Plymouth Industrial REIT Inc. Q1 2023 Earnings Call
Immunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead.
Thank you and good morning, welcome to the Plymouth Industrial REIT Conference call to review the company's results for the first quarter of 2023 on the call today will be Jeff Witherell, Chairman and Chief Executive Officer Pen White, President and Chief Investment Officer, Anthony sell Ladino, 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 the SEC.
A replay of this call will be available shortly after the conclusion of the call through May 11 2023.
The numbers to access the replay are provided in the earnings press release.
For those who listen to the replay of this call. We remind you that the remarks made herein are as of today may 4th 2023.
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 the 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.
Okay to risk and uncertainties that can cause actual results 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 will also discuss certain non-GAAP measures, including but not limited to <unk> <unk> and adjusted EBITDA debt.
Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures.
<unk> in our filings with the SEC.
I'll now turn the call over to Jeff Witherell. Please go ahead.
Thanks, Trevor good morning, everyone and thank you for joining us today.
We're only a few weeks removed from the Q4 call and I would like to note that the first quarter was right in line with or slightly better than our outlook for the year.
That's exactly what we have this quarter. So we will keep our prepared remarks relatively brief this morning.
Same store NOI growth is expected to be the main driver of our organic growth. This year and we reported a nine 1% increase on a cash basis with occupancy in the same store pool at 99, 1%.
That's a bit above the full year rate, we guided to and Anthony will walk you through that later.
We believe the strong same store NOI growth, we're producing puts us near the top of the sector and we're pleased with how the portfolio is performing.
Leasing is the top priority both within the existing portfolio and in the development program and we are in great shape with our 2023 explorations and have a strong start on 2024 explorations.
Jim will highlight a few stats in a moment, but I'd like to call out the 15, 9% increase on a cash basis for leases that commenced during the quarter and the 25% increase on leases commencing over the next three quarters.
That gets us to our full year total of 19, 3% increase.
All along that we'd have a heavy mixture of contractual rent renewals this year, but we're still hitting the 18% to 20% mark to market with the big increases we're getting on new leases.
With our quarterly business update in early April we shared the current status of our development program.
We brought three of the phase one development projects online with two of them fully leased a project in Atlanta, and one in Portland, Maine, and the other in Cincinnati undergoing active leasing.
We have one more project in Atlanta that is expected to be completed later this quarter and we are actively leasing it.
We also expanded phase one to include two smaller projects in Jacksonville. These are already fully leased and are expected to be completed in the third and fourth quarter.
Current development program represents a total investment of $61 million and we're expecting initial returns on this investment in the range of 7% to 9%.
This program has been a good way to unlock the value and land, we already owned and we expect to selectively pursue additional projects. If the returns meet our threshold and if we have a clear line of sight on pre leasing.
Golden Triangle continues to be the region, where we're seeing a large number of announcements for re shoring and near shoring initiatives with over 90% of our portfolio located in this region. We believe we will continue to benefit from the favorable supply and demand dynamics projected to occur over the next five to 10 years.
One point worth noting is that we are getting these strong rent increases on an absolute and net effective basis combined with the higher same store NOI on a much lower cost basis.
The other major initiative, we've outlined for this year is to continue improving our capital structure.
Our net debt plus preferred metric has declined again this quarter, making this the fourth consecutive quarter of reduction.
As Anthony will describe later, we expect further delevering to occur as the developments come online and we will look for other opportunities to improve our capital structure when they make sense.
Jim why don't you provide some color on the leasing activity.
Thanks, Jeff Good morning.
First touch on the leases, we previously signed that commenced during the first quarter.
We had a 15, 9% rental rate increase on a cash basis on leases commencing in Q1.
That's on an aggregate basis, you'll note from the release and the supplemental debt the new leases experienced a 37, 9% increase.
New leases experienced an 11, 7% increase.
We experienced a 56% renewal rate during the quarter.
The leases that renewed 21% were associated with contractual rent bumps that high percentage of renewals coming from contractual rent bumps is something I'll come back to in a moment.
And the development program, which isn't included in these calculations, we had 236000 square feet commencing a newly constructed industrial facility in Atlanta, Georgia.
For signed leases commencing in Q2 through Q4, we will experience an aggregate increase of 25% on a cash basis with a 31, 2% increase with new leases and a 16, 3% increase on renewal leases.
When we add up all leases signed through May 1st that will commence in 2023, we will experience an aggregate increase of 19, 3% on a cash basis.
The lease renewal rates so far for 2023 leasing is 56% and we have addressed over 72% of the total square footage originally slated to expire in 2023.
Consistent with our 2023 operating plan the Q1 ending occupancy rate was 98, 1%.
That's down sequentially due to a net 110000 square feet going vacant during the quarter and the inclusion of a 155000 square feet in new development space completed during the quarter.
There are a couple of points to note here about 2023 leasing to date.
Clearly the rental increases are accelerating later in the year, bringing us into that 18% to 20% Mark to market, Jeff noted earlier.
Second with a higher than normal rate of renewal leases being associated with contractual renewals, which are typically much lower than if the tenant moved to a market rate, we think the aggregate rent increases could even be higher.
Turning to 2024, we have already leased 19% of the initial 2024 explorations, we will experience an aggregate 14, 4% increase on a cash basis on these rents.
Five 1% for renewals and 61, 9% for new tenants.
Rental increase compares favorably to this time last year when our earliest batch of 2023 leases were up 10, 1% on a blended basis. The renewal rate for these transactions was 79% with 34% of the renewal leases associated with contractual renewals.
<unk> with nearly every quarter since dependent Mike we have collected over 99% of our rents billed during Q1 and there are currently no active rent deferral agreements at this point I'll turn it over to Anthony to discuss our financial results.
Thanks, Jim.
The first quarter was in line with what we anticipated in guidance with some favorability in G&A and higher NOI, partially offset by higher interest expense.
Let's walk through some of the key metrics.
Same store NOI on a cash basis was up nine 1%.
We anticipated. This Q1 result would be a bit elevated due to a strong new and renewal leasing rates and favorability in operating expenses.
This is above our full year range of $7, two 5% to 775%, but consistent with the quarterly projections, we used to create that range.
That's one of the main reasons, we affirmed guidance for instance, we expected the timing of scheduled repairs and maintenance to occur mid year and that we would receive real estate tax assessments that may not be fully recoverable.
This implies a Q2 same store NOI below the full year trend line with the second half of the year trending back up.
It's purely a timing of expected spend issue.
Having said that as we continue to convert rollover to triple net lease structures, we anticipate less leakage prospectively.
G&A for the quarter was down year over year on an absolute basis, and down 131 basis points as a percentage of revenues.
While some of the favorability will be captured on a full year basis. The majority is due to timing of professional fees.
It should be anticipated that we remain range bound on a full year G&A outlook.
Interest expense continues to reflect the increase in borrowings on our revolver associated with completing our development plan.
EMEA, approximately 355 basis points increase in sulfur year over year.
The revolver remains our only debt that is not hedged or fixed.
And our only use of the revolver at this time is to fund the Jacksonville development buildings.
Noted in the release, we have funded approximately 88% of the $61 million of the development program that.
That now includes the two pre lease Jacksonville buildings to get us to 720000 square feet of new space.
We do not anticipate the use of the line for the balance of the year.
As we discussed last quarter, the weighted average share and unit count was up year over year.
With a full quarter of the higher share count from the conversion of Madison's remaining shares of the series B in two tranches last year.
We also did not utilize the ATM during Q1 or to date.
Turning to our balance sheet. We ended Q1 with net debt to adjusted EBITDA at 714 times and net debt plus preferred to adjusted EBITDA at seven <unk>.
Five three times.
That's four straight quarters of improvement in the latter metric.
Leaving us more than a full turn down from Q1 2022.
With the development projects coming online this year, we expect more delevering to occur during the second half of the year.
As of March 31, 90% of our total debt carries a fixed rate or was fixed through interest rate swaps. The total weighted average cost of debt.
396% with 58% of the total debt on an unsecured basis.
Our liquidity position remains strong as presently we have $10 2 million of cash on hand, plus an additional 7.0 million and operating expense growth.
And $262 $5 million of capacity on our revolving line of credit.
We continue to evaluate our options to address the series a preferred earlier than anticipated.
The Q4 maturity of the AIG loan with utilizing some of this liquidity <unk> select dispositions and other financings.
We don't have anything new to report on this front, but we will keep you apprised.
As noted earlier with the first quarter results tracking in line with our expectations and development leasing up on schedule.
We affirmed the 2023 guidance we issued in March.
But no large move out some of the existing portfolio and the continued rent increases we're getting on both new and renewal leases the range of execution for the balance of the year as determined mainly by how quickly we get our remaining developments leased up.
Combined with the continued simplification of the capital structure. The gradual delevering, we're in a great spot to let our strong same store NOI growth and market fundamentals shine through.
Operator, we're now ready to take questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from Nick Fillman from Baird. Please go ahead.
That's an additional 7.0 million and operating expense growth.
Maybe starting on capital deployment going forward. It looks like you had some solid activity in the leasing pipeline, especially in development.
Maybe for you.
Jeff or pan going forward whats the more favorable options is it development or acquisitions.
Okay.
Hey, Nick.
Well acquisitions are have been on hold for the first quarter.
Will we see some clarity in the capital markets both on the debt and the equity side I don't think youre going to see us doing many acquisitions.
On the development side.
Pretty much completed phase one.
We did start to small.
Projects in Jacksonville that are fully leased.
On the development side, we're really going to need to see a clear line of sight for a tenant to.
Quickly before we're going to start construction. So again spec construction is probably something we're not going to do.
Okay. That's helpful. And then maybe turning to Jim you kind of called out the renewal options out where that happened during the quarter.
Just curious on like explorations going forward, what percentage would you say have those embedded options.
Probably about 10%.
Okay.
And then last one for Anthony it looks like rent collections quarter over quarter kind of improve like 30 basis points of that like a 100 basis points that you are not collecting around is there anything to read through on those specific tenants.
So there is really not the composition of watch list tenants has not grown in fact that shrunk quarter over quarter.
So we anticipate that collections will remain high.
Shouldnt.
Anticipate any.
Large credit loss impacts for the balance of the year.
Very helpful. Thanks, guys.
Thank you.
Our next question comes from Todd Thomas from Keybanc. Please go ahead.
Good morning. This is AJ on for Todd just a couple of quick ones sorry, if I missed I am joined by same store occupancy was nine 1% in the guidance assumes a midpoint of 98.6% are there any known move outs or anything specific to point to or is that just an assumption given the macro.
It's an assumption we anticipate that same store pool will maintain.
A fairly high level of occupancy through the balance of the year.
Okay. That's helpful.
And then just switching gears to development leasing good momentum on the Jack in Jacksonville in Boston in the corridor.
Can you can you talk about timing of Commencements for Jacksonville, and Atlanta Phase one.
Like when is it going to commence and is there a free rent period associated just as I think about the model.
Yes, the ranking.
Atlanta Phase one started in February it was four months free rent.
It's five year lease.
In Jacksonville.
One of the 10 year lease.
A five year lease and.
Coming on in the third and fourth quarters, respectively.
Okay. That's helpful. And then just one last one if I can.
Can you talk about rent trend. So last quarter. You mentioned, there was about a $5 per square foot spread between rents on new supply.
Your existing in place rents are you seeing that gap improve at all.
You.
In place rents have gone up.
Roughly 20%.
On average.
The deal that we do.
If it wasn't for the fixed rate if it wasn't.
For the fixed rate renewal, probably about 5% higher.
As far as the new the new buildings coming online.
We're still seeing a premium for that but.
Our buildings are closing the gap.
Great. Thank you.
Thank you the next I'm sorry, our next question is from Bryan Maher from B Riley Securities. Please go ahead.
Great Good morning.
Any thoughts.
Given the Squirrelly economic environment, which is kind of making you hit the pause button on.
Spec development is there any thought of maybe pushing out the walls on leases that you are renewing next year, maybe at $3 five years now any thoughts on pushing that out further.
Yeah.
Sure.
Well Brian .
I mean, our sweet spot.
Is three to five years right, that's where most of the three pls signing three year contracts.
So three years to five years.
It is really the sweet spot for that.
We're still seeing double digit rental increases.
And as construction.
Drives up here.
The thought processes across the across the industry is that.
Occupancy is going to be.
Gonna stay high.
No.
We're not really too worried about the Walt I think it's gone up a little bit we feel pretty good about it we're not going to turn this into a net lease REIT.
Okay.
Operator.
Operating expenses were a little higher than we thought is there anything kind of unusual going on there.
No there's not.
Specifically <unk>.
<unk> identified real estate taxes, those have gone up.
I think we got hit and indeed, those were about 10% higher than budget, where you still anticipate.
Receipt of assessments for Chicago, and Ohio during the second half.
Latter half of the year, we anticipate increases there.
And what's important to note on that is not necessarily the.
The absolute increase in real estate taxes, but.
Our continued success in converting rolls are triple net so that we can capture more of that increase.
So there still is some leakage through.
The balance of the year that's why.
We anticipate that.
The same store results will be a little bumpy.
In the second quarter, and then ramp back up within the guidance down by year end.
Okay, and then just last for me it seems like we're kind of getting a little bit of conflicting data right. So you are putting up good numbers. Good rent increases, but you are holding back on development acquisitions et cetera.
Should the positive trends continue are there projects that you are currently.
Penciling out thinking about.
Want to pursue that in the next quarter or two you might pull the trigger on and go ahead Brett.
And as far as spec development is concerned no.
But we've got 200000 square feet, that's been designed in Cincinnati, and if a tenant a tenant come through based on where the rental rates are in construction cost have come down a little bit we can build that at a high single digit yield. So that is something that where we are in the market on a few.
Few other locations same type of thing.
With our land bank so.
We're happy to do that.
Thank you that's all from me.
Thanks, Brian .
Our next question comes from Mike Mueller from J P. Morgan. Please go ahead.
Yes, Hi, a couple a couple of questions first of all I appreciate the color on the 23 in 2004 Commencements in the 'twenty four Commencements, you mentioned about 5% spreads on the renewals.
So there still is some leakage through.
Is there something specific weighing on that or is that I guess.
Mix of fixed renewables that you alluded to.
Yes.
There was one deal that was 350000 square feet with a fixed rate renewal of five 2% over expiring rents. So that brought the average staff. If you back that out the average and all the other deals that would be 24, 4%.
Okay, and then just last for me it seems like we're kind of getting a little bit of conflicting data right. So youre, putting up good numbers good rent increases that youre holding back on development acquisitions et cetera.
Got it Okay and then.
Thinking about the development pipeline, if youre looking out say the next three years or five years, where do you think or where would you like to see that average.
Should the positive trends continue are there projects that you are currently.
Penciling out thinking about.
Total expected investment or pipeline size kind of gravitate around.
We want to pursue that in the next quarter or two you might pull the trigger on and go ahead Brett.
I don't think we really have a great number on that into the future I mean, if you look at what our program has been it's been building on land that we acquired when we buy a deal and some of the most recent deals we've acquired some additional land.
And as far as spec development is concerned no.
But we've got 200000 square feet, that's been designed in Cincinnati and if a tenant if a tenant comes through based on where the rental rates are in construction cost have come down a little bit we can build that at a high single digit yield. So that is something that we are.
For us to build on the infrastructure is in place. So it was very opportunistic.
When we're going to build.
We're in the market on a.
So we like building.
A few other locations same type of thing.
We're adding great value and I think we're building it probably higher yields and a lot of people because we already own the land or basis of zero the infrastructure cost.
Without land bank so.
We're happy to do that.
Okay. Thank you that's all for me thanks.
Thanks, Brian .
Our next question comes from Mike Mueller from J P. Morgan. Please go ahead.
For water gas and things like that it's already in the ground. So it's not high risk.
Yes, Hi, a couple a couple of questions first of all I appreciate the color on the 23 in 2004 Commencements in the 'twenty four Commencements, you mentioned about 5% spreads on renewals.
And it's not we're not taking development risk. If you will so we'd like to do more of it just depends on the location and the land availability construction costs.
So I don't think I can really give you like $200 million a year I don't know if I don't think we can give you that number.
Is there something specific weighing on that or is that I guess.
The mix of fixed renewables that you alluded to.
Got it okay that makes sense I appreciate it. Thank you. Thank.
Thank you.
Yes.
As a final reminder, if you have a question. Please press Star then one.
There was one deal that was 350000 square feet with a fixed rate renewal of five 2% over expiring rents. So that brought the average staff. If you back that out the average and all the other deals that would be 24, 4%.
Our next question comes from Mitch Germain from JMP Securities. Please go ahead.
Thank you.
Any thought about recycling some assets here.
If you could find some good opportunities in the acquisition market.
Got it Okay and then.
Okay.
Thinking about the development pipeline, if youre thinking looking out say the next three years or five years, where do you think or where would you like to see that average.
Hey, Mitch.
Yes.
We have a handful of properties that.
We're thinking about selling.
Total expected investment or pipeline size kind of gravitate around.
So we're going to do it opportunistically, we're going to sell it for a real estate reason.
And I think as the market settles down I think Youll CSL.
I don't think we really have a great number on that into the future I mean, if you look at what our program has been it's been building on land that we acquired when we buy a deal and some of the most recent deals we've acquired some additional land.
Like I said about a handful of properties that we've earmarked for disposition.
Okay. That's helpful. And then has the joint venture discussions been shelved for now until the macro environment stabilizes or is that still something thats under consideration.
For us to build on the infrastructure is in place. So it's a very opportunistic.
It's still something Thats under consideration.
When we're going to build.
Sure.
So we like building.
We're constantly in the market looking at deals.
We're adding great value and I said, we are building it probably higher yields and a lot of people because we already own the land or basis of zero the infrastructure cost.
There is some dislocation in the market believe it or not so.
We're looking at deals like that.
For water gas and things like that it's already in the ground. So it's not high risk.
On a JV basis so.
We are in the market every week on that in.
And it's not we're not taking development risk. If you will so we'd like to do more of it just depends on the location and the land availability construction costs.
We'd be very willing to do a deal with our existing partners. If it's the right deal.
That's it from me, thank you and nice quarter.
Thanks, Nick.
Yeah.
So I don't think I can really give you like $200 million a year I don't know if I don't think we can give you that number.
There appears to be no additional questions I'll turn it back to Jeff Witherell for any closing remarks.
Got it okay that makes sense I appreciate it thank you.
Thank you all for joining us this morning.
Thank you.
As a final reminder, if you have a question. Please press Star then one.
As always we're available for follow up questions. Thanks, again have a great day.
Our next question comes from Mitch Germain from JMP Securities. Please go ahead.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Thank you.
Any thought about recycling some assets here.
If you could find some good opportunities in the acquisition market.
Yeah.
Hey, Mitch.
Yes.
We have a handful of properties that.
We're thinking about selling.
So we're going to do it opportunistically, we're going to sell it for a real estate reason.
And I think as the market settles down I think youll see us sell like I see.
That's about a handful of properties that we've earmarked for disposition.
Okay. That's helpful and then.
The joint venture discussions been shelved for now until the macro environment stabilizes or is that still something thats under consideration.
It's still something Thats under consideration.
We're constantly in the market looking at deals.
There is some dislocation in the market believe it or not so.
We're looking at deals like that.
On a JV basis so.
We are in the market every week on that in.
We'd be very willing to do a deal with our existing partners.
If it's the right deal.
That's it from me, thank you and nice quarter.
Thanks, Nick.
There appears to be no additional questions I'll turn it back to Jeff Witherell for any closing remarks.
Thank you all for joining us this morning as always we're available for follow up questions. Thanks, again have a great day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
Yes.
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Yeah.
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