first quarter, we capitalized about 350000 of interest in it.
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 million to $38 million. This narrows the range of guidance provided at year end of $34 million to $38 million.
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 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 6% to $6 5 million Alright, 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.
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.
And the first question will come from Dave Rodgers with Baird. Please go ahead.
Hey, good morning, everybody 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 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 pipeline as you see the year progressing.
Yeah. Thanks, Dave.
Good to catch up with you again.
We think there's opportunities in both.
What I'd say is near term.
We're 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.
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 entitlements. These days are taking depending on the market in nine months to 18 months.
So in terms of having an impact on our square footage those are going to be a little bit further out.
But we are actively looking and we do have the capacity to take on those projects because again, they all kind of <unk>.
Stag or a little bit between due diligence entitlement process, and then actually developing them.
We bolster we've also bolstered our team internal team on the construction development side.
A couple of people over the last couple of years and we just hired someone about it.
A month ago as well so we feel really good there, but we also see there's really good acquisition opportunities.
We just 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 will realize over time as leases roll.
And are thrilled to have that and we think there'll be increasingly some additional opportunity as we move forward through the year I think being a.
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.
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 is 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 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 its 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 in really the construction space and particularly in the industrial space.
Has this been delays and what I would comment on is a number of these.
Forward transactions are with probably a couple of the largest industrial merchant builders in the country.
And Theyre Gcs are 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 work has 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 widespread across.
Across the industry, we're managing it where we can as I mentioned that.
Once we're undergoing construction, we're certainly putting in a lot of the spec improvements into the buildings. So they are ready we pre ordered equipment that if for example can be used on a certain development. We can relocate it to another development for example dock Levelers.
Used to kind of in the loading docks.
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 have been a little bit of delays. We think there are 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.
Other things that get pushed out as well.
Yes.
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 Thats, 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 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.
Yes, so I did say, 23% and I think it's just a factor of the market and that we try to be reasonably conservative.
In sort of forecasting brands, the market's really dynamic.
Really accelerating over the last three to six to nine months in terms of rent growth.
So we try 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 on it and therefore, we're adjusting 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 or year. So we are relying on proven deals it's pretty much across our portfolio. We're seeing rents continue to grow all the.
The markets are short space all have.
Low vacancy we think that's going to sustain growth is going to sustain for the next couple of quarters as I alluded to.
I think theres, 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 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 on our forward 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.
<unk> 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.
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 range is 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 in the new.
Projects into the pipeline. Thanks.
Yes, I think it's really just the mix of.
Projects that are in the pipeline and cost 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, we're probably being conservative because it's new and a little bit far off little bit further out into the development pipeline as well.
But again I think the movement overall, it's fairly small so I think it's more just a slight mix and reallocating some costs than any real change in cap rate outlook or yield outlook on the projects.
Okay. Thanks for that and then just thinking in terms of some of the commentary from earnings.
Had some pressure on the industrial recent general I mean in terms of leasing expectations going forward do you expect a shift in the tenant base at all or.
Different types.
Types of tenants different business segments, pulling back where others may be seeing the same kind of demand for industrial space.
Yes, 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 seem to have an impact on the sector.
I think one thing I would say and I think our peers, obviously at their earnings a couple of weeks ago, but I think we all had seen Amazon slowing and frankly, it pulled way back earlier in the quarter.
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 is pulling back by E. Commerce broadly just because they are a big piece of it may be shrinking I think our other peers commented on that as well.
Not shrinking overall, but shrinking as a percent of the demand.
I think what we're seeing is a couple of different things one continued omnichannel retailers bolster their e-commerce efforts.
Describe kind of what do you call it low.
Instead of the home improvement chain, Lowes 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.
Some of the other retailers for example, Macy's announced a $1 4 million square foot build to suit in the Charlotte market for E. Commerce. So we think there's all the other players catching up to what Amazon has 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 at <unk> that support consumer product companies and health care companies those all still.
Are really active.
And what we've seen a lot of them focus on is 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, we have a tenant in.
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.
Thats 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 sectors.
So we think even with that.
The slowdown that Amazon said theyre going to have in their absorption 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 about some more color surrounding the last mile industrial assets in Orlando and Palm Beach, just curious what exactly last mile 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.
Yes, so I think as a general comment on our portfolio.
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 is doing.
So in reality, they are not dramatically different than some of our other assets. For example, the two buildings in Orlando are varied.
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 everything else.
And that's already 100000 foot tenant in our portfolio the two Orlando assets.
Yeah sort of similar type of park fully built out very close into Orlando.
Tenants 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.
Alan in Palm Beach again, there are buildings that.
Or just located really where there is very little industrial.
Card usage is actually for an auto parts importer.
It's 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 again I don't think they are wildly different than some of the other assets in our portfolio. They just.
That's the location and Thats the use.
If that answers your question.
No definitely does Michael really appreciate that.
And then last from me no with the.
Renewal that came in in April .
And just address the bulk of your expirations for this year, sorry, 2023, looking pretty light as well I think it 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.
Yes.
A ton of of early renewal again, the 2023 ones are still pretty far out what I would say in 2022 I think there is about three <unk>.
Left.
I think we are in discussions.
For one of them one is the building in Charlotte that we bought.
Early this year with a tenant had a short term.
Lease there.
We are actively looking that tenant.
May or may not stay we don't really have a good read it's a large European.
Conglomerate.
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 that filling that if that's the direction. We go.
And thats kind of in August .
July August lease exploration, and then really the only other exploration in 2022 is about 63000 feet I believe which is actually the tenant that we're more than doubling their space and going into the pre lease 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 theyre going to 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.
Great. Thank you.
And the next question is from Emmanuel Korchman from Citi. Please go ahead.
Good morning, everyone.
Just maybe sticking to that.
Charlotte acquisition.
So if I just quickly Google to address it looks like you've got your marketing docs.
It was built in 2019, but it doesn't look like it was occupied until I guess this conglomerate that you just 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 so easing at least industrial why would this building in particular not have leased.
More quickly unless I'm just wrong in my analysis.
Yes, so I think this building.
Again, I don't have the data exactly I think an effect it really deliberate late 2019 and early 2020, there's been a tenant.
The company Thats 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 right before COVID-19 hit.
I think Charlotte was a market.
During COVID-19 that there were a lot of deliveries in 2019.
For 2019 early 2020, I think we bought another building in Charlotte If you remember a 400000 foot building that delivered.
Similarly, and.
With half leased when we bought it and we fairly quickly leased up the second half.
<unk> early.
Early 'twenty and middle or 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 fairly quickly and when we bought the other building 400000 foot building with 200000 feet vacant we saw.
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 think there is 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 data for a while Charlotte.
Certain markets were a little bit.
It took a little bit while to get back into gear, but frankly, it's been super active in leasing 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.
Hi, good morning.
Pro forma.
So you're paying down some debt.
With the term loan.
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, John Clark, we're going to take out.
The first.
For mortgages that we would have on our maturity schedule.
We will 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.
And if I consider I think you guys are baking in about 3.5% growth in.
NOI quarter over quarter.
That really just a function of there's just not as much activity that.
It kind of happened since the start of the year.
How should I think about.
That forecast.
Yes, I think.
I think you hit it again, if you look at what we've leased up.
And when 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.
Not a huge amount of new buildings are new leasing that hitting.
Versus the first quarter, we do think we're going to be adding projects into the second half of the year.
As well as kicking in some 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. 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 more or less in line with kind of the past couple.
Full leased.
The acquisitions, we've done for you.
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.
<unk> has.
The buyer pool that you're talking to changed at all versus what maybe your expectations, where because of some of that.
That market volatility.
Yes, I'll take that John .
The buyer pool has been quite good.
We really haven't seen a change versus our expectations going into it we launched it.
I think mid March or third week of March or so we kind of hit the market and.
And we don't really we haven't seen any really any drop off.
In the buyer pool or changed into what we expected and I think we've been.
A little bit more pleasantly surprised with the level of interest and number of buyers again ill caveat that its a relatively small sale.
The book values, I think six five plus million, we think will do.
The 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 Aegis 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.
Yes, I think I think it's both in your question which is.
Most.
Areas, where we're looking to put industrial it increasingly harder to do one the sites properly zoned sites, just arent aren't really there and available for the most part.
And 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 talents are pushing back or had been pushing back on Lehigh Valley I think it's been up 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 are conditional using every township a couple of cities are a little bit easier, but thats, a pretty small piece of it. So that's very difficult and in other markets were in whether its <unk>.
Connecticut.
<unk>, we're not in southern New Jersey Theres increasingly.
Increasing our position into more and more industrial.
And so they've just make it a little bit harder to get the approvals. So I think thats 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 and MBS.
People don't want it in their backyard much as they want two hour delivery.
Don't want it to come from next to their house.
And so.
It is a challenge, but there are sites you can find and we're working through.
The site, 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.
Is 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 that 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.
Yes, 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 is that manufacturing is is look I think companies. It takes a lot of investment and in time to figure out your most efficient manufacturing.
Footprint and how to do it 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 part 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 all.
I'll go back to Charlotte, where Theres, a Philip Morris plant that underutilized a couple thousand acre site.
That.
I 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 use is red Bull has put 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 dollars 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 is 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.
Unusual burst in 2020 in 2021.
Retail general bricks and mortar retail is probably growing a little faster. In 2022, then 2021 is 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 chain and supply chain efficiency and we think that continues to be.
A longer term tailwind.
Coupled with some of the comments earlier about supplier delay in construction is going to continue for at least the next 12 to 18 months.
It may normalize after that but I think it's going to still be a fairly slow development process use.
It used to be a couple of years ago, you could start a building start 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.
Think supply is going to continue to have struggled to meet that in the near term I think.
It's difficult to predict what the overall economy will do but.
Just 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 will continue to provide underlying demand weather.
15%, 20% rent growth, it's probably not sustainable for five years in a row, but 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 Joe.
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 field.
Feels like the 18th week of earnings for me, though were not that fine but.
Where are you on the progress of getting the numbers out sooner.
Manny for the question.
We went live with the accounting system. This quarter. So this wasn't the quarter for us to to move things up but.
But we haven't we had really good success from it and the team is pretty excited about 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.
No more questions. This concludes and this will be trusts 2022 first quarter earnings conference call. We thank you for joining us and enjoy your weekend take care.
Okay.
Okay.
Okay.
Okay.
[music].