Q2 2022 Indus Realty Trust Inc Earnings Call
Good morning, and welcome to the Indus Realty Trust's 2022 second quarter earnings Conference call.
This call will be followed by a question and answer session.
Odd yourself into the queue for questions during any time over the course of this call by dialing Star then one on your keypad.
It is now my pleasure to turn the program over to Ashley Pizzo, Vice President of capital markets and Investor Relations.
Yes.
Thank you and good morning, everyone welcome to our 2022 second quarter earnings call.
Additionally, irregularly available earnings materials and this is also published a supplemental presentation, which is available on its website at www Dot India Archie Dot com under the investors tab. This conference call will contain forward looking statements under federal Securities laws, including statements regarding future financial results. These statements are based on.
Current expectation estimates and projections as well as management's beliefs and assumptions forward looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.
List of those factors. Please refer to the risks listed in the company's most recent 10-K filing as updated by our quarterly report on Form 10-Q and subsequent quarters.
Additionally, the second quarter results press release, and supplemental presentation contain additional financial measures such as NOI SFO core S. F O adjusted <unk> and EBITDA, which are all non-GAAP financial measures.
As such we've provided a reconciliation to those measures in accordance with regulation G and item 10 E of regulation S. K.
Our speakers. This morning are Michael Gambon, and as the CEO , who will cover recent activity market conditions and updates on our pipeline followed by Jon Clark, Our CFO , who will cover the second quarter results in detail. After their prepared remarks. The line will be opened up for your questions with that I'll turn the call over to Michael.
Thank you Ashley.
Good morning, everyone and thank you for joining us today.
We delivered strong results in the second quarter, and our business is well positioned for strong external and internal growth into the future.
Since the start of the year, we've added over 520000 square feet, representing more than a 10% increase to our in service portfolio.
And we expect to add another 875000 square feet over the next six months.
Our current portfolio remains well leased and we're actively pre leasing upcoming deliveries at rents above our underwriting.
Our leases have market Escalations, which continued to trend up in the portfolio has embedded mark to market rents both of which will support continued internal growth. We are growing our cash flow and delivering strong returns on our investments.
Currently the overall industrial market is experiencing record low vacancies with rental rates strong growing strongly across markets.
Tenants remain active and overall new supply remains in check due to continuing delays in receipt of approvals permit and critical construction materials.
That said, we recognize that the capital markets have changed since the start of the year.
The continued uncertainty regarding economic growth inflation and other factors could impact the operating environment over the next several quarters.
We believe that with the strength of our portfolio and our balance sheet. We are well prepared for any change that may occur.
We have strong tenancy with over 75% of our tenants or their parent companies, having to either more than 500 million in revenues or publicly traded.
Approximately a third of our tenants are investment grade rated.
Ed This statistic exclude some large companies that are major tenants for us such as Ford Motor Tesla and Qunar Noggle.
Additionally, our rent collection history is excellent and we've recorded no bad debt expense in 2022.
We ended the second quarter, and 99, 4% leased and going forward, we have a relatively small number of leases rolling over the next two years.
Subsequent to the end of the second quarter, we leased the only vacancy of 35000 square feet that was in the recently completed 102000 square foot Lehigh Valley warehouse.
The lease rate for this space with nearly 30% above the rate we achieved with the adjacent tenant last fall.
And this resulted in a stabilized yield for the project and more than 50 basis points above what we estimated at the start of this year.
Also at the end of July the short term tenant at Paragon way in Charlotte vacated that Georgia, and 17000 square foot building.
This building is move in ready, which makes it well positioned for fast moving requirements, particularly given construction other delays prevalent throughout the industry.
You can see in the Charlotte market is 1.6% according to Cushman and Wakefield and the only competitive space isn't a spec building that is expected to deliver in the next couple of months and is located in a different submarket.
We expect upon re leasing will meaningfully exceed our initial underwriting and we are encouraged by current prospective tenant discussions.
We also are making good progress pre leasing our upcoming future deliveries.
Buildings are well located across a number of markets and we believe our best in class assets and strongly performing regions with multiple demand drivers for logistics space.
We are fully leased or upcoming 234000 square foot delivery in Connecticut.
With the initial tenant in the building taking the rest of the space. The rent for this expansion is 17% above what the tenant is paying for its initial space.
We also have executed one lease at our upcoming 195000 square foot Landstar logistics delivery in Orlando, where that two building project nearing completion, we are seeing significant tenant activity in rfps.
We also have strong prospects for the remaining vacancy in the 42% leased to building Nashville acquisition.
The buildings are essentially complete and the existing tenant is already operational.
The delay in closing that purchase is related to some off site work the developer needs to complete which got held up and permitting documentation and approvals. We expect to close on this acquisition late in the fourth quarter. When this last bit of work is completed.
The Landstar logistics project in Orlando, we'll enter our in place portfolio later this month.
And with the Paragon building this will likely lead to somewhat lower overall portfolio occupancy rate next quarter that we're hopeful will fill those spaces relatively quickly.
In terms of upcoming lease expirations other than Paragon way the only lease expiring in 'twenty 'twenty. Two is at 73000 square foot space occupied by the tenant that is expanding and relocating into the 234000 square foot building I mentioned earlier, that's expected to deliver at the end of September .
That tenant expects to overlapping the two buildings for several months. So we do not expect really to to really get that space back until early next year.
In 2020 three the largest lease exploration makes up approximately 60% of our total explorations by square footage.
That tenant has renewal notice date at the end of August for a one year renewal.
We are in preliminary discussions with the tenant regarding their intentions, including a possible longer term renewal, but these conversations remain in the very early stages.
And looking at our overall disclosed acquisition and development schedules, we have one 8 million square feet and approximately $173 million in purchase price and Romanian development cost.
We expect this combined pipeline to stabilize at a high 5% stabilized yield at.
I'd also note that far initial stabilized yields we use estimates of current cash rents rather than projected our net effective GAAP rents expected completion.
Additionally, these yields assume a 95% occupancy factor.
As a result, these yields typically understate, what we realize upon completion and when a building becomes 100% occupied.
We're very pleased with the building purchases we have under agreement are estimated stabilized yields on these acquisition on this acquisition pipeline continue to increase as rents push upwards across our markets.
For example, based on our current preliminary tenant discussions for the Charleston forward acquisition, our initial stabilized yield would be more than 60 basis points above what we estimated at the start of this year.
Turning to developments in addition to the deliveries I already mentioned in the Lehigh Valley, we are underway on a 206000 square foot building.
Expect to close during the third quarter on the land site to support our 91000 square foot building.
Lehigh Valley market remains very strong with estimated vacancy at below 2% and limited new development opportunities all of which continues to support the strong rent growth I mentioned earlier.
Yeah.
For developments overall construction costs remain elevated though recently these increases have been at a more measured pace lead times for certain items like steel have shortened over the past couple of months, but other items, such as dock levelers electrical panels, and Transformers and HVAC units are being quoted up to a year for delivery.
We have learned to plan and manage around these delays, we continue to proactively order materials and building more improvements into our developments to make them move in ready upon delivery.
Overall these issues continue to stretch out everyone's delivery pipelines with delays the increase in overall supply into the market.
Our development yields remained strong and as I mentioned before we're using our best estimate of cost and current cash rents along with a 95% occupancy factor.
Right now the acquisition market is somewhat in a process of price discovery with very few trades, making it hard to discern current individual market cap rates.
And the markets, we closely follow the future. It trades that have closed or the deals that are awarded or under agreement to buyers. The cap rates typically had been lower than what we would've predicted.
Our acquisition development pipelines will support external growth through next year, and well into 'twenty 'twenty, four and represent 31% growth in our square footage from where we stood at the end of the 2022 second quarter.
And importantly in the current environment, we have all the capital we need to fund these future developments and acquisitions utilizing the cash on our balance sheet and available future draws on our term loan.
Also note that some of the spend and extends out well into next year and even into 'twenty 'twenty four provided us some flexibility with the timing of these capital needs.
We have a history of making strategic investments in periods of uncertainty and remain very targeted in our pursuits.
One particular area in which we continue to focus is our land for development.
Good industrial sites remain very hard to find the entitlement process can take nine to 18 months or longer and typically we do not purchase the land until these entitlements are completed.
We feel we have the financial flexibility to continue to pursue select opportunities, while maintaining conservative leverage ratios by using the capital on our balance sheet undrawn lines of credit.
And asset recycling, including a continued pursuit of selling noncore land holdings.
Lastly, I want to highlight a few of our sustainability initiatives.
We recently received approval to install solar arrays on top of two of our Connecticut warehouses.
As rooftop solar installations will generate just under one megawatt of electricity and are the first of all we hope will be several solar opportunities across our portfolio.
We are also rolling out in the OLED lighting upgrade opportunity for our tenants as of the end of last year, we already had energy efficient lighting and 100% of our portfolio.
With approximately 50% penetration of L. A D. But our goal is to convert the entire portfolio to L. A D in the future.
Lastly, we are recognized as a green lease leader, which reflects our team's efforts to incorporate energy efficiency and sustainability into our leasing practices.
I'll conclude with thanking the Indus team for their continued hard work and exceptional performance.
Great Pride in our very low employee turnover and the long tenure of our staff it.
It is through their efforts that we achieve our results and earn it and are in a strong position for future success.
With that I'll turn it over to John for the financial review.
Thanks, Michael.
Starting with a strong headline figures, we produced core F. L for the 2020 to the second quarter was $5 million, that's a 70% increase over the comparable quarter of the prior year and up 25% from the first quarter of this year.
<unk> benefited the most from growth in NOI.
Oh, I was $9 2 million for the second quarter up 31% from the prior year's second quarter.
Growth was driven principally by the impact of acquisitions. During 2021. The addition of the Charlotte build to suit placed in service in October of last year, and the acquisition of Paragon way in Charlotte as well as increased occupancy and the value add acquisitions and previously delivered spec developments.
As Michael noted as of June 30th our occupancy is 99, 4% and our total in service portfolio and a 100% in our stabilized portfolio.
As of today, we'd be at approximately 96, 2% leased when including the lease signed in the Lehigh Valley and the vacancy at the Charlotte building that Michael discussed.
<unk> for the second quarter was $4 1 million compared to $2 7 million for the second quarter of 2021.
Maintenance capital expenditures increased by 180000 this quarter versus the prior.
Period, reflecting the balance of a roof replacement project, we discussed last quarter on the earnings call.
We expect about 800000 maintenance capex spread over the next few quarters, we expect second generation leasing cost to be about 450000 over the next two quarters based on leases already signed and those expected to be signed before year end.
Just as a reminder, the financial metrics, we discussed today exclude the office flex portfolio, which is recorded as a discontinued operation.
The change in the capital markets and economic uncertainty has somewhat impacted that sale process.
We continue to be in discussion with several potential buyers and remain hopeful that we will complete a sale sometime later this year.
Cash same property NOI for the 2022 second quarter was up 11, 3% versus the comparable 2021 period.
Cash same property NOI benefited most from the commencement of leases on previously vacant first generation space the burn off of free rent on existing space in the portfolio as well as from standard lease Escalations, which currently average around 3%, but I would note that new leases continued to achieve.
Escalations above that and typically are achieving three 5% to 4%.
Our same property portfolio was 100% leased and we have limited upcoming explorations as Michael noted earlier, which likely impacts some of the near term same property NOI growth.
However in future years same property NOI will benefit from the mark to market.
<unk> in our portfolio, which we currently estimate at 25% on a cash basis and 31% on a GAAP basis. We expect this mark to market to continue to increase due to upward pressure on rents and the quality of our portfolio.
Wrapping up just a few things on the income statement interest expense was about 200000 for the second quarter. This is net of a $1 2 million.
This is net of $1 2 million received by the company in relation to termination of the interest rate hedges on mortgages paid off during the quarter.
It also includes about a half million of capitalized interests. This quarter due to an increase in the company's development pipeline in the second quarter.
General and a minute ministry of expenses were $2 4 million in the quarter down from $2 7 million in the comparable prior year period.
The decrease was primarily related to a decline in the performance of the nonqualified deferred compensation plan as compared to the prior year period.
I'll next just turning quickly to the balance sheet.
Our liquidity at the end of the second quarter was $266 7 million and that reflects $76 7 million in cash 90 million of available draws on the delayed draw term loan and a $100 million of borrowing capacity on the revolving credit facility.
We expect to draw a portion of the term loan in the fourth quarter and the balance will be drawn in the first half of 2023.
As Michael mentioned with the draws on the term loan and our existing cash we have the capital we need to fund our disclosed acquisition and development pipelines.
With the term loan fully drawn we will expect to have a conservative debt to enterprise value and retain good financial flexibility.
Additionally, in light of the current short term interest rate trends and given our current cash balances, we may opt to repay the $26 million floating rate construction loan sometime this year when.
When repay this will effectively have no debt maturing before 2027, and we would have no floating rate rate debt outstanding.
This quarter's release, we provided some additional earnings guidance information for the third quarter and for the full year.
Please note that these assumptions only include what is identified in our acquisition and development pipeline schedules.
For the full year, we raised the low end of our guidance estimate.
Two $336 5 million to $38 million, which is up from guidance provided last quarter of 35 million to $38 million.
This forecast includes the positive impact to NOI from the Florida portfolio acquisition that closed in the second quarter, but also considered the impact and the delay of deliveries from our development and acquisition pipelines as compared to what we assumed in the beginning here of the budget.
Additionally, this reflects stronger rents and renewals and new leases based on what we have been achieving in lease discussions.
Both our current and prior guidance range for NOI from continuing operations includes a 365000 lease termination fee that will be recorded in the third quarter and will impact the full year results.
We entered into this termination with an existing tenant only after we had secured a replacement tenant and after the existing tenant expressed interest in vacating early in order to combine its operations at a different site.
Moving on to G&A, we estimate G&A for the year to be between $11 4 million and $12 2 million.
This is lower than our previous guidance as it reflects the benefit from the noncash mark to market on our nonqualified deferred compensation plan, which lowered our reported G&A.
The revised G&A guidance assumes this plan has no impact on our G&A forecast for the second half of the year.
Also included in our G&A forecast for the year is about $1 5 million of noncash stock compensation expense.
Finally for the full year guidance, we estimate interest expense of about five 5% to $5 7 million.
Yeah, and this is impacted by the actuals for second quarter, which was net of a one time gain on terminated swaps.
The full year interest guidance. It seems the second draw on the term loan during the fourth quarter of $30 million to fund our acquisition pipeline and development spend.
Interest expense guidance is also impacted by the anticipated decrease in capitalized interest each quarter for the balance of the year based on developments reaching completion.
Interest expense does not include any impacts from the potential pay down on the construction loan that I mentioned earlier.
For the 2022 third quarter, we estimate NOI from continuing ops of between 9.1 and $9 6 million, which includes the benefit from the early termination fee that I touched on for the full year guidance.
We estimate G&A, excluding the mark to market charges on the nonqualified deferred comp plan will be about 3% to $3 4 million in the third quarter.
And we estimate interest expense will be between $1 6 million and one 8 million for the third quarter.
As discussed for the full year interest expense guidance assumes lower levels of capitalized interest as compared to what was reported in the second quarter due to fewer projects under development.
With that I'll turn it back over to Michael.
Thank you John I want to thank those of you on today's call and all of our stockholders for their continued support.
Our business is performing well and we are optimistic that we will we will continue to grow our cash flow net asset value and most importantly shareholder value.
That concludes our prepared remarks, and I'll turn it back over to M. J to take your questions.
Thank you Michael we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Tom Catheter would be T. I G. Please go ahead.
Thanks, and good morning, everyone.
Michael.
I appreciate the comments both talking about how you recognize the capital markets have changed since the beginning of the year and then also how do you think a more targeted strategy.
We're really focusing on land.
Ken.
So it sounds like you have.
D prioritized maybe.
Maybe stabilized or value add acquisitions from here is is that a fair assessment given your commentary.
I don't know if I'd go that say that exactly I think.
We always have looked at both as you know we've done a lot of acquisitions, but historically have done even more on the development side.
I think we're getting that is just simply you know at the moment. There's obviously some questions about where cap rates are or where they may be heading and that's just created some.
Some uncertainty as to acquisition values.
But more importantly were just not seen a lot out there or available at the moment, but what we continue to push on our land sites as.
As I mentioned.
Industrial lands, which are really hard to find and you know there's chances are you just made ever find good ones in certain markets Youre looking at versus we feel with buildings.
Over time buildings come up for sale and get resold you know want to land site is bought and developed on its no longer a land site. So I wouldn't say, we're not looking at acquisitions I just think at the moment, we think there's a good opportunity to continue to push forward on our land build that pipeline up for ourselves, where we'd really be putting.
The significant amount of capital to work down the road, where if we're finding Atlanta today going through entitlements and approvals, we're not looking to actually close on the land for 12 to 18 months and then commence construction and we can control that timeline, but we're still opportunistically looking at acquisitions, obviously being a little bit more.
Conservative in our assumptions and everything else, but there are opportunities out there we've looked at a few of them and we're going to continue to look look at them as they come available or solicit ones off market that we think could be particularly particularly interesting.
I appreciate that.
Sticking with.
Your comment on.
As you know.
Accordingly, and I think it's usually under an option structure you mentioned the nine to 18 months to get it entitled in that you don't close.
Until you receive those entitlements does that limit somewhat your pool of opportunities as you're looking at land just because the person that's selling it has to hold it for that period of time, there's obviously added risk or just again given the size of the company is it is it not a material.
Reduction of that opportunity set.
I don't think it's a large reduction there are certain situations, we've been involved in or looked at land, where certain sellers and insisted on much shorter timeframes and not waiting for entitlement.
In those cases, we'll assess what we think are the risk to getting approvals and entitlements and it really depends on.
Markets status of the land or their wetlands on it does it require army corps permits things that are much further kind of out of our control and longer lead time versus others. So yeah.
You know not the Super generalize, but for example in the Lehigh Valley, where there's a lot of conditional use and.
Special exceptions, you have to go through two entitled land and can be quite challenging that'd be one we'd be.
You know very hesitant to do anything other than until we got full approvals for example in other markets, where if some things by right zoning there arent any wetlands or other concerns like that it may be something we consider a shorter period. So it's not a hard and fast, but it's typically we seek to get all the.
Titled mentioned, most sellers recognize that that's what most buyers are required and you know occasionally we'll lose a site, but we don't think it significantly limits, what we look at.
Got it.
Got it.
Kind of sticking with developments.
The 110 trade board now kind of fully leased up with the with the deal you did this quarter.
What are the thoughts on maybe go in stack on another development there just given the success in the pre leasing on that project.
Yeah, No. It's something we always continue to consider and evaluate it as you know we have a couple of other entitled land sites in that market. One that's adjacent to our main park in Connecticut that can support another about 250000 square foot building. So we havent announced anything immediately but the Connecticut market has been doing really really well.
A significant amount of.
Institutional interest on the developer side, but also we're seeing lots of.
Interest from <unk>.
Occupancy is currently outside of Hartford, there's lows and.
Wayfarer, but we still did one 2 million square foot facilities.
Yeah, there's other big occupiers looking for things. So the market has been really good and strong which is really encouraging you were doing well with.
Our tendency in our rent growth and leasing is as we discussed and yeah. We just think it's a really good market and it could be something we do.
Going forward I mean, as you know our land basis is really attractive given we inherited this land in our company. So the incremental cash earns a really tremendous returns when we put it into a building at least stabilize it. So it's something we think about nothing we've announced or scheduled at the moment, but we think those off.
<unk> are out there.
I appreciate that thank you Michael and then one last one for me John on the balance sheet with the delayed draw term loan can you walk us through your thoughts on paying off.
Fixed rate mortgages with the first $60 million draw there a lot of those mortgages didnt come due for a number of years. It looks like the rate was was pretty much on par with with the term loan is this just a general move towards.
Unencumber in more assets to go to more of an unsecured type borrowing strategy in the future or potentially down the road looks.
Looking towards.
Some sort of an investment grade rating or was there something else driving off the pay off of those assets.
No you're absolutely correct those four mortgages essentially were on par with the with the interest rate on the delayed draw term loan delayed draw term loan averages about 4.1 for 5% and I think the average of those mortgages was around 4.13.
This was all about freeing up the collateral they were over 10 buildings. There was encumbered by those four mortgages that we freed up a lot of collateral to basically build up a unencumbered our borrowing base.
Well that and these these four mortgages could be extinguished or no cost and the only cost could have been swap breakage, but on the days that we broke it we actually had a cashless.
Got it that's it for me thanks, everyone.
Tom.
The next question comes from Dave Rodgers with Baird. Please go ahead.
Yes, good morning, Michael I wanted to ask you about your discussions with tenants, obviously with the 100% occupancy in the same store pool, you have got a little bit of an upper hand, but I'm just kind of curious on if your tenants are starting to reflect any of the uncertainty or concern that you mentioned that youre seeing in the investment sales market.
Anything to read through in the discussions about renewals et cetera.
Yeah, no. It's as others have commented it's sort of this tale of two cities between the capital markets and then you know leasing activity on the ground.
Leasing activity remains really strong there's very limited options for tenants in pretty much all of our markets. So.
Really rent growth continues to be really strong tenants are not kind of wavering or push them hard back on escalations rent growth or other things. They typically just continue to need more space and not have a lot of options. So we're not seeing hesitancy.
Or concerns or anything else, yet with tenants I mean, we read the news I'm sure our attendance read the news or or or have there you see how they plan their business. So it's so at some point that may change, but.
What we're seeing from our tenants hearing from our tenants seen in our negotiations.
Is not really any retrenchment of the strength in the in the kind of landlord friendly market, we've been having for the last couple of quarters.
So that that all seems really positive.
I appreciate the color on that and then maybe turning again to your investment strategy and I know the market and price discovery and you answered Tom's question as well, but I guess I'm curious if you're out there kind of making a large number of unsolicited bids if youre taking advantage maybe of the lack of liquidity to try to step in and buy product given that you are highly <unk>.
Liquid today under Levered and fully occupied.
Aggressive are you guys being in terms of stepping out and trying to find the next round of opportunities, maybe particularly on existing assets versus land and really kind of stepping in.
Yeah. So so we are looking.
You know I think the challenge is is in I think is kind of the.
Norm, what you hear in any market not just real estate is it sellers.
Expectations always always lag kind of where buyers see things and so yeah, we look at opportunities, but as I commented, even the things we see that are trading the <unk>.
New ones that do get treated or get awarded typically the price. It has been higher cap rates lower than kind of we would have anticipated. If so and said what do you think this is going to trade for in today's market and these are things. We looked at seriously are things. We just we're following so we are looking but I'd say there aren't tons of great opportunities out there that we.
Found that we just say, let's write the check in by this it at this price because we just don't think.
The pricing is corrected a lot, but obviously, if we see something that we think has really good rent growth potential whether it's your own existing mark to market that significant or just a really unique location or asset. We certainly would be are looking at it and trying to buy it but the reality is sellers are being very particular.
The brokers seem to say that they think as you get through into September and beyond there'll be more things in the market and sellers will sort of zinc.
Adjust to the new normal but at the moment, it's actually just hard to get sellers to agree to a price.
That's any different than what they would have sold it for six months ago.
And last for me.
You have been kind of a takeout or some of these developers as you think about even earlier and earlier construction loan costs going up quite a bit from what we hear are you seeing some of those existing relationships.
Our relationships or new relationships just approach you more to say hey can you finance it from the very beginning and get US started I mean that might take a couple of quarters, but are they reaching out or do you not feel like even some of the developers are feeling any of the pressure of the current environment.
I think it's it's mixed southern developers I think some of the ones. We know some of the larger ones still remained pretty active what they say as they become more selective in their projects kind of this forward market has gotten pretty quiet.
So to your point I think there are opportunities for a project that if we think it's a really good bill potential building in a great location and a great site plan of developers come up with that does provide an opportunity. If we're willing to fund that given our capital situation that we could fund that.
And be able to have a building at what we think is a really strong.
<unk> yield and as we say the advantage of that structure as we kind of get the construction at a fixed price. The reality is we haven't seen a lot of that yet, but it's something we are we've thought about as well. So I think it's it's it's an opportunity that's out there.
Thanks, Michael.
Thanks, Dave.
The next question comes from Craig Mailman of Citi. Please go ahead.
Hey, good morning.
Wanted to go back to the commentary.
Some of your assets under contract kind of rising 60, Bips year ends.
I'm just curious in your cost of capital.
Keith on the debt and equity side, how is the investment spread.
Even with the higher rates.
Yeah. So we.
Obviously, there is debt capital, which which is as John talked about we've kind of fixed at about a 4.15% on the incremental borrowings on the term loan which.
It really hasn't moved from really where it that's been for the last couple of years.
Equity capital, obviously very stocks lower arguably the equity capital is little more expensive.
But as we said our yields have gone up we think as much or more so.
So we think our spreads remain solid and pretty consistent to where we thought they were a while ago. Yeah. We're hoping certainly are our equity capital costs don't continue to go up but we do expect as I mentioned I believe that the yields on our act with potential acquisitions.
Continue to have room to run and I think as I pointed out several of these as you know don't deliver until middle of next year. So that gives another 12 months if rents continue to grow we'll benefit from that on those aspects and particularly on the acquisitions or we don't have any construction cost.
Increase in construction cost risk Conversely, if construction costs happen to go down we don't benefit either.
But we do see upside if rent goes up and two if we fully stabilize these properties as opposed to the 95% that also adds to the yields that that's not in what we've kind of <unk>.
<unk> is a convention we showed that 95%. So we think we have really good returns and I think the second piece of it all is not just where the initial returns are but where do we think theyre going to go over time, and we think about things on a five and a 10 year basis and if we think we have really good assets in the initial yield is a certain number.
<unk>.
Yeah, we're hoping in five and 10 years as rents continue to grow in the assets increase in value that will get a better and better return and even a simple analysis is the Lehigh Valley building I mentioned, you know that building, we just delivered and the tenant that's in two thirds of the building is paying 30% less than the other tenant we just put in so there's.
Already a pretty significant mark to market in that building already and so we think there's just lots of ways to continue to create value and drive returns that are that are well in excess of our cost of capital.
Okay, and you said, you're you're insulated from construction cost increases.
Sharing any of that risk with the developer.
On the on the acquisitions of forward. The forward acquisition buildings correct. Those are fixed price purchases. So whatever purchase price. We have listed in our supplement in our tables. That's the final purchase price the developer has to absorb any cost to any cost increases or benefit from any cost decreases.
Are you getting a sense of.
Whether the developer.
Martin.
Delays or input cost increases I'm, just kind of curious from that developer standpoint now.
Theres less product on the market.
They're getting squeezed.
New projects.
Limits the amount of product you guys can see and.
Existing relationships I'm, just kind of curious on their side, if you've heard anything anecdotal about this.
Retail projects and kind of the cost associated with them.
Yeah, I think you know without going to specific projects just because it's obviously a discussion of other developer.
I think certain of them.
The costs are probably higher than what they initially budgeted and scheduled for these projects.
Presumably they built in enough profit margin over what they did but either way it sort of contractual obligations.
Obligation so.
We think they have enough profit margin built in and.
We are highly confident in all of these projects are underway, they're all underway and under construction with contract. So I think they probably gotten squeezed in maybe a couple of these are margins I don't think we've seen.
Since that point I don't think things have come down in price and pricing continues to move up a little bit, but you know much more as I said kind of controlled pace from what we saw say starting a year and a half ago with for example, steel pretty much tripling in cost.
So so the developers still are doing that we think fine on these projects are probably less well than than they thought.
Just like on their own development, we've had cost increases that are on development. We benefited from the rent growth that we're going to see on those projects. In this case the developers agreed to sell it at a fixed price.
Yeah, and I think it's interesting because if you are speaking to some of the developers I think six months ago a lot of them are.
Yep.
A little less happy they've done forwards and other things and committed because of the strong rent growth and they felt they'd underpriced their deals.
I think talking to some today, they're happy that they entered into forward contracts and aren't doing it on spec.
Cause of of you know some some more uncertainty and as you say increases in someone mentioned the increases in construction lending for example.
So yeah I think overall they continue to move you move forward on projects and I think ultimately they will strike deals that makes sense for them.
Okay, and then you know.
As you guys are looking for more.
Can you just kind of backhaul development pipeline.
From a risk mitigation standpoint kind of what's the internal thought process.
Amount of development that you want going at once.
The smaller size of the portfolio I'm just kind of curious.
Internal with some things.
Yeah, I mean I think it's.
On one hand, because we're to your point, we're not so big that we really can look at things pretty Granularly and project by project market by market and roll it up to see what's our capital what do we think.
Prudent amount to have what's the different delivery schedules and what are we doing across markets. So you know I can't say, we have a firm cap that it's X million or X amount of square footage, but its something we intently focus on is kind of every building how does it fit within our own delivery schedule, how does it fit within our own capital schedule.
Role vis vis acquisitions and also what do we see.
Across markets in terms of what are other people developing and delivering and whats that timing and how does that impact us. So we're very cognizant of it and that's sort of the reason we like development.
You know, particularly even find sites that are multiple buildings, which we've done in the past because we obviously can control phasing in building after building and kind of manage that as well so.
It's something we're very cognizant of especially going into a little more uncertain environment. Currently we're finishing up a series of developments and once those finished in the next couple of months. The only one we have underway is the one I mentioned that the 200000 foot building in Lehigh Valley. So we think that combined with our forward purchases across the different markets, we feel really.
Comfortable with it as we are.
Entitled more land and have it ready to put in production, we're going to evaluate.
Whether we go full vertical on that are not based on market conditions based on our outlook for that market and for that building in that type.
Great. Thank you.
The next question comes from Connor Seversky of Baron Berg. Please go ahead.
Good morning out there thanks for having me on the call.
One quick housekeeping question, Michael had mentioned in the prepared remarks to expect an increase in vacancy as you roll through the end of the year is this just call. It a 171000 square foot north in Orlando and 105000 square feet in Nashville, or is there anything else baked into that expectation there.
Well the only thing we mentioned was the Charlotte building, where the tenant was in occupancy through the end of July and has vacated as I mentioned, we feel.
You've had some preliminary tenant discussions we feel good about but yeah theres no no lease to report there so that potentially could be a vacancy as well.
Okay, and then for the Nashville acquisition under contract for the Orlando Development can you provide any.
Update on expectation for what the leasing schedule should look like or what rates could look like.
And I don't think we've really given out specific we there I think on a Nashville I think what I just mentioned was.
We feel we've had good tenant discussions we actually have preliminary leases out for the second building.
In terms of hitting our vacancy we're likely not closing on that acquisition until.
Towards the end of the year. So that's one that probably wouldn't hit the third quarter anyway, and we're hoping by the time, we close on it that will actually have leases in place for.
The entire the two buildings. So we feel you know certainly trends are good there and the activity remains strong in that market and making progress there in Orlando again, we think it's we're seeing lots of RFP activity lots of tenant inquiries. We've have some LOI is that a pretty.
Far along for a series of spaces in those buildings, we typically underwrite 12 months to lease up a building upon delivery when we do two buildings like in Orlando similar to how we did in <unk>.
And in the Charlotte market a couple of years ago, we typically see more like 18 months, just because it's two buildings right next to each other.
We certainly hope to.
Outperform that underwriting certainly the market's been really strong tender activity remains well you know in Florida on that building on those two buildings, we're seeing really good rent versus what we'd expected that was land we put under agreement.
Right at the kind of early days of Covid in May of 2020.
I think our initial underwriting sort of on that site was in the low sixes. What we're seeing today are rents kind of at $8 plus for that building. So we think that's going really well you know that market remains really strong euro brokers and in Orlando as well and several other markets comment that it is as busy as its ever.
Ben.
Again that could change as things change in the future, but at the moment, that's going along we think really well.
Okay. That's all for me I appreciate the color.
Thanks Cotter.
The next question comes from Mitch Germain of JMP Securities. Please go ahead.
Thanks for taking my question.
Michael I'm curious about deploying capital going forward.
Is the goal to build scale in your existing market footprint or are you still looking at some new markets as a place to park some capital.
Yeah, It's really both you know, we're hopefully going to be at about seven markets.
Sort of between the forward acquisitions, we have at our existing portfolio.
I said our goal is really to grow in all the markets. We're in continue to further penetrate into those markets. We.
We sort of set a goal of we're not going to enter a market unless we can get to at least a million square feet over time.
So we're below scale call. It our version of scale in several of these markets. We continue to look in those markets as well as Lehigh Valley, where we have some developments in the pipeline.
And all of our existing markets, but that said we continue to look at a select group of other markets.
Where we really like the opportunity. So if we can find the right right.
The purchase will do it you know I think we've talked in the past that we've looked at other east coast Port markets something like a Savannah.
Markets in Florida, we did acquire a couple of buildings in South Florida.
Earlier this year.
One of our acquisitions theater acquisitions persons actually relocating to Florida.
And the next month, so we're gonna be continue to be active across the state there.
As well as other markets. So it's really going to continue to be both we think theres opportunities, but the goal is really not to be in 20 markets in the next several years, but maybe add one or two more but continue to grow in all of them as we scale the business.
Great. That's it for me thank you.
Great. Thanks Mitch.
With no more questions. This concludes industry L. T trusts 2022 second quarter earnings call. Thank you for joining us and enjoy your week.
Okay.
Yeah.