Q2 2022 Plymouth Industrial REIT Inc Earnings Call
Hello, amongst all of us industrial REIT second quarter, 2022 conference call.
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I would like to turn the conference over to your host today trips all the rest of you our partners. Mr. Sullivan. Please go ahead.
Thank you and good morning, welcome to the Plymouth Industrial REIT Conference call to review the company's results.
Quarter of 2022.
On the call today will be Jeff Witherell, Chairman and Chief Executive Officer, Anne White, President and Chief Investment Officer, Anthony seller, Deno Executive Vice President and Chief Financial Officer, Jim Connolly Executive Vice President of asset management.
And Anne Hayward General Counsel.
Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website, along with our Form 10-Q and supplemental filed with SEC.
A replay of this call will be available shortly after the conclusion of the call through August 10 2022.
The numbers to access the replay are provided in the earnings press release.
And those who listen to the replay of this call. We were buying is due that the remarks made herein are as of today August three 2022, it will not be updated subsequent to this call.
During this call certain comments and statements we make may be deemed forward looking statements within the meaning prescribed by the securities laws.
Including statements related to future performance of our portfolio, our pipeline of potential acquisitions, and other investments future dividends and financing activities.
All forward looking statements represent plymouth's judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual result to differ materially from our current expectations.
Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the SEC.
We also will discuss certain non-GAAP measures, including but not limited to chorus that though.
<unk> and adjusted EBITDA definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC I'll now turn the call over to Jeff Witherell. Please go ahead.
Thanks, Tripp and good morning, everyone and thank you for joining us today.
You'll hear from US. This morning is very consistent with what you've heard from other industrial landlords. So far this quarter industrial fundamentals are as strong as ever tenants are showing zero sign of economic distress rent growth is robust supply chains are shrinking and borrowing costs are ratcheting up significantly while seller and buyer expectations appear.
To be mismatched.
We will keep our commentary short on these well trod and topics, but we can certainly devote more time to them in Q&A if necessary.
We're pan and I would like to focus most of our time. This morning is on correcting some false premises and reaffirm our belief in our markets.
When we look across our portfolio you can see that our operating metrics reinforce our thesis that our markets have strong fundamentals lower cost of living higher labor force availability lack of new supply competing with our property type and tight availability for space that is in high demand for the majority of our tenants.
In addition, recent large corporate.
And manufacturing relocations to these regions and the ongoing shift in supply chains, certainly reinforced our long held belief that a tier one only investment strategy, it's not only short sighted and subject to higher volatility, but also inconsistent with a discipline diversified investment approach.
There are a lot of facts about the non coastal markets that are being overlooked.
There are two major developments that I would like to highlight first is the decision of the Ford Motor company to locate the development of their Blue Oval City just outside Memphis.
This is their future electrification program and will consist of over 10 million square feet and over 10000 new jobs.
The second is the Columbus, Ohio market, where Intel is building to semiconductor fabrication plant on 926 acres.
This is a $20 billion capital investment that will create 3000 high tech jobs.
There was a reason these global companies have chosen these markets to create the future of their companies.
Based on numerous requests we have received of late to better educate the investment community on what's being missed about our markets. We have a few new slides in our investor presentation that supports this commentary.
We will also have third party research posted on our website as well that provides a lot more empirical data.
Now, let's turn to the key operating stats for the quarter.
They look a lot like what we've reported the last several quarters, but where we're starting to see the cumulative impact of double digit rent increases and record leasing volumes show up and accelerating same store NOI growth.
Occupancy was 97, 3%.
Cash re leasing spreads were 22, 2% same store NOI on a cash basis was up 15, 8%.
Rent collections were well over 99%.
Core <unk> per share was up 15% and a S. F O per share was up 28%.
Consistent with our announcements in June ahead of NAREIT and our quarterly activity update in early July we have elected to pull back from acquisition activity.
Ken will get into the drivers for this decision later.
Until we see some stability in the capital markets. We expect our primary source of growth for the near term will be organic growth complemented by our development program that can produce yields in the 7% to 9% range.
We have provided some new disclosures related to our development program in the quarterly supplemental on pages, five and 12 that I want to highlight such as more definitive completion dates funding percentage percentage leased.
As this program progresses, we will be able to give you a better idea of the status of each project.
Portland, Maine, we have completed construction at our $9 3.070 million square foot building and we are now 50% leased with proposals out for the balance of the space.
In Atlanta, we're under construction with a new 237000 square foot industrial building that should deliver in the third quarter.
And at 180000 square foot building adjacent to it that should deliver in the fourth quarter. The total investment for these two was approximately $24 million. We currently have a lease out for signature on the second building for the entire 180000 square feet.
And Cincinnati.
At our Fisher Industrial Park, we have a new 155000 square foot building under construction for a total investment of $12 2 million that should also deliver in the fourth quarter.
We have five other buildings that are in various stages of development, but have not yet begun construction and <unk>.
<unk>, we have another 200000 square feet that we are considering and Fisher park in Jacksonville, We are preparing to begin construction on 176000 square feet over four buildings that are in our existing parks.
Out of the 176000 square feet, we have a leased signed on 20000 square feet and a lease out for signature on 41000 square feet.
As it relates to our balance sheet, we know where we need to be in terms of leverage while our plan to gradually delever has extended a bit due to the current state of capital markets. We know 'twenty 'twenty three will be a big opportunity for us we have the series a preferred that can be repaid beginning on January one.
Absent the ability to Accretively access equity capital in the markets, we expect to Delever through EBITDA growth.
We also have several options we are actively considering in terms of uprights additional asset dispositions on a limited basis or JV such as the one we completed with Madison and Memphis Divot.
Dividend payout ratio is among the lowest across our peer group and provides a solid return to our shareholders.
Ken why don't you take it from here on what's occurring in our markets and with our acquisition activity.
Thanks, Jeff Good morning, everyone.
During the second quarter and through the first week of July we closed on $65 million of acquisitions totaling 652000 square feet across six industrial buildings.
Weighted average initial yield on the acquisitions was five 9% at a weighted average cost of $103 per square foot.
These acquisitions expanded our footprints in Chicago, Cincinnati, Cleveland and St. Louis We also entered the Charlotte market for the first time and continue to look for new opportunities in the Carolinas.
The $65 million and acquisitions was slightly below what we had projected for Q2, but we elected to pass on several opportunities that we had previously underwritten year to date. However, we've completed $254 million in acquisitions, which would still be one of the more active years in our history.
While our investment pipeline remains very robust we believe it's prudent to press the pause button on new acquisitions for the time being.
Buyers and sellers are going through a period of price discovery, which is consistent with what we've seen in other periods of public market volatility and Swift move moves in interest rates.
The wake of rising interest rates inflationary pressures and recessionary type discussion is permeating the economic landscape.
And cap rates are being reevaluated, while re trades have become more ubiquitous.
Deals are still closing, but at 10% to 25% less than initial guidance.
As we have said in prior calls we will focus on what we do best at Plummet.
That means we will look for opportunities that are accretive on a cash flow basis.
Allow us to secure a above market rental increases.
Our regional property management and asset management teams and focus on markets with low vacancy rates strong rental growth and high tenant demand for our preferred product type and size.
So far the results of this investment strategy speak for themselves.
Where we think we need to elaborate a bit more and connect the dots for the investment community is why we've invested where we have and what we're saying that others seem to be overlooking.
As Jeff mentioned earlier, we've added a few new slides in our markets and our investor presentation.
Which helped crystallize our investment strategy, specifically, our history of investing in tier two markets and an older properties E class b that typically have smaller tenants.
Junction with ever send young and their industry research arm Avant we've pulled together in an analysis of tier one and tier two industrial markets.
When comparing tier one markets such as Los Angeles, and at Empire, Northern New Jersey, and Seattle for instance to our tier two markets, such as Cincinnati, Columbus, Indianapolis, Jacksonville, Memphis and others.
Find that tier two markets enjoy higher affordability and lower labor costs than tier one markets in fact tier two markets. Both in industrial will work the business ratio four times that.
Tier one markets and.
And that's important because as.
As most of you know workforce availability and labor costs are predominant factors for companies occupy in industrial space.
As well as population growth.
Since 2005 population growth in our tier two markets was 13, 4% compared to five or five 7% in tier one markets.
And the projected population growth for tier two markets for the next four years is two 1% compared to a minus <unk>, 3% in tier one markets.
There are two markets predominantly lie within the center of the country.
C C I Am Institute Chief Economist.
T Conway calls the Golden triangle in area that roughly Triangulates, Illinois, Texas, Florida and backup to Illinois.
The Golden Triangle contains over 70% of the U S population.
And half of the U S GDP.
More ports than any other region in the country.
And five of the seven class one railroads.
90% of U S households, live within a five hour truck drive of primary intermodal facilities and inland rail ports.
So while the coast certainly have a commanding presence for logistics the Golden Triangle has recently become the epicenter for logistics infrastructure.
The strongest ecommerce parcel delivery logistics and retail firms have expanded significantly throughout the region.
According to the CCD I Am Institute in 2000, and West Coast ports handle 65% of all shipping containers with east coast and Gulf Coast ports and when the other 35%.
Yet in 2020 that ratio became balanced at 50%, 50% and that is another reason why we continue to invest in the Golden triangle, where over 90% of our portfolio exists.
Another interesting statistic is that the availability of industrial space throughout the country and 20000 to 150000 square foot range has shrunk significantly as a percentage of total inventory over the last 20 years.
The predominant development focus in both tier one and tier two markets. That's been in buildings 500000 square feet and over with nearly a third of all inventory in tier two markets over 500000 square feet.
Since 2010 and tier two markets. There has been only 7% growth in the 20000 to 150000 square foot range and over 75% growth for 500000 square feet and over.
And yet the size range that has experienced the highest year over year rental growth. According to CBRE industrial logistics research.
Lease signings for space between 100000 square feet and 300000 square feet.
So what does all this mean first it means that all new supply is not created equal.
Your comments about the large amount of new supply coming online in our markets that anyone quoting those statistics.
Need to acknowledge that little to none of that product competes with our product and our tenant base.
Second the highest demand and most liquid size of space being leased in our markets comes in the 20 to 150000 square foot range.
Third.
Plymouth average size tenant is about 65000 square feet.
With 70% of our a b are concentrated in leases under 250000 square feet.
Lastly, the high demand for these smaller spaces. The shared number of tenants executing leases in this size range and the limited supply is pushing up rental rates.
Market rents have been increasing but we have been outpacing them. We see this on the ground every day.
These dynamics are what originally attracted us to these markets and we believe our thesis has been proven out.
I would also note that we've looked at rent growth statistics in these same markets.
For every year since 2006, and they've shown that in past recessionary environments. They remained relatively stable compared with tier one markets.
The bottom line is that we believe continuing to invest in the Golden triangle in assets between 100000 square feet and 300000 square feet well.
It will enable us to continue to push rents for the foreseeable future.
As we have already demonstrated.
Now I'd like to turn it over to Jim Connolly to walk through the leasing activity and portfolio operations.
Yeah.
Thanks, Ken good morning.
Leases commenced during the second quarter of 2022 totaled in aggregate of one 5 million square feet for leases greater than six months.
These leases included 500000 square feet associated with renewal leases and 1 million square feet for leases with new tenants.
The weighted average lease term for these leases was five seven years and the rental rate associated with these leases increased 22, 2% over prior lease rates on a cash basis.
The renewal rate for Q2 was 33%.
For the year through Q2, the weighted average lease term on commencing leases was five four years with a 19, 5% cash rental rate increase.
In the first half renewal rate was 51%.
So at the end of July we have executed leases totaling $6 4 million square feet related to space scheduled to expire during 2022.
Which represents 92% of the 7 million square feet of total 2022 explorations. This amount includes adjustments for acquisitions in early terminations.
The renewal rate for these transactions was 71% with a weighted average lease term of four one years.
Furthermore, we leased 630000 square feet of space that had been vacant at the start of 2022.
55000 square feet of new development space.
Have had just 106000 square feet go vacant without being released.
Rental rates associated with all executed leases commencing during 2022 is 17, 1% over prior at lease rates on a cash basis. These transactions include seven leases of at least 10 years on 518000 square feet. We have also leased the roof on the new Portland building for solar panels, which will be <unk>.
Operational during 2023.
There was $1 million 28000 square feet lease for space expiring during 2023 at rates of 11, 1% above expiring cash rents. While this amount is less than the 2022 total rental rate increase it is actually greater than the renewal rate increase through Q2.
2022 of 10, 1%, which is what this space is comprised of.
Our leasing prospects for our Atlanta, Florida, Cincinnati and main development projects that we are actively working.
Additional solar leasing is also in the works with loose space totaling $4 2 million square feet being awarded to two sole event is to lease out the solar panels should be operational during the first half of 2023 generating approximately 42 megawatts of power.
Portfolio wide occupancy at the end of Q2 2022 was 97, 3% up 30 basis points from the end of Q1 due to the commencement of the vacant space leasing previously mentioned.
921000 square feet of vacancy within our portfolio at the end of Q2 533000 square feet has been leased with Tennessee. Starting later in 2022 with another 98000 square feet categorized as being repositioned at five locations.
In total there were 10 buildings with.
One 266000 square feet classified as being repositioned during 2022 due to rollover and planned renovations most of this space approximately 95% of it is currently leased but excluding all of the repositioning square footage occupancy rate would be 97, 5%. If you add it back all of it.
Future leases coming online our occupancy would have been 98, 8%.
Finally through 725, we get collected 99, 3% up five rents billed during Q2 2022.
Currently no active rent deferrals.
The asset and property management teams continue to deliver at a high performance level buildings, you may at least at a high occupancy level went the way. It has continued to increase tenant relations are high and our buildings are well looked after at this point I'll turn it over to Anthony to discuss our financial results.
Yeah.
Okay.
Thank you Jim.
We were pleased to report double digit increases in same store NOI and core <unk> and <unk> per share and unit.
There are a few points that stand out in our Q2 results that I will discuss before providing commentary on our updated guidance assumptions for the year.
Let's start with acquisitions of $48 9 million completed in the second quarter was less than the $74 million Mark we previously communicated.
However, we completed another $16 5 million soon after the quarter, bringing us closer in line with what we had projected.
Consistent with Jeff and pens earlier commentary, we are not expecting additional acquisitions for the balance of the year.
G&A, excluding the write off of dead deal costs associated with prospective acquisitions not consummated was eight 8% of revenues as we held the line on expenses.
Interest expense, however was a headwind for us as rates moved approximately 100 plus points from Q1, leading to a 24% sequential increase in interest expense on only $20 million and incremental debt.
We did not deploy the ATM at any point after our last earnings call.
Same store NOI on a GAAP basis was up nine 4% and up 15, 8% on a cash basis.
That's an acceleration from Q1 that we attribute to sequential growth in revenue from our new and renewal leasing in the portfolio supported by improved expense reimbursement as we convert expiring rollover to triple net lease structures.
Triple net leases now account for approximately 72% of same store ABR as of quarter end.
More specifically in the same store pool, we saw strong leasing results in our Chicago and Ohio markets.
Accelerated lease up and our Cincinnati market.
Looking at our balance sheet, our total debt to total market capitalization moved up to 52% at quarter end, primarily due to the decline in our stock price from Q1, while net debt plus preferred to EBITDA improved 50 basis points to eight three times.
As of June 30, 79% of our total debt carries a fixed rate or fixed through interest rate swaps with a total weighted average cost of debt of $3, 61% with 55% of total debt on an unsecured basis.
As noted on our last call, we recast our unsecured credit facilities, adding five new banks to the facility and increasing it to $800 million in total from $500 million.
The increase was comprised of an additional $150 million to our unsecured revolving line of credit, which brings it to $350 million and a new $150 million five year term loan, which brings us to $450 million in term loans.
We have implemented interest rate swaps on $300 million of the term loans.
Sequencing moving them to sulfur based from LIBOR based in mid July .
Our current leverage continues to reflect the fact that we are carrying approximately $24 8 million and investments on our balance sheet as of June 30th related to construction in progress associated with the development activity for the project as Jeff outlined earlier.
While these projects are currently a drag on net debt to EBITDA, they will be contributors to earnings as well as NAV creation when they come online over late this year and next.
Our liquidity position remains strong as personally we have $15 9 million of cash on hand, plus an additional $7 2 million in operating expense as grows.
And $282 $5 million of capacity on the revolving line of credit.
Turning to our 2022 guidance, we have affirmed our core <unk> per share and unit range with a contribution from previous acquisitions.
More than doubling of our annual same store NOI range, and lower G&A offset by higher interest expense.
The effect of the previously disclosed conversion of half of the series B shares to common shares on a one for one basis.
<unk> of lease up on our new development projects.
With respect to same store, we have derived a low end of the new NOI growth range of seven 5% to 8% to account for one potential move out of approximately 200000 square feet and.
An additional real estate taxes insurance and utility impacts some of which may not be fully recoverable from tenants for the terms of their respective leases.
As mentioned earlier the impact from acquisitions is slightly below what we had originally anticipated.
And G&A will be lower than expected as we carry forward the expense controls through the balance of the year with guidance, reflecting a $475000 decrease to the mid point.
So at this point absent the one acquisition completed in early July .
The only debt, we expect to add to the balance sheet is related to our development program for the balance of the year as Jeff noted earlier, we know where our leverage targets need to be and we will come sooner all options together absent the use of the ATM at current price levels.
We expect to be very judicious with the use of debt.
Anticipating fixing the rate on our new $150 million term trumps.
We have increased our full year guidance on interest expense by 1.15 million from the midpoint.
The incredible leasing and our ability to capture double digit mark to market, coupled with our ongoing sourcing of value creation and development opportunities we.
We will fuel organic growth and provide strong returns to shareholders.
All of these levers continue to drive <unk> growth and rightsize, our leverage profile as incremental EBITDA comes online over the next 12 plus months.
Operator, we're now ready to take questions.
Yes. Thank you.
At this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker phone please pick up the handset before pressing the keys to try a question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
And our first question today comes from Todd Thomas with Keybanc capital markets.
Hi, Thanks, good morning.
First question just around the guidance.
<unk> 47, again second quarter implies.
Implies a bit of a step down to get to the midpoint.
You increased the cash same store NOI growth forecast by 375 basis points and it looks like the drag from G&A and interest expense was a net drag there of about a penny and a half of <unk>, but can you just run through some of the moving pieces to help bridge the step down from.
<unk> 47 in the quarter towards the midpoint of the guidance.
<unk> range.
Okay.
Thanks for the question so the drags.
And kind of order of priority there is potentially some anticipated impacts with respect to opex that we're conservatively in a bit there's the full impact of the conversion of the series B.
And then.
Just a little more conservatism around.
The increase in.
Debt costs.
Okay whats embedded in the.
The guidance for the remaining conversion of the series B in terms of timing.
There is there is no subsequent conversion so the guidance reflects the 50% conversion that took place in.
April of this year.
Okay.
Got it and then as we think about the the series a preferreds roughly.
Roughly $50 million you mentioned in your prepared remarks Thats call. It January one of next year.
What's the current thinking there in terms of.
In terms of taking those out.
Presently we have sufficient capacity on the line to take the the.
Series a out and.
We would be usual utilizing that capacity to redeem.
<unk>.
That series.
Okay.
That's helpful and then if I could just one last one for you you mentioned.
In terms of.
Asset pricing that deals have been re traded more recently than that.
Wired returns have increased can you just provide a little bit more detail on the changes that you are seeing an initial cap rates in your markets.
Yes sure Tom.
As a general comment I think you are.
Seen some.
Some cap rate.
Expansion across the board in our markets.
Kind of anywhere from 25 bps to $60 65 bps kind of depending on.
On the kind.
And the length of the length of lease terms.
But we definitely have.
Scene.
A lot of.
Hey, guys.
Reexamination.
Sellers, whether they want to put.
Also in the market right now.
I think their expectations may not be in.
Sync with what's going on in the ground.
So I think.
A lot of folks are on the sidelines and I think thats, having an effect on valuations. So there we're still in a period of price discovery.
I think we'll probably get more clarity on that.
After the summer after around labor day or so.
Okay alright, thank you.
Yes.
Thank you.
Thank you and the next question comes from Bryan Maher with B Riley FBR.
Good morning, staying with that line of questioning for a minute I think in your prepared comments.
You might have said that some deals were closing at 10% to 25%.
Below the initial contract price I'm paraphrasing there obviously.
Who would the salaries be who would take such a haircut 2025% level.
Kind of what's their motivation do you have any insights into that.
Probably don't have a lot of insights a little bit more conjecture oftentimes there may be.
Funds for instance that I want.
Required to sell no matter what the market conditions are there may be other reasons above and beyond that for other southern types.
But I think in my prepared.
Remarks.
That those haircuts.
Applied against initial guidance per se not exactly I applied against those under contract but.
We get a lot of.
Me and my team got a lot of calls.
From various brokers across the country that.
From on deals that we may have looked at in the fourth quarter for instance, our early first quarter and passed on and we get calls and say Hey, I know you've looked at this.
567 months ago, but we've.
Realigned our expectations of the seller has would you consider.
X price instead of why price and so those kind of conversations.
Have been occurring a lot more frequently in the last 30 to 60 days than they did.
Six months ago.
It helps.
That's helpful and Golden Triangle comments, that's really really helpful. Insights can you talk a little bit about.
Rental rates, which clearly are well into the double digits.
Are you finding any push back from tenants or perspective tenants on those.
Those rates continuing to be sustainable at those levels at least for the next several quarters.
Sure This is Jim.
The rental rates.
I'm going to go up.
It's really been no pushback I think it's the.
The continued lack of space and tenants I wanted to make sure that they have warehousing.
Into the future.
Okay and just last from me the comments on Memphis in Columbus were helpful. As it relates to Ford and Intel.
Can you give us any more detail about kind of how youre thinking about the long term increase in demand in those markets relative to kind of existing and proposed new supply.
Yes right.
Those comments were just two out of many that are out there and I think the theme that we're that we're trying to get across to people is that.
Global City in Memphis.
Bill Ford said, he said were betting the future of the company on electrification and we're doing it in Tennessee, and there's a reason they're doing it there instead of Michigan.
So this overall theme that we have is.
This type of manufacturing.
I would call the Intel facilities in Columbus is somewhat of a re shoring they looked overseas to build those there is a reason that they're not building them in and the silicon desert, but theyre, putting me in Columbus for a reason and we think that the.
Based on lots of research, we think that theme of <unk>.
<unk> Onshoring Assembly manufacturing.
High level distribution is.
Going to take place over the next 10 to 15 years I mean this this trend that is happening for re shoring and trying to enhance the supply chain is a trend that's going to going to continue to go for a long period of time.
So if you talk about.
Our markets.
Yes, I think there's five markets in the country that represent almost 70% of up most of the new construction, Chicago, California, and so on and so forth. So when you get into Memphis, and you get into places like Columbus, where our buildings are we don't really see an oversupply issue coming for us.
There are certain parts of Columbus, where theres a lot of new construction going on class eight facilities, mostly bigger box, but for our type property in general.
We just don't see any overbuilding in most of our markets.
Okay. Thank you.
Thank you.
Thank you and the next question comes from Dave Rodgers with Baird.
Yes, good morning, everybody, maybe Anthony and Jeff These would be for you on the same store improvement obviously guidance doubled from last quarter to this quarter in terms of your cash same store NOI guide. So I guess talk a little bit more about maybe what surprised you guys. In those numbers that allows you to drive that up and the gains that you saw is that primarily related to kind of.
The outperformance in <unk> or again do you think you can kind of get some of that back. It does seem like some of the comments about the second half or maybe not as strong as the first half.
Yes, there was a little surprised a little acceleration so the surprise with with respect to the spread it was just outsized relative to our initial guidance.
With respect to the acceleration that took place primarily in Cincinnati.
And.
I think we're going to see a fairly similar.
Impact in Q3.
The caution around the same store is that we have about $1 million, one and available and expiring leases.
For the remainder of the year and while we are optimistic there's potentially a little downside to the extent that the one that we specifically identified vacates.
And then in addition to that Dave as I mentioned.
When speaking with Todd that there are some potential impacts with respect to opex, specifically real estate taxes, and specifically in our Chicago markets, where.
We have less triple net leases.
And recovery becomes potentially a gating item to the extent that we have.
Significant increases in real estate taxes.
Alright Thats helpful. Appreciate that Anthony maybe with the deals that you guys said you backed out of you obviously did close some acquisitions in the second quarter.
But you chose not to pursue others what was unique about those that you chose not to pursue with the timing was there something unique in the leasing prospects for those assets.
Economically that you were worried about or was it purely capital cost.
I think.
Against a backdrop of.
Macroeconomic issues going on.
With respect to interest rates being high and of course in inflationary pressures.
Continuing.
We just decided to press the pause button as I mentioned.
There were a couple of deals that.
When we drill down through due diligence we just found.
More.
Capex potential capex is it related to.
Particularly roofs.
You kind of get into a discussion with brokers and others about where to allocate and there is some difference of opinion along those lines.
During the course.
Of course the discussions.
The macroeconomic.
Environment seem.
It seemed to soften even more so so I think we're probably not unlike a lot of other of our peers that we decided let's just see what what happens when the dust settles and.
So we've always tried to be very prudent with how we allocate capital.
Thank you.
We've demonstrated that.
We have been demonstrating that for the last.
Two or three months.
That's helpful. And then maybe last for me on the development side, you. Obviously gave some additional disclosure. So thanks for the added disclosures this quarter can.
Can you talk about your Delta development cost protection that you have in place currently and then also as you look out to the pipeline that you kind of mentioned this quarter.
Can you talk about your comfort with being able to secure pricing on those transactions to move forward relatively quickly or going back to your just your recent comment pen.
If costs are kind of moving on roofing materials and the like do you end up kind of putting pause on future development just want a better clarity on that if I could thank you.
So Dave this is Jeff.
Have always done our own development. So we were very involved in the entire process of getting these buildings built however, when we bring on a contractor would actually start construction, we're doing a fixed price contract.
So there are no exclusion to that contract. So steel prices go up concrete go up we're not we're not.
We're not responsible for it so it's up to full price.
Truck pads every everything's included dock Levelers and so on and so forth. So that all gets ordered.
In conjunction with signing a contract and we don't sign those contracts with the contractor until we check back in with the brokers and seeing where.
Where we've ended up so I think.
What give us.
Date that these things are going to get done it's just we're in the market.
Everyday leasing as you can see we signed a lot of leases right across our portfolio. So.
These are.
We are signing 10, sometimes 10 leases a week and so we know what's going on in the market.
I'll give you an update that just came in.
In the last 10 minutes and so in the prepared remarks.
We have 176000 square feet in Jacksonville over four buildings in our parks.
<unk>.
I had stated that 41000 square feet was out for signature it just actually just got signed.
So we have a 20000 square foot lease signed.
Have a building in Jacksonville, and 41000 square feet is a full building and that just got signed this morning, a few minutes ago.
We've got again, a lease out for signature in Atlanta and.
Yes.
That building will be will be in on time and on budget in the third and fourth quarter both of those building so.
A lot of activity in Cincinnati again this is a.
Fisher Industrial Park is our 125 million square feet.
Existing park and we have land in there to build another three or 400000 square feet and we've got.
<unk> is it going up 155000 square feet now in Cincinnati lot of interest in that.
No.
Going forward, we're going to continue to build out if the demand is there.
Alright, Thanks, Jeff.
Sure thing Thank you Dave.
Thank you.
And the next question comes from Barry, Oxford with Colliers.
Right.
Alright, thanks, guys.
Jeff I think it's smart to.
Pause on here on acquisitions, if we're gonna be kind of going through a repricing, but let's say as we go into 'twenty. Three do you anticipate the acquisition volume to be where it has been previously or do you see yourself doing more development than acquisitions wont be as big a component going forward.
Yes, Thanks, Barry Yep Yep.
So again on development, we want to be clear.
We believe that it is these high single digit yields.
It goes with our theme, where he will build new buildings at high single digit yields we will buy class b at attractive yields and will buy class a at attractive yield right, we'd like to say, we're buying class a class b prices and I think we've proven that out, especially in St. Louis which is we have done phenomenal job there over the last 12 months.
We're not big developers, we're not out buying land, we're not we're not.
Taking that risk of developing the land and then putting buildings on it right. So we're not going across the interstate bringing in all the infrastructure water sewer gas whatever electric bringing it across spending millions of dollars on infrastructure. Then then go build a building right. Those are developers, it's a little higher risk game.
Interested in so we are building on land that we currently own.
Would we buy an adjacent parcel yes, if it all made sense. So I just don't think that development going forward is going to be a big piece of the pie is going to be incremental it's going to a lot of out of that a lot of add a lot of value.
I think I'll answer this for Panama.
We think the acquisitions are certainly going to be available to us next year, and we will continue to buy below replacement cost at.
At very attractive yields.
Okay.
The short answer Jeff you see the acquisition pipeline returning to some sort of normal normal rate at some point.
You've got all of the sellers that have backed away from the market until until things settle down right and that makes sense, yes, so they're going to have to sell eventually.
Alright.
That's the beauty of what we've always said is we get questions of why did somebody sell that building, there's probably 12 reasons why they sold that building or one of 12 and one of our favorite buyers or sellers as the guys that have to sell because of the fund or the public guys that are already kind of built into there.
Year end and.
We read it we can write a check and we know what we're doing we get through due diligence as quick as anybody but.
But its thorough due diligence you don't see us passing on roof inspections like we see some people doing we just don't do that it's silly. So.
<unk>.
So we're geared up for it as you know Barry.
We just think the next couple of years theres going to be a lot of product for sale.
Great. Thanks for the color Jeff.
Thank you and our next question comes from John Kim with BMO capital markets.
Thank you.
I just wanted to clarify the Apple being repriced in the market.
I think Pat you mentioned valuations down 10% to 20%, which would imply cap rate expansion 60 to 120 basis points or more in the Q&A and then you mentioned cap rates are up 25 to 50 and I realized you said the valuations are down based on original guidance, but it seems like a very big discrepancy between the 60 to 120.
Versus 'twenty.
<unk>, 25% to 50% I, just wanted to clarify, which which one was more accurate in terms of what youre, saying.
Yes, Hey, John sure.
The real answer to all of this is that we are still in a period of price discovery.
Hard to pinpoint exactly.
But yes on average.
We are seeing.
Cap rates.
Between $25 to $50 25 to 70 cap rates as you know don't tell the whole story, especially when it is applied to our types of properties.
Other factors that go into.
Analyzing these deals such as Capex and length of lease term, how many tenants so on and so forth.
Cap rates are probably more applicable to what I call real estate bonds the tenure Amazon leases.
Or or Walmart leases or some kind of investment grade tenants, where they may have been trading at.
Three caps on the coast.
They have come up 100 basis points, maybe more theyre more.
Interest rate sensitive if you will.
So.
We've seen it.
As I mentioned earlier, we've seen all sorts of reasons why sellers are taking some properties off the market or or they have to agree to sell at a price that was different from your expectations.
Nine months ago, So I think.
It's a little bit over the board.
It's not an exact science I don't have a specific pinpoint.
Cap rate.
Decompression.
Factor two to throw out, but I can share with you the ranges and again reiterate that.
We're still in a period of price discovery and that will probably become more clarified.
As as.
As we get closer to labor day.
So what level would you be more active on investments.
Certain initial cap rate threshold would it be just stipulate stabilization in the market towards your cost of capital or are you are you more focused on replacement costs.
Yeah.
Yes.
Good question, we kind of take all those factors into consideration and.
I think thats, we always have.
Thank you.
We've always taken.
Cap rate obviously.
It relates to our cash flow, which is very very important to us.
But we're also looking at the.
The macro environment economic environment, and yes of course, our cost of capital is a factor so.
So all of those things.
Go into our.
Our our bucket of factors if you will when we.
Analyze whether to.
Push the throttle further faster on acquisitions, so I think.
The good news is we do have and maintain a pretty solid robust pipeline.
We're certainly.
So looking at opportunities in all of our markets, but with where the where are we I guess, it's probably the best way to say it and I think maybe that.
Maybe we'd get a cleaner sense of.
How this is going to shake out.
The remainder of the third quarter and fourth quarter.
Okay and can you provide an update on the current mark to market you have in your portfolio.
On average.
Yeah.
On average we have roughly.
Little by.
The low 10% still.
Is that on a GAAP or cash basis.
That's on a cash basis.
Okay.
Thank you.
Thanks, Sean.
Thank you and the next question comes from Anthony how its truest.
Good morning, guys. Thanks for taking my question.
Can you provide any update on the solar panel initiatives and maybe quantify the economics.
Yes.
We have.
Okay.
Illinois has a community solar program. So we've contracted with two solar vendors trying to take advantage of that and they are going to take on.
Lease.
Space on top of our buildings and they will get the incentives, where we actually have no outlay on.
This solar panels, so we're negotiating leases on roughly $1 2 million.
Million square feet, which generates 42 megawatts of power.
We expect those leases to be signed shortly and then as a discovery period, where they implement.
Everything with the utilities.
The permits set and then.
Police incurs roughly 90 days after all of that.
The signing of the lease so we expect.
Some of that next year roughly.
Yes, roughly a million dollars.
Income from leases.
With no outlay.
Okay, and so do you receive that $1 million in 2023 or.
In the fourth quarter of 2022.
That would be at 23.
Yes into 'twenty factor.
Gotcha.
<unk>.
And just going back to the cap rate expansion comment is that 25 to 60 bps. Despite this across all the markets or is there some markets held up better than others or some that's weaker than others.
Well I think Theres always.
There are some markets that are that are weaker than others no matter what.
Type of macro economic environment.
We are working and I think whats.
If anything even though there has been some interest rates interest rate increases obviously for the first half of this year, there's still a fair amount of.
A great amount of capital on the sidelines that might be keeping some of these.
Cap rates.
Low in fact, and this is just because of the backdrop, we're dealing with because in the first half of this year we had.
Record low vacancy across all markets.
Solid demand has increased.
Year over year rent growth demonstrably I mean, the asking rents for the first half of the year increased 14%.
It is impressive that was taking rent growth was even higher I think it is at 18%.
So.
We're.
We're still seeing obviously.
A huge demand from investors for industrial space across the board, but that being said.
Some of the some of the buyers out there that typically leverage up a little bit more than others.
Are spending more time on the sidelines and.
So I think that that has a modifying.
The effect on overall evaluations.
Sure.
So we're on it we're keeping track of it.
A lot of deals every single day and.
Sure.
Not a lot of what has been getting getting done if you will in July and August , but I think again after labor day, we're going to see.
See some kind of crystallization if you will.
Of where cap rates are and overall returns.
Okay. Thanks, guys.
Thank you.
Thank you.
Last question today comes from cost of rescue with Bahrenburg.
Good morning, everyone and thanks for having me on the call got to dig a little deeper for some of these questions here, but.
Maybe just to start on the development pipeline with about $24 million remaining.
For the for the projects in motion is it reasonable to assume that the cost per square foot is essentially even across those projects for modeling purposes.
You're talking about the price per square foot to build garner right.
Yes Jack.
So it will be a little higher than.
In Georgia, because new building smaller buildings.
Cincinnati is inline with Georgia, and main was a little bit higher than.
As well because of the smaller builder.
Okay. So it's in Boston, we'll probably see the highest hit in terms of square foot price per square foot.
And then in terms of the in terms of the NOI yields within the range of 7% to 9% does the same thing apply I mean, as Boston getting to 9% versus Atlanta, Cincinnati down near the sentence or other way around.
Yes, correct.
General turnkey.
Sure those numbers are turnkey so.
And the glasses space will be a little bit higher but the rents are higher as well so it's a little bit higher yield.
Okay, and then just jumping back to early 2023 with the option to redeem those preferreds I mean.
Slowing down the acquisition pipeline and being somewhat conservative with development prospects is there an element of this where youre freeing up capital such that you won't have to use the revolver to take down that preferred.
This gives you another option to get rid of that overhang.
They're potentially via cash flow will be some.
Download the preferred if you will but we will need to use the capacity under the revolver to take out the entire instrument.
Okay and is the goal to take out the entire instrument.
Presently it is yes.
Okay.
Okay understood. That's all for me thank.
Thank you.
Thank you.
Okay. Thank.
Thank you and this concludes our question and answer session and I would like to return the floor to Jeff one of the Roth for any closing comments.
Thank you everyone for joining us today as usual we're available for follow up questions and we will talk to you next quarter.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.