Q3 2023 Plymouth Industrial REIT Inc Earnings Call
Hello, and welcome to the Plymouth Industrial REIT third quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Tripp Sullivan of SCR. Please go ahead.
Thank you good morning, welcome to the Plymouth Industrial REIT Conference call to review the company's results for the third quarter 2023.
On the call today will be Jeff Witherell, Chairman and Chief Executive Officer, Anthony <unk> Executive Vice President and Chief Financial Officer, Jim Connolly Executive Vice President of asset management, and Anne Hayward General Counsel.
Golfs 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 November nine 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 November circa 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 law.
Statements relating to the future performance of our portfolio potential acquisition disposition and other investments.
Dividends and financing activities.
All forward looking statements represent plymouth's judgment as.
As of the date of this conference call and are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.
Investors are urged to carefully review various disclosures made by the company, including the risks and other information disclosed in the company's filings with the SEC.
We will also discuss certain non-GAAP measures.
<unk>, but not limited to core <unk> <unk> and adjusted EBITDA definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with SEC and now I'll turn the call over to Jeff Witherell. Please go ahead.
Thanks, Tripp good morning, everyone and thank you for joining us today.
Our third quarter operating metrics reinforce my belief that our properties located within the Golden triangle are well positioned to capture the demand from a broad array of users.
We experienced a 24, 1% increase in rents on a cash basis for the quarter and expect to be higher than 20% for all leases commencing in 2023.
That's at the high end of our 18% to 20% Mark to market.
We've also addressed our over 93% of our 2023 expirations.
A lot of progress on 'twenty 'twenty four exploration well.
Organic growth remains on track as well with a six 8% increase on a cash basis through the first three quarters of the year in same store occupancy of 98, 6%.
In the Golden Triangle markets, we're seeing positive space absorption.
Continued market rent growth and favorable supply demand environment for our type and size of space.
We expect to roll out a new white paper on the Golden Triangle ahead of NAREIT. This month, but we have continued to see further investment in these markets that indicates there should be a substantial demand associated with the onshoring and ensuring for many years to come.
We believe we continue to be in the right markets and a low per square foot basis, and able to provide attractive space to tenants that need greater access to these markets or might operate with more of a focus on margin.
And our development program, we delivered two projects during the quarter.
The first is our second building in Atlanta, which is a new lease for 72000 square feet that commenced in September.
We have proposals under consideration for the balance of the space.
The other building is in Jacksonville, where we have a single tenant fully leased that also commenced in September.
Our final building in our phase one development program is under construction in Jacksonville.
It is fully leased and expected to deliver in mid 2024.
As we've noted before tenants are taking a little more time to make decisions on this new space, but we essentially have two spaces left to lease and the new development and we have active proposals under consideration for both.
Improving our capital structure through disciplined capital allocation has been a major initiative for us.
We demonstrated our commitment to this improvement during the quarter with the elimination of the series a preferred stock.
T J execution of the ATM program at prices close to our LTV and the disposition of an industrial building in Chicago for a substantial gain.
As a result of these decisions, we lowered our net debt plus preferred metric for the sixth straight quarter.
At six seven times as of quarter end, we exceeded our year end goal of seven times ahead of schedule.
We are on a path to further gradual delevering in 2024.
Yesterday, we also took care of our largest debt maturity with the pay off of the AIG alone.
I'll, let anthony get into the details, but I do want to call out that our initiatives to swap our debt at the beginning of the year have put us in a good position.
I want to focus on the September disposition for a moment we.
We had previously identified several properties that could be potential disposition candidates for real estate decisions.
One of these factors was if it made more sense for an owner user and that was the case with 65 10 West 70, <unk> Street in Chicago.
Sold that property for $19 9 million, which was a price of $65 per square foot, yielding a 4.9% cap rate on in place NOI and an IRR of 31, 1% over a six year hold.
After paying off a mortgage on the property, we had nearly $14 million in net proceeds to combined with the ATM proceeds to eliminate the series a preferred.
We have another disposition that is under contract to sell by year end for $16 $8 million. This property is our only asset in New Jersey and should result in another gain on sale.
This expected sale provides additional proceeds for debt repayment <unk> acquisitions and eliminate the market, where we did not have any scale. Another factor. We'd previously identified we will continue to evaluate buildings that for real estate reasons, we no longer desire to hold.
But what remains of 2023, you can expect us to be laser focused on getting our remaining spaces leased in the development program and taking advantage of the leasing opportunities ahead of us in the existing portfolio. We will also continue to take a hard look at how we might apply any proceeds from additional dispositions to reduce debt <unk>.
Fund acquisitions on an accretive basis and set us up for a successful 2024.
Jim why don't you provide some color on the leasing activity.
Thanks, Jeff Good morning.
And our first touch on the leases, we previously signed that commenced during the third quarter.
Yeah.
We had a 24, 1% rental rate increase on a cash basis on leases commencing in Q3 on an aggregate basis, you'll note from the release and the supplemental that's a new leases experienced a 25, 9% increase well renewable leases experienced a 23, 6% increase.
We experienced a 68% renewal rates during the quarter of the leases that were renewed 9% were associated with contractual rent increases which impacts the overall renewal rate increase.
Related to the development program in Georgia, we executed a five year 72000 square foot lease at 180000 square foot facility with active tenants pursuing the balance.
Cincinnati, we executed a five year lease for 47000 square feet and a 155000 square foot facility and are closer to other deals to fill the balance of the space.
Both executed leases commenced during Q3 and for all of the remaining 215000 square feet of space you have to be leased in our development program. We have active proposals under consideration.
Year to date, we have addressed over 93, 5% of the total square footage is scheduled to expire in 2023, when we add up all the leases commencing in 2023, we will experience an aggregate increase of 21% on a cash basis.
The lease renewal rate so far for 2023 leasing is 67, 5% through the first three quarters of the year of the leases that were renewed 12, 5% of the renewables where contractual increases.
With total portfolio occupancy at 97, 6% and same store occupancy at 98, 6% both of which are down slightly from Q2, but through October occupancy is back up to 98% for the entire portfolio has remained at 98, 6% for the same store.
As you can see we continue to benefit from strong leasing activity with rental rates still accelerating and occupancy outperforming the national average of 95, 6%.
Turning to 'twenty 'twenty four we have already leased over 34% of the initial 'twenty 'twenty four explorations.
We will experience an aggregate 14, 3% increase on a cash basis on these rents 13, 9% for renewals and 31, 8% for new tenants.
This rental increase compares favorably to this time last year when our earliest batch of 2023 leases were up 10, 3% on a blended basis.
We know what percentages for these transactions was 74%.
With 43% of the renewal leases associated with contractual renewals.
Rent spreads for 2024 are expected to be similar to 2023 with strong market rent growth projected for our market.
Consistent with nearly every quarter since the pandemic, we have collected over 99% of our branch billed during Q3 and there are currently no active rent deferral agreements at this point I'll turn it over to Anthony to discuss the financial results.
Thanks, Jim.
The third quarter saw core <unk> 46 cents per share driven by sequential improvement in leasing spreads contributions from our phase one development, namely Jacksonville and Atlanta sorry.
Slightly lower than anticipated interest expense, coupled with lower professional fees and corporate operating expenses.
As Jeff mentioned, the path to sustaining sub seven times net debt to annualized adjusted EBITDA has accelerated due to our strategic use of the ATM.
And in asset Divesture to redeem the series, a and repay a portion of the outstanding loan balance.
Our net debt and net debt plus preferred metrics have now converged as the series a was the last of our preferred instruments to be addressed on our balance sheet.
We ended the third quarter with net debt to adjusted EBITDA at six seven times.
Our sixth consecutive quarter of Delevering.
As of the same period ended 93% of our debt carried a fixed rate or was fixed through interest rate swaps with a total weighted average cost of debt of 4.01% with 58% of the total debt on an unsecured basis.
Subsequent to quarter end, we made another major improvement to the balance sheet with the pay off of the AIG loan our largest secured debt principal amount representing approximately 12% of our total debt outstanding.
On November one we repaid the AIG loan in full which was $106 9 million after the release of lender S grows.
After carefully reviewing numerous options for repaying this loan throughout the year and with an eye to how we can best position us for an investment grade balance sheet, we decided to use our unsecured credit facility for the proceeds.
We anticipate executing an interest rate swap and a very new feature on approximately $100 million of notional value across three counterparties.
That will have a tenor matching the remaining term on our facility maturing in August 2025.
By going this route we have preserved optionality, while mitigating our exposure to variable rate.
Improved our debt on an unsecured basis from 58% to 70% of total debt outstanding and eliminated all but $19 million of debt maturities until August 2025.
Further we will have the flexibility to pay off tranches of this facility with potential disposition proceeds instead of locking in higher interest rates over the next five to seven years.
We achieved same store cash NOI growth of five 4% for the quarter and six 8% year to date.
During the third quarter, we did see operating expense pressure, primarily due to higher real estate taxes and annual maintenance expenses coming in higher than expected the majority of which we anticipate recovering as a part of the end of your expense reconciliations.
We once again affirmed core <unk> guidance for the year and have held constant our same store NOI range as we anticipate recoveries to adjust to the incremental operating expenses incurred.
Aided by no notable dip in occupancy for the balance of the year.
Our full year range for interest expense remains unchanged. However, G&A expectations for the year have been decreased to a range of $14 2 million to $14 6 million.
Operator, we're now ready to take questions.
Thank you very much our first question comes from Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks, Good morning, I, just wanted to touch on the development leasing.
And just see if you could provide a little bit more detail around.
Tenant demand and the potential timeline to to continue to get some leasing done, particularly of Fisher Park, one and new Calvin too.
Yes. This is Jim.
And Cincinnati.
I'll close with two potential candidates and expect some movement in the next couple of weeks multi tenant in the building is open up a wider range of opportunities there.
In Georgia, we are very close on a lease with a food manufacturer of blended food products.
<unk> been working with Georgia power to address power supply issues, which are getting resolved and we expect to have a leased shortly.
Yeah.
Okay, and then how should we think about new starts.
Moving forward from here or is there anything.
That you're that you're contemplating anything that might hit before year end or in early 2024.
So Todd this is Jeff.
So.
As in the prepared remarks, we are phase one development program is basically finished where we have one building under construction in Jacksonville, That's least that'll be delivered early 2024, we were not going to take on any more spec development.
However, we do have in Cincinnati 200000 square feet, we are talking to a potential build to suit.
So those are the only things that we would ever.
Probably in the next 12 to 14 months.
We're going to strictly be looking at build to suits. So we have four or five sites, where we could build on and so that's our focus.
Okay.
Okay.
And then and then Anthony.
You commented on on the balance sheet and an overall leverage which came in quite a bit as you mentioned so you're below the seven times.
Threshold.
What what's the next target in terms of leverage and where do you expect to be over the next few quarters.
After the disposition and the additional lease up and are in the development pipeline.
Yeah. Thanks Todd.
We've said early on our target is to be sustaining between five and seven times, we have made cigna.
Significant inroads and as you mentioned came in under our seven times target.
There is certainly an opportunity as development stabilizes in 'twenty four for another half turn down.
So our next kind of <unk>.
Target, if you will would be sustaining.
Around six five times.
Maybe just under that.
The next question comes from Nick Tillman with Baird. Please go ahead.
Hey, Good morning, guys, maybe a question for Jeff for Jim just on 2020 for leasing.
You've gotten $2 2 million square feet.
Just.
Some of the larger known explorations Fedex communication test design are any of those addressed and what you've done.
So far or maybe get a color on those two individual leases.
Yeah, I mean, it's a lot.
The largest space that.
Coming up next year of course, you know Fedex Fedex, which.
Has a.
We know notification date of 131 of next year.
We've begun our engagement with them on potential.
Renewal and we expect to hear a definitive answer.
After the end of the year.
We're working with physical supply, which is maersk.
That building is is quite full that the operations are strong there.
We expect to have renewal in that space at 330000 square feet.
The silver line is a known move out and we're working on marketing that space, We've got six to eight potential.
Potential prospects of various sizes and we're trying to see how we can fit them in the space also the neighboring tenet is has approached.
[noise] approach us about extending their existing lease and potentially expanding into some of that space as well.
And then one other.
No vacated the ladder building.
Building in St. Louis was a 140000 square feet.
That's helpful and maybe just on like Fedex or some of these larger boxes, obviously a lot in the news on dress new supply being in bigger box, maybe what's in place rents relative to just say what development rents would be.
On the Big box, where we are.
Were still lower.
And then the new product coming online.
As an advantage for us of course.
The most of our portfolio is well positioned against them.
The new supply coming online being much much.
Probably.
Up until like a 20% discount.
And then maybe for Anthony are you guys in prior quarters had mentioned maybe refinancing.
With more secured debt was that more a factor of just working towards investment grade balance sheet or where is the pricing may be secured debt not us.
Not as great as you initially had thought.
Both factors played into the decision. So there clearly is heightened.
Pricing with respect to secure.
That we also didn't like the.
Uh huh.
The the lack of Optionality with respect to secured we think when we when we hedged a portion of the line that we.
It should come in around six and a half that equates to a hedge rate of call. It four eight plus our facilities spread. So we do think that's well priced vis vis today's alternatives.
Yes, it's short term.
It serves as a bridge to.
To get us to hopefully a less volatile interest rate environment two years from now.
The next question comes from John Kim with BMO capital markets. Please go ahead.
Thank you.
Your 23 guidance implies a fourth quarter increase in Epsilon and same store NOI, it's at 40.
95%.
On the I know my friends.
We got some developments that may help with earnings but can you just walk us through some of the drivers to get to your fourth quarter implied guidance.
Yes, certainly John.
Little lift in topline.
We had some temporary vacancy.
They can see that fills up in the fourth quarter, but the.
The Big story is really recoveries as we mentioned there was a dampening effect on same store.
Which is attributable to higher than anticipated real estate taxes, and maintenance expenses and to a lesser extent.
Insurance, all of which are largely recoverable.
And.
As we've been rolling these legacy leases gyms.
Jim's team has been doing a really good job of converting those to more favorable lease types and so we're going to we're going to see that pick up.
As we complete our our final camber ex in the fourth quarter, and then kind of prospectively, we're going to see improvement in recoveries in 'twenty four and beyond.
Got it.
On your discussion on <unk>.
24.
Leasing activity so far in the.
At least that you've achieved you.
You guys mentioned that in 'twenty three you started off at a more modest level than and then those cash leasing spreads accelerated during the year.
I was wondering if you can just comment on that dynamic is that a function of.
The mix of renewals versus new leases, a year ago, and you see a similar acceleration in 'twenty for mark to market.
Yes that is.
Exactly it most of the renewals kick in and some of them have fixed rate renewables.
The numbers.
Around 40 something percent of the AR.
The existing renewals had fixed rate leases. So those kick in early and they start the weight off at a low level and then as we get more market rates.
Included the overall rate goes up.
Okay, if I could squeeze one more in the four 9% cap rate you got on your disposition I know they went to a user but what was the mark to market.
All set.
Our mark to market in Chicago is.
In the mid teens.
And then John just yeah, just just as a reminder that was based on in place NOI on a fully stabilized basis, it's probably around.
A 6% yield.
The next question is from Anthony Hau with Truest. Please go ahead.
Hi, guys.
Thanks for the question I, just noticed that our occupancy is down.
It's like I think two 3%.
If you can provide any color on that.
Yeah.
We did.
We had a.
And we restructured the lease so.
We.
Yes.
Yes.
That extra spaces.
Just came on the market recently and we've got a longer term deal with a new company that was formed out of bankruptcy.
And we also collected all the rent.
That they owed us as part of it too.
Yeah.
I think it was more printing.
Okay. Thanks.
Thank you.
The next question comes from Bryan Maher with B Riley Securities. Please go ahead.
Thanks, Dan Good morning, just wanted to for me are you guys starting to see any.
Slowdown in construction activity in your markets that you would chalk up to the higher interest rate environment.
Hey, Brian, Yes, certainly I mean, I think I think that's part of it.
And as you can see there's some softening in the big box.
You see seven 800000 million square foot buildings kind of sitting there even in parts of Columbus. So.
I think it's a combination of both.
And then as it relates to getting leverage down.
Escalating congratulations for that.
Is that increasing your appetite to start to look at new acquisitions.
And if so would that be funded with kind of a combination of cash and debt or would you skewed towards some capital recycling activity.
Yeah.
So I think as we indicated we're not going to increase leverage so we're not going to we're not going to go out and start buying properties on the line and move up leverage so that's not going to happen.
We've also indicated that we're not going to be issuing dilutive equity at this time. So we're.
We're not interested in.
Getting out there so as we see deals that match up with the cost of our equity we would certainly entertain that.
We're still seeing some softening in the market, we're seeing deals get pulled by sellers.
Theres still some negative leverage in certain parts of the country that seems to be waning. So sure. That's a great strategy, but some people are employing that.
So I don't think that we have a real appetite for that we are in discussions with people with LP units. So we're having a lot of discussions, but we're certainly not going to not going to move leverage up and that is there a second part of that question that I missed.
No.
Really just how would you find in capital recycling, you've pretty much address state that thats, all I have and congratulations getting out of New Jersey, yes. Thank you.
The next question is from Barry, Oxford with Colliers. Please go ahead.
Great Hey, Jeff.
Touched on acquisitions, but are you, saying look there are some one off opportunities in the market, but look across the board I just don't like what I see.
From a pricing standpoint.
Well I think it's more nuanced than that Barry Yeah, we are seeing deals that.
The prices stock prices have been moving around a lot lately, but.
Two not too distant past, we have been at a point, where we've seen accretive deals.
Again, we're going to take a hard look at the real estate like we always do the capex needs and so on and so forth. So there are deals out there.
Put in more equity and they're going to take pretty much whatever is out there.
So for US, it's really just finding the right real estate as usual and making sure it's accretive.
Alright, but okay.
Theres not a lot of product out there.
Okay, that's very clear.
But it sounds like you're waiting for the market to come to you.
That is correct yes.
Yes.
Jeff on supply are you seeing supply kind of sort of slash deliveries seeping into your markets or maybe not as much as.
The national numbers would indicate.
Well I think it is I think you have to look at it submarket by Submarket as opposed to just a market I mean, if you take a market like Chicago, There's 21 Submarkets in Chicago Okay.
Alright, and then really I think.
It's not so much the market is.
It's really the size of the building.
As Jim said, we have.
70000 square feet belief and we have three or four proposals.
You can talk to someone that has 800000 square feet and no one's been through the building and three months. So I think that that's really what it is.
And that's where all the building was Barry right. So as you go out and build new construction. It's a lot cheaper made a lot more sense a few years ago to go out and build a million square foot buildings, because that was all the rage people were buying them unleashed at low cap rates and I think thats dried up significantly.
Significantly.
Right.
Is that one of the reasons why you're not interested in doing spec.
Development at this particular juncture also.
Yeah.
We have seen that.
Pete.
Tenants are taking longer to make decisions the elk.
Ultimately do make them.
But there's been a slowdown so we're not going to go out and put it back out in the marketplace.
It's a smart move.
As a reminder, that star one to queue up for a follow up.
The next question comes from Mitch Germain with JMP Securities. Please go ahead.
Thanks for taking my question.
The contractual renewals that Jim you referenced.
Are those at market or are they at an agreed upon.
Level.
Yes.
Agreed upon level.
So that's already baked into the leases signing is kind of what youre, suggesting.
Correct and then the leases that we inherited we don't.
Typically do that but.
Without leases.
Okay. That's helpful.
And then.
Anthony I think you kind of mentioned the AIG loan obviously, it's on the line now youre going to swap a portion of that.
I'm, assuming the swaps that flexibility for you to pay down without penalty is that the way that you're structuring that.
Yes, we are we're going to have a multi tranche structure across the notional amount. So that we preserve flexibility to the extent that we continue to execute on select asset sales and look to further pay down.
Outstanding debt.
Okay.
And as we think about.
As we think about 'twenty 'twenty four obviously, we will have a little bit of a.
Push higher in rate because of the change from.
The composition of that debt from the AG to the line is that the way to think about it.
Yes.
Okay, great. Thanks, guys good quarter. Thank.
Thank you Mitch.
Yeah.
The next question comes from Mike Mueller with JP Morgan. Please go ahead.
Yes, Hi, I guess on the on the developments to build to suits.
Can you talk a little bit about return requirements, just given the capital markets backdrop, given what you would traditionally underwrite on spec and just kind of put all that into context.
Yeah, Mike I think I think it's fairly simple I mean, we've been building to high single digits.
And I think that if we can build to a high single digit in eight or nine.
So that would be how that would measure up.
But if you want more color I don't know what it would be but pretty simple okay.
Got it and then.
I guess.
<unk> pretty spotty at this point I mean, how should we think about dispositions over the next few quarters. I know you have something lined up in the fourth quarter, but even if you don't see anything on the acquisition side do you think youll still be somewhat active on the disposition front.
To a certain extent I mean again we've.
We I think we've talked about this a lot and we're happy to to reemphasize that.
Like Chicago was it was a perfect owner user building right. There was limited parking limited docs that made a lot of sense to sell it in an owner user is not looking at the cap rate. They are looking at maybe the next 20 years, so whether they pay $10 million or $14 million I don't think it really matters to some people if they want that building and they want the location.
I think new Jersey is kind of a similar play for us and we have just a handful of other properties that we've identified.
Part of the strategy was to was to sell out of New Jersey, We have one building there we.
We have one building in Milwaukee, we probably will sell as we indicated so we were not going to gain scale, we're not going to be in the market.
I mean, our strategy is to try to manage and we managing 70% of our properties in house.
That will continue to tick up over time, and I think that has.
And in the environment for the next couple of years I think real estate operators I think youre going to see that we're going to deliver a result of that strategy.
Okay. Okay. Thank you.
Thank you.
The next question is a follow up from Anthony Hau with Truest. Please go ahead.
Anthony I'll have a follow up question on bulk of swap.
What rate should we expect for those.
Okay.
I think we're going to come in at an all in rate of about six and a half.
Okay.
And for your watch list has that changed over the past six months.
And do you expect like bad debt reserve to return back to like people a level.
Our watch list and Jim can affirm this has not materially.
Materially changed.
One in one out it is only a handful of tenants.
And in terms of.
Bad debt.
We've we've had.
De minimis write offs pre during and post COVID-19.
We're not anticipating.
A material increase in the run rate as it relates to bad debt.
Thank you.
Thank you.
There appear to be no further questions at this time I would now like to hand, the call back to Mr. Whether al for closing remarks.
Thank you all for joining us.
This morning, we are available for follow up questions as usual and we will talk to you next quarter. Thanks, so much.
The conference has now concluded. Thank you for your participation you may now disconnect your line.
Okay.
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